Developments in Accounting and Corporate Reporting - Essay Example

DEVELOPMENTS IN ACCOUNTING AND CORPORATE REPORTING BY COLLEGE PRESENTED TO Developments in Accounting and Corporate Reporting The history of accounting is detailed and dates back many years to the human civilization period. Therefore, the subject has undergone strategic changes over historical periods to what it is today. Considering that trade between communities dates back to civilization, a form of accounting must have existed, which guided in the trade of goods and services. Moreover, some form of accounting must have been practiced in the development of cities, in managing trade and in the concept of creating and managing wealth. Therefore, accounting as a subject is an old as trade, which makes it necessary to evaluate the practices that led to the development of the current accounting subject. This paper examines these developments and other issues that may have impacted in the development of accounting. Importance of understanding the historical background It is important to understand the historical background of any subject such as accounting. Understanding accounting background and how it has developed is essential in understanding the past, and leads to a better understanding of the present practices. Understanding the historical background of accounting discipline, trends and practices that could have led to its current status facilitates better understanding of the profession. It is only through evaluation of the historical developments of the subject that people may appreciate accounting as it is today and its significance in the society, in organizations or other areas of application. Moreover, understanding the historical background enhances a better understanding of the objectives of the accounting theory and what the subject intended to achieve. In other words, a problem is better solved by understanding the objectives at the initial stages of a process. Furthermore, understanding the historical background of the subject allows people to delve deep into understanding social, economic and political events and the significance of the subject in shaping these issues. For instance, as the article illustrates, there is a debate on whether accounting was a social construction, based on how accounting influences the society. Considering that there lacks a universal understanding of the accounting theory, the theory may be best understood by investigating the use of data, which people relate to accounting practices. Understanding such practices and how they relate to use of accounting data will lead to credible links on what accounting theory might mean, and how it has evolved over time to what it is today, as well as its impact on the social, economic and political spheres of a society. Therefore, understanding the historical background of a subject involves delving deeper into how the subject impacts the society and its influence on the political and economic spheres. Such understanding leads to a better understanding on what might be regarded as the accounting theory. Stewardship Stewardship was a primitive accounting activity that dates thousands of years to the civilization of humanity. Stewardship was an activity that involved keeping of records and count of items to prevent theft of the states treasures and wealth. In other words, it was an activity of being a custodian of another persons items to prevent theft. As such, stewardship could be considered as a primitive accounting process, though its role was mainly to ensure the kings treasures were counted and kept safe to prevent theft. As the article illustrates, the ancient Greeks had detailed emphasis on accountability for all people working for the state (Higson 42). As such, the practice of engraving public officer’s wealth on stones was an attempt to enforce accountability, which could be regarded as one of the best evidence that stewardship at such an early age was similar to accounting practices today. Moreover, there was a close relationship between a steward and his lord, which is reflected in the current relationship between an accountant and a company to whom such accounts belong. Moreover, another practice that resembles the current accounting process involved collection of records on debts, receipts of payments and other inventories in the Roman Empire (Higson 42), a process which resembles the current accounting procedures of keeping records for similar items. As such, stewardship could be regarded as the strategic activities that ensured accountability of state’s wealth, which then transformed to the modern day accounting discipline. Stewardship transformed over thousands of years to the current accounting discipline. From the early Egyptian and Roman stewardship that involved keeping of records of all items in a state to avoid theft, stewardship evolved to a process of efficient management. In the Roman Egypt, phrontistai produced records that showed acquisitions and outgoings in monetary or any other form, as a way to prevent dishonesty and losses (Higson 42). These accounts then paved way for the manorial accounts, which were in use in the thirteenth century in England. These accounts were in the form of charge-and –discharge accounts (Higson 43). This was a report of the agent’s responsibilities to his lord, indicating the moneys the agent has received and the ones they had spent. The concept of accounting, especially with regard to cost accounting as used today, dates back to after WWII. The accounting evolution was a result of the industrial revolution and made use of the concept of cost accounting. Andrew Carnegie is credited for having initiated an