Accounting can be considered
to have many roles in society, it can be a form of communication across
different arenas. Society is essentially made up of various arenas which
consist of: organisational society, political concept and economics.
Communication across these
arenas are via financial language within financial statements, essentially
helping users with decision making.
In this essay I will evaluate
the following statement ‘Communicating reality in accounting is easy – we
simply record what we see’.
There are various theories and
images set out that help underpin accounting. In other words, the theories are
set out to understand what accounting is all about and how it should function
in an ideal world. Financial statements have been socially constructed, meaning
that they have been constructed for people by people, which is an example of
one theory in accounting.
“People only think of you as
communicating reality, but in communicating reality, you construct reality”
(Hines,1988: p.257). Accounting researchers like Hines has challenged the view
of external realism. He argues for a socially constructed accounting
presentation, suggesting that accountants do not illustrate reality, but in
fact construct reality.
Solomons (1991) suggests that
accountants should go out and look at journalists, follow their rules and
essentially report the news as they see it. “I believe that accountants are
like journalists. They should report the news, not make it” (Solomons, 1991: p.287).
However, Tinker (1991) disagreed with Solomons’ theory and suggested
accountants may misrepresent reality like journalists can. Tinker also stated
that “David Solomons does not say that journalists actually “do” report the
news, only that “they should”” (Tinker,1991: p.300). I think Tinker is trying
to convey a message by saying that Solomons’ use of words means that even
journalists do not report the news as they see it.
I understand the implications
of an accountant going out and doing what a journalist does, effectively ‘reporting
the news as they see it’. However, I personally feel that many journalists
misrepresent reality and with accountants going out and being like them, this
can influence a misrepresentation of reality too.
This can be further proven
when Tinker used the example of the director of Israel Broadcasting, failing to
comply with the journalist’s code of practice. (Tinker,1991: p.300) In other
words, if journalists can fail to comply with the rules and regulations set out
for them, what makes it so sure that accountants would not do so too?
Solomons (1991) then went on
to say that accountants should function like cartography in producing maps of
economic reality. Again, Tinker disagreed with Solomons’ theory stating that “maps
do not represent facts as there are misrepresentations that affect our
behaviour” (Tinker,1991: p.300).
It was then further suggested
by Solomons (1991) that accountants should function like a speedometer in
capturing the real economic speed of an entity. However, Tinker (1991) argued that
drivers would then be tempted to tamper with speedometer readings to avoid
detection and prosecution, and thus would be a subject to the same
“incentives-to-cheat as managers who produce financial reports”. (Tinker,1991:
I personally agree with Tinker
(1991) as the idea of drivers being able to tamper the speedometer to avoid
detection can ultimately result in accountants doing the same to the financial
In addition, Solomons (1991)
offers the idea of accountants conveying their messages through telephone
communications to a group of users or an audience. He also stresses that the
task of accountants is to provide information which is free from bias.
On the other hand, Tinker (1991)
further disagreed with his theory, stating that “Thoughts and words may be made
to differ intentionally or otherwise. There is no guarantee that they will
conform to “what is understood” and that the telephone is selective, and
inevitable reflects intended and unintended bias” (Tinker,1991: p.299).
However, as demonstrated by
Solomon (1991) and Tinker (1991) no specific image/theory fully captures what
accounting is all about. In my opinion I think that the different theories
provide different angles on seeing things, and possibly implementing these
theories could possibly throw some light onto accounting and make sense of it.
It is also evident that such
debates between researchers taking place represent the problematic nature of
accounting and the possible loopholes in its development.
A conceptual framework was put
forward to set out the theoretical ideas which underpin accounting. This idea
started in the late 60’s early 70’s by understanding the accounting purposes. (Deegen
and Unerman, 2011).
The conceptual framework is
derived from accounting concepts and can be described as a ‘boundary’ with
components such as IFRS, true and fair view, SSAP2 and case law. However, there
are ‘grey’ areas which are issues undetected in accounting.
Accounting had no structure in
any kind of theoretical framework, unlike professions such as doctors and
teachers. These professions had theoretical knowledge backing them up such as
science in the case of a doctor and technology in the case of a teacher.
Accounting originally had no knowledge base but essentially evolved over time.
A conceptual framework can be
described as “a coherent system of interrelated objectives and fundamentals
that is expected to lead to consistent standards” (Deegen and Unerman, 2011: p.206).
Ultimately a conceptual
framework is an attempt to identify what accounting is about, who is it for,
what are the objectives and what makes information reliable. A conceptual
framework might give us information about these ideas.
It gives us various
definitions of items such as assets and liabilities and an understanding of
what we do in accounting. However, it may also be viewed as unhelpful as it is
time consuming and costly.
It has been argued that there
are various benefits relating to having a conceptual framework in place. “Providing
the foundation that can provide the guidance for standard setting, allowing the
standard-setting body to utilize economics in their efforts to develop
standards and providing broad prescriptive concepts to allow other concepts to
flow from them” (Belkaoui, 2004: p.202).
I believe that having a
conceptual framework in place is a step in the right direction as it provides a
‘foundation’ for a knowledge and theoretical base essentially reducing some
loop-holes. These loop-holes could be the basic definitions of items such as assets
and liabilities. However, with that said, I also believe there are still many
loop-holes within the conceptual framework. The conceptual framework is not a
standard, therefore will accountants comply with it?
