The Main Aim of Developing Accounting - Assignment Example

Exam Questions Name: Course Professor’s name University name City, State Date of submission QUESTION ONE From a historical and origin point of view, accounting develops around a theoretical basis whether its own or borrowed from other disciplines. The main aim of developing accounting rests on the achievement of desired objectives that generally tilt towards utility maximization (profit maximization). Despite being developed with a key focus in achievement of certain objectives, accounting is regulated. Regulation means there are certain fundamental principles governing the maxims of accounting. The question thus arises on whether accounting is solely based on these fundamental principles or developed to address the desired objectives of agents. The following is thus a critical evaluation of this question. It follows that from the fall of the Great Depression onwards, accounting tends to base on various fundamental principles/laws and absolute precepts. The latter explains the formation of and development of the accounting standards and bodies in Australia, that are enforceable. Such would include the formation of the FRC (Financial Reporting Council) and the AASB (Australia Accounting Standards Board) (Deegan, 2009)). The latter would later adopt the IFRS (International Financial Reporting Standards) which regulate and dictate the accounting methods and financial reporting guidelines. To cement this argument, In Australia, for example, the IASB has the ultimate control of the accounting standards. Thus, accounting bases itself on fundamental principles or laws (Deegan, 2009). On the other hand, the theories of regulation depict a situation where accounting is solely developed and created in the achievement of certain desirable outcomes. First, the Public interest theory (PIT) focuses on those regulations put across by the government in the sole interest of the public. The government places these regulations in order to achieve outcomes that seem desirable to the public interest (Posner, 1974). Secondly, the Capture Theory reveals that accounting regulations tend to benefit those who are regulated than those who are meant to be protected by the regulations. Thirdly, the Economic Theory suggests that accounting regulations are put forward by the regulators and the governments to serve their selfish interests (Posner, 1974). An example is when there is lobbying from industry groups to reject or accept certain standards used in accounting. The latter derives from the rationality hypothesis. In a nutshell, accounting in all these cases seeks to achieve certain desirable objectives on the parties thereof. PAT (Positive Accounting Theory) shows evidence that accounting is not based on fundamental laws, but rather created to achieve various desirable objectives. In this case, PAT shows how accounting assists making functional the relationships between various agents in the firm (Posner, 1974). For example, in a shareholder-manager relationship, PAT suggests that the manager is delegated power to decide on decisions relating to operations of the firm by the shareholder. Thus, the managers institute those accounting methods which maximize their individual, as well as the company interests. Behavior accounting research also follows this path in the fact that it provides information on how various agents react given accounting information (Posner, 1974). For example, a company may position its financial reports in a favourable manner so as to attract investors and gain the support of its shareholders. In conclusion, it is evident that accounting is heavily regulated since the fall of the Great Depression. The implication is that various accounting standards and bodies were set to govern the way accounting operated. The latter makes it to be based on fundamental principles such as those dictated by the IFRS. However, most of the accounting theories including behavioural research accounting reveal that accounting is developed and created in order to serve certain objectives. In summary, accounting can be said to be multi-faceted in the sense that it follows fundamental principles and at the same time serves to accomplish certain objectives. QUESTION TWO There are many instances where many professional accountants play “chartered accountants” in the course of their work. Chartered accountants are expected to behave ethically and professionally at any particular time. In that case, it is important that they consider how their behavior helps promote the ethical culture of the organizations within which they do operate. That means upholding a conceptual framework that is focused towards safeguarding certain fundamental principles. These may include integrity, objectivity, due care and professional competence, professional behavior and confidentiality (CCAB, 2009). In my observation, I have seen people playing chartered accountants and thus failing to uphold the above fundamental principles. In one case, the observation is that most of the clients have the sole interest of tax evading and thus avoiding paying it. In such a case, when some chartered accountants are approached by such clients, they do their tax planning as per the client’s requirements. The main motive is to earn money though this is considered unethical. In this case, the chartered accountant fails to remain professional, objective and uphold integrity (CCAB, 2009). In a similar case, a chartered accountant gives