Developing a Conceptual Framework in Accounting - Essay Example

? DEVELOPING A CONCEPTUAL FRAMEWORK IS AN IMPOSSIBLE POSSIBILITY: FINANCIAL ACCOUNTING MENTS BY PRESENTED It is Impossible to Develop a Conceptual Framework in Accounting Introduction In every business entity, there is a growing need to develop financial statements to facilitate measurement of performance in ensuring the company is in line with its goals and objectives, as well as identifying the business position in the competitive market. Accounting plays a significant role in a business entity; it is prepared by the company to inform the public of the company’s performance and progress, which attracts more potential investors to the company to inject more capital and enhance the growth of the enterprise (Deegan and Unerman, 2009). There have been increasing efforts towards formation of standardized approaches in accounting, in what may be explained to be an accounting conceptual framework. The standardized approach in accounting aims to offering a holistic and uniformed approach in which all accounting problems can be handled. Moreover, such standards help in ensuring ethics and morality in accounting discipline considering that fraud and dishonesty are the main vices affecting the economic discipline as people undertake such economic roles with selfish interests, eroding the integrity of such a profession. Knowledge regarding elements and aspects of accounting and the image created by such profession are thus of critical importance in accounting. Knowledge and Sources of Knowledge Epistemology is the discipline concerned with the theory of knowledge and the way people can attain knowledge. In most cases, sentences are only used to convey meaning, and the meaning itself does not reside in sentences. A proposition is the main element in a sentence as it refers to the meaning of a sentence, and it is the one that leads to knowledge. In accounting, knowledge can be gained from a diversity of sources. Knowledge may be attained through skills in doing something. An accountant who spends most of the time preparing financial statement will develop skills in the practice and this would lead to more detailed knowledge than other accountants in a separate department. This involves the act of “knowing how” to do something. Moreover, such knowledge may be genetically programmed in that some people are born with talents and have much higher proficiency in carrying out specific tasks. Knowledge may also be obtained through acquaintance with something or observing something until one grasps the basic concepts in doing it. For example, as person can observe the basic operation of balancing a balance sheet, or any other financial statement over time till they grasp the basic concepts of performing such a task even without formal education on how to do it. Many people in on-job training learn through acquaintance till they develop such skills and are able to perform as required. Knowledge may also be obtained through understanding statements in an inductive reasoning approach. For example, one may gain knowledge by first appreciating the fact that a financial statement has to convey the truth about a company. Therefore, one has to develop a belief regarding the truth conveyed in such a financial statement, and then look for some good facts as evidence to prove the belief is true. However, it must be recalled that truth has to remain as truth despite one knowing it or not, and is not influenced with such inductive reasoning. Knowledge and truth are thus independent of one another and one requires deeper investigation to determine if such knowledge really leads to reality or truth. Accounting Theories Hendrickson (1970) defines a theory as a set of coherent hypothetical, pragmatic and conceptual principles that guide in the field of inquiry (as cited in Deegan and Unerman, 2009). The use of the word coherence indicates that all the elements in a theory have to work together in presenting a certain knowledge, or result in accounting. However, Deegan and Unerman (2009) noted that theories are in most cases based on logical reasoning. Therefore, the study of accounting theories may be informed by trying to instill the culture of logical reasoning in students. Theories, as Deegan and Unerman (2009) elaborate, may also be either scientific, which involves inductive reasoning, while others do not provide explanations for a particular phenomenon in accounting, but do outline what has to be done in a particular case. Accounting theories therefore provide a logical framework for accounting practice by detailing the rules, principles and assumptions to be followed. There are various accounting theories that guide the accounting practice. These include the accounting formula, which is the most basic theory behind the double entry accounting system; accrual concept which explains that all revenue transactions have to be recorded when they occur and not when the cash changes hands; consistency theory which states that once a company settles on a particular accounting method, the method has to be applied uniformly and has to be consistent over the following accounting periods, but can be changed with a valid business reason (Deegan and Unerman, 2009). In addition, the conservatism concept requires that all liabilities have to be accounted for even with chances that they may not occur; and the going concern requires the lead accountant to consider a business financially viable, and with the resources to continue in the foreseeable future in the period that the accounting is being carried out. Importantly, the above theories are fundamental ideas, or assumptions which guide the financial accounting practice implying the reality of the accounting process may not be achieved through such theories, as there are various assumptions made to ensure harmonization of accounting practices. Conceptual framework According to ACCA Global (2012), and accounting body, a conceptual framework may be defined as a spirited general attempt to define real purpose of accounting. In other words, a conceptual framework has to put in consideration the conceptual and theoretical issues related to financial reporting with an aim of forming a coherent foundation underpinning the development of a standard approach in accounting. In this regard, a conceptual framework involves some forms of generally accepted accounting principles (GAAP) (ACCA Global (2012), which is a theoretical framework to determine how transactions share to be measured. The main reasons behind development of an agreed conceptual framework or principles to guide in accounting aims at establishing a framework through which accounting standards may be achieved, laying out fundamental principles which should not then be repeated over and over in accounting standards, and a basis through which accounting disputes have to be resolved. However, such a framework as it tries to offer a holistic solution becomes too broad; the generalized approach of principles may not be of any help when actually doing accounting work, or preparing some financial statements. So far, there has not been a solid agreement on the contents of such a framework and setting of such holistic standards. Such guidelines do not offer a step by step formwork, but only offers general guidelines in accounting operations; it is up to the accountant through their knowledge and experience to apply the best approach to preparing statements due to the variation of factors considered in different