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Accounting: Constructing Economic Reality Essay

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Updated: Jun 6th, 2021

Introduction

Economic reality plays a central role in the practice of accounting and the standard-setting process. However, the problem with economic reality is that it exists in different forms, some of which are ambiguous. Therefore, with the lack of a standard framework on how to construct this reality, accounts get a free pass to present reality as they deem necessary or “as is”. The images that accounting theorists and researchers bring to their subject of investigation shape the way they understand the world around them, hence their reality.

The set of constructs that accountants use to shape reality in their practice generates numerous insights, hence diverse implications. Accountants could even use assumptions to create a certain reality in the process of making sense of complex situations. Constructing reality for accountants is easy because accounting does not have any philosophical presupposition, and as such, the difference between distorted accounts and desirable objective ones is primarily assigned to the practice.

Lack of Philosophy in Accounting

The link between philosophy and accounting is, in most cases, seen as an ambiguous concept. Other fields of study are anchored on some philosophical framework, which is used to question the basic and fundamental concepts associated with such professions and the need to have a meaningful understanding of the same. However, even though accounting is underlined by an overarching theory, scholars in the field rarely illustrate or even define it. As such, the lack of philosophical presupposition allows accountants to construct reality as they wish, which has probably led to the many financial scandals that have been witnessed in this century.

There lacks of a framework to assess the accuracy and faithfulness of the information provided in accounting and financial reports. Accountants have the liberty to identify what is relevant concerning financial information and the extent of disclosure. As such, accountants are presumed to give reliable data, which explains why stakeholders depend almost exclusively on financial reports when making investment decisions.

The reality created in accounting is thus subjective and a product of the accountants’ interpretation of different situations. Consequently, creating reality becomes easy because it is only used to arrive at a predetermined end. For instance, financial reporting could be directed towards being useful in decision-making for shareholders even if biased and inaccurate information is given. Truth, in this case, is relative, and it is based on the way things are in the real world.

Additionally, truth is a construct created by human beings using a certain language, which is also a human creation. Consequently, the truth can only exist within the human mind, which explains why economic reality, as part of social reality, is vague. Truth in accounting can only be what standard-setters deem it to be, hence the ever-changing accounting language, vocabularies, and standards. Therefore, the accounting philosophy continues to evolve, and creating any form of reality in this field will remain easy for such an important task is left to the judgment of accountants.

Ambiguity in Accounting

Creating reality in accounting is easy because it is based on the numerical view of situations. According to Morgan, “accountants try to represent organisations and their activities in terms of numbers. This is metaphorical. And like all use of metaphor, it gives but a partial and incomplete representation of the reality to which the numbers relate” (480). The good news for accountants is that they are not required to give a complete representation of the reality that they create through these numbers. For example, corporations are characterized based on annual sales, the number of employees, or total assets.

Similarly, the reality concerning the success of an organization could be created using growth in profits or return on investment, and by doing so, accountants are only required to abstract reality from a more concrete construct.

Using a reductive and abstract system based on numerical signs, accountants create a world of relationships between things and people – which is an easy task. Davis et al. state that numbers are arguably made to represent “the reality and the reality is interpreted through the numbers…In essence, the numbers stand in analogical relationship to the reality which they describe, and are manipulated to try to create different ways of characterising and describing that reality” (308).

For instance, calculating the relationship between profits and sales, the reality created is only a slice of how these factors relate to each other. This outline of corporations given by numbers is devoid of other important factors, such as political and human aspects, which play a critical role in shaping the reality of organizational life.

Creating Reality in Accounting

Accounting is an interpretative art whereby accountants are expected to be subjective in making sense of a complex web of phenomena, which underscores the process of reality construction. The accounting reality formed is based on a predetermined end, and thus it becomes easy to create such a reality because the accountant knows what to expect from it. For example, in the quest to make an organization efficient, say within a hospital, accountants are invited to create rigorous financial controls.

The objective, in this case, is to cut costs and streamline operations for profitability. As such, the involved accountants propose the introduction of systems to achieve the set objectives. Nurses and other professionals become extensions of this new system whereby they are required to allocate their time, use the available resources rigorously, and stay within the budget.

Ultimately, the relationship between nurses and patients and doctors changes, and decisions that hitherto would be made with quality care provision in mind, are now made with profits as the center of focus. In the process, the entire nurses’ work orientation changes from the traditional patient-centered focus to an administrative duty under the requirement of meeting the budget. In the end, the corporate culture in that hospital changes. In this case, accountants succeed in creating a different reality within the organization based on the simple task and objective of ensuring efficiency. Even though the humane aspects of healthcare provision, such as offering patient-centered care, suffer in the process, the accounting reality created justifies every decision taken.

