Accounting is a system that records, classifies summarizes, interprets financial information about a specific business. It is backbone of business financial world. It was created in medieval times in consideration with Development of trade and commerce. It shows profit or loss for specific period and nature of balance sheet.Topics show Accounting and accountability are co-related in first part and how accountability works .It also shows how representations of accounting like Financial statements are presented AICPA defines Accounting as an art of collecting, recording and analysing financial data and interpreting the findings. Concept of accounting remains the same whatever the meaning changes. But incessant and complexing economy system and businesses require a system of adaptation to trace relevant details regarding economic activities. Accounting theory creates a structure to certify that accounting practices complies with the traditionalism and consistency and accuracy. It is mainly concerned with its methods. Concepts of assets, liabilities and income and expenditure are still a basic function of accounting practises today. There are 2 vital categories of accounting:-
- Financial accounting deals with collecting and analysing data for making financial reports of the company such as balance sheet for the share holders , stake holders .tax authorities and public. It shows company's strength and weakness and about future interventions and details of company. These reports show the actual financial position at end of accounting year.
- Management Accounting deals with providing information for internal audiences for making business decisions on day to day basis. Supplying accurate information to make simplification in practises is vital. Information is provided through reports weekly or monthly basis to make necessary changes and work upon it. These reports generally shows Cost of goods produced, salary cost, accounts receivable ,accounts payable.
Accounting practices make venture accountable for these practises because the theft, dishonesty, selfishness is existent in every business. Particular area of accounting correctly enforced eliminates the chances of misuse of deception.How accountability works?
"It is not only what we do , but also we do not do, for which we are accountable" by author Moliere. Accountability in simple terms means to be held responsible for the activities to others for common or group objective. Accountability is defined by Anthony Giddens as in association employee as a part of organisation systems is accountable and responsible for his work and not the customers are to the association. Accounting is nothing but accountability. As both means the same to be liable to someone. Accounting imitate and its practises signify and form and run the organisation (Roberts, J 1991 ' The possibilities of accountability' 16(4) p.p 355-368). Hierarchical accounting is a traditional form which is practised till today in many institutions. In these it becomes a medium of passing and discussing about events concerning to organisation.
Accountability's positive characteristic is to be held responsible for his deed in order to tone his intellect of himself and activities. Visibility is vital in bond between responsibility and Statute of self. Accounting can be compared to child's understanding of spectacular image of himself for visual appearance in mirror (merleau paunty 1964pg 136). He feels in confused reality when he sees it but to recognize and guide him about his visibility other's viewpoint taken into consideration satisfies himself and others about able to be visible. Accountability brings us to a real world of everyday life. In initial stages person's self is represented by association of particular approach towards himself and towards other in social activities he contributed. It shows that accounting systems and practises are accountable and visible to themselves as well as outsiders of organization. Accounting's part of invisibility is shown in its capacity tp present objective data and independent of interests of who makes and utilize it. It's universal nature of making self realisable is vital( Roberts 1991 ' The possibilities of accountability' 16(4) p.p 355-368) By habermas definition regarding work and interaction it can be observed that accounting orientations creates a factual information to reproduce in that subject to not only to one's self and other's action but to self and other self's. Accounting information which compiles is termed as imposing understanding .But it's method are relevant because details are collected over hierarchical distance. Socializing forms of accountability serve to humanize the experience of work to cushion the individual from personal harshness.
Accounting should act as a guideline in provide details of resource usage of company through use of budgets shows accountant's responsibility. Standard Costing is a budget analysis and is a method of providing details regarding cost in and then these cost are compared with actual cost and compare the outcomes. Charles Harrison (1930) not satisfied with old system of standard costing described by Garcke & Fells (1911) and A.L.Dickinson (1908) due to lacking significance and acting efficiently. Garcke from his article proclaims that standard costing and budgeting it's like a beneficiary in providing details to prevent obstacles and enhance efficiency. Innovation in costing can improve the economic performance of individual contributing towards common goal of enterprise.
Annual reports are created at end of accounting period are accountable on behalf of institution of providing a true picture of economic stability at end of the year as well as future projects,plans to internal and external public specially to shareholders. It shows details about its achievements, Expanding markets, about future endeavours, diversified business portfolio for shareholder's, investment opportunities , financial statements viewing company's reputation. It is been viewed in Chwastiak and young article that silence in this reports leads to injustice with outsider's of company. Main theme is not breaking silences but to demonstrate the injustice done behind the scenes (Chwastiak & Young (2003) 'Silence in annual reports' 14: 533-552 ). Financial Institution to maintain better economic position in the economic market, stability and to expand market, hiding injustice is worst thing. Corporate economic expansion in terms of expanding markets for goods and services forgets the effects of such expansion as global warming, over population, deforestation. These silences are not disclosing it. But expansion in different sectors, areas globally like investment banking, securities are main attractions of these reports. In some cases, silences are deliberately planned in accounting process such as tax thefts, hiding the important issues actual market knowledge to clients about investments. And in some cases it are inevitable to accounting process. Annual reports can view the world completely if it's shows a real picture of company. It can develop, expand, and earn reputation not only in business world but also in social world by fulfilling clients, shareholders and public as well being accountable to society. Worker's which are inevitable part of the company are less important compared to productivity which is unseen in reports(Chomsky, 1987; Herman, 1995; Korten, 1995 p.p 547 silence in annual reports).By motivating them with rewards will improve company's productivity as well as reputation in market. A quote "work could provide more than a pay check" by Schumacher 1973 shows it can improve the human development process and increases productivity beneficial to economic and social community.