business financial statements. The subjectivity and relying on ethical and moral standing of an accountant can therefore not be done away with. Therefore, with the broad accounting approaches, and though there are attempts towards formation of standards in all accounting operations, achieving this reality seems to close yet too far due to differences in accounting principles and approach; implying it is not possible to have an articulate and holistic conceptual framework in accounting. Image The image created by accountants is in most cases confusing to the general public. It is important that accountants have to think critically about morals and ethics any time they prepare a financial statement, and try as much as possible to avoid any unethical and self interest in such accounting practices. This raises the question of how one may be perceived to be independent noting there is much at stake in accounting. Since accounting is a complex process, which may not be conceived by many people, there is a belief that what is reported is actually the truth and reality of the business. However, people will have different perception on judging reality, which further poses more questions regarding the type of reality being communicated by such accounting statements. Since the accounting statements only report certain concepts, the requirement of being true and fair, and justifying such accounting reports when few can adequately understand them raises the question whether such accounting concepts are justified in creating the real image of a business. Though facts are unbiased, and accounting is about reporting facts, accounting still has major deficiencies. Groups with power can have a better leeway to legitimize their reality; reality is a matter of perception and depends on people. For example, government as an interested party in accounting process may have a higher bargaining power in pressing inclusion of certain elements that would increase tax paid by businesses. The fact that different accounts may prepare varying accounting statements portrays an image of lack of reality in accounting; reality has to be the same regardless of the approach, similar to the truth. Therefore, reality is mainly based on the image crated by an accountant regarding their moral and ethical standings, which creates the belief that such statements have to reflect the reality of the company; the image created by such an accountant offers more confidence to the public regarding their neutrality in accounting operations. A positive image is therefore the power determining the neutrality of such statements, and the perception of public regarding neutrality of such accountants. Accounting Concepts Ruth (2003) states that accounts present statements based on facts which show the reality of the business. These facts may be opposed by many people but they still stand to be the truth about any given business entity. The progress of any business entity is well displayed by the statements and successful strategies are developed based on the facts in the statements hence they are unavoidable. Accessing a business entity for a single day may not reflect its clear true picture thus evaluation for a given amount of time helps display the picture clearly. The problem in such statements is whether the facts provided lead to an image of truth and knowledge. Truth has to be independent of one’s knowledge. However, statements are understood in the criteria that they have to be true; one has to belief that such statements are indeed true and reflect the actual figures, and has to seek for a good evidence to support such knowledge. However, due to the complex nature of financial accounting as presented in accounting statements, there is a problem of being sure if the reported figures are indeed true to lead to proper and informed knowledge regarding the company’s position. This requires reliance on sensory perception, and the sense of knowing, which raises the question whether the truth has been known. Since accounting is a complex process, it has to involve numerous factors both known and unknown. These factors raise the degree of probability of reporting in such accounting statements, calling for the role of professional judgment in accounting, and the experience of such an accountant. Therefore, knowledge is based on perception that such figures represent the truth, with a high degree of probability. Due to the fact that the society is a combination of different people who have different realities with different opinions and comments, the accounting sector is faced with many questions which demand answers. The complex relationships and social inequalities introduce the complexity in laying down a well conceptual accounting framework. Such ideologies dictate that accounting can only exist in a given social structure; capitalistic society (Ruth, 2003). Moreover, the fact that different people will have different interests to protect makes reality to be subjective in considering which reality proves to be more legitimate than the other. The ability of different groups to reshape meanings in the field of accounting makes it relatively hard to have a holistic approach in accounting. Perception and probability are highly subjective; as the truth may not be accurately known depending on how these factors represented, it makes it hard to have a conceptual framework in accounting practices. The idea of regulation in financial accounting by governments in free market perspectives and other types of markets, and the social impacts that this regulation has on accounting further constrains the use of a general approach in accounting (Deegan and Unerman, 2009). For example, in international accounting, there is great variation in accounting practices, with different explanations being given on why these variations are prevalent in accounting. Accounting statements depend on predictions and estimates. These predictions and estimates may be based on many factors which may vary between two accountants. The complexity of making accurate estimates makes the accounting process complicated and tedious. Using the past outcomes to make predictions about the future may not necessarily work, and it may result to underestimation or overestimation hence yielding inaccurate results. This may affect the parties concerned with the accounting information as they do not display the precise picture of the organization. Hence some figure out accounting framework as hard to develop. Development of a conceptual framework in accounting will require harmonized and general approach in accounting and its principles across the board. However, the field of accounting being a social activity in communicating various ideas to stakeholders and the public in general becomes very fluid and prone to effects of personalities, government regulations, knowledge bodies, skills and experience among other factors. With these different elements in accounting, it might not be possible to introduce a holistic approach in accounting operations, making development of a conceptual framework difficult. References List ACCA Global, 2012. The Need For and an Understanding of Conceptual Framework. [online] Available at: http://www.accaglobal.com/content/dam/acca/global/PDF-students/2012/sa_oct11_framework.pdf [Accessed 29 November 2012]. Deegan, C. and Unerman, J., 2009. Financial Accounting Theory.Second European Edition. New York: McGraw-Hill, Ruth, G.E., 2003. Analyzing financial statements. NY: American Bankers Association. Read More