a false opinion in auditing matters so as to favour the client requests which are unethical and also illegal. In auditing, some items including fixed assets and stocks though not properly verified, some chartered accountants tend to give a certificate that such accounts show a fair and true view. In such a case, such an accounting professional shows or plays chartered accountant (CCAB, 2009). Thus, the critical evaluation of the picture displays a professional accountant, playing around with the basic fundamental principles set forth for the chartered accountants. Chartered accountants should remain ethical and professional. The latter implies desisting from threats to upholding the fundamental principles. Such threats may include self-interest, advocacy, intimidation, self-review and familiarity. Whenever a chartered accountant is faced with an ethical or professional dilemma, they should also consider seeking advice from their professional bodies. QUESTION THREE Part A Behavioural Research (BR) mainly investigates how the accounting information is used by individuals in making decisions. In this view, the accounting profession could utilize the results of behavioural research in a number of ways. First, behavioural research in accounting provides information that can assist in predicting how individuals react to certain accounting disclosures (Deegan, 2010). An example would include the CSR disclosures. The BR can also help the accounting profession in developing a set of well-defined knowledge that would help in explaining and thereby predicting behavior of accounting agents or individuals. Secondly, since the BR focuses more at predicting behavior at the individual level, its significance to the accounting profession is significant in many aspects. It addresses the situations or factors that tend to impact these judgements. It also evaluates the quality of judgement results made by auditors, users and preparers of accounting reports. Finally, BR adds to the body of knowledge on how to improve judgement in the accounting profession (Deegan, 2010). Part B The results of the BR could be used by managers of all companies in certain ways. First, managers could use the results to decide on the outcomes of introducing new policies to the company structure mostly the accounting principles (Deegan, 2010). Secondly, managers could use the results to investigate how their company’s market shares are valued by the individual analysts. Thirdly, managers can assess the probability with which creditors or financial institutions may finance the company. Fourthly, the managers are also able to know the assessment of bankruptcy and risk by auditors and the bankers on the company (Deegan, 2010). The managers may also capitalize on these results to influence the decision-making patterns of the company’s stakeholders including the shareholders or stockholders, potential investors and other interested parties. For example, if the debt ratio of the company is high enough, the manager may balance the financial reports so as to favour the equity and asset accounts. In this way, individual investors including lenders, investors and the stockholders will show confidence with the company (Deegan, 2010). Part C Behavioural Research is predominantly undertaken in an experimental setting and not then actual real world setting. Therefore, the results of the experimental setting are generalised over a broad set of agents in the real world. The latter presents several challenges. The first challenge is that the studies are most often deviant from the real world situations (Deegan, 2010). The implication is that the results may be false in many real world settings due to variability in culture and way of life which influences decision-making of individual agents. The second challenge is that the BR carried out for similar issues but in different settings yield different results. Therefore, inconsistencies are bound to exist causing confusion on which results to use given the variability. The third challenge is that there are many exceptions in behavior. Thus, making a generalization of behavior using BR tends to yield mixed results and in some instances false results in real-world situations. Lastly, it is also difficult to replicate the cues and behavior in an experimental setting to the actual real world cases (Deegan, 2010). QUESTION FOUR Part A The article on Brown and Fraser (2006) explains three cases focusing on social and environmental accounting. First is a business case whose objective purpose rests on increasing the value of the shareholders through Community Social Responsibility Reports (CSR). The CSR reports do this by increasing through factors such as social marketing and increasing reputation. The business case, however, rests on several key assumptions (Brown & Fraser, 2006). The first assumption is the shareholder primacy which entails assigning the shareholders interests the first priority as compared to the other stakeholders. Since the main objective is increasing shareholder value, CSR main objectives are solely this and seeks to increase the reputation of the organization and its shareholders through social marketing (Brown & Fraser, 2006). For example, a pharmaceutical company may hold CSR initiatives aimed at offering free prescription drugs to the disadvantaged in the community. Other assumptions include the focus to the management of stakeholders rather than the manager’s accountability, consultations on CSR reporting with