According to Solomon (1991) “If accounting is to retain any credibility and without credibility it is worthless – Its guiding light must be neutrality in Financial Reporting”.
Process of risk management via accounting is very important aspect for entity as it is crucial for sustainability in the market. Risk measurement is internal aspect where disclosure of risk policy is external aspects cover in financial reporting. As per the current economic situation organizations are conscious for effective accounting and faithful representation to stakeholders and third parties. Risk disclosure is very important for entities to sustain the faith of investors and employees. It can be quantitative or qualitative or both. Using unbiased professional judgment and relevant accounting standards organization can do faithful representation. This paper represents the effective concept of creditability and neutrality in accounting by evaluating above given statement of Solomon.
Important Aspects of Accounting
Accounting is very vital and important part of business. It is about giving an account of business transactions. It has its own principle and methods for recording of business transactions given by regulatory accounting body. Accounting is based on various principles like going concern, Accrual, matching, consistency and realization. This is not exclusive list, but recognition and matching is general rules for operation of accounting body. It represents the fair value of transactions. Hence, accounting provides most vital information of economic situation of entity. It is necessary that it should be represented in fair manners to understand it clearly by users. The concept of objective is fundamentally related to measurement. Accounting itself is recognized as measurement discipline. Hence, one could expect accounting practices to be objective. As per the recent study of accounting definition shows that not all current public accounting practicing are publicly objective. Individual Experience of accounting measurement may vary according to changes. Therefore one can say that objectivity of accounting can vary as per the needs of accountant in the entity. Thus current accounting policies are not explicitly objective. Reliability in accounting means that information presented is unbiased, free from error and faithful. It is determined by accounting standards and accountants and auditor apply such standards in procedure of financial reporting. As per number of studies, individual when receives actual outcome of process, they learn to adjust for bias in forecasted information, but are less likely to purchase biased forecast than unbiased forecast. Faithful representation of financial statement is key part of creative accounting by presenting records fairly which gives true and fair view of the entity. Annual report can never be free from biased as economic situation represented in financial reports measured under condition of uncertainty. Annual report includes assumptions and estimates regarding various matters which are base on future uncertain events. As per the recent corporate scandals and their outcome to investor, there is huge probability that accounting of entities can be biased by not disclosing all the information. Accounting of any transactions does on the document and facts available in the base. It is important to realize that report should be based on factual data to assure user that it is free from misstatement and error. Hence, it is important for entity to emphasize on importance of the reporting accounting entity being independent.
Representation of Economic Reality in Accounting
The word reality comes from Greek word, which means to study or that which appears. Economic reality is has long established roots in accounting practice and research. It has been believed by many practitioners. Accounting should provide clear picture of reality. Representation of economic reality through accounting may require professional skills. As per Arthur (1993) represented three possibilities that profit is socially constructed which are all objects are socially constructed, and profit is not different. Profit can only exist in the context of economically active human society and profit is social fiction constructed to promote and maintain interest of particular group or individual. As per Mattessich (1995 to 2013) reality covers many layers as hierarchy including physical, biological, psychic and social. Based on his model accounting objects do exist in economic reality. As per him physical reality exists behind tangible assets and social reality exists behind debt and other accounting objectives. Social reality also exists by generated property of social people. Hence, accountancy is subjectively construed and it can change to re shape the reality.
Corporate Accountability and Accounting Fraud
Construction Company Carillion is big example for financial threat to the stake holders. Share prices of company collapsed from July 2017. Company was under great financial debt and failed contract. It was Public Sector Company. Payment was coming in delay and $900m debt pile were main factors to send company into liquidation. The aggressive accounting and pension deficit was missed red flag by auditors. It was said at the time of scandal that it is not only Carillion that is built in send but it is our whole system of corporate accountability. After charging hefty fees by big firms as auditor they provided false assurance to investors, public and employees for almost two years as per various reports. Hence, fair financial representation is very crucial and important aspect to decide creditability of the company. Billions of dollars have been lost in financial disasters which destroyed company and life of investors. Lehman Brothers, Satyam scandal, and recently Volkswagen show poor representation of financial transactions of business. Accounting firm Arthur Anderson which was later accused for doing wrong with Enron, irregularities found during the audit of decent. After that they split their company. Worldcom was involved in huge financial fraud. Irregularities and unfair accounting practices found in books of them. This company used false internal transfers and false operating expenses to understate profit.
Accounting in Public Interest
As per the Wyatt accounting is most important factor of society. Hence, public rightfully expect accounting profession to be practical, intellectual and to have regard with public. Government body and standard setting bodies servers to protect public interest via representing fair principles for accounting. Accounting profession shows that social contract stands a bond with public, hence to protect public interest helps to strengthen public relations. Hence, recommendation and feedbacks from public is important to build structure for any principle by accounting bodies. Public shows confident in professional accountant because their work shows result of financial soundness in industry. International federation of accountants (IFAC) has established code of ethics for accountants related to objectivity, integrity, confidentiality and professional prudence. IFAC has developed series of standards to protect public interest like international standards on auditing, International standards on quality controls, International code of ethics for the professional accountants, International Educational Standards and International public sector accounting standards. IFAC is based on three basic concepts for conceptual framework of any codes or standers which are seeing cost and benefits for the whole society, adhering the democratic principle and process and respect of cultural and ethical diversity.
