Importance of Accounting Regulation
Accounting regulation is the combination of accounting, principles, policies and standards that guide the accountants to maintain proper books of accounts of an organization or business or any person requiring to maintain books of accounts properly. The objective of accounting regulation is to properly summarize, classify and maintain the books of accounts of an organization or a person to ensure the books of accounts correctly contain the financial transactions entered into by the organization or the person for a particular period (Di Pietr et. al. 2014).
The main objective of accounting regulations is to ensure that the accountants and managers of an organization follow these regulations while accounting and financial reporting for an entity. Without regulations the accountants and management will get a free hand to manipulate the books of accounts. As a result the very objective of accounting and financial reporting, i.e. to show the true and fair picture of an organization in financial reports, will be defeated. The purpose to issue and develop accounting standards is to regulate the accounting practices of the accountants. Australian accounting Standards Board have issued number of accounting standards (AASBs) that are to be followed in maintaining the books of accounts and preparing the financial statements (Di Pietra et. al. 2014). With the motive of improving the quality of financial reporting International Accounting Standards Board (IASB) is continuously focussing on to improve the existing accounting standards. AASB is following on the footsteps of IASB by introducing new and improved accounting standards for the entities to follow. Thus, it would be definitely wrong to say that the current approach of regulation is sufficient in accounting. With changing times the accounting regulations also need changes (Tang, 2018).
Accounting is continuously evolving to make it better than it was. The International Accounting Standards Board (IASB) along with its members including Australian Accounting Standards Board continuously look for opportunities to make new and better standards to improve the quality of financial reporting (Basel Committee, 2015). Corporate regulations along with accounting standards ensure that the scope to manipulate books of accounts and financial reporting is significantly less. The current approach to regulations is one that is broad in its objective as the regulations are mainly to improve the system of book keeping and maintenance of accounts instead of strictly regulating accounting and financial reporting. Hence, it would be wrong to say that the current approach to regulation is not sufficient however, there is always scope of improvement to make better regulations (Silva do Carmo, Ribeiro and Guedes de Carvalho, 2018).
The International Accounting Standards Board (IASB)
Hoffman (1982), discussed the importance to make provisions for all expected losses in the books of accounts to ensure that all possible liability are recorded in the books of accounts. The accounting regulations and rules must be followed properly to ensure true and fair picture is depicted in financial reports. A business organization always makes provisions for doubtful debts even though it is not certain that bad debt will arise in the future. This is to comply with the concept of prudence (Orlikowski and Hoffman, 1997).
The concept of public interest can be explained in simple terms as the interests in proper accounting of the society. Accounts of an entity must be prepared in accordance with relevant rules, regulations, accounting standards and ethical norms to provide to be of public interests. Public interest can be defined as the interests of the society to the books of accounts of an entity (Van Akkeren, Buckby and Tarr, 2016).
Client is important but does the obligation to act in public interest create any problem?
There is no doubt that books of accounts maintained for a client and thus, client is of utmost importance to an accountant. But that does not mean that the public interests potentially create any problem. The obligation to maintain accounting in public interests is not a separate obligation rather part of the overall accounting rules and regulations. The books of accounts of an entity must be maintained as per the accounting standards (AASBs) and Corporations Act, 2001. The accounts maintained must show the true and fair state of an organization. Only if the books of accounts show true and fair picture of an organization it can be said that the accounts have maintained in public interests (Barth and Landsman, 2017). The maintenance of books of accounts in public interest is not an additional obligation but inherent within the accounting principles and policies that must be followed in preparation and presentation of books of accounts of an organization. Thus, there is no question of any problem arising as a result of maintenance of books of accounts in public interest (Baudot, Roberts and Wallace, 2017).
A brief description about the concept of public interest would be helpful in understanding the direct relation of the concept with importance of clients in accounting. As already described earlier that pubic interests is not an additional norms that an entity follows in maintaining the books of accounts. Rather it is the combined requirements of maintaining books of accounts as per the accounting principles and policies and by following the applicable accounting standards. By adhering to the fundamental accounting principles, policies and AASBs an entity in Australia will fulfil the requirements of public interest. Preparing books of accounts in public interests help the stakeholders as well as others to assess the financial performance and state of affairs of an entity correctly (Silva do Carmo et. al. 2018). Importance of clients is obviously of paramount importance however, since both the concepts, i.e. public interests and interests of the clients are not conflictory hence, there is no question of one raising potential problem for the other (Schaltegger and Burritt, 2017). Accountants have to comply with the accounting principles and policies while maintaining the books of and reporting financial information. By doing so the accountants will proceed towards fulfilling the objectives of accounting for both client as well as the public in general as both require recording to financial transaction properly in the books of accounts to report correct amount of profit or loss and assess and liabilities of a business.