stakeholders and focus on technical aspects in the future. The major difference of the business case relative to the other cases is that its key focus in CSR activities is the shareholder’s value addition in the long-end (Brown & Fraser, 2006). The second case entails the stakeholder accountability with the main purpose of increasing transparency and accountability of organizations. The key assumptions include offering “information rights” to shareholders, making meaningful participation of the shareholders in terms of decision making and having a future focus to increasing accountability measures (Brown & Fraser, 2006). The key difference of this case is that it offers a pluralist relationship where groups contrast on CSR performance. An example is where a CSR initiative to provide free prescription drugs would be seen differently by a political entity and an economic entity. The case also tends to focus on the organization more than the society since it entails “information rights” to shareholders and increasing transparency and accountability (Brown & Fraser, 2006). It also fails to change social systems due to power imbalances. Where an organization fails to depict transparency and accountability, for example, the CSR activities carried out by such an organization would be a reflection of the rotten system and as such ineffective towards the primary objective of the CSR initiative. The third case is critical in a way that it seeks to reveal the ills of the society through CSR. These may include social inequities, environmental destruction and the exploitation prevalent in the capitalist system. The key assumption is that there must be a radical change for accountability to occur in a capitalist system. Also, businesses are the ones undertaking CSR in the capitalist systems. The major difference is that this case argues for a radical change through CSR to the capitalist systems (Brown & Fraser, 2006). An example is where the business may lobby for environmental protection through constant local and international media campaigns. Multinational corporations may also lobby through their governments for such CSR initiatives. Part B I agree to the business case. The reason is that the main objective is to increase the shareholder’s value that also translates to improved organizational performance. If instituting CSR reports increases the value to the shareholders, then the organization will increase such measures so as to advance their shareholder's interests further. The latter forms a win-win situation for all the parties involved. The implication for the accounting education is that accounting studies will align themselves towards the main objective of increasing the value to the shareholders. Accounting practice will deviate towards instituting accounting methods that favour incremental value to the shareholders. QUESTION FIVE The Global Financial Crisis (GFC), a complex financial event, had different implications for the accounting practice. Of the many implications, the role of fair value accounting stands out as one of the major implication for the GFC (Kothari & Lester, 2011). The fair value accounting, especially one related to securitization of assets. Prior to the onset of the GFC, the gains and incomes recorded on transactions related to securitization reflected inflated earnings that then translated to overstated asset balances (Kothari & Lester, 2011). In this way, the poor application and implementation of the fair value rules of accounting contributed to the GFC. The accounting rules at the time allowed for the anticipation of future incomes of companies and organizations which led to overstating their asset and capital accounts valuation (Kothari & Lester, 2011). The implication was that accounting for these transactions resulted in overstating liabilities and asset on the subprime lenders balance sheets. When the lenders defaulted on the mortgages, the assets indicated on such balance sheets disappeared and as a consequence many banks were not able to cover for the losses (Kothari & Lester, 2011). The later resulted in banks not being able to qualify for Tier 1 requirements and as such mortgages were not considered as sufficient assets. In such a case, the banks became insolvent with very significant negative capital accounts. Thus, fair value accounting should necessitate for removal of accounting rules that allow for future anticipation of incomes. It should also provide for systems that make it apparent of bad eventualities at that specific time (Kothari & Lester, 2011). References Brown, J. and M. Fraser (2006). “The Approaches and the Perspectives in the Social and the Environmental Accounting: Overview of Conceptual Landscape," The Business strategy and Environment, 15, pp. 103-117. CCAB (2009). The Ethical Dilemmas of Case Studies for the Professional Accountants that are working as Chartered Accountants and Non Executive Directors. Retrieved from, http://www.ccab.org.uk/cutenews/data/files/CCAB_case_studies_Sept_09.pdf Deegan, C. (2009). The Financial Accounting Theory, 3rd Ed., North Ryde, NSW, McGraw-Hill Australia. Deegan, C. (2010). Financial Accounting Theory, 3rd Ed., North Ryde, NSW, McGraw-Hill Australia. Kothari, S. P., & Lester, R., (2011). The Role of Accounting in the Global Financial Crisis: the Lessons for the Future. MIT Sloan Management School, Cambridge Ma. Posner, R. A. (1974). “Theories of Economic Regulation.” Bell Journal of Economics and Management Science 5: 335-358. Read More