Accounting and Finance Theories and Issues: A Critical Analysis Report

This report critically evaluates accounting and finance theories and issues, focusing on the USA context. It examines the benefits of traditional accounting for capital markets and management, while also addressing its potential detriment to shareholders and society. The report further analyzes the limitations of current accounting rules in adapting to economic and social changes, including corporate failures. It highlights the need for accounting to reflect sustainability and ethical corporate behavior, particularly in the context of manufacturing and environmental impacts. The report explores stakeholder interests, efficient market hypotheses, and the relevance of financial information, ultimately advocating for improvements in accounting practices to better serve stakeholders and promote financial robustness in a dynamic environment.

ACCOUNTING AND FINANCE
THEORIES AND ISSUES

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................1
REPORT..........................................................................................................................................1
1 Traditional form of the accounting has been beneficial to capital markets and the
management to detriment of the shareholders and the society as whole. ...................................1
2 Current accounting rules and regulations do not allow the companies to financially robust to
be able withstand the extreme changes in economic and social environment. ...........................3
3 Manufacturing and other processes are adversely affecting natural environment and social
environment and requires accounting to change for reflecting the need for sustainability and
ethical corporate behaviour. ........................................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Accounting refers to method of recording the financial transactions of the business.
Accounting process involves analysing, summarizing and reporting the transactions to the
oversight agencies, statutory authorities and the tax authorities. Accounting theory is describes
as the set of frameworks, assumptions and the methodologies used in study and the application of
the financial reporting principles. All the accounting theories are bound by conceptual
frameworks of the accounting. The theory with evolvement of regulatory standards helps in
developing new practices as well as procedures. It is more of qualitative than the quantitative and
is useful for financial accounting and reporting. Accounting theory involves review of the
historical foundations of the accounting practices and the manner in which the accounting
practices are being changed and are added to regulatory frameworks governing financial
statements as well as financial reporting. Report will critically evaluate different scenarios of
accounting and the processes followed in the current period taking into account USA.
REPORT
1 Traditional form of the accounting has been beneficial to capital markets and the management
to detriment of the shareholders and the society as whole.
Traditional accounting refers to accounting which calculates the profits when the invoices
are actually sent or received regardless of whether the money is actually spent or received. It is
also known as accrual form of accounting. On the other accounting which looks when the money
is spend or received it is known as cash accounting. Due to the various issues faced by the
organisations many of the companies switched from traditional accounting the cash basis of
accounting.
Current accounting framework in USA requires the companies to follow set standards for
reporting the financial position of company. It could be evaluated that the current accounting
follows accounting standards framed in compliance with IFRS. All the transactions and events
are to be recorded by the organisation as per these frameworks in manner that are understandable
and clear.
Traditional accounting activities are embedded with the trading transactions between
buyers and traders. Accounting transaction between them are generally simple and individual. It
is seen that many of the actors of financial markets are reluctant in preparing financial
statements.
1

Capital markets are referred as the placed where investments and savings are moved
between the suppliers of the capital and who are in requirement of the capital. The capital market
consist of primary market, where the new securities are sold and issued and in secondary market
already issued securities between the investors are traded (Sun and Habib, 2020). They seek for
improving the transactional efficiencies. It brings parties holding capital and parties seeking
capital.
Accounting systems are framed for providing useful information to the large stakeholders
including creditors, shareholders, suppliers and customers or government authorities. Meeting
information needs of the stakeholders was very difficult as the needs and requirements of parties
were different as per their interests in the company. Even when principle of investor primacy is
advocated by the IASB it is criticised extensively. Primacy principle could be justified rationally
with the set of plausible assumptions on securities market. The accounting standards setters
assume the users as rational economic being. The calculative users are required to request
disclosures which will be assisting the shareholders and investors in the framing their own
judgements for calculating the risks and values and for forming predictions on the future cash
flows. But it is very essential to understand and gain knowledge on the AS and its implication in
practical.
The informational needs of the users of the financial information are often assumed than
explored. Accounting frameworks are designed with motive of expressing information that are
required by the users of the financial information for serving their best interests. Accounting
information provides clear justification for the different accounting as well as for disclosure
requirements.
From the normative perspective, assets could be recognised in the balance sheet under
continuum of the approaches from the pure statistical theory to dynamic approach. Under static
theory for protection of creditors, balance sheet shows liquidation values of the assets. It implies
that intangible assets are fictitious assets and should therefore be expenses off. On the other
hand, dynamic theory lays emphasis over going concern (Brooks and Oikonomou, 2018). It is
concerned over presenting the net income which is informative of the future cash flows.
Capital markets were concerned about relative importance of stakeholder values,
concerns and the social issues. The utilitarian strategy was also promoted that aimed at
maximising stakeholder benefits and welfare of stakeholders and the benefits to the society.
2