According to Solomon (1991) “If accounting is to retain any credibility and without credibility it is worthless – Its guiding light must be neutrality in Financial Reporting”.
The creditability is main and important aspect of any entity. It is quality of being sound in the market. Creditability means accounting information does not comprise any error or subjectivism. It contains the faithful image of mirroring the business transactions in financial reports. Conceptual framework of entity frames credibility in content. Hence, it is very important that recording of account should be done in truthful manner. Accounting should always be objective in related to creditability. As per above said it should be represented in truthful manner by fair recording of transactions and event occurred for specific period in the business. It must reflect the meaning and consequences of such economic event by fulfilling legal requirement in the business.
Accounting reports presented should be neutral and biased free. Every accounting report influences the decision of investor and third parties. It is pre requirement that it should be complete and accurate. A complete and faithful disclosure of accounting transactions and events always ensures the creditability of information provided in financial statement as it provides balance between numbers and information. Hence, if any event or transaction which has occurred in entity for particular reporting period, it must be represented in financial statement and in truthful manner. Company always presents its financial aspect in assets, debt, capital and earning criteria. For example if company is expecting doubtful debt of $50,000, then to check validity of assumption past records of company is required to check. Validity of assumption is also important to create liability in business. For that many things are required to check by accountant like due date of payment of such sale, payment and penalty payment methods, assessment of debt is realistic or not, probability of cash payment and probability of future recovery of doubtful amount.
Every description in financial statement represents obligation and economic resource of entity. Qualified professional records transactions and event by applying accounting techniques and principles. Credibility of such records means presenting faithful display of economic situations which can directly or indirectly affect the resources of the entity. Reality of every record comprise of economic benefit or economic cost generated by it. Every cost or benefit should be recorded by accountant with fair assessment. If there is absence of any legal requirement or accounting requirement but it may affect the economic situation of entity than it should be disclose in financial statement to aware the users. Decision taken by management for selection and display of information should not influence the shaping of outcome, it should be neutral. There can be various accounting methods for same decision which can give different financial outcome for display of information, accountant may shape such information to get pre determined outcome hence it is very important that accountant should be neutral. This limitation may refer selective disclosure of information regarding business events or transaction. Entity may choose not to display such information which can affect negatively to economic situation of it. Hence, it is very important that entity should avoid such practice of representing unrealistic information of business transactions and events. It will be very difficult to measure creditably of the firm if information represented is not truthful.
Information presented must be disclosed on the basis of nature and cautious assessment so it can exactly show mirror image of entity’s financial position. Degree of assessment should be fair and measured by experienced person. Overestimated expenses can reduce display of earnings or underestimated expenses can show unrealized earning in same manner, overestimated income can show unrealized earning and underestimation of income can hide true figures of earnings from investors and third parties. Hence, it should not be overestimated or underestimated it should be represented with neutrality and cautiousness. Company always represents information by choosing high probability of gain or loss with degree of estimation and cautiousness. If probabilities are not equal, information is presented as degree of estimation. Limit of cautiousness and estimation assessment is always sensitive towards outcome. It can lead to permanent underestimation or over estimation of outcome. Information which is based on estimation and judgment can trigger difference of qualitative approach for standards. Hence, in present circumstances convergence in accounting regulation is made to discuss such limitations in accounting standards.
Another measurement of creditability of entity is disclosure of information on the basis of conceptual framework adopted by entity. Conceptual framework always supports creditability of accounting standards by complete disclosure requirement within reasonable limits. It is measured by materiality and reliability benchmark and cost or benefit derived from such transaction. Specific professional judgment may vary between different professionals by applying various methods; hence it is important that assessment should be done on reasonable basis with professional attitude so it can be comparable by users. Standards of various regulatory bodies stipulate the presentation of accounting information. Methods or shape of information disclosure may vary in financial statement of each entity.
Independent observer called auditor issues assurance regarding relevance and creditability of information provided in financial statement. Auditor confirms display of information in financial statement and purpose of happening such event and transactions in the entity. Hence, direct and indirect verification of information and correspondence between accounting and economic aspects is crucial feature for every entity as it represents the value of entity in the capital market. Sometimes information is also assessed by another expert to confirm the display of information. The need of correspondence in accounting and economics arise because of errors can occur intentionally or unintentionally and it can distort the information provided. Such errors can be limited to direct control like inventory valuation, debtors, creditor and cash management or in indirect control like reassessment and recalculations. Various ratios in financial reports also represent the creditability of the business. Hence, it is very important for business to represent correct creditability in financial statements.
Accounting profession must include responsibility to display faithful information of entity in public interest. Qualified professional must report any relationship or interest which is susceptible and can negatively influence resource of entity without any pressure. A solid financial reporting will increase comparability of financials in the eyes of investors. It will be also true mirror for the organization to improve internally and externally. Accounting has vital impact on society socially and economically both, it is important to maintain integrity of accounts to maintain creditworthiness in economy. Hence, statement given by David Solomon is correct that without credibility it is worthless – Its guiding light must be neutrality in Financial Reporting.
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