Benefits and Critique of Conceptual Frameworks - Literature review Example

Introduction: The conceptual framework is a basic framework for financial reporting, and it is a foundation of financial accounting. Allmost all international accounting standards have a framework that comprises of concepts, classification and principals of managerial accounting practices, with the intention of increasing the quality of financial reporting and data. Wagner (2003) maintains that a high quality financial data is useful to the stakeholders of an organization, because they will provide a true value of the business organization. This kind of information can be used to calculate taxes, and investors can use this information to decide on whether to invest in the company or not. As explained under the financial reporting standard of United States (FASB), they define it as a coherent system of unrelated fundamentals and objectives which prescribe the functions, nature and limitations of a financial report or data. The purpose of this paper is to provide a critique on the concept of conceptual framework. This paper holds that the conceptual framework has failed in its major objectives of setting accounting standards, and resolving complex accounting issues. This paper has an introduction, which talks briefly of this concept of conceptual framework. The body of this text contains a critique of the conceptual frameworks. It also talks about the benefits of these frameworks, and how they have evolved over time. The conclusion and the discussion section is a summary of the major points identified in this paper. Benefits and Critique of Conceptual Frameworks: Miller and Bahnson (2002) further explains that for purposes of providing a framework of resolving disputes, setting standards of accounting, and providing fundamental principles of accounting standard, the conceptual framework was developed. These principles were developed with the effort of the financial accounting standard board of United States (FASB), and the IASB, which is an International Accounting Standard Association. There are several obkectives that made FASB and IASB to come up with the conceptual framework. Its major aim and objective was to provide guidance in the identification of financial reporting boundaries. Furthermore, Nioche and Pesqueux (1997) explains that the intention of developing conceptual frameworks by IASB and FASB was to understand the meaning of financial reporting, the scope that it should comprise of, and its characteristics. In contribution in the discussion on the objectives of conceptual frameworks, Miller and Bahnson (2002) further explains that its major objective was to understand the characteristics of finacial reporting, and its main elements. Through this understanding, Ravitch and Riggan (2012) explains that accountants will manage to prepare high quality financial records that can be relied upon by government, auditors, and investors of an organization. Furthermore, Wagner (2003) explains that the use of conceptual frameworks will have an impact of increasing the harmonization of financial reporting. This is because it would decrease alternative or competing standrads of financial reporting. Therefore, Sztompka (1988) believes that, this action improves the quality of reports, and it removes inconsistencies in the presentation of financial data. Furthermore, this standard porocess will have an impact of reducing political interferance, in regard to the setting of accounting standards. This is an objective that Hines (1980) agrees with. Hines (1980) further continues by denoting that the conceptual framework has an ontological assumption. This assumption denotes that the relationship between economic reality and financial accounting is reflecting, undirectional, and a faithfully reprdoducing relationship which assumes that economic reality normally exists intersubjectively, objectively, and independently of accounting practices. Based on these facts, the major objective of finacial accounting or reporting is to reflect, represent, measure or mirror this pre-existing economic reality. Despite this important objective of conceptual framework, there are a lot of criticisms, which emanate because of the failure of conceptual frameworks to fulfill and achieve its functional objective. Specifically, it has failed to provide guidance on setting of accounting standards, and resolving issues that touch on accounting controversies. Ross and Westerfield (2005) believes that conceptual frameworks are very useful accounting practices in the first place. In explaining his point, Ravitch and Riggan (2012) believes that conceptual frameworks are dervied from an established body of accounting objectives and concepts. However, Oppermann (2001) believes that conceptual frameworks have failed to provide a consistent, standard and coherent body of accounting rules that can be used by accounting professionals. This will help in improving the efficiency in financial reporting, and the data developed. Nioche and Pesqueux (1997) believe that the current conceptual frameworks