Objectives of Accounting Regulation
Hence, the obligation to act in public interest does not raise any potential problem for the client or vice a versa.
Often it is told that in accounting there is only one truth but the quote clearly suggests that there are more than one truth in accounting. The impact of truths in accounting is accounting practice is explained here.
The objective of accounting is to record financial transactions in the books of accounts and prepare financial reports from such books of accounts at the end of particular period to show the financial performance and position of an entity as on such particular date. However, due to differences in business environment and the nature of businesses it is not possible to have a single set of accounting principles and policies applicable for different businesses and circumstances (Massingham 2017). However, it would be wrong to say that accounting has been created with the objective of achieving various desired objectives and thus, there is no fundamental concept and absolute law governing accounting.
According to Ruth D. Hines, the accountants create reality through financial reporting to communicate reality of an organization (Hines, 1992). Accounting has been created and developed to allow business, non-business, individual, sole proprietorship, partnership and companies to maintain their books of accounts in accordance with the accounting principles and policies to show the true and correct picture of an organization as on a particular date (Goldthwaite 2015). There is definitely one truth in accounting and not truths. This is because there are certain areas in accounting that owing to their importance and complexity not possible to have single accounting principles and polices governing different types and classes of companies. For example depreciation due to the different types of assets used cannot have a single rate of depreciation applicable to different types of assets. This does not mean that there is more than one truth in accounting. Over the years accounting as a subject has undergone number of changes so it is natural that the associated regulations governing accounting will also needed be changed with change in the subject. Accounting regulations have to be commensurate in order to be effective and thus, it is important to understand that these have to be evaluated on a regular basis to be useful and effective. Accounting practices are conducted with the objective preparing financial statements of an entity. The fact that there are more than one substitutes available in different areas of accounting it does not mean that there is no impact on accounting practices. The users of financial reports will obviously have to be cautious assessing the financial statements of an organization (Schaltegger and Burritt 2017).
Impact of Accounting Regulation on Financial Reporting
For example, the management of Enron used the Fair Value Accounting (FVA) concept to mislead the users of financial statements to keep the expectations of the shareholders high which in turn induced the prices of shares to go even higher. It is not only that the concept of public interest was not followed but the management used accounting regulations to mislead the stakeholders and general public. Hence, it is important to have an independent verification system of accounts and financial reports and not to consider the financial reports as truth as truth can be created by the management by using the loopholes in accounting rules and regulations.
The Corporation documentary suggests that businesses are ‘externalizing machines’.
Meaning of externalizing machine:
Externalizing machine means keeping the social and real costs of business operations off the books. These are costs generally borne by the society however, corporate social responsibility requires reporting such costs to show the true and fair picture of the financial performance. However, due to profit motive of corporates these costs are still kept off the books.
According to Brown et. al. recent years have seen a huge surge in the companies complying with the requirements of corporate social responsibility. Along with that social and environmental accounting has also improved significantly. With the objective of sustainable development more and more companies are publishing reports of triple bottom line and development reports for sustainability. The annual report even of smallest companies listed in Australian Securities Exchange (ASX) such as IDP Education Limited has also attached a separate report on corporate social responsibilities of the company as can be seen from its latest annual report to prove the point made by Brown et. al. Apart from that companies such as BHP Billiton, Amcor Limited, Telstra Corporation and others have all continuously provided separate statements on corporate social responsibilities initiatives taken by these entities over the years.
Importance of CSR and Social and Environment Accounting (SEA) has been clearly established by the ever growing compliance of companies by publishing these reports. Various administrative bodies have been established to look after the quality of reporting. Self-reporting is not an effective idea to allow business entities and organizations comply with provisions of the corporations act 2001. Self-reporting by business on Corporate Social Responsibility or sustainability is not a matter of concern as the entities must follow the relevant accounting standards and accordingly, shall self -report on these matters. CSR and sustainability reports have been introduced to business very recently. Thus, it is very much in the development stage (Belal 2016). As the time would pass the reporting would improve. As mentioned as long as on organization follow the mandatory accounting standards and prepare books of accounts as per accounting principles and policies there is no reason for not trusting the disclosures made by the organizations about CSR.
The Concept of Public Interest in Accounting
Companies in different countries in all across the globe are not compelled to prepare annual CSR and sustainability reporting. However, with increase amount of accountability of business organizations to be socially responsible a compulsory report on CSR is very much a possibility in the future. It would be a move forward to make it compulsory for companies to prepare and present annual CSR and sustainability reports. In fact the companies must be motivated to invest significant amount of profit in CSR initiatives to discharge its obligations as a corporate citizen in different countries (Kroon-Batenburg et. al. 2015).
