Accounting as a Profession

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Table of Contents

The Purpose of Accounting
The Interested Parties in Accounting and how Accounting Serves their Interests
Internal Users
External Users
Implications of Accounting
References

Accounting plays a significant role in the collection, analysing, and communicating financial information to society. Nevertheless, to create a broader understanding of the term accounting and on its primary purpose, we have to consider it from a social perspective. In any society, people coexist by the creation of relationships with each other (Walker, 2016). Besides, there are three significant areas in a community; the categories are economic, social, and political arenas.

Therefore for the community sections to effectively function, the communication among them must be active. However, it becomes impossible to achieve interactions without proper accounting. Studies show that accounting information serves multiple essential purposes. This paper focuses on analysing accounting purposes through the identification of various users in the societies, and the implications drawn from accounting needs and functions as this discipline serves the interested parties.

The Purpose of Accounting

Accounting helps in communicating the financial health of an organisation or a business to all parties interested in the information. The role helps in assessing all liabilities, assets, cash flow, or the entity for both current and future investors. Accounting acts like the lifeblood of sensible businesses that provide central information to ensure various organisations get their jobs done. Financial statements are an excellent example of information generated from accounting work (Sherman & Young, 2016). The goals and objectives of private and government organisations depend on informed decisions regarding adequate scarce resource allocations.

Interested parties connected to a given institution like the suppliers, employees, investors, government, researches and many others remain eager to acquire different information about the financial position of the organisation. As a primary function of accounting, various reports are used to update the stakeholders. Updates make it easy to identify and predict the financial status of the organisation and formulating economic policies for upcoming activities and appropriate course of action.

However, the reliance of stakeholders in an organisation on accounting information such as financial statements when making decisions is only wise in ideal situations. Sherman and Young (2016) warn that dependence on accounting information has limits in the real business world. Accounting information may fall off the mark because the generation of financial statements relies on estimates and judgments that are sometimes subjective rather than objective. Conflicted interests amongst managers and executives incentivise them to inject errors into accounting information such as financial statements.

Another role of accounting is to enhance accountability. According to the objectives of responsibility, accounting functions in a principal-agent model. The agent – the accountant – provides a report on how management has utilised the allocated resources and the final results of the performed actions. However, a perfect principal-agent liaison is only possible in an ideal setting. There is an assumption in the relationship that the information the principal receives is fair and right (Andriof, Waddock, Husted, & Rahman, 2017).

The provided reports relate to the concept of truth and fairness concerning juridical interpretation from the perspective of either the agent or the principal in a complete contract setting. However, in a real-life context where many contracts are incomplete, factors such as employee demotivation, conflicts of interest and ulterior motives can thwart the principal-agent relationship, potentially jeopardising accountability.

Accountability happens when an individual or a particular department in an organisation is held responsible for the performance of a specific task. Mostly the parties are reliable right execution of a given role, even if they are not responsible for performing it. Besides, other parties in a given environment monitor the performance of various tasks by those accountable for these tasks. Therefore, the responsible party is the one that carries all blames if things fail. However, through accounting, the mistakes are minimised, and the responsible parties can monitor all activities of the organisation in a way that will prevent errors and fraud.

Legitimation is another role of accounting in society. The majority of the organisation needs to legitimate themselves to acquire resources in a given environment, for example, when trading securities. Organisations tend to have three outputs in nature; talk, decisions, and actions. Through one or a combination of the mentioned outputs, an organisation can legitimate itself by being accountable in the accounting process through the provision of truthful information – budgets and ex-posts among others – to give the actual financial outlook of the firm. Budgets frequently talk about the decision made or the one to be made while ex-post accounting talks on the achieved actions.

Nonetheless, as firms push to legitimatise their positions in the market, the process will likely be erratic. This is because accounting output information relies on the analysis of the data that managers and executives give. If the management provides incomplete – hides information – or wrong information for analysis, it implies that the output will not indicate the exact position of a firm. Different actors in business may desire a specific financial description for their organisations in various contexts, taking into consideration the development of accounting principles. Furthermore, the choice of accounting principles is a component of legitimation.

The elements of subjective influences in firms’ legitimisation processes show the unreliability of the legitimising process and that not all companies viewed as legitimate are indeed legitimate. However, the lack of reliability on the process to be legitimatise is not an accounting problem. It is an ethical problem for management. It can result in other issues compounded for shareholders and other parties that do business with a firm that appears legitimate but is indeed illegitimate. Through the use of accounting reports, different actors and organisations can, therefore, legitimise themselves, if the process is a hundred per cent reliable.

Perhaps the most significant impediment to having an ideal principal-agent model working in accounting is creative accounting. According to Ismael (2017), creative accounting has come under criticism in the contemporary world, primarily due to the collapsing of giant firms such as Enron, World Com, Arther Anderson, and Palmarat. In the beginning, accounting arose from the desire to have financial and economic transparency in firms and industries, creating prestige and trust between stakeholders. However, in the advent and infringement of regulation, scandals have become common within the accounting profession. As Ismael (2017) posits, creative accounting is the alteration of a firm’s real economic and financial position through tools, practices and unrestrained practices facilitated by legal norms. Instead of managers using creative accounting to elucidate a firm’s real economic and financial image, they use creative accounting to preserve their self-interests.