The framework lacks in
consistency and I believe there is room for interpretation as well as opinion.
For example, little attention is given to the concept of the true and fair
view, which is essentially a fundamental loop-hole.
Accounting only had SSAP2, the
‘Disclosure of Accounting Principles’ to depend on before the development of
the conceptual framework.
“Developed in 1971 SSAP2 has
historically played an integral role in accounting in the absence of other
standards” (Barden, 2000: p.80).
SSAP2 considered consistency,
accruals, prudence and going concern as the fundamental concepts in accounting.
These accounting concepts are argued to construct reality.
Being consistent in accounting
is essential, in relation to accounting a company may have to show consistency
when calculating depreciation. For example, if a company uses straight line
depreciation to depreciate their assets, they should be consistent and use the
same method throughout.
The going concern concept is
the assumption that an entity will remain in business for the foreseeable
SSAP2 was beneficial to
accounting however there were a few problems. Prudence required judgement and
opinion, which conflicts with neutrality. Going concern required that
accountants make fundamental assumptions about the future of a business, which
essentially contradicts prudence (Barden, 2000).
FRED21 turned into FRS18
‘Accounting Policies’ in December 2000. The statement of principles 1991, made
it essential that SSAP2 was reviewed.
FRS18 states the importance on
accruals and going concern concepts. However, prudence and consistency are of
lower importance. FRS18 singling out the two concepts of accruals and going
concern in my opinion is a good thing. This is because the going concern is
extremely important to generally accepted accounting principles (GAAP).
Without the going concern
concept, businesses would not have the ability to prepay or accrue expenses. If
the public did not assume that a given company would stay in business and keep
operating, why would they prepay or accrue anything towards that business? I
think it also plays a huge role in assets, as the entire concept of
depreciating as well as amortizing assets is essentially based on the given
idea that the business will continue to operate.
FRS18 disregards the
importance of attempting to define the true and fair view, which essentially
relies on the user’s knowledge of what true and fair view means.
FRS18 then further state that
comparability and relevance are of greater importance as it has been driven by
the need for users to be provided with relevant information, which is easily
comparable. These can be referred to as the qualitative characteristics.
If we take these definitions
apart, the terms prove to be socially constructed as well as subjective.
Information should be relevant
to the decision-making needs of the user. This information is considered
relevant if it helps the users of the financial statements in predicting future
‘trends’ of the business.
In relation to comparability,
it is essential that financial statements of one accounting period is
comparable to another for the users to come to meaningful conclusions about the
trends in a business.
All these theories, concepts
and standards that are in place is an attempt to put forward knowledge. There
are also sources of knowledge known as: perception, reasoning, introspection,
memory, faith, intuition and lastly, testimony.
Perception is the process of
gathering knowledge through our five senses, therefore this can be related to
the process of induction under observations.
The process of induction is
known as the process of gathering knowledge. This cycle consists of observations,
laws and theories, and finally prediction. This is the development of ideas or
theories through observations.
“Theories are developed by
deductive reasoning, which is based more upon the use of logic rather than
observation” (Deegen and Unerman, 2011: p.6).
However, there are some
disadvantages to the process of induction. I personally think that the process
of induction assumes that someone knows what they are asked to observe. For
example, if someone was told to go out and collect data of how many red cars
there are, you are assuming that they know what a car is, and they know what
the colour red is.
Ultimately this means that
observations can be flawed. Once observations have been collected, you come up
with a law and a theory and implement it which then results in a prediction of
what the future can be like.
Karl Popper suggests that
precise theories can be proven false through observations. For example, if
someone says, ‘all tigers are orange’ and then someone finds a white tiger then
that theory has been proven wrong through observation.
True and fair view might form
the foundation of this framework. However, we may not ever fully understand
what a true and fair view is.
If we break down the words, we
can have a better understanding of what the true and fair view means. The truth
does not change, only our knowledge of it does. True and fair view can be based
on the knowledge of the user and theories can possibly help us gain this
“The Companies Act 2006
requires that the directors of a company must not approve accounts unless they
are satisfied that they give a true and fair view” (ACCA, 2014).
There is always the concept of
users vs. preparers and it is important to try and understand the requirements
and expectations of both parties. Financial statements have been socially
constructed to present a true and fair position of the company.
Solomons (1991) has argued
that financial information should be neutral, in other words free from bias
therefore meeting the definition of true and fair.
Users would want accounts to
be signed off for reliance and assurance, however the preparers would not want
to do this as if any errors were to arise, the person who signed them off could
possibly be sued for providing a false representation of true and fair
An example of this could be
the Tesco scandal which occurred in 2014. The company had overstated their
profits and presented their accounts having signed them off as a ‘true and fair
representation’ of the company.
However, the error was found,
and it was evident that it was not given the correct attention to be corrected
and therefore Tesco were penalised for not complying with the rules and
In conclusion I think that
communicating reality is a lot more complex than one would think. This is due
to the many requirements of the public such as the ‘true and fair view’ and
essentially the need to have a knowledge base. It is important that accountants
have an in-depth understanding of what their profession is, and the process of
gathering that knowledge is very long winded. Furthermore, communicating that
reality may consist of biased information and finding a way to communicate that
reality is often hard as there are many theories of what should be done.