Whether Accounting Report Is Subjective or Objective - Literature review Example

Institution: Name of student: Date: Whether Accounting Report is Subjective or Objective Introduction Objective accounting report is an outcome of the decision made based on the facts of a certain situation and not influenced through personal feelings, ideas, preferences and tastes. On the other hand, subjective accounting report is linked to decisions made based on personal feelings, preferences, tastes and views. In this context, therefore, it is important to understand the existing difference between subjective and objective report based on the principle of respective judgements. Objective judgment is perceived to be absolutely true, while the truth of subjective judgements largely depends on the person making the decision. Although some disclosures are objective in nature and require minimal professional judgment, it is surprising that other disclosures are subjective in the sense that an accountant is required to apply their experience and decisions to give the relevant and useful information (Charlie, 2012). Generally, the auditor’s responsibility is to evaluate the fairness of accounting estimates provided by the management in regard to the financial statement taken from the entire accounting systems. Since estimates are analyzed based on subjective and objective factors, this implies that ensuring controls over such information could be a difficult task for management. Despite the fact that competent personnel use appropriate and reliable data, there is a likelihood of bias particularly in subjective aspect of the accounting report. Therefore, it is crucial for auditors to understand that while planning and implementing the procedures to evaluate accounting reports or estimates, they should consider the biases associated with the subjective and objective factors (AICPA 2015). Based on critical analysis of various literatures, this essay will discuss whether accounting report is subjective or objective. The emphasis is that a standard financial report has to be objective. Most contemporary companies give out their financial reports with a target of attracting investors. However, most of the reports are full of malice and are meant to convince the stakeholders that the company is running fine financially. That may not be the case anyway. The professional finance officers influence the auditing process, hence, making the financial report subjective. However, standard financial reports ought to be objective. It is important to mention that subjective understandings are the source of the debates on the way the emergence of social reality occurs. The understanding, which is objectified via interaction, lie at the accounting research’s interpretive management. Kakkuri-Knuuttila et al as cited in Ahrens (2008), continues to mention that the framework of Burrell and Morgan’s (1979) as the crucial exodus of the debates. The distinctions they came up with about nominalism and realism, anti-positivism and positivism, voluntarism and determinism, ideographic and homothetic research influenced accounting researchers. The society assumptions as characterised by conflict or order also influenced the interpretative accounting researchers in coming up with strict distinctions between objective and subjective knowledge. This clearly shows that engagement of objective and subjective accounting aspects is often brought on board by determining how the environment or the social passes via accounting. Accounting, conversely shapes, extends and ramifies the social (Clarke, 2005). It is notable that the auditors make the requests at times that they are pressed-hard by demands of cite lining and versing from the rulebook by their clients, so as to create a backup of the judgements by the audit about accounting practices that are questionable (Shyam, 2002). The book for the accounting rules has to a great extent grown after approximately thirty years of writing. It is filled with a lot of details meant to replace auditor and management judgement about fairness of, in regard to financial statements. For the rule writers, it is a losing game. New gaps are created by each rule covering a new contingency. For instance, if there a rule against stealing of a shirt, after sometimes one may argue that it is not written anyway that the shirts button should not be stolen. Third the structure of administration of FASB is biased in terms of supplying the rules. An accounting environment that is competitive enables rules makers to make use of the signals of the market in writing the cost-of-capital lowering rules. This could however be differentiated by investor and industry clientele. Corporate managers will be in a position of signalling their intent to a shareholder (Shyam, 2002). This implies that a shareholder can easily read the intent without confusion. Morgan (1988, p.477) examines that accountants often have a tendency of behaving as engaged in more objective, value-free as well as technical enterprise in providing the true information. Instead, they are perceived as subjective constructors of the reality because they make situations to occur in limited and one-sided manner. This implies that accountants provide partial and not one-sided understanding of reality that he and she as a professional really intend to present. Accountants are not just practising a craft that is technical like the technicians. Nevertheless the accountants are part of processes that are much broader of constructing the reality as a result producing one sided partial views of reality. This is similar to how artists are obliged to produce partial views of the reality they wish to present. By exploring and appreciating the accounting process dimension, new accounting epistemologies are developed by accountants. The epistemologies put emphasis on the interpretive aspects of the subject as opposed to the objective aspects. It happens in ways that help in broadening and deepening the contribution of the accountants to social and economic life (Morgan, 1988). Some accounting reports contain the information selected by the accountants to depict the financial situation of the company. According to Levisohn (2002), financial reports are sometimes misleading and sometimes aggressive. The accounting methodologies in several instances are complex. They are as well indecipherable. However, the methodologies are not necessarily inaccurate, fraudulent or illegal. Reason being, the corporate accounting complexity