accounting procedure that enabled him to note and have credible tracking of all the operating costs in the company. Corporate Governance Under corporate governance, the major role of financial reporting is creating a true image of the performance of a company, illustrating all transactions and assets of a company in the highest degree of honesty. Corporate governance is aimed at promoting integrity; corporate governance ensures all transactions are handled with the highest degree of integrity and to the best interest of stakeholders. Major companies have failed due to lack of proper financial management and lack of sound management practices. As such, accountability has been a problem in many corporations, with managers falsifying account statements with a view of creating a false impression about the company to stakeholders or with an aim of defrauding the company. As the report indicates, corporate governance is a management process that addresses the shortcomings in the boards of many companies and prevents financial misappropriation (Higson 46). Therefore, as the report indicates, while management refers to running an organization, governance refers to ensuring organizations are run properly and with integrity. As such, the role of financial reporting under corporate governance is to present the true picture of the company, which facilitates better and credible decision-making process among stakeholders, and particularly investors. One role of corporate governance is to set the strategic direction of a company in the long term. Strategic decisions can only be set using the actual and truthful records of the company’s performance. The current actual performance of a company will depend upon the reported financial reporting, which are then used to set the directions and objectives that the company seeks to attain in the future. This will also facilitate credible and better management actions based on facts and not on falsified accounts. Another pillar of corporate governance is recognition of legitimate accountability in the management. Financial reporting reveals all the activities of the management by examining the assets, liabilities and income streams in the company. Financial reports reveal any inconsistency in transactions, which might be an indication of unethical practices in the company. Therefore, financial reporting is the background of corporate governance. In other words, through financial reporting, it is possible to ensure the company adheres to the best management practices possible without cases of financial misappropriation. Financial reporting detects any case of inconsistency in a company and may lead to litigation and loss of jobs among implicated people. As such, financial reporting will encourage managers to adhere to the highest standards of governance. With reduced cases of misappropriation of funds in the company, there are high chances that the company improves its performance and accesses capital markets much better; investors seek companies with sound management practices and better markets for goods and services based on the reputation of a company in the market. Consequently, financial reporting is the key to ensuring improved leadership in organizations and encouraging transparency. Important to note, though corporate governance does not emanate from financial reporting, financial reporting discourages cases of fraud, which may enhance the level of integrity as required under corporate governance. As the report indicates, boards of directors in a company have to strive towards promoting integrity and consistency of their reports and meeting the objectives and letter of reporting standards (Higson 47). Therefore, financial reporting promotes the culture of integrity in companies, which leads to sound management and improved performance in companies. Preparing a Profit and loss account There is no right way to calculate the profit and loss statement. However, this does not suggest that any process followed in preparing these statements is right provided the people understand how the statements are prepared. On the contrary, there is a need to adhere to standardized methods of preparing the loss and profit accounts. Though there are different approaches in preparing the loss and profit accounts, there are various agreeable rules that have to be followed in such a process. For instance, taxation theorists argue that value increments are not treated as income because they would not facilitate payment of taxes. This rule is also agreed by accountants who argue that increments do not permit payment of dividends (Higson 56). As such, each entry in the profit and loss account has to be agreed upon by the major stakeholders in the field, which prevents inconsistencies and contradictions in preparation of profit and loss accounts. Therefore, among all the accepted methods of preparing the profit and loss accounts, the final answer would bear more similarities than differences. This might suggest that any statement preferred has to adhere to specific standards as agreed by the respective accountant bodies. These standards have to be respected when preparing any profit /loss account. In addition to preventing conflicts among the various methods of preparing profit and loss account, such standards help in preventing loopholes that may be used unethically in the business. Consequently, to ensure uniformity and standardization in the accounting profession, basic standards of accounting have to be followed with regard to treatment of the different entries in a profit/loss account. Reference Higson, A. 2003. Corporate Financial Reporting Theory & Practice. London: SAGE Publications Read More