Interests are different of different stakeholder groups which makes it difficult for the markets to
meet the needs of all the stakeholders. Previously the shareholders were not provided with
complete information and disclosures that made several number of stakeholder groups and
shareholders to suffer losses.
Efficient Market Hypothesis
Strong form hypothesis
This version of efficient market hypothesis states all the information the one which is
available to public and information which is not known publicly are accounted completely in the
current stock prices and no other type of information is there that could give investors advantage
on market.
Weak form hypothesis
It states that the historical values, past prices and trends could not predict the future
prices. Weak form efficiency provides that the stock prices reflect all the current information.
Traditional accounting requires the firms trading in capital markets to provide full details
of the transactions and events that are being carried out by the organisation. It requires firms to
provide disclosure of the significant accounting transactions and the events that could influence
the decisions of shareholders or other investors. It is making the organisation transparent to the
shareholders and allowing them to assess the financial stability and performance of the company.
The rules and approaches have protected the interest of shareholders and enable them to take
decisions on the basis of financial information (De Villiers, Dumay and Maroun, 2019). All the
actions and decisions of management have direct impact over their securities and shareholders
can review the impact of the decisions and actions over the company. The frameworks also
require the company to provide all the details and present the financial information that serves
the best interest of users of the financial statements. Traditional accounting methods have helped
the management and organisation to meet the requirements of regulatory authorities by providing
information in the manner prescribed. The motive is to protect the interest of shareholders and
other stakeholders of the organisation from suffering any damages. Investors tend to reduce their
shareholding from the companies that are suffering with profitability issues and whose financial
risk is increasing continuously (Safriliana and et.al., 2020 2019). Therefore, it could be stated
that the traditional accounting is helping capital markets and management in safeguarding the
interests of shareholders and investors.
3

2 Current accounting rules and regulations do not allow the companies to financially robust to be
able withstand the extreme changes in economic and social environment.
In the current scenario board members, investors and the executives have full confidence
in the financial statements of company. All these parties rely over the information provided by
the statements for making estimates about timing, magnitude and uncertainties associated with
the future cash flows and judging whether resulting estimates of the values were presented fairly
in current stock prices. It helps in making decisions about whether to make investments or to
acquire company, promoting efficient allocation of the capital. However, this scenario is not
followed in real world due to various reasons. Financial statements depends on the estimates and
the judgement calls that could be widely off the mark even if it is made in the good faith.
Financial metrics aimed at enabling comparison between the companies probably not be most
accurate way of judging values of particular firm (Fischer-Pauzenberger and Schwaiger, 2017). It
is case for the innovative firms in the fast moving economies that are giving birth the unofficial
measures coming with own problems. Executives and managers routinely encounter strong
incentives for deliberately injecting the error in the financial statements.
Corporate Failure
Corporate failure entails discontinuation of the operations of company that leads to the
inability of reaping sufficient profits or revenues for paying the business expenses. This happens
due to several reasons such as incompetence, poor management and poor marketing strategies.
Corporate failures results also as accounting does not allows to withstand with the economic or
social environment.
Share Market
It refers to the place where the shares of public listed companies are traded. Primary
market refers to place where the companies float shares to general public in initial public
offering for raising capital. Stock exchange facilitates the stock brokers for trading in company
stocks and the other securities.
There has been wide spread dissatisfaction with usefulness and relevance of the financial
information, mainly among the corporate executives and investors. Dissatisfaction is
corroborated by the extensive research that consistently documents growing gap between the
financial information and capital market indicators and for the reported earnings. The earnings
4

