The Role of Accounting in Society - Literature review Example

The Role of Accounting in Society Critically evaluate the following statement: We communicate reality: that is the myth; that is what people believe. It is even what most of us believe. And, in a sense, we do communicate reality. There is something there: bricks and people and so on. And the organization can, say, be 'doing well', or 'doing badly', in whatever sense you take that to mean. And it is our job to convey it. But what is 'the full picture'? There is no full picture. We make the picture. That is what gives us our power: people think and act on the basis of that picture! (Hines 1988, p. 254) Introduction The above statement by Hines (1988, p. 254) seems to indicate that the work that accountants perform is not as objective as most people (and the accountants themselves) believe. The statement seems to suggest that what accountants and others perceive as reality might not be the reality after all. Instead, the perceived reality may be subjective reality in real sense. In other words, such reality is based on a people’s understanding of what reality is. However, people’s perceptions can be questioned and even challenged by others who have different ideas of what constitutes ‘reality’. This essay is a critique of Gareth Morgan’s (1988) article, which proposes a similar idea to the proposal made by Hines (1988, p. 254) in the above quotation. According to Morgan (1988, p. 477), accounting constructs reality in a one-sided way, which also happens to be limited. Morgan’s view is that objectivity in accounting is to a great extent a myth which acts to hinder possible development in the accounting discipline. This essay argues that Hines (1988) and Morgan (1988) make plausible arguments about accounting being a profession that leans more towards a constructivist paradigm as opposed to an objectivist paradigm. Constructivist accounting scholars and the validity of their arguments Constructionists generally view knowledge as a creation of the mind (Andrews, 2012). To them, constructivism is inconsistent with realism and even what people define as real is essentially a description of their subjective experiences (Andrews, 2012). Applied in financial accounting, the foregoing arguments by constructivist accounting scholars would be interpreted to mean that the accounting profession is not based on scientific knowledge; rather, what is known about financial accounting is the result of people trying to make sense of what accounting is or should be. In the society and in firms, where most accounting practice takes place, the perception that the practice is objective could be pegged on the habits, routines and the formation of stores of knowledge, which creates the impression that accounting knowledge and practice is objective. However, some people view accounting practice as the result of secondary socialisation where different duties are given an identity based on what they achieve. The article by Morgan (1988) seems to fall in the latter category because it argues that accounting should be a form of dialogue, where accountants should perceive and probe different situations using different approaches. According to Morgan (1988, p. 482), “accounting principles and practices...are ultimately based on metaphors creating partial one-sided ways of viewing the world”. According to the author, accounting is concerned with issues of representation, since the practice is meant to account for different uses of finances. It is argued that the numerical representation of finances is just a metaphor that is used by accountants to represent or express complex realities, which also happen to be multidimensional (Morgan 1988, p. 482). The argument that numerical representation of an organisation’s performance only expresses aspects that are numerically quantifiable as advanced by Morgan is plausible because as Carlsson-Wall et al. (2015, p. 4) observe, not all qualities in an organisation can be quantified. Moreover, Morgan (1988) indicates that since different accountants handle different scenarios in their place of practice, the objectivity that is upheld as the true reality creates more problems because at some point in their work, accountants have to rely on some assumptions or conventions when generating their reports. Other authors such as Hooper and Low (2000, p. 5) support Morgan’s assertions by noting that while a scientific approach to financial reporting has been the norm in accounting practice, there are narratives that prove that accounting can also be regarded as an art as opposed to a science. According to Hooper and Low (2000, p. 5), art does not claim to replicate reality; rather it shows that there are different aspects to what some people perceive as real. Arguably, Morgan (1988, p. 482) is advancing the notion that accountants are simply not objective reporters of what the figures that they present show. Instead, accountants are also actively engaged in the construction of what is represented to the larger audiences as reality. The fact that several other authors question the representation of accounting as a reality possibly indicates that Morgan’s arguments could indeed be plausible. Hines (1991, p. 319) for example argues that the conceptual framework of the Financial Accounting Standards Board (FASB) is only a reflection of the reasoning of the board members who conceptualised it at the time. In her article, Hines (1991, p. 391) rightfully questions the assumption that “social reality exists objectively and intersubjectively (sic)”. Therefore, to assume that the FASB conceptual framework is a true representation of reality seems to suggest that other people are meant to believe that the reasoning and assumptions of the framework’s framers were accurate at the time, and will always be accurate – something that is highly unlikely. Corporate scandals involving multinational companies such as Parmalat provide evidence that supports Morgan’s argument that accounting is not an objective representation of reality. As Deegan (2009, p. 43) indicates, the scandals in Parmalat and several other organisations such as WorldCom and Enron were traced to less-than-objective financial reporting, which was the work of financial accountants. Even with prescribed accounting standards available for use, the financial accountants in all the aforementioned firms chose to mislead audiences who were interested in their financial reports, hence arguably supporting the argument that accounting can be a subjective practice. Based on the statement by Hines (1988, p. 254) as highlighted in the starting section of this essay, what the financial accountants in the abovementioned organisations were doing is creating a false picture because they had the power to do so. In other words, they were in a position where they could make their audiences believe whatever was portrayed because they were active players in the creation of what they wanted to pass as the ‘reality’. The term ‘creative accounting’ perhaps best describes what accountants try to achieve when they deliberately avoid objectivity and instead select methods that provide particular desired results. Hooper and Low (2005, p. 5) argue that the failure of companies due to financial accounting-related fraud goes to show that the accounting methods that are perceived to be a representation of objective reality are mere representations, which in Morgan’s article are referred to as metaphors. Therefore, Hooper and Low (2005, p. 5) argue that in financial accounting, numbers are just notational metaphors used by accountants to present a particular front to targeted audiences. According to Tassadaq and Malik (2015, p. 544), creative accounting takes the form of misreporting financial accounts; publicity management through positive but inaccurate financial reports; and hiding or underestimating losses among other strategies used to create the impression that a firm is doing well financially, while in reality, it might not be. The practice is variably referred to as earning management as indicated by Schipper (1989, p. 91). According to Shah, Butt and Tariq (2011, p. 533), creative accounting is often used when a firm faces a critical situation and might not be entirely bad since it allows accounting some flexibility in creating a desired future for the firm. While the advantages and disadvantages of creative accounting are outside the limits of this essay, it is somewhat obvious that such methods as applied by financial accountants demonstrate the premise of this essay that indeed reality is subjective as opposed to objective. Creative accounting creates a subjective reality that veers away from what would be expected from objectivists. Morgan (1988, p. 481-482) has also claimed that accounting is shrouded in the myth of objectivity. It is argued that objectivity in accounting is an impossible ideal and any assumption that it is an objective practice only creates operational problems (Morgan 1988, p. 482). Citing the ‘fair value’ concept, Power (2010, p. 198) and Chea (2011, p. 15) observe that the concept is based on the idea of reliability, which in itself is a construction of people based on shifting economic valuation methods. Reliability further gains footing in accounting when it is supported by decision makers who occupy positions of influence in institutions that matter. In other words, therefore, both the fair value and reliability concepts as used in accounting are based on subjective views. These views reach a point of agreeableness in what Power (2010, p. 198) refers to as politics of acceptability and are thus passed off as objective standards of accounting. It can be said that Morgan is right in his argument that accounting is shrouded in the myth of objectivity because as Hooper and Low (2000, p. 7) observe, the decision about what should constitute a unit is an act of invention rather than deduction. Therefore, such decisions are more art-related as opposed to being scientific. Whatever accounting standards that financial accountants are meant to use for purposes of representing what is termed as objective reality were thus deliberated, judged and decided upon by people, whose objectivity can be put into question. In other words, therefore, not everything in financial accounting can be predicted or accounted for by quantifications and definite standards. The efficiency perspective, which is an argument in positive accounting theory, indicates that different characteristics in a firm provide a justification to the different accounting methods used in different organisations (Deegan 2009, p. 42). While the positive accounting theory is consistent with the objectivity perspective, one would argue that the efficiency perspective is in itself proof that there is no one-fits-all solution to financial accounting. In other words, the efficiency perspective seems to support Morgan’s (1988, p. 482) sentiment that objectivity is an impossible ideal in accounting. Morgan (1988, p. 482) proposes that the “only viable long-term solution” to problems that arise from perceiving and treating accountants as objective people rests in the recognition and acceptance that accounting is subjective and that accountants are better guided by a code of practice that recognises that they (accountants) are not objective. Moreover, the article proposes that the code of practice for accountants should recognise them as people who engage in complex processes and situations (e.g. the corporate culture, technology, shareholders and economic and social policies) before constructing what other people perceive as reality. Morgan’s argument as indicated