Proper legislations should be introduced to make it compulsory for business organizations to report its CSR activities. Companies must prepare CSR reports periodically to adhere to the requirements sustainability of business. The concept of sustainability if not made mandatory then there is no point expecting businesses to follow sustainable practices. Only if the sustainability business practices are made compulsory that it would possible to achieve the objective of sustainability in business. Thus, sustainability can be defined as the business practices that encourages the business organizations to sacrifice present business with an objective for conserving resources for the future generation. CSR reports is one of the many ways to improve the concept of sustainability in business and organizations should be motivated to prepare such reports (Hopwood 2015). Countries where CSR statement that has been made compulsory shows that the proportion of compliance with corporate regulations have increased significantly. As a result not only the companies have complied with different regulations but also have discharged their operations with increased amount of efforts to comply with the requirements of corporate social responsibilities. Despite the ever increasing competition in the market the importance of CSR is essential.
The decision of trusting an organization depends on the financial reporting quality of an organization. In case the organization has a good track record of reporting its financial performance and position correctly in financial reports including its corporate social responsibility initiatives then there is nothing wrong in trusting the disclosure made by such organization.
‘The fence does not designate the organization. We do that. We designate it, by deciding what things will be part of the organization …’ (Hines, 1988, p. 253).
The above statements made by Hines cannot be supported. It is because accounting does not allow the accountants to manipulate the books of accounts of an organization by including information that only accountants want to include leaving aside all other information. Accounting is based on certain principles and policies that must be followed in maintaining books of accounts. An accountant cannot determine which information is to be included and information to be excluded. He is under an obligation to record all financial entries in the books of accounts as per double entry system of accounting using accrual basis of accounting (Belal, 2016).
Relationship Between Public Interest and Client Obligations
Accountants do have certain liberty in areas that provide more than one accounting principles and policies that are allowed to be followed. For example in case of depreciation, inventory valuation, valuation of goodwill and other such areas an accountant has the liberty to use his personal judgment. However, that does not mean that all the information that are recorded in the books of accounts are dependent on the personal judgment of the accountant. Accounting has certain rules and regulations that have to be followed by accountants irrespective of the situation and circumstances. Thus, to comment that in accounting the information is only recorded as per the personal judgment of the accountant is not correct (Brown, 2017).
However, the accounting scandals such one that resulted in collapse of Enron showed us that if managements wants to manipulate accounts it can do so quite easily by using the accounting principles and policies, rather the loopholes in accounting principles and policies. In case of Enron, the management used Fair Value Accounting to window dress its income statement and statement of financial position to portrayed a rosy picture of the organization by recording profits subsequent to entering into contracts to keep the shareholders expectations higher to achieve the personal goals of the executives at the expense of the company and other stakeholders.
Evaluation is an integral part of Accounting. In order to improve the quality of accounting and financial reporting in general the accounting standards board in the country, i.e. AASB continuously looks to modify the existing standards. The changes in accounting regulations are to ensure that the organizations comply with the financial reporting requirements of the country. The objective of introducing new accounting regulations is mainly to improve the quality of book keeping and accounts maintenance system of organizations and entities in the country (Gopalan, Martin and Srinivasan, 2016).
International Accounting Standards Board since its inception is trying to reduce the number of alternatives available to the accountants in areas that provide more than one alternative. Thus it is clear that the above statement made by Hines in 1988 about accounting is not justified. The accountants have certainly some scope in to use their own personal and professional experience and knowledge while maintaining books of accounts and preparing financial reports. However, the continuous efforts by the accounting standards board both domestic (AASB) and international (IASB) to ensure that the quality of accounting system improves have resulted in formulation of number of accounting regulations and compulsory accounting standards that must be fooled I preparing and presenting the financial reports of an entity. As a result the ability of the accountants and the managers to influence the financial reports of an entity have reduced significantly. Thus, the chances of partiality in accounting is not there anymore. Thus, accountants and managers do not have the right to designate fence by deciding which information to include and which information not to include.
One Truth or Many Truths in Accounting
The concept of public interests in accounting is one of most important considerations while formulating accounting standards and policies. The objective of accounting is to maintain proper books of accounts of an organization to ensure that such accounts reflect the true and fair picture of an organization. Thus, the whole purpose of having an efficient accounting environment in a country is due to the concept of public interests.