Recording all transactions that occur in an organisation is another significant role enhanced by accounting. The actions should happen as soon as any transaction takes place and involves putting them in journals. It is easy to transfer the journalized information to the ledger accounts. The ledger books are then used to record all the tractions measured in terms of money. Generally, there has been a lot of disputes and fraud experienced in society over the mismanagement of finance. However, with proper accounting, auditing can be done in various departments of organisations. The information recorded acts as reference materials that help in solving future financial conflicts.

Primarily, the world needs accounting because the public needs professionals who will maintain a business’s transactional record to ascertain profit or loss-making of the company as well to depict the financial position of the firm and provide such accounting information to interested parties (Ismael, 2017). Additionally, accounting’s core objective is to safeguard and advance the public interest, even in times when pushing the interests of the public may be in opposition to the position of the executives in a firm (Bracci, Stecollini, Humphery, & Moll, 2015). At no particular time should a professional accountant compromise any isolated objective in favour of the other.

Professional accountants should provide the actual financial information of a firm even if that correct financial position may make the public lose trust in the firm, lower the firm’s share value, lead to a financial crisis or job loss. However, in times when economies are in turmoil, professionals conceal sensitive information because they fear losing investor confidence and stockholders’ trust, but that should not be the case.

The Interested Parties in Accounting and how Accounting Serves their Interests

Accounting information of a given organisation serves the interests of various parties in society. The parties get the information from different parties. Therefore accounting information systems designs of any given institution should provide satisfactory reports based on social needs. Users of accounting information occur in two broad categories; there are internal users and external users of accounting information. To effectively serve society, accounting recognises the executives and managers as internal users. On the other hand, the external users are the investors, government agencies, general public, creditors of funds, employees, and finally, the customers.

Despite the distinction between the two categories of users, the contractual, as well as the financial obligations of internal users towards their external counterparts, defines the boundary for external users in terms of mandate and responsibilities. According to Ismael (2017), every profession has an in-built code of ethics that governs the professionals in it. From June 2019, IESBA’s 2018 rewritten and revamped “International Code of Ethics for Professional Accountants (including International Independence Standards)” came into effect (Jules & Erskine, 2018). Within this code, all professional accountants’ conduct draws from the principles of “integrity, objectivity, professional competence and due care, confidentiality and professional behaviour” (Jules & Erskine, 2018 para. 2).

The principal-agent model postulates that there is a clear distinction in the roles of both parties. Nonetheless, creative accounting has provided loopholes that internal users exploit at the expense of external users. Nonetheless, external users, especially the stockholders or investors, still bear contractual oversight over executives so long as they do not infringe on the functions of the executives. For instance, the board – on behalf of the stockholders – can dismiss an executive if there is evidence of unethical conduct by the executive.

Internal Users

Internal users regularly use a combination of financial accounting and management information to enable the secure governance of their organisations. For instance, company management uses accounting information to evaluate and carry an analysis of the financial position and performance of the company. Accounting evaluation and analysis helps owners to make essential decisions and suitable actions that are necessary to improve the organisational performance in terms of profitability, financial standing, and the cash flow in the firm. As a central function of the managers, setting rules and procedures that will help in achieving organisational goals are attained (Uyar, Gungormus, & Kuzey, 2017).

Through accounting information generated by both financial and managerial accounting systems of the company, the task becomes achievable. On the contrary, owners are responsible for providing the capital investment required to start and run a business with a central objective of earning the profit. The owner needs accurate financial information that indicates the earned profit and losses at a given fiscal period. Only accounting can provide the required information to a business owner who wants to establish how well their businesses are doing. The report helps owners to make a sound future decision like how to expand or contract the organisation.

External Users

Accounting information has a significant role to external users of a given organisation. The use of accounting information is a route and a tool to accomplish the needs of external users. For instance, in a corporate form of organisation, there is a separation of ownership from a management role. In most cases, investors usually provide the required capital, and the management team operates the entire organisation.

Both potential and actual investors utilise the accounting information in the company in various ways. The accounting information is used by real investors to know how management uses their funds and the expected performance of the organisation in the future. Furthermore, the data provides owners with the information they need to decide whether to decrease or increase their shares in the investment. Besides, potential investors typically use accounting information to determine if a given company is suitable to invest in, depending on their needs and the financial performance of the companies as evidenced by financial accounting reports.

In society, lenders are financial institutions or individuals who usually lend money to other firms and business to earn interest on it. Therefore, they require accounting information to evaluate the financial performance and the position of the company (“Users of Accounting Information “, 2019).

With clear assessment, lenders will know precisely the business that they will lend their money. Accounting thus helps lenders to avoid possibilities of fraud and loan default issues due to reasonable assurance obtained from accounting information. Additionally, suppliers in society are organisations or individuals who usually sell raw materials or merchandise to other organisations on a credit basis. The group uses accounting information to get an idea regarding the future creditworthiness of a given organisation or business, thus determining whether they will continue to provide their services and goods on credit.

