Accounting Does Not Communicate Reality, It Constructs Reality - Essay Example

Accounting Does Not Communicate Reality, It Constructs Reality” (Hines, 1988) “Accounting does not communicate reality, it constructs reality” (Hines, 1988). Extracted from Cooper, C., 2013. A Critical Perspective. In: Jack, L., Davison, J., & Craig, R., (Eds.). The Routledge Champion to Accounting Communication: London. Introduction Accounting, in a wider view, is described as a practice as well as a body of knowledge which basically looks at the practices that performs transactions and methods of recording them, record keeping, internal audits, reporting functions and analysis of accounting information as well as providing advice on issues relating to taxation and pricing. Accounting is a used in our day to day lives to help us keep our records of transactions in our business, whether it is formal or informal. It makes our records be in order that it is easy to know whether an entry is an income or expenditure. It is, therefore, that systematic process where accountants use to identify; record, measure, classify, summarize, interpret, and communicate information related to accounting. Accounting will show us whether the business is making losses or profits. It also clearly shows the assets and the liabilities of the business to its exactness. Therefore, with accurate accounting information of a given firm, an investor can be aided to make an informed decision of whether to invest or not in the business. This shows how strongly accounting can communicate to us about the reality of businesses. However, we need not forget that that same reality that is now communicated by accounting records was prepared by accounting itself. Accounting principles are used to prepare accounting reality in various organizations. This paper is, therefore, aimed at researching about those roles of accounting in organizations that make it be considered to not just communicate reality, but to be the one that constructs reality in the organizations. Accounting in the Context of Communication In accounting, we communicate reality that is the myth in accounting or what most of us believe. Accounting uses communication as a leitmotiv. Accounting, therefore, takes various forms of communicative methods including written narratives, pictures, graphs, tables, numbers, cartoons and photos. In this form, use of financial statements is the most significant form of communicating the financial and accounting position of any organization. The statements may incorporate the use of tables, graphs, narratives, and others to ensure the communication is clear (Jane, 2012). Accounting communication can also be considered in the social, political, and economic context. In the economic context, communication is used in accounting to provide information on the contemporary happenings in the economic sector such as the banking crisis and financial instability. In the political context, it can be used to communicate the fact that the financial sector has dominated over the manufacturing sector. In the social context, accounting is perceived to be a profession. Therefore, it requires certain social recognition and social power. Accounting is, therefore, used to communicate useful and neutral information that go much further in fulfilling a lot of social functions in the society. Accounting in the Context of Constructing Reality Ruth Hines (1988), in her seminal research article ‘Financial Accounting: in communicating the reality, we construct reality, summarizes the whole concept of accounting in the context of constructing reality. Hines tried to put forward the point that we can only understand things best from a human perspective. Humans are best described to understand the world through the use of symbols and language. Through the use of language and symbols, humans can learn about societal norms and the cultural backing of the said norm. This only shows how the human understanding is socially constructed. The cultural reasoning behind norms may be different from across cultures. However, our realities are built upon those cultural foundations from where we belong. Such realities come up so natural that are ultimately made into law that is supported by the national institutions (Hines, 1988). Realities are, therefore, those things or actions that have a genuine impact and can affect the lives of humans. Accounting is, therefore, considered to construct reality in the sense that, here are those accounting concepts with genuine economic impact that can affect the lives of people. Goodwill is such a concept that has a genuine economic impact on people and can affect their lives. It is, therefore, an accounting constructed reality, which some people tend to forget about. Goodwill is intangible, but it is real and is considered an asset. Therefore, this proves the fact that accounting does not communicate the reality, but it constructs it. The strongest myth in accounting that we can consider is that it communicates reality. Here is a case where, after accounting books have been prepared, we rarely question what it communicates. Instead, we believe that it communicates and reflects the position of the organization. Therefore, concepts such as goodwill and profit can be considered mythical as we always believe them since we know that they reflect what the organization is. Roles of Accounting in Organizations Accounting has been considered to be in the forefront to effect certain impacts in order to make organizations realize their meaning. The major way in which accounting makes the reality of the organizations be realized is through financialization of operations. This is where the financial sector in a society increases with the increase in its overall economy. In this case, financial markets tend to change how they are operated by forming a set of rules that govern their authority. There has been an increase in the way financial markets, institutions and elite gain greater control of the economic policies in our governments. It, therefore, becomes a reality when it contributes to unequal income growth in the economy (Robin & David, 2013). In an organization, accounting has been seen to reduce all operations in the organization to numbers. When we want to represent everything in the organization in a way that they can be accounted for, they must be reduced to numbers. Here, we find that concepts such goodwill and depreciation, among others, are represented in terms of numbers. This makes accounting be seen as give reality to what has been considered mythical. It, therefore, becomes easy to communicate the total representation of an organization through changing all it has in the form of numbers. A clear evaluation can be done; analysis drawn and accounting position of the organization communicated. This becomes the organizations reality. It is, therefore, the fact that accounting constructs reality in the organizations. In as much as accountants are considered communicators of reality, they are also faced with some challenges. When trying to communicate this reality, for instance, when trying to reduce goodwill