Traditionally accountants have been trained to handle specific information as stipulated by international financial reporting standards (Accounting Standards Board, 1999; Colwyn Jones, T. 1995;) and generally accepted accounting principles. However, of late the disclosed accounting information under these two reporting standards has come under criticism. This is because firms as known have not been disclosing the all information required for people to make decisions (Adolf J.H.,1985, Anderson, M & Edwards, J. R. 1998). Take examples of the world com, Enron, and many others.
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Concepts and principles
Normal accounting reporting has accounting concepts and principles all geared to monetary reporting and this include:
- (Money measurement convention – This is the accounting of items that can only be measured in monetary value. For Example: – Items like motivation and leadership cannot be measured in monetary form. Meaning that some information to be included.
- Realization convention: – Items/ transactions are accounted for when they occur and not when actual payments are made. An example is a contract to transfer the land title for payments made in one year. The payment pertains to the period when the title was transferred.
- Materially convention: Only transactions that are material should be considered for accounting purposes. An example is when an auditor is reporting his findings in an audit report where immaterial items are left out.
- Going concern convention: – This states that the firm should prepare its accounts as if the firm is not curtailing its operation in the foreseeable future. An example is when a firm records its assets at cost and not at market value.
- Prudence convention: – Profits and gains are not recorded unless they have been realized. An example is unrealized gains.
- Matching concept: – Expenses are matched with incomes when such expenses earned the revenues. An example is when expenses like electricity are accrued at year-end.
- Historical cost convention: – This is the recording of transactions at their original cost. An example is a recording of plants and equipment; furniture and fittings.
- Dual aspect concept: – That every accounting transaction affects both sides of an accounting transaction i.e. double entry. For example, when a company purchases a vehicle, the vehicle account is debited whereas the cash account is credited.
- Stable monetary unit convention:- This convention argues that the purchasing power of money ( shillings; dollar; pound, etc) keeps on changing due to inflation and deflation) an example is when transactions are converted purchasing power or the current cost accounting approach
- Business entity convention: The transactions about a business entity must be separated from individual/ private transactions.
The above-mentioned principles as they are designed are meant accounting information that is expressed in monetary values. However, there is some information that is very vital that needs to be expressed in the final financial statements to increase accountability. Such information includes what has been done to the society to avoid things like environmental destruction and other information relating to all stakeholders. To understand the information required by various stakeholders, we shall explore corporate sustainability, which is a new concept that requires more information to be input into financial statements. This is also changing the role of a traditional accountant.
Most countries have required their organizations to embrace corporate sustainability to assist in increasing the amount of information. In to have proper accounting information accounting standard setters must consider issues of corporate sustainability (Armstrong, P. 2002). With corporate sustainability in mind, firms will tend to give more information to meet the requirements of corporate sustainability. I will look at corporate sustainability and the amount of information required satisfying McMonnies, P. (ed) 1988;
Corporate sustainability can be defined as current and evolving management for corporate paradigm which acts as an option for traditional goals of growth and profit (Griffiths A, Hillman A.J. Keim G.D, 2001). Corporate Sustainability emphasizes societal goals, like social ethics and sustainable development. Sustainability being an option for traditional goals of the firms it mixes four concepts of management in achieving organizational goals. By sustainable development, I mean environmental protection, economic development, equitable distribution of resources, and social justice. Business managers have adopted strategies that take care of organizational goals and objectives and its stakeholders, at the same time sustain, protect natural and human resources for the survival of a corporate in the short run and the long run (Castro C.J. 2004 Brown, Little, and Company, 1997) To achieve this manager must blend the concepts of sustainable development, corporate social responsibility, Accountability and stakeholders’ theory. These concepts form corporate sustainability.
We have to know who requires accounting information and why? After knowing this then I explore the amount of information required by stakeholders. This is explained well in corporate social responsibility. There am exploring corporate social responsibility (Watts, R. L., and Zimmerman, J. L. 1986; Smith, T. 1992; Page, M, 1991).
In order, to understand the issue of stakeholders and the information required I will examine the issue of corporate social responsibility. Social responsibility concerning the management of corporate is defined as duties and moral obligations of corporate to other stakeholders. Corporate social responsibility is moral rights, wrongs, and obligations for business managers for any business transaction or decision. The moral responsibility of corporate depends on the nature of business and the individuals involved (Lehman, G. 2005).
