Finance & Accounting resit essay
The role of accounting can be defined in many ways. However, the role of an accountant can be summarised by the following statement, ‘recognising, logging and communicating/sharing economic information to the various type of users who require this information.’ “Accounts are always engaged in interpreting a complex reality, partially, and in a way that is heavily weighted in favour of what the accountant is able to measure and chooses to measure, through the particular scheme of accounting to be adopted” (Morgan 1988, p. 480). Solumon criticised the way in which accounting was seen as extremely biased in a number of different ways, in addition he criticised how this had turned into a much larger economic, social and political problem. In my opinion, this has turned into an even larger problem today, this is potentially due to the fact that markets are even more volatile. In addition to this, due to various mathematical models being even more ineffective, this has in turn led to some economic predictions having no real substance and therefore these are no longer effective at giving varying predictions regarding predicting economic outcomes. Although Solumon was and still is widely criticised due to his views and beliefs regarding neutrality and on the basis that he provides no alternative method to reach the notion of neutrality in accounting. I hold the opinion that his viewpoint is a valid one due to his views on accountability and transparency within accounting. The main point here is that we can have transparency and objectivity in accounting. We can argue that neutrality can be distinguished from normative accounting. Firstly, information that is displayed in the financial statements should accurately present the transaction and events occurring within that time period. Faithful and accurate representation should require these events and transactions should be accounted for in a method that represents their true financial and economic substance instead of their normal legal form. In explanatory terms, this would mean that if substance of an operation or transaction is vastly different from its mere legal form, then that specific transaction should be accounted for in relation to its economic substance and reality. The justification regarding this is that information pertaining to financial details which are included in financial statements should represent the business core transactions and the corresponding events rather than from a legal point of view; in order to present a clear and transparent viewpoint. When discussing and relating these statements to neutrality in financial accounting; information which is displayed in financial statement essentially must not contain any information which is regarded as bias. Hence, it can be said that these statements should exhibit and indicate a balanced interpretation of the companies’ activities; therefore meaning that they should not at all be presented in a manner which can be seen as favourable to the company as this would obviously lead to bias. These financial statements need to be compared with one another within the business to attain a grasp of the company’s financial position, therefore it is important to not undergo any systematic bias. Systematic bias is where accounting systems automatically have developed a fundamental inclination of favouring one specific outcome over another one, over time. These inclinations of systematic bias may be conceded due to the accounting policies being overly prudent, potentially due to over precautious management. Following on from the previous statement, that financial statements are used for comparison purposes. It can be said that neutrality is vital, as in order to compare financial reports in accounting, consistency is key. This is because, if reports were biased and inconsistent; there would be no way of accurately assessing the financial information. This would lead to unreliable predictions and forecasts which could be seriously jeopardising. Therefore, it can be said that in order to comprehend meaningful assumptions regarding an entities financial performance, trends and position over a specific time period; transparency and consistency is vital. An alteration in accounting policies of a business may be compulsory to provide a more relevant and accurate financial statement. These policy changes may also be due to a distinct change in general accounting practices, in this kind of circumstances, the proposed change and the circumstances or nature which have led to the change must be divulged in the businesses financial reports. The reports or financial statements of one entity also must align and be consistent with the various functions within the business and in addition to this; align with the businesses within the same field. This is to ensure that the user is aided as much as possible when analysing and assessing the performance and operations of a specific company when comparing to industry standards. It can therefore be argued that it is a necessity for businesses to adopt approaches to accounting policies which fit in and align existing accounting practices within the industry. Upon following the notion of clarity within accounting, it can be argued that
Accounting is a method through which firms can obtain information regarding their costs of day to day activities and their costs of undergoing business. Businesses can also assess various other details such as if they have broken even, made a profit or even made a loss. Therefore, accounting can be seen as a way for business entities, people or governments to monitor and track their working capital, assets and land, however it is not limited to this. Developing on this idea of monitoring finances, accounting can be also used by firms to rationalise whether their monetary transactions are being favourable or detrimental to their business or the surrounding society. An example of this is discussing externalities. If looking at the case of a factory, although it can be highly cost-effective and profitable to run a factory, however the factory itself is polluting society and the surrounding environment, the firm should analyse the impacts it is having societally and environmentally due to the polluting factory. Rather than profiting arbitrarily in the short run, without any thought of the damage that is being done, the business entity should view the situation from a long term perspective. This can be achieved through use of accounting tools which can aid in establishing and highlighting these issues. However, these tools must be utilised in a non-bias and accurate fashion. However, this is much easier said than done, since the dawn of financial statements and the notion of accounting, people and business entities have been mishandling finances, these mishaps have been known to occur in a range large business such as AIG all the way to Royal Bank of Scotland.
Carillion is a prime example of how firms can mismanage their finances and in this case intentionally. This situation clearly displays how a business entity can use aggressive and intentionally biased accounting in order to mask its mounting problems and its varied losses. It also concealed its losses through this aggressive accounting manner; in order to inhibit its shareholders from witnessing the overwhelming problems it was going through, in order to ensure the businesses survival and in turn that the business would stay afloat. The accountants who were responsible for Carillion’s financial reports created false accounts to give the impression that the business was highly profitable even though the business had to borrow money from various sources purely to pay the shareholder dividends. With regards to the debt the business entity accrued and amassed over the years due to the appalling management; the accountants used a well known mathematical option pricing model; the Black Scholes model. This uses the notion of ‘implied volatility,’ the accountants at Carillion assumed the market isn’t subjected to sudden volatile changes in price. This model however is seen to be very old fashioned and as a result of this, the businesses financial statements could not be independently verified, and therefore allowed for the business to give the appearance of having reasonable financial statements. “The historical year-end and half-year public reporting of the group’s net debt has been aggressively managed through the short term deferral of payments, acceleration of receipts and receipt of short term loans from JVs,” (Morby, 2018).
Accounting is normally a tool which is meant for financial data to be collected, analysed and implemented. It can be said that this tool is meant to establish the fiscal and economic status of a business entity, personal financial accounts and even government finances. However, it must be added that these financial accounts must also demonstrate accuracy, consistency and transparency; therefore, it must include all aspects of finance, especially comprising of a business’s legal responsibility and their expenses. Although, the state of the current law, there are no specific guidelines pertaining to externalities; especially towards negative externalities where aggregate costs to the society and the economy are increased. Because of the fact there are no by laws regarding negative externalities, businesses are finding various loopholes to avoid acknowledging and paying for the aggregated damages that are caused to environment and to society. On the other hand it can be argued that in terms of environmental and social damage, who is to blame? To try and understand who is to blame for these situations I will use the following example. If referring to littering of water bottles, do you blame the people that produce the water bottles for not making their bottles environmentally friendly, or do you blame the user who chooses to purchase the environmentally unfriendly products? Therefore, assigning blame and responsibility is a highly complicated discussion, as its tricky to take into account a singular entity, business or individual and assign responsibility to them. The same goes for the case of these externalities going unacknowledged and businesses using aggressive tactics to cover them. Are these situations occurring so businesses can ensure that responsibilities lie elsewhere or are they occurring for various other reasons. In any case it is always difficult to assign blame.
Irregardless of these