reported through the financial statements of most of the companies no longer reflects the
enterprise performance. Dissatisfaction is also corroborated by the empirical evidence that is
consistently documents decreasing ability of the financial information and the earnings
particularly, for reflecting performance of firm, predicting the future performance and explaining
stock prices and their returns (Unda and et.al., 2020 2018). Many studies provides that increased
rules and regulations has degenerated financial reporting to burdensome compliance exercise
instead of endeavour for informing stakeholders.
Corporate executives are aware about continuous loss of relevance of financial
information and to disclose non-GAAP data and providing non GAAP earning numbers by
making adjustments to the reported earnings and financial data for the various items &
questionable expenses such as goodwill write offs and assets. Various routine adjustments are
performed for the financial information and seek more timely and reliable information sources
for the valuation purposes. Regulators are aware of the loss of financial relevance and are
engaged continuously in increasing the effectiveness of financial reporting and enhancing
relevance and understandability of financial information. It is very crucial to analyse the
relevance of the financial information and making relevant adjustment to it is very complicated
and complete care is required to be taken.
The current accounting rules and regulations are not allowing companies to be financially
robust. It could be analysed from the various corporate failures in the recent years due to changes
in social and economic environment. Along with growth and development of economy all the
companies are not able to keep up with the evolution that leads to failure of the organisation.
Currently all the accounting rules and regulations are focused towards establishing frameworks
that are making the companies to comply number of statutory requirements (Nurkasheva and
et.al., 2020). It is greatly affecting the organisations in coping with the changing economic
scenarios and social change. The current accounting rules do not provide the companies to meet
the changing economic and social requirements.
The Positive accounting theory seeks at appreciating and explaining concept of the
economic consequences of interests of the managers and the financial reporting and accounting.
It aims at providing reasons why managers and accountants choose for particular accounting
methods over the others. The theory provides that managers with the bonus plans anchored with
earnings are likely to accept methods which increases the reported income of current period.
5

Other hypothesis of the theory provides that high debt/equity ratio makes managers to use
methods that will increase earnings.
The PAT theory focuses over motive of management for the financial reporting choices
with the use of statistical processing and economic models when there is information asymmetry
and agency cost. The theory aims at predicting the accounting choices as overall need of the firm
for minimizing cost of capital and contracting costs by applying techniques and methods from
economics. Behaviour of the managers and opportunistic attitudes of the managers and their
impact over accounting policies are investigated widely and it has provided that reports are often
presented in the manner that shows company as beneficial to the outsiders driving benefits to
internal executives and management.
Despite of various reforms the corporate accounting have remained murky. Firms
continue to make ways to game system, on the other online platforms have dramatically changed
competitive environment for the businesses (De Villiers, Dumay and Maroun, 2019). There are
various problems associated with the current accounting policies and procedures and do not
allow companies to accept changes of social and economic environment.
Universal Standards
Worlds has seen an accounting revolution. Initiating was taken to unite the accounting
standards of individual countries with IFRS. Currently around 110 countries are using same
system in some or other manner. Convergence has stalled and also substantive changes seems
unlikely in the future. There has been significant implications relating to failing compliance with
IFRS and accounting standards. Analysis of the investment targets, competitors or acquisitions
will require comparison of the financial statements under different accounting regimes
(Kotsupatriy and et.al., 2020). It has been seen that results under IFRS and national accounting
standards could have significant difference for changing the acquisition decisions as number of
countries have have designed own versions of IFRS imposing carve outs.
Revenue Recognition
It is tricky part for the regulatory puzzle. For instance, if company sells internet service or
smartphone package to company. Contract for product or the service generally includes future
upgrades the costs of which could not be predicted at time of sale. It makes it difficult to
determine profits that it will be generating . If no objective way is there in the current accounting
standards for measuring the costs beforehand, company will not be allowed for recording the
6