here also makes sense because Elliott and Elliott (2011 p. 3) define accounting as “an art of communicating financial information...” This definition creates the impression that accountants engage in an art that allows them to select information that is relevant and reliable for use in developing the right financial statements, which communicate the economic resources and performance of a firm to interested stakeholders. Moreover, there appears to be an element of a decision-making prerogative that accountants have, although it is guided by prescriptive standards such as AASB, ASB, FASB or other standards depending on the jurisdiction that an accountant works in. As Pitz and Sachs (1984, p. 40) indicate, prescriptive guidelines only aid the decision-making process. However, they do not guarantee that the person making the judgement (in this case the financial accountant) will not have errors in judgement. Even where errors in judgement do not occur, Pitz and Sachs (1984, p. 41) argue that there are cases where superior human judgement overrides prescriptive guidelines. Similar sentiments are expressed by Gervasio and Montani (2013, p. 58) when they note that the annual balance sheet may contain accounting items that are based on a certain item (e.g. a current account) but could also contain items that have been conjured up by the person who compiled the same balance sheet. In other words, Gervasio and Montani are reinforcing the same arguments expressed by Morgan in the article under critique by acknowledging that accountants (or the balance sheet compilers) are not always objective and should not therefore be expected to be. In the concluding part of Morgan (1988), the author argues that if people in the accounting profession opened up to the idea that their profession is more subjective than objective, they would be better placed to come up with solutions to the challenges they encounter. Arguably, the fact that accounting standards keep changing to reflect changing times since Morgan authored his paper in 1988 could be interpreted as an indication that the arguments were well-founded. The accounting standards in Australia have for example undergone numerous amendments over the years as can be inferred from the Australian Accounting Standards Boards (2016) website. Despite the changes made in accounting standards over the years, it is worth noting that Morgan’s preference for accountants to be perceived and recognised as professionals who base their work on subjective interaction as opposed to perceived objective reality is yet to be achieved. Perhaps Morgan’s arguments are more theoretically sound than they are practical. It is also argued that subjectivity goes against the features of financial information, which include timeliness, reliability, relevance, consistency, and accuracy (Davies & Crawford 2012, p. 4). Interestingly, the foregoing attributes are based on the assumption of objective reality, which is what Morgan argues against in his article. Conclusion To sum up, it has been argued Morgan’s (1988) article makes sound arguments about accounting being more subjective than objective. The arguments are supported by literature sources, which hold a similar proposition. The essay has even used cases of corporate failure whose cause has been traced to accounting fraud and indicated that such failures are evidence that accountants are not always objective and have a decision-making prerogative, which they can use to portray the organisations they serve in a particular way. In the end, it has been observed that the different amendments made to accounting standards could be interpreted as evidence that Morgan was right in his arguments. However, it is noted that the subjectivity concept is not supported by the same standards that are often amended. Therefore, it is stated that perhaps the inconsistencies that exist between features of financial information and subjectivity in accounting practice as advocated for by Morgan could be the reason why the author’s proposals have not been embraced yet in the accounting profession. References Andrews, T 2012, ‘What is social constructionism?’ Grounded Theory Review – An International Journal, vol. 11, no. 1, viewed 19 October 2016, . Australian Accounting Standards Board 2016, Frequently asked questions, viewed 20 October 2016, . Carlsson-Wall, M, Kraus, K, Lund, M & Sjogren, E 2015, ‘Accounting talk through metaphorical representations: change agents and organisational change in home-based elderly care’, European Accounting Review, viewed 20 October 2016, . Chea, AC 2011, ‘Fair value accounting: Its impacts on financial reporting and how it can be enhanced to provide more clarity and reliability of information for users of financial statements’, International Journal of Business and Social Science, vol. 2, no. 20, pp. 12-19. Davies, T & Crawford, I 2012, Financial accounting, Pearson, Upper Saddle River, NJ Deegan, C 2009, Financial accounting theory (3rd edn rev.), McGraw-Hill Australia: North Ryde, NSW Elliott, B & Elliott, J 2011, Financial accounting and reporting (14th edn), Pearson Education Limited, Edinburgh Gate, Harlow England. Gervasio, D & Montani, D 2013, ‘IFRS subjectivity: the other side of the coin’, Universal Journal of Accounting and Finance, vol. 1, no. 2, pp. 58-69. 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Schipper, K 1989, ‘Commentary on earnings management’, Accounting Horizons, vol. 12, pp. 91-102. Shah, S, Butt, S & Tariq, YB 2011, ‘The use or abuse of creative accounting techniques’, International Journal of Trade, Economics, and Finance, vol. 2, no. 6, pp. 531-536. Tassadaq, F & Malik, QA 2015, ‘Creative accounting and financial reporting: model development and empirical testing’, International Journal of Economics and Financial Issues, vol. 5, no. 2, pp. 544-551. Read More