BE150 Issues in Financial Reporting
Module Code And Title : BE150 Issues in Financial Reporting
Introduction
This study is going to evaluate unsettled debate about the neutrality of accounting information and its political impact. Different types of factors that affect financial information are going to be discussed in this study as well as communication of economic reality of a business organization is enlightening to find the need for accounting information for stakeholders. Necessity of critical evaluation of accounting information for understanding the economic reality of a company is going to be analysed in this study. Companies thought users and stakeholders are addressed less so that they can be driven as per their accounting information and continue this process for a long period.
Unsettled debate in accounting on whether financial accounting is neutral or political
Accounting prepares accounts and statements for unbiased data and entire data is rectified after completion of every. As cited by Hines (1988), company includes a proper lawsuit for preparation of financial data that is a neutral process where company represents its performance based on verified metrics. Internal and external audits are done in companies to rectify errors of accounts. Stakeholders and investors make their decisions on the basis of an annual report that is prepared following accounting standards, however, in recent years it has been seen that companies have included some biased information in their accounts to show less profitability to save government taxes. Financial accounting standards are neutral however companies use different gaps of law and include biased data for more revenue.
Auditors are implemented by stakeholders to verify the neutrality of accounting of a company that increases reliability of the company. As opined by Young (2006), the management team always wants to increase performance by including biased data to prepare high quality financial statements to collect funds from investors for their future growth. Financial statements of a company are verified by auditors and third parties and the same result from different verification sources ensures its reliability. From a theoretical perspective financial accounting is a neutral process of representation of a company’s financial performance however companies have the opportunity to use gaps of law and make it biased for their betterment. Financial accounting is not political because it is prepared following IFRS rules that it is a neutral process of measuring a company’s performance.
Political involvement has been seen in financial accounting and entire data was shown differently to show better performance and reduce taxable expenditure of a company. As per the opinion of Bay (2018), financial accounting includes recording transactions and summarizing these data to report financial statements for a company that shows a business operation for a particular period. External parties get knowledge about a company from their financial accounting and it has proper guidance for its preparation. Concepts of accounting are made from neutrality which means financial data must be collected from authenticated sources and it is free from bias. Accounting assumptions have a rule that it must be biased free and not prepared to influence some parties or make decisions. Maintaining the reliability of financial accounting depends on faithfulness of representatives however their predetermined objectives may include political involvements.
Functions of accounting are prepared based on accounting standards and there is no scope for political involvement that indicates its neutrality. Effective financial statements attract a lot of investors, stakeholders, and other parties. As cited by Mauro et al. (2021), formulation of business is dependent on financial statements and forsakes their financial accounting based on their objectives. Most firms prepare financial accounting to develop their organization and include biased data that is not going to be identified; however few companies use it to show their actual performance to stakeholders. Utilization of financial accounting in a neutral perspective or political perspective is chosen by the management team. Most users of the financial accounting of a company do not have in depth knowledge that allows political involvement easily.
FASB has constructed standards for financial accounting in a specific and quite limited way for users of decision makers of economic rationale. As opined by Zou et al. (2019), different types of financial statements are prepared by firms and most companies have started including biased data to enhance their financial performance, however, there are some firms that make neutral financial accounting analyses for stakeholders. Stakeholders can expect unbiased stents from firms however utilization of financial accounting completely depends on the management team. Auditors are unable to change this type of data and it is hard to maintain the neutrality of financial accounting of a company.
Management team is involved in preparation of the annual report and they have more power than external users that reduce neutrality of accounting standards. As per the opinion of Knight and Tsoukas et al. (2019), accounting standards are made based on neutrality. On the other hand, it is hard to understand the political involvement of that firm because every data is presented as per rules. Sometimes financial accounting shows a picture of a growing company that suddenly breaks down within a short period and a lot of stakeholders are exploited due to untrue representation of financial statements. It is hard to understand how to include biased data and finding the core of it is not possible because auditors are not a part of the organization and they are aware of what they see and the outcome of records of financial transactions.
Communicating economic reality of business entity to meet need for accounting information
Every transaction and accounting entry represents economic resources and obligations of a business. As cited by Gendron and Rodrigue (2021), economic reality determines the nature of business by evaluating financial records and transactions of a business. A large number of investors and stakeholders are entitled in communication to find economic reality to meet accounting information. Human resources observe the economic conditions of a firm and analyze it to find its health. Communication of economic reality is necessary for decision making; however, a lack of neutrality affects the entire process of economic reality. Users of financial statements justify the usefulness of financial reports and the entire truthfulness of financial accounting depends on it.
Companies provide their financial data to impress their stakeholders due to fear of losing out in a competitive market that economic reality does not meet accounting information. As opined by Unerman et al. (2018), it is hard to make effective decisions on the basis of accounting information because most of a company’s economic reality is different from its reality. The financial board has assisted users of financial statements as a rational actor of the economic reality of financial models that are used in organizations. Diverse economic factors are evaluated during communication of reality of the actual economic condition of a business entity. Understanding accounting information is possible to meet with economic reality if users are entitled to different types of calculation methods to understand it because economic transactions are made in organizations that include economic events that have potential to impact the economic reality of a company.
Political aspects affect economic reality and users are unable to make appropriate decisions towards an organization. As per the opinion of Themsen and Skærbæk (2018), a proper understanding of economic calculations is necessary to participate in economic communication however lack of knowledge is a big boundary for it. Different types of historical costs and artificial expenses are included in financial accounting to show high expenses that help to reduce the tax liability of a company. These kinds of events are not identified without having a clear idea about financial calculation and internal economic factors of the company. Company standard is settled by management decision makers and they made the aim of various events of confluence that creates an outline between demand and its accounting uniformity. A large number of people have no knowledge about calculation of accounting information. It is hard to communicate economic reality and financial statements of business entities.