Business organizations have adopted various ethical policies because they believe in showing the neighborhood their moral responsibility and in the process, they have increased their sales. Corporate social responsibility like any other concept is to be discussed in broad terms. The idea of corporate social responsibility was introduced in 1973 when it was introduced in American corporations. Its basic premises of ethical obligation have made managers and shareholders own self-interest in business transactions. Every business manager who incurs business transactions will put society’s goals and aspirations in the front.
Corporate social responsibility revolves around four basic theories which will include social contract theory (contractual relation), social justice theory (equitable distribution of resources), rights theory rights of community where the company is operating) and deontological theory.
Social contract theory: This theory assumes that there are several contracts both explicit and implicit between individuals, organizations, and institutions. Social contracts evolve around whims of trust and are made in harmony. Corporations are assumed to the business world by entering into contracts with the society in exchange for resources and acceptance to operate without interruption.
Social Justice Theory: This examines the fairness in the distribution of societal goods and services. The theory puts forward arguments that societies are considered, by way of distributing social goods. Corporate managers have a responsibility in ensuring these goods have been appropriately being shared in society (Griffiths, I, 1995; Hopwood, A.G. & Miller, P. (eds.) 1994: Froud, J., Johal, S., Papazian, V. & Williams, K. (2005)
Rights theory: This theory deals concentrate on the rights of various members of the society like human rights and other rights. Corporate managers should not interfere with the property rights and human rights of members of society. Corporations will have property rights should not be used to affect the rights of employees and the local community.
Deontological theory: This theory assumes that everybody is equal and should treat with respect and everybody has a moral duty to that effect. This belief is for everyone, including corporate managers, shareholders, and other stakeholders.
The brain behind the stakeholders’ theory of the firm is R. Edward Freeman, in his book 1984, Strategic management: A stakeholder Approach. He defined stakeholders as “any group or individual who can affect or is affected by the achievement of the organization’s objectives”. He argued further that “the basic premise of the theory is that the stronger your relationship are with other external parties, the easier it will be to meet your corporate business objectives, the worse your relationships with stakeholders, the harder it will be. Strong relationships with stakeholders are those based on trust, respect, and cooperation. Unlike corporate social responsibility, which is largely a philosophical concept, stakeholder theory was originally, and is still primarily a strategic management concept.”( Freeman, 1984).
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This theory aims to assist corporate identify stakeholders and strengthen the relationship with them and other external groups this will make them remain competitive advantage and relevant. Stakeholders will include shareholders, employees, customers, and suppliers. It is difficult to identify others because there are no clear formulae for defining stakeholders (Wilson, 2003). However, since the advertisement is making the world a small village, everybody is becoming a stakeholder depending on several factors. The factors to be considered in defining qualifying one as a stakeholder may include global impacts of an industry “such as climate change or cultural changes due to marketing and advertising ( Cosserat, G. 1994. Chwastiak, M. & Young, J. J. 2005; ) Examples of social responsibility includes:
- Customer – fair price, safe product, and moral competition
- Local community – creation of jobs and development of infrastructure
- Government- job opportunities for citizens and taxes arising from business transactions.
- Supplier – regular business and prompt payment.
- Employee- a salary to sustain the family and good working conditions.
- Shareholder- good dividends and appreciation of investments.
This is a legal requirement and ethical obligation of corporate to give an account of the actions and being responsible for their action. Accountability is a duty for one to justify and explain or report his or her actions. Responsibility is a duty for one to act responsibly. There is the relationship between shareholder and management which is and agency law thus agency theory. Management acts as agents’ and the shareholders act as the principals (Wilson, 2003). Shareholders entrust their capital to management in return for accountability and return on capital. Accountability is not limited to the agency law, nor only to the relationship between management and shareholders. (Oxford University Press, 1987).
Accountability does not only relate to the relationship between managers and shareholders but also another stakeholder as identified by Freeman in his book. Proponents of stakeholders theory argued that businesses are the authority to exist for good behaviors.
