Accounting representations be partial in to achieve organisational

Category: Accounting

In an organisation, control is the vital aspect in running the business well. In many contemporary organisations, accounting representations In order to stay in competition with the all the players and to achieve success in the business environment, control is the key driver. An organisation cannot operate without a form of control. Control, literally, means the top management has the power and they act as the controller in the organisation.

Representation is information given to arrange insurance about the nature of risk involved. The risk of the representation is 'causally connected' by the crucial elements of the reflective representations (Dourish, 1995). Also according to Dourish (1995), changes in the representation reflect the changes in the system, and changes made to the representation can alter system behaviour.

Accountability is an obligation by the directors to give an account providing the annual reports and accounts to the stakeholders, especially the shareholders and the investors (Oxford Dictionary of Business and Management, 2009).

Control is an ability to direct and the power to influence the financial and operating policies of an undertaking with a view to activities of economic benefits gains (Oxford Dictionary of Business and Management, 2009). StudyCIMA.com (2009, Control Theory tab) defines organisation control as a control level the top management monitor outputs and compare target and performance standards. According to Hopwood (StudyCIMA.com, 2009, Control Theory tab), control in an organisation is not the only control devices at the work in the organisation, it, however fit within the other social and administrative control systems. Therefore, reporting the annual financial reporting to the stakeholders is part of social control.

Objective and Function of Financial Reporting

The financial reporting is needed to provide useful information for investment and credit decisions, useful information for accessing cash flow prospects and enterprise resources information (Kieso, Weygandt, & Warfield, 2004 cited in Young, 2006, p.579). Hence, the financial reporting is also a way for the businesses to communicate investment information of the organisation with their stakeholders and potential stakeholders who will invest in the business. It is also the way to project useful information of the organisation to the shareholders, besides presenting it to them during the annual general meeting.

The function of financial accounting is to provide financial information to stakeholders of the organisation (Young, 2006, p.579). It focuses on the information needed by stakeholders such as shareholders, investors and creditors. These stakeholders use the financial accounting provided over a number of years to evaluate the company's financial position and to make their economic decisions. It is used as a form of communication to the stakeholders. Companies usually communicate results of activities to interested parties, accounting practices justified to the financial statements. Companies also use the financial accounting as a form to attract potential investors. By disclosing the financial accounting on the internet, it will also attract potential employees who are interested in working for the organisation. Hence, the same theory works for the potential suppliers and buyers. If the company disclose a sustainable account, it discloses a different set of image of the company to the public, which attracts different people as their stakeholders.

Advantages of Accounting Representation

The need for information of the parties of interest, the stakeholders, e.g. the management team of the business, investors, shareholders, creditors and government in matter such as taxation and regulation adopted by the organisation (Young, 2006). By having a more transparent financial reporting for the stakeholders, it gives confidence to stakeholders such as the internal which is the employees and the external stakeholders which is the customers, creditors and prospective investors. Employees prefer to work in a more secure environment. The collapse of Enron turns employees to be more cautious when choosing a job. All the employees of Enron were jobless overnight and were evacuated from the building. Customers prefer to purchase from companies that are reliable, same goes with creditors, they also prefer to sell to reliable customer. In business, management prefer to deal with customers and creditors in a long-term basis rather than a one off transaction. By having a frequent transaction with the stakeholders, the management is likely to have an agreement of a better price bought from the creditor, hence, sell at a more attractive price to the customers.

Transparent financial accounting is a mean of attracting prospective investors. Current investors as well as the prospective investors are interested to know about the organisation's current status as well as the future and predicted state of the organisation. Investors, be them current or potential, rely a lot on the financial accounting the organisation published. There is no other source for the investors to obtain the organisation's information other than the organisation itself. Therefore, the transparency of the organisation's financial reporting is vital to the investors. Other information obtain may be sources from else which is not from the main source, the organisation itself. The current investors which they are the shareholders, they will receive annual reports of the organisation's financial cash flow for the management and they would have attended the annual general meeting held annually. On the other hand, the potential investors could only rely on the organisation's published financial report to make judgement on whether or not to invest in the organisation. Many organisations would enhance their financial accounts by using creative accounting to manipulate the cash flows to attract investors. However, contemporary investors will not put their entire trust to the organisation's report if has not have a good rating and have not found to be transparent on their published financial accounts.