The culture of accounting is developed over a long period of time. It is desirable to have a suitable accounting culture in a country to ensure that the organizations both, business as well as non-business organizations to follow the accounting culture to report its financial transactions by properly recording these transactions in the books of accounting. The accounting principles, policies, standards, and other elements of accounting all contribute in developing accounting culture in a country. In case Australia the accounting culture inspires the entities to correctly reports its financial transactions in books of accounts and financial statements (Tucker and Schaltegger, 2016).
Accounting is subject which is undergoing a continuous process of evaluation to improve the financial reporting and maintenance of books of accounts. IASB and IFRSB have been formed to issue and develop quality financial reporting standards to improve the quality of financial reporting. Over the years number of accounting standards have been issued by these Board to improve maintenance of books of accounts to show actual financial results. There is no doubt about the huge scope of improvement in accounting however, it also cannot be termed as puppet in the hands of the accountants. The efforts are on and will continue to improve the subject of accounting. Whether it is by formulating new and improved corporate reporting regulations or by developing new accounting standards, all efforts shall be made to improve the quality of accounting and financial reporting.
References:
Barth, M.E. and Landsman, W.R., 2017. The contribution of bank regulation and fair value accounting to procyclical leverage.
Basel Committee, 2015. The interplay of accounting and regulation and its impact on bank behaviour: Literature review. Working Paper 28, Bank for International Settlements, [Online] Available from: https://www. bis. org/bcbs/publ/wp28. pdf. [Accessed 22 September 2018]
Baudot, L., Roberts, R.W. and Wallace, D.M., 2017. An examination of the US public accounting profession’s public interest discourse and actions in federal policy making. Journal of Business Ethics, 142(2), pp.203-220.
Belal, A.R., 2016. Corporate social responsibility reporting in developing countries: The case of Bangladesh. Routledge.
Belal, A.R., 2016. Corporate social responsibility reporting in developing countries: The case of Bangladesh. Routledge.
Brown, J., 2017. Democratizing accounting: Reflections on the politics of “old” and “new” pluralisms. Critical Perspectives on Accounting, 43, pp.20-46.
Di Pietr, A., Ay, M., Art, S. and Ronen, J., 2014. Accounting and regulation. Springer,.
Di Pietra, R., Gebhardt, G., McLeay, S. and Ronen, J., 2014. Special issue in governance and accounting regulation. Journal of Management & Governance, 18(3), pp.675-681.
Goldthwaite, R., 2015. The practice and culture of accounting in Renaissance Florence. Enterprise & Society, 16(3), pp.611-647.
Gopalan, R., Martin, X. and Srinivasan, K., 2016. Accounting based regulation and earnings management.
Hines, R.D., 1992. Accounting: filling the negative space. Accounting, Organizations and Society, 17(3-4), pp.313-341.
Hopwood, A., 2015. 8 Accounting and the. Critical Perspectives in Management Control, p.141.
Kroon-Batenburg, L.M., Schreurs, A.M., Ravelli, R.B. and Gros, P., 2015. Accounting for partiality in serial crystallography using ray-tracing principles. Acta Crystallographica Section D: Biological Crystallography, 71(9), pp.1799-1811.
Massingham, R.K., 2017. The Role of accounting in legitimising the culture of the Australian construction industry.
Mintz, S., 2016. Accounting for the public interest. Springer,.
Orlikowski, W. and Hoffman, D., 1997. An improvisational model for change management: The case of groupware technologies. Inventing the Organizations of the 21st Century, 265.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts and practice. Routledge.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues, concepts and practice. Routledge. [Online] Available from: https://www.taylorfrancis.com/books/9781351282512 [Accessed 23 September 2018]
Silva do Carmo, C.H., Ribeiro, A.M. and Guedes de Carvalho, L.N., 2018. International Accounting Regulation: Public Interest or Interest Groups?. CONTABILIDADE GESTAO E GOVERNANCA, 21(1), pp.1-20.
Tang, C., 2018. Fair Value Accounting, Prudential Regulation and Financial Contagion.
Tucker, B.P. and Schaltegger, S., 2016. Comparing the research-practice gap in management accounting: A view from professional accounting bodies in Australia and Germany. Accounting, Auditing & Accountability Journal, 29(3), pp.362-400. [Online] Available from: https://www.emeraldinsight.com/doi/abs/10.1108/AAAJ-02-2014-1601 [Accessed 23 September 2018]
Van Akkeren, J., Buckby, S. and Tarr, J.A., 2016. Forensic accounting: Professional regulation of a multi-disciplinary field. Australian Business Law Review, 44, pp.204-2015.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