Agency Theory is a theory of accountability which guides to explain audit development. In these principals appoint agents and delegate decision making authority to them. Agents work on behalf of these principals .Due to information asymmetries and interest, principal's lack trusting agents and will resolve these by putting mechanism to minimize scope of information asymmetries. On the other hand, agents may be influenced by financial rewards, connections with other parties that are not directly accessible to principals. To maintain trust among agents and control their behaviour many types of mechanism was used like paying more perks, giving additional financial rewards, making contracts and penalties for breaking any rules or acting under certain regulations.(Institute of Chartered accountants of England & Wales(2005) 'Agency theory & role of audit')
Principals play various roles to avoid circumstances of information asymmetries that of expert auditor, statutory auditor in which body of shareholders act as principals and board of directors as agents. Financial statements or reports as a mechanism for shareholders to monitor the performance of directors regarding company's position and in case where financial information is biased, to maintain trust audit helps to stable the relationship between principles and agent. Auditors are directly accountable to shareholders in providing reports which are free from bias and contains true details. Principal and agent conflict as illustrated through agent's theory highlighted development of audit. It is seen as vital mechanism for shareholders to help ensuring that directors are running the company in the shareholder's best interest.How representations are presented?
Financial Statements are medium of representation of accounting by keeping records of financial activities of a business. They are prepared to know economic stability of business. Financial statements are of 4 types ; Balance Sheet, Profit and Loss account, Statement of Cash Flow and Retained earnings. As mentioned in Article "the Unbearable Ambiguity of Accounting" by Brendan Mc Sweeny ,1988 p.p 18 views that accounting reports of a institution can be represented through financial statements to imitate economic reality. It shows the picture of company to shareholders, stakeholders.
Representation Faithfulness is described by FASB (1980) as a "correspondence or agreement between accounting measure or descriptions in financial reports and economy criteria it purport to represent. Original framework divided reliability into sub headings of representation faithfulness , neutrality and verifiability. Board in order to avoid arguments with concept of 'reliability' thought of renaming the concept of representation faithfulness. Representation Faithfulness is simplified term respective of verification. In accounts, to verify calculations and clear the doubts, depreciation of assets is double checked. But it doesn't mean to verify the results of book value actually provide faithfully representations of assets cash flows. (mcsweeny.B (1997) 'The Unbearable ambiguity of accounting' pp691-712)
Main importance of representation faithfulness in accounting is to records transactions acting like a neutral, expert without bias of information and predilections. Representation Faithfulness as stated in FASB (1980) is expressive and prescriptive term for accounting representations but methods of applying requires qualifications and threats. Cash Flow accounting is a system of complete reporting and its provides information on factual basis having a clear, unambiguous and objective (LEE 1984 p.p 47-48). Cash flow qualifications and retreats like it is reasonably objective so measurement process is not bias from personal judgement and it can never be. From Possibilities of Representation Faithfulness by FASB & LEE 1984 it can be concluded that themes of representation of accounting are contingent .They normally occur within ranges and exhibit patterns that ideal of representation faithfulness function regulative. Young's point of view on article by Hacking, 1986 is that different user has different perspective of usage of financial statement. 'Flesh and blood' user may have conflicting view about financial statement usefulness whereas abstract user has no doubts regarding its use For getting possible outcomes user representation are taken into consideration. Information cannot be seduced and for getting impact by new information there must be some representation of the world .It means there must be representation that can be influenced by new information.( Young,J. (2006) ' Making up users' Accounting , organizations and society 31:579-600)
Different philosopher's think representation differently. As cooper 1992:255 states power of representation can be increased or decreased by information. Zuboff (1988) states that informating is a method of representation considering that things are modified and represented by substituting natural presence over artificial terms such as technologies. It also symbolizes principal of economy which turns losses into gain. Accounting information can be represented to the material advantage of those having control of the corporation. Corporate control should be represented by money terms respective of accounting information and representations to be effective. (Herbert G. Hunt 3 and Raymond L.Hogler "Corporate ownership and accounting choice: a critical analysis). SOX Act 2002 was introduced in America as corporate law to maintain transparency and governance to boost investor's confidence. Laws, legal penalties, restrictions to avoid meltdown like Enron, World Com were comprised in these laws. It focuses on independent audit, internal control procedures, data retention etc. But excessive regulations can make financial markets less attractive to investors (Sarbanes -Oxley: an endangered specie?; Critical Perspectives on Accounting 19 (2008) p.p 927-930)
Instrumental use of accounting as Creative Accounting is considered for representation. It main aim is to inflate profit figure of Balance sheet. Assets and Liabilities may also be manipulated to hide problems or to remain within limits. Various tricks like off balance sheet finance, over optimistic revenue recognition and usage of exaggerated non-recruiting items. Techniques of creative accounting changes over time due to change in accounting standards. Because in order to have regulations accounting standards are improved but those intend on creative accounting find new ways of doing it. As creative accounting involves setting up other entities and then trading with these entities. There was a bias to record income, revenue and profit from transactions with these entities, rather than cost, expenses and loses .Enron created this entities offshore to reduce amount of tax they pay and done by legally (tax avoidance) and it can take illegal forms (tax evasion). Enron managed to succeed for a long time in hiding from auditors, government. By using creative accounting and fraud to manipulate profits they were able to affect the stock price, the next illegal step was to start to trade to benefit from inside knowledge they had.Implementation of Control
Webster's Dictionary defines Control as purpose of policies and regulations for directing, regulating and managing production, administration and other business activities to fulfil organizational objectives.