Beside the external stakeholders, Meigs and Johnson (1967, p.3 cited in Young, 2006, pp.581-582) state that the managers of the business needs the information to assist in planning and control activities of the organisation. Young (2006, p.582) states the usefulness of accounting information and reports were 'more practicable, more reliable'. It was a measurement used in reflecting the profit. In the case of Enron, where the management decided not to be transparent on their financial reporting where they were practicing creative accounting to conceal many financial figure of the company from public. Management of organisations find they prefer to be less transparent in their publish accounts reporting as they stand a chance to conceal what they do not wish the public to be aware. At times, organisations find that there is necessary evil in a business. In order to succeed, organisations tend to do many things which are against the grain in the business sector. These, however, may offend the stakeholders which the organisation already knew. They persist in doing in order to achieve what they want yearn for in running the business. The business is a rat race which these doings will not end, because greed is in every human being, it will bring to an end or discontinue by the organisation only if the organisation fails, which would mean it must have collapse. Once the organisation collapses, there is no turn back to the organisation; therefore, it changes the particular organisation forever. Say, Enron, due to just a mistake of institutionalised, systematic and creatively planned accounting fraud had brought the organisation to become a popular symbol of wilful corporate fraud and corruption scandal. The bankruptcy which has also changed the accounting sector which it was affected by Enron's appointed audit firm, Arthur Anderson. The dissolution of Arthur Anderson was as well due to the fraud and corruption as well as greed which have turns the accounting firm from a big five accounting firm to a bankrupt firm overnight. Further, the failure and the collapsed of Barings Banks, the oldest merchant bank in London, was due to the massive trading loss in the futures contracts market listed on the Osaka Securities Exchange in Japan and Singapore International Monetary Exchange in Singapore. A derivative trade in Singapore unhedged losses escalated rapidly. The organisation was corrupted where the derivative trader held two positions which have conflict of interest. He held as both the floor manager for Barings' trading on the Singapore International Monetary Exchange as well as the head of settlement operations. Given these roles, he short-circuited normal accounting and internal control and audit safeguard, in effect to be able to operate with no supervision from London. After the collapse, in his dual roles, he was charged with ensuring accurate accounting for the unit.

Disadvantages of Accounting Representation

Too much information published in the annual financial report may leak the organisation's various types of structure and confidentiality to the rivals. Many organisations chose not to disclose a transparent financial reporting is because other competitors could easily know their product business life cycle as well as they trend the organisation is run. Therefore, the competitors may make the first step forward leaving the company far behind time.

Because accounting is a form of art of recording, classifying and summarising the historical transactions and events as well as the cash flows of the organisation (Grady, 1965, p.2 cited in Young, 2006), transparency makes it easy assessable to all stakeholders for their convenience, it is also made assessable to the competitors. Given the financial reports which include the financial statement and the accounting practices the organisation adopts to be transparent, the corporate activities are likely to be predicted by the competitors. Hence, their decision in running the business will be communicated to the competitors through being too transparent. It, therefore, affect the management controlling decision when the competitors could have make the first move in the business cycle.

Must Accounting Be Partial

Yes, accounting representation must be partial in an organisation in order to achieve control over the organisation as well as to gain control over the stakeholders in the organisation. Upper management power over work and the workforce is no doubt is only possible in societies which human hierarchy have been normalised; however, others perceived it as the power of the position (Chwastiak and Young, 2003, p.548). Although it is perceived as power of the position in the organisation, it stands a vital part in every organisation. Without control, organisation will not run as smoothly as it would be in the demanding and hectic business world.