Artificial income and future possibilities are reflected in accounting information however a lot of biased information is found during auditing. As cited by Heald and Hodges et al. (2018), fresh accounting information not only helps external users but also improves decision making ability of a company. Economic reality and accounting information directly intersect because financial statements are prepared based on them. Financial resources are made effective because a large number of people do not have any idea about firms and their performance; it assists them in their decision making. Accounting standards must provide accurate relevant information on financial health and do not include Chronicle transactions of finance. Communication of economic information helps to judge the reality of accounting information of a business organization. Investigation of theoretical literature and understanding the decision-making process through accounting information is necessary to meet the reality of a business entity.
Biased data are included in firms to sustain their existence for a long period in a competitive market however actual accounting information contains a neutral perspective during the preparation of financial statements. Most people blindly believe financial data as it is prepared based on accounting standards however it is not their fault because a few people have the idea that financial information can be biased. As opined by Duro et al. (2019), collapse of financial resources creates panic among Investors that they withdraw investment due to fear of loss. In this case, firms make changes in transaction history and put biases that show better health of the company than actual. An individual must be self-conscious to understand the financial performance of a company based on the internal and external environment of the company.
Reality of an economic condition does not independently exist in accounting information, so understanding the health, performance, and structure of a company is hard. As per the opinion of Sweet (2019), it is hard to ‘realize’ something before it becomes a reality in accounting information that there is always a doubt about the physical reality of financial reports. A lot of criticism is there in the constructivist approach because it neglected social structure in the current situation. Emphasizing people to build social relationships is necessary to understand the reality of the economic structure of an organization.
Stakeholders are likely to continue as users seem to know Address less
Users do not have much idea about accounting information so it is easy to make them realize that whatever shows in accounting information is correct. As cited by Moşteanu and Faccia (2020), stakeholders continue their activities as they believe that users are addressed less about accounting information. There is no accurate testing method for accounting information that firms continue their operations to prepare accounting information as per their requirements. As opined by Wang et al. (2018), making biased data of accounting information is easy as users do not have access to internal information of a firm. A large number of funds are invested in organizations based on accounting information and inaccurate data is the reason for stakeholder exploitation. Theoretical framework and conceptual analysis represent that accounting information plays a neutral role for organizations and stakeholders however political involvement affects it as it is made as per predetermined goals of the management team.
Operating communication and monitoring accounting information is one of main characteristics of auditors; however external users do not have permission to access internal factors and evaluate authenticity of historical transactions. As per the opinion of Mayangsari et al. (2018), a big example of biased accounting information is that the stock market does not react to the disclosure cost of replacement; however, it may react as depreciation changes. Stakeholders and users have no choice rather than understanding the internal environment of the company and its market policies for decision making. A lot of stakeholders have appealed to the government to make effective decisions and follow several types of activities to ensure profitability.
Communication of the reality of financial accounting is so hard that it is necessary to construct reality by spreading awareness about financial standards and the measurement process of accounting standards. As cited by Mbir et al. (2020), companies do not think twice to make biased accounting information to achieve their predetermined objectives, however appropriate auditing has the ability to find biased information. Users are addressed less because they do not have external sources that are going to rectify biased data of the company. Unnecessary adjustment in accounting information affects reliability that management team and stakeholders are distracted to achieve their goals. A lot of accounting issues are found in companies’ accounting information and they made those mistakes for their own achievements.
Financial information does not provide an accurate idea about organizational efficiency and weaknesses are not spotted through it. Companies have total control over price fixation and implementing a biased cost of production is simple in this method. Accounting information shows the overall transaction of a company in a structured way however these data are not useful to control cost of organization. As opined by Stolowy and Paugam (2018), no standards are mentioned for access that determining errors are hard and stakeholders have to go through this information without verifying it. A large number of users completely depend on accounting standards however companies have to maintain social responsibility and provide accurate information about financial performance. Few steps have the ability to prevent these types of issues; one of major steps is to double check records and frequent auditing.
Users of accounting information are addressed less because they do not have much understanding about the internal environment that they have to believe in, which is an incomplete performance analysis of a company. Accuracy of accounting depends on presentation and disclosure that does not include an error or biased data. As per the opinion of Knight and Tsoukas et al. (2019), digital software is taken into consideration in organizations because these types of technologies use artificial intelligence that does not include biased data in accounting information. Considering different types of digital resources for preparation of accounting information is necessary to prevent errors and represent neutral information for stakeholders and users. Financial reporting standards are applied to a company for a particular period and it is hard to understand the effectiveness of accounting information for stakeholders and other users in decision making.
Conclusion
This study has discussed neutrality of accounting information and its impact on stakeholders and users. It can be concluded that accounting information is neutral from the theoretical framework however firms prepare it as per their predetermined goals. A lot of biased information is included in accounting information however there is no way to test accuracy of this data. Understanding the economic reality of a company is hard because most of the users are unaware of communication between economic reality and accounting information. Users have no knowledge to solve this complexity of accounting information that stakeholders and users are easily exploited. Implementations of digital accounting systems have the potential to remove errors and political involvement that produce accurate financial information about a company. Understanding the optimal utility of accounting information is unknown to users. Companies include relevant information to attract them; however, it is a big threat for companies as well as users.
References
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