Organization can itself be viewed as control process. Organization management is helped by accounting control mechanism to identify difference between actual and planned results: budgetary planning, control and standard costing, overhead cost allocation,Risk management.. Budget planning is intended for motivation, evaluate performance and control of operations.Planning is related with goal setting such as budgetary control. Control is exercised upon actual budget and planned budget targets of output and their cost. Standard costs are usually related with a production company's costs of direct material, direct labor, and manufacturing overhead. Overhead cost allocation like activity based control system finds activities that causes cost to arise and use those activities as bases for common cost allocation. These actions causes expense to occur to avoid future losses (Katherene Terrell, Robert Terell Survey of Accounting: making sense of business p.p 99). Control demands planning. Cybernetic model of control states that process is controlled when system objectives are controlled, a means of measuring result along with dimensions of objective, predictive model of system being controlled and various alternative choices are available to controller and ability to act is extremely forced by bargaining and negotiation process. This control would never be exercised in general and existing techniques can be improved for control mechanism.(Foot, G 2009 Lecture notes )
William.G.Ouchi's three control mechanism: Market, Bureaucracy and Clan. When level of interdependence is lowest and there is a single task or exchange, or when it is feasible and economical to establish a competitive market price for each multi-task or exchange at that time market control mechanism should be bring to light. Bureaucracy control mechanism should be emphasized when labour's diversity and employee turnover is high and even low interdependencies and clarity of individual performance is high. When the levels of worker diversity and turnover are low and the level of interdependence is high, the clarity of individual performance is low and teamwork is critical turnover and clarity of individual performance are low and interdepencies is high and critical team work are highlight feature of Clan control (Ouchi, W March (1980) 'Market, Bureaucracy and Clans Administration' science Quarterly, 25(1) p.p 129-141)Interplay of Control with Representation and Accountings
Relationship between control with accountability and representation is linked through Budget. As budget, a control mechanism termed as model are specific types of representation of resources. And as budgets are planned and prepared by manager's making them accountable for making it .In a company when budgets are prepared by lower level managers, there accountability is recognized through this mechanism.Failure of Financial Institution
Well designed management accounting and control system are being essential components of well managed company and representations undermine concept of reality. Various financial institutions and investment banks like Lehman brothers, Goldman Sachs, Merrill Lynch, Jp Morgan, Citigroup, AIG, Enron became bankrupt. Lehman brothers collapsed due to most level of loan portfolio consist of loans for buying real estate. Property market meltdown led to fall in property prices and value became lesser than loan outstanding caused to failure. Lehman brothers collapse led a major impact on world economy. Another institution Merrill Lynch one of 3rd largest Wall Street investment bank worth more than 100$ billion was tookover by bank of America for 50 $ billion due to failure. Merill lynch firm's stock rating were biased and bent in a shape to secure and maintain profitable contracts for investment banking services. Company dispersed delude information to assist business clients. (World socialist website april 2002(16) article). Company Management was accountable for misguiding investors by providing non-factual information. It was through email that unwillingly represented about company's economic condition and fake stock prices came to light to investors. To become victorious than federal regulations, pushing Wall Street to change its direction was real motive of firm. It represented creative accounting in its reports to increase profit, off balance sheet transactions and to show good economic stability making false impression on outsiders. Improper internal control, Budget planning and risk management leads to this situation of failure. Rules and regulations can make firm work under control preventing frauds to arise. While in Enron, which was highly praised by external environment, but internally decentralized financial and control decision making structure made it difficult to get perspective view on management activities.
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