Government agencies also need financial information about a business to aid in imposing taxes and laws. The general public again uses the accounting information when it comes to seeking education purposes like teaching students on accounting and finance, when researching the impacts of a given organisation on the economy, for public job seeking and opportunities. Another group that benefits in accounting is the customers (“Users of Accounting Information “, 2019).

Through accounting information, customers can access essential data concerning the current position of a company. In society, customers occur in various categories; they are either producers, found at various stages of productions, retailers and wholesalers, as well as the end-users. The accounting information here helps customers to make a judgment about the future of a business organisation. Manufactures or producers at each production stage require assurance that a given organisation will persist in providing goods and services necessary. Besides, retailers and wholesalers need the reliability of constant product supply.

The final consumer also wants a continuous availability of certain products. The mentioned needs of customers, therefore, indicate that accounting information is essential, starting from the primary producer or manufactures to the end-users in a created value chain.

Finally, employees in any organisation lack a hand in significant management practices of a firm. Workers are external users when it comes to accounting information because they are consumers of the accounting information generated even though they ensure that firms remain operational. Employees are more interested in the financial report of a given business organisation because both employees present and future aspects depend on the failures or success of the business.

Through accounting information, workers can evaluate the profitability of working with a company in terms of better remuneration, job security, job promotion, and retirement benefits. The assessment indications enable employees to continue working or quit a given corporate for their current and future interests. The accounting information determines how employees will dedicate themselves at the workplace.

Implications of Accounting

When correctly done, accounting information is of significant use in society, within the political, social, and economic arenas. However, for the functions to be useful and efficient, it calls for openness, fairness, and accountability (Zyznarska-Dworczak, 2018). All institutions in a given environment aim to remain economically sound by making a profit. Nevertheless, it all depends on how the organisation will play to convince the general public and information users. With accounting, all interested parties in a particular organisation need financial information that will guide them to make a proper decision that determines their current and future relationship (Carr, 2017). Studies indicate that companies which provide suitable accounting information to the interested parties tend to prosper.

Considering the vital role that accounting plays in society, and the considerable number of parties that depend on the information accounting generates, one can conclude that it is a delicate field that requires significant attention. With proper accounting, a company can reduce errors in its financial systems. Proper accounting will help to keep essential records that are invaluable in situations of disputes. If an organisation can solve both internal and external conflicts, it will be easy to carry activities because all parties will gain trust in the firm. An increase in the number of stakeholders interested in the accounting information of a company requires accountable for all the activities they carry out. Managers face much pre

ssure from the owners, thus enhancing the spirit of accountability. When the financial information provided to society is reliable, an organisation will create a suitable means of communication. Proper presentation of the accounting information reduces the chances of miss understanding among various parries connected to an organisation. With adequate information provided from the financial documents, any stakeholder can read, evaluate, and make the decision on how to go about based on the understanding.

A firm lacking proper accounting approaches cannot provide reliable information to society. For instance, any business organisation that lacks accountability in its accounting process will lose its legitimacy, resulting in failures. No business stakeholders will want to associate themselves or invest their capital in a fraud organisation. Besides, an organisation that does not provide credible accounting information to society tends to scare away investors.

Incorrect information can be made the government initiate investigations on a company, thus facing closure chances. Consequently, the lack of accountability in government-based organisations will lead to an increase in corruption (Bracci et al., 2015). When not serviced with accounting information, the interested parties, suspect corrupt and dubious undertakings because the responsible accountant lacks the pressure always created through responsibilities.

References

Andriof, J., Waddock, S., Husted, B., & Rahman, S. S. (2017). Unfolding stakeholder thinking: Theory, responsibility and engagement. London, United Kingdom: Routledge.

Bracci, E., Steccolini, I., Humphrey, C., & Moll, J. (2015). Public sector accounting, accountability and austerity: More than balancing the books? Accounting, Auditing & Accountability Journal, 28(6), 878-908. Web.

Carr, C. L. (2017). On fairness. London, United Kingdom: Routledge.

Ismael, A. Y. A. (2017). The impact of creative accounting techniques on the reliability of financial reporting with particular reference to Saudi auditors and academics. International Journal of Economics and Financial Issues, 7(2), 283-291. Web.

Jules, D., & Erskine, R. (2018). The International Code of Ethics for professional accountants: key areas of focus for SMEs and SMPs. International Federation of Accountants. Web.

Sherman, H. D., & Young, S. D. (2016). Where financial reporting still falls short. Harvard Business Review. Web.

Users of accounting information in accounting for management. (2019). Web.

Uyar, A., Gungormus, A. H., & Kuzey, C. (2017). Impact of the accounting information system on corporate governance: Evidence from Turkish non-listed companies. Australasian Accounting, Business and Finance Journal, 11(1), 9-27. Web.

Walker, S. P. (2016). Revisiting the roles of accounting in society. Accounting, Organisations and Society, 49(C), 41-50. Web.

Zyznarska-Dworczak, B. (2018). Legitimacy Theory in management accounting research. Problemy Zarządzania, 16(72), 195-203. Web.

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