Sustainable development covers a wide area ranging from protection of the environment, micro and macroeconomic growth and development, and social justice in terms of distribution of natural resources. Therefore, sustainable development is where the use of natural resources, investments directing, new technology introduction and defining human needs direction and aspirations for long term gain of the societal growth. The concept of sustainable development covers the area of politics, economics, law, environmental science, business management, and management. Like democracy, justice, fairness, and other societal concepts, it is difficult to find a definition (Wilson, 2003). From the literature available, research shows that the issues of sustainability cannot be left to the governments (Oxford university press, 1987). Sustainable development has contributed to corporate sustainability by helping companies identify areas to focus on, which include environment, economic performance, and social. It also provides social goals for a corporation, governments, and other groupings.
Failures in the financial reporting
Failures in the financial reporting standard led to the failure of many firms and the introduction of Sarbanes-Oxley. This an extract of the act governing firms on reporting after the famous Enron case.
“The Regulatory Flexibility Act directs us to consider significant alternatives that would accomplish our stated objectives while minimizing any significant adverse impact on small entities. In connection with the amendments, we considered the following alternatives:
- Establishing different compliance or reporting requirements or timetables that take into account the resources available to small entities;
- Clarifying, consolidating, or simplifying compliance and reporting requirements under the rules for small entities;
- Using performance rather than design standards;
- Exempting small entities from all or part of the requirements.
The coverage of Section 10A(m) of the Exchange Act, as added by Congress in Section 301 of the Sarbanes-Oxley Act, makes no distinction based on an issuer’s size. We think that improvements in the financial reporting process for listed issuers of all sizes are important for promoting investor confidence in our markets. For example, a 1999 report commissioned by the organizations that sponsored the Tread way Commission found that the incidence of financial fraud was greater in small companies. However, we are sensitive to the costs and burdens that will be faced by small entities. We have endeavored through the amendments to alleviate the regulatory burden on all listed issuers, including the small proportion of small entities that will be affected, while meeting our regulatory objectives (Ezzamel, M., Lilley, S. & Willmott, H. 2004; Whittington, G. 1991).
We believe that a blanket exemption for small entities from coverage of the requirements is not appropriate and inconsistent with the policies underlying the Sarbanes-Oxley Act. Similarly, we believe that different compliance requirements for small entities also would interfere with achieving the primary goal of the amendments to increase the competency and effectiveness of audit committees for all companies with listed securities. The majority of commenters generally agreed with this approach and did not support lesser standards for smaller issuers overall. This commenter did not believe the requirements will impose a disproportionate burden on small issuers. We recognize that because the requirements apply only to listed issuers, the quantitative listing standards applicable to listed securities, such as minimum revenue, market capitalization, and shareholder equity requirements, already serve somewhat as a limit on the size of issuers that will be affected by the requirements.
Another commenter, however, was concerned that smaller issuers may have particular difficulty locating qualified audit committee candidates that will meet the independence criteria, especially given the implementation period proposed by the Commission. While these commenters advocated various approaches, such as an exceptional and limited circumstances exemption for smaller issuers or SRO authority to exempt individual small issuers on a case-by-case basis, most agreed that an additional implementation period would be appropriate for these issuers. We are sensitive to the possible implication for smaller issuers and for SROs that would like to specialize in securities of these issuers. The final rule provides an extended compliance period for listed issuers that are small business issuers. In addition, the modifications to several of the other exemptions in the final rule, such as the overlapping board exemption and the new issuer exemption, should provide additional flexibility to small and new issuers in meeting the requirements of the rule. Our approach of not mandating specific procedures for the auditor responsibility requirement and the complaint procedures requirement should give issuers additional flexibility in meeting these requirements. Given the fact that the requirements will impact such a small number of small entities, we are not aware of how to further clarify, consolidate or simplify these amendments for small entities.
The amendments use performance standards in several respects. As noted above, we are not specifying the specific procedures or arrangements an issuer or audit committee must develop to comply with the standards. We do provide design standards regarding audit committee member independence, as these are the standards we are directed to implement by Congress. Accordingly, we believe that design standards are necessary to achieve the objectives of the statutory mandate. We do have the authority under Section 10A (m)(3)(C) to exempt particular relationships concerning audit committee members, although, for the reasons discussed above, we are not using that authority at this time for small entities. (Hopwood, A. 1974 ; Becker, S. and Green, D. 1962)
Let us compare the financial statements of two companies operating in different countries in the same but displays different information.
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