have not been able to achieve this goal. A good example is the accounting standards and techniques used by Enron before its downfall. Enron was able to use sophisticated accounting tools and standards, to report its financial information. These methods were too complex, and the normal stakeholders of the company could not understand them. By the use of these accounting techniques, Enron was able to hide its fiancial perfomance, resulting to a loss of billions of dollars of shareholders money. The accounting technique used by Enron was the Mark to Market accounting principles or techniques. This is because the company believes that by using this technique, it would be able to provide a true economic value of the company. This accounting principle requires that once an asset is acquired, it should be valued at its future expected value, as opposed to its present value. This method weas used by the company to give an account of its complex transactions, hiding the true value of the company from the shareholders. Miller and Bahnson (2002) further explain that Enron was the first company that did not belong to the financial sector, to use this type of accounting standards and principles. This therefore means that other companies were using differen t accounting standards and principles, hence the conceptual frameworks developed by the FASB failed to introduce a standard set of accounting principles and standards that could be used in the financial, and non-financial sectors. Kieso and Weygandt (2001) further explain that a conceptual framework should have the capability of increasing the confidence and understanding of financial staement users in the data recorded. By looking at the case of Enron, this is an aspect that the conceptual frameworks failed to achieve. This is because the financial reporting standard that was used by Enron, was very complex, and contained a lot of discrepanices, which was very difficult to understand. Furthermore, users of the financial statements or reports were unable to match the cash flows, and the profits that the company made or achieved. The company took advantage of this situation, and provided misleading and false reports, which is against the principles and standards that govern the creation of conceptual frameworks. Furthermore, this method of accounting enabled the company to record income that they did not receive, and this had an effect of increasing the financial perfomance of the organization. Kikuya (2001) therefore believes that the existing principles of conceptual frameworks, was unable to solve the controversies in regard to the best accounting standards to use, resulting to the collapse of Enron. In fact, Greuning (2006) explains that FASB is the one which granted the company to use the Mark to Market accounting techniques, as opposed to the traditional accounting techniques which are easy to understand, and more difficult for a company to manipulate its records. Elliott and Elliott (2008) explain that it is difficult to solve emerging and new practical financial accounting problems quickly, with different standards and principles. However, with the existence of basic theoretical framework that can be used to solve the problems, then it would be easy for accountants to resolve the issues under consideration. For example, the United States Securities and Exchange Commission denotes that lack of a standard set of accounting laws and procedures, limits the American companies from efficiently competing with other companies, in the international market (Ashbaugh and Pincus. n.d). Furthermore, the stringent accounting standards established by the United States normally limits the ability of other companies to raise capital in the stock market of United States. This is an indication that the existing conceptual frameworks have failed to establish a universal accounting standards that can be used for purposes of providing a financial report. Jones (2006) explains that the incapability of accounting bodies to develop a universal framework is not a new concept. This is because sine the 1920s, committees, organizations, and interested people have published and developed their own conceptual frameworks. However, not a single of these frameworks was able to be accepted universally, and practiced. For example, in the year 1939, accounting experts were able to establish a committee on accounting procedures (CAP), and its responsibility was to act as an official body responsible for setting and creating accounting standards. However, CAP failed in its initiatives, and it was thereafter replaced by APB, which is an abbreviation of Accounting Principles Board. This was in the year 1959, and its major responsibility was to establish and create accounting standards. The major failure of CAP was its inability to develop a single accounting standard that could be used to solve the various controversies, regarding financial reporting. The APB also failed to develop a financial reporting framework that was universal, and could be used for purposes of solving financial controversies. This is the reason why in 