has exponentially grown together with the structures of finance and operation of several companies. Things like earnings and sales that used to be objective concepts have become complicated and subjective in many scenarios. Financial accounting is at an increasing rate becoming an art of judgement and estimation. The growing globalization, competition, financial engineering and deregulation have designed a measure of the things companies do. And the manners in which the companies manage their risks in a more complicated manner are as well measured. Venturing into foreign markets calls for the need of using derivate in the intangibles value and it is, however, often hard to establish how the way the figures are derived (Levisohn, 2002). Lo (2007), states that there is no topic between finance and accounting that is a little more provocative than management earnings. The discipline involves, explicitly, potential mischief, wrongdoing, conflict, dagger and cloak as well as senses of mystery. Earnings management takes place when a manager uses judgement in structuring transactions and financial reporting to alter the reports of finances. They do so as to mislead the stakeholders about the company’s economic performance that is underlying. They as well do so to influence the contractual outcomes (Lo, 2007). This clearly shows that accounting report is not objective because there is no trustworthiness as it is evidently mentioned that a manager relies on his or her own judgement in structuring transactions and financial reporting to make unnecessary changes in the financial reports. Several companies today hire outside accountants so as to ensure that the information offered is objective. External accounting companies are more reliable and efficient (Cappelli, 2008). The executives in modern organisations go through a lot of pain from the failures they face in management of talent. Practices of talent management especially in the US over the past generation have been dysfunctional. That has led to corporations lunching to shortfalls from talent surpluses. Management of talent at its heart is just a matter of anticipation of the human capital need and hence establishing a plan that is reliable to in meeting it. In the contemporary response to the challenge, there are two camps that are equally effective but distinct. The more common of the two is doing nothing. Anticipating no needs and planning for nothing. The reactive approach overwhelmingly relies on outside hiring and it has faltered because the management surplus talent has eroded (Cappelli, 2008). According to Firth (2002), an Auditing Company is supposed to provide non-audit services. Accounting firms have been providing non-audit services to the audit clients they have. The exercise has been happening at an extremely alarming rate of growth. Few studies have been conducted to determine the join audit provisions of non-audit and audit services. A single reason for the research paucity is that there is lack of data that is publicly available. Therefore, is not easy to empirically test theories and examine relationships. A recent legislation, however, in the UK calls for non-audit fee publications to be paid to the auditor of a company. The discloser therefore makes provisions of the data needed for investigation of audit and consultancy services provision. A model seeking to explain the decision making of the company is developed so as to hire non-audit services from auditors. The model indicates that a company that faces a potentially high cost of agency make purchases non-audit services of relatively small amounts (Firth, 2002). Clarke (2005) discusses an example of the company Enron. He indicates that, for instance, the failure of Enron brought a catastrophe that was not able to compare to the damage the company may have caused in case it succeeded. Disconnections of corporate have recently been caused by the emphasis on stakeholder importance that has been relentless. Such corporate as Enron from their moral underpinnings that are essential encouraged them to exclusively concentrate on financial performance. Auditing the company helped Enron lie to investor (Clarke, 2005). Conclusion Based on the above discussion, practically, it can be concluded that accounting report is subjective rather than objective. It is notable that the auditors make the requests at times that they are pressed-hard by demands of cite lining and free from the rulebook by their clients, purposely to create a backup of the judgements by the audit about accounting practices that are questionable. It is apparent that accountants that are professionally qualified may comfortably cook the book so as to provide information that is not true, real and authentic for the sake of their personal interests. The most effective way of protecting an accounting report’s objective is to hire an external company to conduct the audit. Therefore, companies need to be very careful on how the finance officers handle the accounting of the company. The companies must make sure that the audit reports are objective and not subjective. To be precise, accounting report is objective and not subjective. References Ahrens, T. (2008).Overcoming the subjective–objective divide in interpretive management accounting research. Accounting, Organizations and Society, 33 (2008), 292–297. Charlie, M. (2012). Digital Financial Reporting-Disclosures: Quantative, Qualitative, Objective, Subjective, Useful. Retrieved May 15, 2015 from, Clarke, T. (2005). Accounting for Enron: shareholder value and stakeholder interests. Accounting for Enron. Blackwell Publishing Ltd. 13(5), 598-610. Cappelli, P. (2008). Talent Management for the Twenty-First Century. Harvard Business Review. Lo, K. (2007). Earnings management and earnings quality. Journal of Accounting and Economics, 45, 350-357. Levisohn, A. (2002). Subjective Accounting or Fraud? Trend in Financial Management, April 2002, Strategic Finance. Institute of Management Accountants. Firth, M. (2002).The Provision of Non-audit Services by Accounting Firms to their Audit Clients. Lingnan College. Morgan, G., (1988). Accounting reality construction towards a new epistemology. Accounting Organizations and Society, 13(5), 477-485. Printed in Great Britain. AICPA (2015). Auditing Accounting Estimates, SAS No. 57; SAS No. 113. Retrieved May 15, 2015 from, Shyam, S. (2002). Regulatory competition for low cost-of-capital accounting rules. Journal of Accounting and Public Policy, 21 (2002), 147–149. Read More