revenues from sale unless all the upgrade requirements are delivered and associated cost are
known.
Unofficial Earning measures
Though the unofficial measures of the revenue are new for the many companies,
businesses are employing non IFRS and non-GAAP measures of the earnings for long time.
Problems are faced by the investors in comparing firms following GAAP and those not following
(Reasons for Corporate Failures, 2020). Securities Exchange requires management to be able to
support reasoning behind including alternative measures in the financial disclosures.
Fair Value Accounting
Investors and executives are having two measures at disposal to determine values of
assets that is cost of acquisition and sales price. In 2014, loss of 0.96 per share was reported
using one measure and profit of 0.34 using other by Twitter. There are many cases like this that
shows the accounting rules are not able to provide the frameworks for adopting the changes.
3 Manufacturing and other processes are adversely affecting natural environment and social
environment and requires accounting to change for reflecting the need for sustainability
and ethical corporate behaviour.
The growing organisations and multinational corporations are raising social and
environmental concerns. Environment are harmed at large by the companies using ineffective
use of the resources. Organisations were focused towards profit making without showing any
concern for the society. Resources belong to society and it is the responsibility of corporations to
provide returns to the society. Organisations are supposed to grow along with the social welfare
and growth of society.
As the society became vigilant about the environment exploitation various rules and
regulations were imposed for protecting and preventing the exploitation of environment.
Statutory regulations in the accounting were designed for the corporations to follow and present
in the financial statements measures taken by companies for society or environment.
Sustainability accounting was originated and is considered as the sub-category of the
financial accounting focusing over disclosures over non-financial information on the
performance of firm to external stakeholders like creditors, capital holders and other authorities.
Sustainability accounting refers to the activities having direct impact over environment, society
and economic performance of the organisation (Soderstrom, Soderstrom and Stewart, 2017). It
7

contrasts with the financial accounting in which management accounting is used for the internal
decision making and creating policies which will be having impact over performance of the
organisation at ecological, economic and social. It is aimed at generating value creation within
the organisation.
With the growing awareness towards society and environment corporations are required
to provide for the measures that are taken by them in their financial reports. It could be evaluated
as per the current scenario organisations are having obligations to take active measures towards
society and have ethical approach towards the environment and stakeholders. Accounting
frameworks have been designed for providing the business to report about the investments and
share of profits which is contributed towards society. The Corporate Social Responsibility is the
main measure taken by regulatory authorities requiring the companies to prevent and protect
environment exploitation. It could be seen that the organisations adopting CSR practices are
gaining positive response from the society as whole.
Sustainability accounting refers to tool used by corporations for becoming more
sustainable. In this CSR and the triple bottom line are mainly wide spread. It could be analysed
that the accounting has changed to considerable extent for reflecting the requirements of society
and meeting ethical behaviour amongst the other factors. Organisations showing their interests
and taking actions towards the society could be seen as having more market recognition and
acceptance. These measures include generating employment for the backward areas, investing in
education schemes and making charities for bringing up the backward regions of society. It is
mainly aimed at providing equal opportunities to all to have better life and grow. Corporations
are required to provide in their financial statements the CSR measures to inform the shareholders
and stakeholders (Johnstone, 2018). It builds positive image of the company in society. Different
standards such Sustainability accounting standard board provided policies and disclosure
requirements. It provided the accounting standard for recognising the investments and
expenditures incurred towards the sustainability. As the organisation have different stakeholders
group it is essential that the organisations use ethical code of conduct in presenting the financial
statements. It should provide true and fair view of the financial status of the organisation. Along
with that, it is important to understand the impact of it on the financial position of the company
and its reputation.
8