Creating reality in accounting is dynamic, and it depends on what needs to be achieved, mostly in financial and economic terms, without considering the effects of such decisions on other players in the system. Therefore, creating reality in accounting is easy because it is one-sided, and accountants are not required to account for externalities such as the welfare of employees. For instance, before investing capital in the acquisition of certain technology for a company, a rigorous financial appraisal is needed. Such appraisals only focus on the cost-effectiveness of the technology in question without accounting for other associated factors including social and human consequences.

Morgan states that these “appraisals might often do an excellent job in determining the financial and economic viability of a proposal, but leave other aspects, such as the general social and human consequences, and even the wider strategic impact, unaddressed” (483). In this case, accountants are only required to create a slice of reality to justify the utility of such technology, which then affects organizational decision-making. In other words, accountants are entangled in the process of constructing reality by grasping and presenting complex situations in partial ways, and their articulations are used to sustain such realities as perceived. Consequently, creating reality in accounting becomes a matter of perception, thus simplifying the entire process.

The need for accounting is underlined by the existence of users who need to utilize useful information to achieve a certain goal. Consequently, the rationale or reality of accounting data rests on the needs of its users. Davis et al. argue that any “purposive activity presumes usefulness, the new emphasis given to usefulness has changed the way in which accountants view the role of accounting and has made an impact on both research and practice” (311).

Therefore, the truth or reality created in accounting is premised on the usefulness of the information to a targeted audience (users). Accountants thus create some sort of convenient truths because as Hines posits, “there is no such thing as the truth, but there is such a thing as stretching the truth too far” (253). Based on these arguments, accountants endeavor to present and interpret data in a way that serves the users of the same.

For example, in the Enron scandal, certain accounting realities were created to dupe shareholders and other stakeholders that the company was financially healthy. According to Mallin, Enron used special purpose entities (SPEs) to “conceal losses from the market by giving the appearance that key exposures were hedged by third parties” (2). In other words, accounting practices at Enron created a certain reality, which convinced shareholders that the company was highly profitable.

Creating this accounting reality was easy because the accountants knew what the public wanted to hear. According to Maali and Jaara, “All objects are socially constructed, and profit is no different…Profit is a social fiction constructed to promote and maintain the interests of particular groups” (161). The truth in this statement holds in the case of Enron, which supports the claim that creating reality in accounting is easy.

Another example of how easy it is to construct reality in accounting could be found in the WorldCom scandal. The company’s accounting records showed that between 1999 and 2002, it had recorded expenses worth $3.8bn as a capital investment (Mallin 53). Accounting measures were manipulated to create this twisted reality and the company’s revenue was exaggerated by $3.8bn. In other words, accounting reality may not reflect economic reality because the process of creating the former is highly subjective, which makes it easy.

Conclusion

The creation of reality in accounting involves an ambiguous and easy process based on the capacity of accountants to interpret complex situations using numerical values. The lack of an underlying philosophy or functional overarching theory to govern accounting practices has exposed this profession to subjectivity. Consequently, the reality is constructed to drive a predetermined narrative, such as the cost-effectiveness of certain organizational systems. Accountants are only required to provide a slice of the reality, which is normally one-sided in favor of the set objectives. The ease with which accounting reality could be created contributes largely to malpractices like those surrounding Enron and WorldCom scandals.

Works Cited

Davis, Stanley, et al. “The Images that have Shaped Accounting Theory.” Accounting, Organisations, and Society, vol. 7, no. 4, 1982, pp. 307-318.

Hines, Ruth. “Financial Accounting: In Communicating Reality, we Construct Reality.” Accounting, Organisations, and Society, vol. 13, no. 3, 1988, pp. 251-261.

Maali, Bassam, and Osama Jaara. “Reality and Accounting: The Case for Interpretive Accounting Research.” International Journal of Accounting and Financial Reporting, vol. 4, no. 1, 2014, pp. 155-168.

Mallin, Christine. Corporate Governance. Oxford University Press, 2013.

Morgan, Gareth. “Accounting as Reality Construction: Towards a New Epistemology for Accounting Practice.” Accounting, Organisations, and Society, vol. 13, no. 5, 1988, pp. 477-485.

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