1976 the FASB began working on a conceptual framework that could be easily accepted as a foundation of developing accounting standards, and resolution of disputes involving financial controversies. However, this has also failed to gain international acceptance. This is because the principles established in it, are broad based in nature, and they are not effective in helping to produce an efficient financial statement. Bringle (2011) gives an example of the 1980 statements of the financial accounting concepts no 2 (SFAC), which provides a discussion of the qualitative characteristics that make the information that emanates from accounting records to be useful. This rule is general and broad, and it does not identify what these qualitative characteristics are. It is the duty of the financial expert to identify these characteristics, and hence develop a framework of making the information under consideration to be useful to its stakeholders. Currently, the conceptual framework is blamed for its inability to carry out its functional objectives. This is a fact that the FASB has acknowledged, and they agree that the conceptual framework is inadequate in addressing the current accounting standards. Conclusion and Discussion: The conceptual framework normally provides a guide on how to produce financial reports. Most financial experts view it as a foundation of accounting reporting. This means that conceptual frameworks play a very important role in the financial world, and their provisions should not be ignored. One of the major goals and objectives of the conceptual frameworks is to set up standards on how to report financial information and data. Conceptual frameworks normally advocate for a universal method of data reporting, which is acceptable by all financial experts. However, these frameworks have not been able to achieve this mandate. This is because of the existence of other methods of financial reporting, some of which contradict with the recommended accounting standards, established by the conceptual frameworks. A good example is the accounting standards used by Enron before its collapse. Enron used the Mark to Market accounting reporting techniques, and it was the first company in the non-financial sector to use these accounting standards. This type of reporting made it difficult for shareholders of the company, to trace the financial performance of the company. Through this type of reporting, the company managed to hide the true financial position, hence leading to losses, of billions of dollars, of shareholders money. It is important to explain that there were other traditional methods of reporting, that could have been efficient in providing a report on the financial operations of Enron. However, the company failed to use them. This is partly blamed on conceptual frameworks, which have failed to provide a universal standard of reporting, and solving problems related to financial reporting. Bibliography: Ashbaugh, H., & Pincus, M. (n.d.). Domestic Accounting Standards, International Accounting Standards, And The Predictability Of Earnings. Journal of Accounting Research, 417-434. Bottom of Form Bringle, R. (2011). International service learning conceptual frameworks and research. Sterling, Va.: Stylus. Top of Form Bottom of Form Elliott, B., & Elliott, J. (2008). Financial accounting and reporting (12th ed.). Harlow: Financial Times Prentice Hall. Top of Form Bottom of Form Greuning, H. (2006). International financial reporting standards a practical guide (4th ed.). Washington, D.C.: World Bank. Hines, R. (1980). Financial Accounting Knowledge, Conceptual Framework Projects and the Social Construction of the Accounting Profession. Accounting, Auditing & Accountability Journal. Top of Form Bottom of Form Jones, M. (2006). Accounting (2nd ed.). Chichester, England: Wiley. Top of Form Bottom of Form Kieso, D., & Weygandt, J. (2001). Intermediate accounting (10th ed.). New York: Wiley. Top of Form Bottom of Form Kikuya, M. (2001). International harmonization of Japanese accounting standards. Accounting, Business and Financial History, 349-368. Top of Form Bottom of Form Miller, P., & Bahnson, P. (2002). Quality financial reporting. New York: McGraw-Hill. Top of Form Bottom of Form Nioche, J., & Pesqueux, Y. (1997). Accounting, economics and management in France: The slow emergence of an accounting science European Accounting Review , 231-250. Top of Form Bottom of Form Oppermann, H. (2001). Accounting standards (9th ed.). Lansdowne [South Africa: Juta. Top of Form Bottom of Form Ravitch, S., & Riggan, M. (2012). Reason & rigor: How conceptual frameworks guide research. Thousand Oaks: Sage Publications. Top of Form Bottom of Form Ross, S., & Westerfield, R. (2005). Corporate finance (7th ed.). Boston: McGraw-Hill/Irwin. Top of Form Bottom of Form Sztompka, P. (1988). Conceptual Frameworks In Comparative Inquiry: Divergent Or Convergent? International Sociology, 207-218. Top of Form Bottom of Form Wagner, J. (2003). The foreign policies of the global south: Rethinking conceptual frameworks. Boulder, Colo.: L. Rienner. Read More