Financial Accounting - DOC

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“Accounting is the art of recording, classifying and summarizing in a significant manner andin terms of money, transactions and events which are, in part at least, of a financialcharacter, and interpreting the results” (Kempner,1968). Its origins reside with farmerspredating the 12thcentury in which it was used to make comparisons between who had themost wealth based on the amount of and type of animals they owned. In modern day,accounting is used to answer 3 basic questions what profit the business has made, howmuch does the business owe and how much it is owed. Accounting is split into differentsubgroups in which each performs a different task. Financial accounting is the process ofclassifying and recording monetary transactions of an entity in accordance with establishedconcepts and standards, with presentation delivered by means of income statements,balance sheets and cash flow, during and at the end of an accounting period. (CIMA, OfficialTerminology, 2005). The other subgroup, financial reporting is the process ofcommunicating financial accounting to users of such information. Users of this aremanagement who use this information to operate the business more effectively andexternal stake holders such as investors, customers, regulators, who use this information todetermine whether to get involved with a certain company or to implement restrictions.Furthermore, management accounting is the application of these principles to create,protect, preserve and increase the value for the stakeholders involved. These groupstogether, perform the task of making sure a company is financially stable.The traditional ideology of what accounting does, being the provider of unbiasedinformation in order to facilitate social and economic activity by others. To comply with this,the FRS 18 identifies four ethical rules, Relevance, reliability, comparability andunderstandability (Financial reporting council, 2000). Relevance pertains to the informationbeing useful for its intended purpose, being presented on time, influential on decisions andconfirming what users already think. Reliability, meaning that information is realistic,objective and prudent- relating to a degree of cation when conditions are uncertain. Inaddition comparability dictates that financial statements can be compared from one periodto another, meaning methods and information preparation should be consistent over time.Finally, understandability dictates that “capable of being understood by users having areasonable knowledge of business.......and willingness to study withreasonable diligence” (FRC, 2000, para. 41). Therefore, having prerequisite knowledge is amust. By abiding by these ethical rules, firms will gather neutral, objective results thatprovide a faithful presentation of economic reality. A radical accounting ideology in whichaccountants are agents to promote social and economic change has become moreprevalent. Tinker (1991) argues that accounting shouldn’t just be a passive representation ofreality, but a tool. Whilst, Solomons (1991) states that accountants jobs are to portraycertain aspects of society, not change it. The latter view is commonly excepted, althoughTinker does raise some substantial questions that will be discussed later on.
“Financial reporting is usually seen as something very neutral, mechanical and objective, aprocess that simply measures the economic facts pertaining to a firm” (Palea, 2016).Accounting may aim to achieve this, although this is rarely the case as when compiling themany rules and accounting standards, external factors often drive away neutrality. Tinker’s,(1991) critique on Solomons map analogy dictates that we don’t judge a map on how well itrepresents facts, as maps are never shapes of the original, used as a political tool shaped byrecreational, religious, economical and other interests. A study by Ryan et al. (2000) frimlystated that public sector accounting process has been increasingly influenced by powerfulconstituents. This political arena, often uses forms of voting to reach an agreement, wherelobbying is involved to conform to a certain agenda. Not only is this constricted to the publicsector, but the private sector may be even further prone to these activities. The Financialaccounting foundation, although being a non-profit organisation, received substantialfunding from Enron corporation, which then approved a change in accounting methodsfrom accrual to market to market (Culpan and Trussel in Huu Cuong, Nguyen, 2011). Thisunprecedented change in policy, distinctively shows that Enron influenced the FASB, thusproving the economic interest group theory of regulation. Due to the quantative nature ofaccounting, many items are omitted from accounting such as social and environmentalfactors. There is currently no accounting and auditing standards devoted to environmentalissues within the UK. To encourage business to take up voluntary environmental reporting,the Chemical industries association has seen some success, with some companies findingthat it’s a valuable business exercise, gaining valuable information at a relatively low cost(Gray et al, 1998). In regard to social accounting, UK companies, especially the larger onesproduce a significant amount of social data, with an expectation to disclose informationrelating to corporate governance, charitable and political donations and many more. TheBody Shop has been at the frontier of these latest developments, adhering to the growingtrend in corporate social awareness (, 2020). Overall, accounting isinherently bias from the reasons stated prior, although a push towards neutrality throughusing qualified members, independent of constituent pressure with implementation ofenvironmental and social accounting may lead to a more inclusive version of accounting.demonstrate how accounting was used to conceal useful information which lead tocorporate collapse (gap between talk and action)A prime example of accounting failing to do what it is meant to, can be exemplified by theCarillion scandal. Being the UKs 2ndlargest construction and facilities management companywith over 43,000 employees and working on projects such as the Battersea powerplant, thecompany was thought to be too big to fail. However, a collapse at the beginning of 2015leading to over 1.5Bn in debts and a substantial pension deficit, has lead many to believe,financial mismanagement is to blame(BBC News. 2020). Prior to their collapse, a number ofred flags appeared, firstly Carillion was in the midst of a chain of large acquisitions, with thelast being with Balfour Beatty, who got cold feet and backed out of the deal. Due to this,their portfolio of subsidiaries grew to span aviation, education, health care and defence.Dividend traps coupled with complex long-term contracts meant that their statementsseemed sound and backed by cash flow. Although this was not the case, their thin operatingmargins and build up of troublesome contracts, with mention to Qatar which created over
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