into figures, there is the issue of the fair value that crops in. Accountants consider amortization of goodwill for its fair value to be represented. This amounts a lot of questions and doubts whether goodwill is a reality. And if it is a reality, then why is amortization to find its fair value? Accountants, therefore, have some challenges to explain and defend accounting as communicators of reality in such cases. Financialization, therefore, attempts to reduce all the value of the tangible or intangible financial instruments such as shares. This reduction of value makes the financial instruments be able to be exchanged in various financial markets. The reduction if value here is that has caused a great problem to accountants as communicators of reality. This becomes a problem since, to find a fair value of such financial instruments, they must be discounted to a future cash flow which is not real. In this case, accountants contradict themselves of the reality that they communicate. The New Public Management concept that is currently taking control in most organization has also been seen to change how organizations are run. This system is shifting management from the traditional process accountability to a greater element of accountability where accounting results become the reality of these organizations. This system comes with more emphasis on visible hands-on top management, explicit standards that are measurable, and measure of performance and control. It, therefore, put greater emphasis on output control. However, for the management to keep up to these changed standards, the role of accounting will be changed in the organization. Where accounting was used to communicate the position of an organization, with this New Public Management system, accounting will be seen to set measurable standards by which organizations can be evaluated and controlled (Jane & Richard, 1998). In most cases, accounting has been associated with increased public performance due to this new change in public management. This is because the output is being measured in metric terms that use accounting principles. The results are represented in a table format, where discussions, deliberations, and decisions can be drawn, and new steps taken to control the results in the organization in the future. It is very easy to deliberate upon numbers or figures, as they vividly show results that can easily be compared (Stuart, et al., 1980). This new management system applies certain accounting management concepts such as commercialization and privatization to the public sector to realize better control and performance in such areas. Relevant Accounting Theories Colonization and Absorption Theories This shows new changes in the accounting field are realized and implemented in small controlled groups before its spread to the whole accounting community. The concept is first consumed by a work group which is always composed of the top management in the organization. The changes are then modified, and their influence is seen in the top management or work group. Through this, there will be a continued colonization of accounting practice through other accountants. Therefore, when accounting practices in organizations have influenced the work group, it is possible for it to constitute cultural knowledge in different ways where particular rationalities will be created for the action of the organization. Because of such new cultural knowledge, new patterns and ways of control can emerge in organizations that can come with new authority and influence. Moreover, there will be new concepts coming up in the organizations with time that will result into new legitimate actions being passed (Alistair, et al., 1992). Such actions come up to represent reality of accounting practice and its influence to the society. This theory may make us realize how accounting roles come up in the organization and how it communicates reality. Accounting can, therefore, become very influential in organizations and the society at larger through what it represents. Therefore, according to the contingency theory, it is the context of accounting that shows to what extent it will be powerful. If the accounting concept is that which accountants need to use in their day to day practice, it becomes more significant in the functions of the organization, or in the society at large. Such concepts in most cases make accounting be a societys reality as it communicates issues that are a reality in the society. Accounting also becomes influential through accounting language used. Accounting language has terms that can be misinterpreted by common users who have little knowledge on such a language. Therefore, for accounting to communicate the reality it represents to the society and specifically to the organization, it will depend on the level of understanding of accounting language by the user of that particular accounting information. However, accounting also becomes powerful in a way through its ambiguity of meaning. It, therefore, requires close and clear interpretation of the accounting information to make it make sense. In all these cases, accounting still speaks louder since it constitutes to the construction of reality. Conclusion In a nutshell, the statement that accounting does not communicate the reality but is constructs that reality becomes valid. Most of the accounting concepts are real. Through accounting, this reality is realized from these concepts. For example, goodwill is a concept that exists in the business. However, accounting makes it a reality, when goodwill can be valued and represented in accounting terms. It becomes an intangible asset with value. Accountants, however, face several challenges while trying to communicate accounting reality. Accounting requires amortizing financial instruments to arrive at their fair value. This becomes a contradiction to accounting constructing reality as amortization is done in terms of future cash flow, which is not real. The role of accounting in the organizations, through a new public management concept and others, give accounting more grip as one that constructs reality in organizations and the society at large. Bibliography Alistair, M. P., Cooper, D. J. & Rod, W. C., 1992. Fabricating Budgets: A Study of the Production of Management Budgeting in the National in the National Healthcare. Accounting Organizations and Societies, 17(6), pp. 561-593. Hines, R. D., 1988. Financial Accounting: In Communicating Reality, we Construct Reality. Accounting Organization and Society, 13(3), pp. 251-261. Jane, B. & Richard, L., 1998. Resisting the "new public management". Accounting Auditing & Accountability Journal , 11(4), pp. 403-435. Jane, D., 2012. Barthesian Perspectives on Accounting Communication and Visual Images of Professional Accountancy. Accounting, Auditing and Accountability Journal, 9(5), pp. 1-22. Robin, G. & David, S., 2013. The Growth Finance. Journal of Economic Perspective, 27(2), pp. 3-28. Stuart, B., Colin, C., Anthony, H. & John, H., 1980. Roles of Accounting in Organizations and Society. Accounting Organizations and Society, 5(1), pp. 5-27. Read More