CONCLUSION
Conclusions could be drawn from the above report that the accounting and finance
theories are developing with the changing environment to meet the needs and requirements of the
business. Accounting frameworks are beneficial for the capital markets and the management by
enabling them to meet the financial reporting requirements and making the process transparent.
The current accounting rules are having many problems due to which organisations are not able
to accept the change due to various reasons such different compliance requirements of
accounting standards and managers using the methods for manipulating the earnings. With the
increase in concern for sustainability organisations are paying attention towards the corporate
social responsibilities practices.
SELF ASSESSMENT FORM
1. In my opinion the fair mark for this assignment is 75 – 80 marks
2. In this coursework the best element is evaluating the first paragraph which is about benefits of
traditional accounting for the capital markets and management to detriment of the shareholders.
3. If I get a chance to do the coursework again from the scratch I will be exploring more
information and sources for getting deeper insights about the facts and situations given for the
paragraphs. The evaluation will be performed in more informed manner.
4. The hardest part of the coursework was to provide practical examples for the corporate failures
for not allowing the companies to withstand extreme changes in social and economic
environment.
5. 1. Did the assignment satisfied the requirement of brief ?
2. What are the best answers related to the questions ?
3. How could I improve my performance ?
9

10

REFERENCES
Books and Journals
Sun, S.L. and Habib, A., 2020. Determinants and consequences of tournament incentives: A
survey of the literature in accounting and finance. Research in International Business and
Finance. p.101256.
Brooks, C. and Oikonomou, I., 2018. The effects of environmental, social and governance
disclosures and performance on firm value: A review of the literature in accounting and
finance. The British Accounting Review. 50(1). pp.1-15.
De Villiers, C., Dumay, J. and Maroun, W., 2019. Qualitative accounting research: dispelling
myths and developing a new research agenda. Accounting & Finance. 59(3). pp.1459-
1487.
Safriliana, R., and et.al., 2019. OVERVIEWS OF CONTRACTING THEORY & AGENCY
THEORY: DETERMINANTS PUBLIC ACCOUNTING FIRMS SWITCHING ON
VOLUNTARY. International Journal of Organizational Innovation. 1(3).
Fischer-Pauzenberger, C. and Schwaiger, W.S., 2017, November. The OntoREA© accounting
and finance model: ontological conceptualization of the accounting and finance domain.
In International Conference on Conceptual Modeling(pp. 506-519). Springer, Cham.
Unda, L.A., Khosa, A., Burch, S. and Wilkin, C., 2018. Sustainability of the accounting and
finance academic profession: students’ and supervisors’ views about the PhD supervision
process. Accounting & Finance.
Nurkasheva, N., and et.al., 2020. Current Issues of Accounting and Evaluation of Financial
Instruments in Accordance with International Financial Reporting Standards. Journal of
Talent Development and Excellence. 12(1). pp.6026-6033.
Kotsupatriy, M., and et.al., 2020. Use of international accounting and financial reporting
standards in enterprise management. International Journal of Management. 11(5).
Soderstrom, K.M., Soderstrom, N.S. and Stewart, C.R., 2017. Sustainability/CSR research in
management accounting: A review of the literature. In Advances in management
accounting. Emerald Publishing Limited.
Johnstone, L., 2018. Environmental management decisions in CSR‐based accounting
research. Corporate Social Responsibility and Environmental Management. 25(6).
pp.1212-1222.
Online
Reasons for Corporate Failures. 2020. [Online]. Available through :
<https://www.financialdirector.co.uk/2019/03/29/10-reasons-for-corporate-failure/>.
Post Modern Accounting Theory. 2020. [Online]. Available through :
<https://books.emeraldinsight.com/resources/pdfs/chapters/9781787697942-TYPE23-NR2.pdf>
Accounting Change. 2020. [Online]. Available through :
<https://www.marshall.usc.edu/sites/default/files/arnold/intellcont/finexecarticle-1.pdf>
11

Changing Role of Accounting in Enterprise. 2020. [Online]. Available through
:<https://www.ifac.org/knowledge-gateway/developing-accountancy-profession/discussion/
changing-role-accounting-enterprise-performance-management>
CSR Practices. 2020. [Online]. Available through :<https://hbr.org/2015/01/the-truth-about-csr>
12