According to Chwastiak and Young (2003, p.533), organisations do not publish and discuss the negative repercussions of the organisation profit. This is the partial of accounting representation which many organisations agree that it cannot be published entirely. If the entire picture of the organisation's performance is published, the stakeholders may not like to see the negativity of the organisation as their aim is to have the organisation to maximise the profit. However, in the business environment it is not constant that a business achieves profit or more than usual profits. There are ups and downs in every human lives, it goes the same for a business life. Businesses have life cycle of their own. Some life cycles are on the business itself, other business life cycles are on the product. Stakeholders may not like to know of the business life cycles or the product life cycle, they want to know if there is profit and if they are getting a bigger dividend each year. Therefore, it is the organisation's duty to persuade the stakeholders yet meet the product life cycle at the best effort. By showing a partial financial report to the stakeholders, prevent them from interfering the management to continue to run the business as smoothly as possible. Then, at the end of the year, the organisation will publish the profitable financial accounts to the stakeholders giving them trust and confidence to rely on the organisation to invest their money on their behalf.

In order to achieve a better control over the stakeholders, the organisation should provide a standard setting of the financial reports. Many stakeholders have difficulties in understanding the standards of the financial statement. However, if the standards are well defined to them, this gives them confidence in the organisation. Once they have trust in the organisation, the upper management may find it easier to take charge of the organisation. By securing the managerial control, it could invite the employees to participate in planning and organising their work (Ezzamel et el, 2004, p.784). Managers would not have to spend time organising for the employees. On the other hand, the employees gain independency and those who succeed will stand a chance to move up the corporate ladder. This gives advantages to both the upper management as well as the employees. Upper management could use their time on other decision matter of the organisation. The employees, on the other hand, are encouraged to self-monitor themselves.

Hence, the management in control could as well encourage the employees to monitor their own achievement. Therefore, the upper management could save their time in monitoring and advising them on every move the employees do. This also contributes to the necessity of shifting the organisation to another level of running the business. By having the employees to integrate and measure and monitor themselves is an empowerment and a form of education to these employees to make it work (Ezzamel et al, 2004, p.799).

The upper management made the annual report to rely upon the silence of the injustice, with the aim of making profit appear to be an unproblematic measure of success (Chwastiak and Young, 2003, p.548). There is a fear that the stakeholders will create some problem to the management if the injustice of how the organisation runs the business and it were to be transparent and being published. The decision of being silence of the injustice would shatter the stakeholders if it was revealed.

There are other types of information which could be found in the financial report that might be construing as significant to the stakeholders and they would easily take to mean as inappropriate (Young, 2006, p. 596). The management as the decision maker may have different opinion and different focus as the any other stakeholders as both these stakeholders have entirely different set of perception towards running a business. The shareholders look into the company generating profit and maximising profit whilst the management team in managing the business well and generate sufficient profits to get the company running the following year.

There is a demand for uniformity in accounting principles. A uniformed accounting principle connects users. The partiality of accounting representation where the accounting principles be uniformed will bring stakeholders together. At some point, Young (2006, p.596) suggests that disclosure of the uniformity in accounting principles is needed for rational decision making at the upper management. The shareholders want to see the prediction of the future cash flows of the organisation they have invested in to have the security of the money they have invested in the business.

Conclusion

The business sector as a whole may see partiality of accounting representation as an advantage as it would help to achieve control in an organisation. The partial accounting representation in organisations ensures the organisation disclose the information the organisation wants to be published in their financial reporting yet still be transparent to the stakeholders. It is vital to disclose a more transparent financial report to the stakeholders, especially to the shareholders, investors as well as the potential stakeholders. Companies never want to upset their shareholders and investors as they are the vital backbone of every organisation. Hence, companies should not also neglect other stakeholders such as the employees and the suppliers. The employees would like to work for organisations that are in green business and have a good working environment. As for the suppliers, they would look to sell their materials to companies that are going to manufacture their or sell their materials in a more sustainable way, which it is the aim of many modern and contemporary organisation. Investors are also looking into investing in organisations which deal in a more sustainable and more environmental safe business act. Investors are the major influence to organisations in going green in running the business.

Once the organisations have gained the trust of all the stakeholders, the rest is in the hands of the management. Then, the management get to run the business in their way. Despite the social construction of all the stakeholders, it impacted organisation in doing so to gain more power and control over the organisation. It is every organisations aim to stay in business and gain profits or even enormous profits. Therefore, transparency and harmonisation in financial reporting disclosures should be partial in order for the organisation management to gain control.