Discussion
Accounting refers to the process of recording and analyzing of the financial transactions carried out by the business. The process of accounting involves recording, summarizing, analyzing and reporting the financial information pertaining to a particular company or business (Schroeder, Clark and Cathey 2019). The main purpose of the accounting is to gather and report the information in relation with the financial performance, position and the cash flows of a business during a year (Shahzadi et al. 2018). The financial accounting is one of the branches of accounting which involves the process of summarizing and reporting the myriad of the transactions that results from the normal operations of the business (Warren, Jonick and Schneider 2020).
The main purpose of this essay is to critically examine the statement ‘accounting is an objective discipline’. In this essay, the objectivity principle is critically examined to make arguments in relation with the selected topic. This essay contains examples and theories that would help in arriving at the conclusion pertaining to the objective discipline of accounting. Several researches have indicated that accounting is subjective in nature. The objectivity principle is a concept that the financial statements are prepared on the basis of solid evidence. The main reason behind the implementation of this principle is to prevent producing of slanted and biased financial statements by the accounting department or the management team. This essay explains why the financial accounting information is objective in nature. some of the accountants use these accountants as a subjective discipline. Relevant quotes are used to support the arguments made in the essay.
Economists and accountants have defined the financial accounting in several ways. Generally, the financial accounting refers to the process of operating and designing the information system for collecting and analyzing the financial data for making more informed decisions (Cong 2021). All the financial information is gathered in an efficient way in accordance with the accounting principles for the purpose of reporting the financial information to various stakeholders so that they can make their economic decisions. The financial accounting is said to be objective as it is free from any bias (Pebrianti and Aziza 2019). It implies that the financial statements are to be produced in a truthful manner. The information disclosed by the financial statements should be true and fair (Zeff 2018). The main purpose of financial accounting and reporting is that its should provide information that are required by the stakeholders, including the management, for taking various important decisions in decision with the operations of the business. The financial reports provide information to the internal as well as external stakeholders of the organization. The internal stakeholders of the organization include the directors, managers and employees of the organization while the external stakeholders may take the form of creditors, investors, tax authorities, government and suppliers amongst others. The financial information thus obtained from the financial statements are then used by the stakeholders such as investors to make the right investment decisions with respect to that particular organization.
The Objectivity principle is essential in accounting at the time of reporting the financial statements. The financial reports depict the financial worth of the business. The value of a company is derived using the internal as well as external information about the company. Its importance is heavily increased when the financial statements are prepared using several assumptions. The term accounting is just like any other human activity that must be governed by different principle. In a similar manner, the accounting system has been governed by several concepts and conventions. In most of the case, the external auditors are appointed to verify the financial information disclosed by the company in its financial statements. It is the main reason why several authors are of the opinion that accounting cannot be objective. This aspect is agreeable to an extent when the financial statements are based on basic assumptions and forecasts. It is often assumed that the financial statements of the company disclose accurate information about the financial performance of the company. All the difficulties have to be overcome for making the objectivity valuable by investigating all the relevant evidences before adding it to the accounting system.
The concept of objectivity is closely related to fairness and reliability. The objective evidence may take the form of anything that can be verified physically such as cheque, receipts, bank statement or invoices. In cases, where it is difficult to verify the information objectively, numerous subjective techniques are used to validate the method of estimating the figure. For instance, while determining the value of depreciation expense, it becomes impossible to verify the information objectively. In such cases, the valuation and estimation is dependent on several subjective factors.
The objectivity concept is very difficult to explain as it often leads to disagreement and confusion. The objectivity in accounting is mainly dependent on the measurer. Let’s explain this with the help of an example, when the company wants to measure the net profit of the organization, the accountants are required to provide high level of consensus, instead of evaluating from the layman’s perspective. One of the disciplines of accounting, management accounting, allows for large amount of subjectivity, which means the management accountant uses several assumptions while creating the metrics and methods for measuring the performance of the business (Knuden, 2020). This type of situations is difficult as the accountant’s personal belief or biases will have an impact on the manner in which the performance is measured. For example, suppose the method of measuring the productivity of the worker is needed to be developed by the management. While doing so, it may be possible that the accountants may focus on the output, without giving prior considerations on the inputs. This will have a knock effect on the overall productivity of the employees. In addition, the employees will have the feeling that the process of their performance evaluation is not fair due to the process of information generation.
The subjectivity can also be used to evaluate the bonus scheme within an organization. It may be flexible while measuring the performance of the organization quantitatively, particularly when measuring the managers bonus. The subjectivity principle also plays an important role in analyzing the process of providing incentive to the employees. It helps in reducing the employee risks and maintain the strong relationship between the employers and the employees. The advantage of subjectivity lessens the motivation of the employers, by enabling the assessors to ignore certain types of performance measures, which have been introduced in the bonus plan. This will have an impact on the method of measuring the payout during particular period of time. It also establishes the bias and favoritism into the system of reward within an organization. Due to the factor of favoritism, the managers will not be able to differentiate on what constitute the performance. The subjectivity principle is still remains unexplored largely, despite having its importance within the organization.
The principle of objectivity simply states that the accounting information should be verified to the extent so that the financial information disclosed by the organization are free from any biases (Drewery, Sproule and Pretti 2020). Basically, all the financial information provided by the entity should be reliable so that the various stakeholders can make their economic decisions effectively (Lev 2018). There are certain transactions or entries which are considered to be objective even after having certain limitations. For instance, the use of historical cost information for recording transactions are made on the basis of original documents. They are usually not being influenced by the objectivity and unfairness (Unerman, Bebbington and O’dwyer 2018). Therefore, the historical costing system is still considered to be as objective. It is important to know that the degree of objectivity varies, for instance, while recognizing what intangible assets should be included in the balance sheet of the organization. It is because a sense of judgement is required to determine whether the future economic benefit is probable from such assets or not. Thus, it surges into the subjective to result in similar circumstances and accounting.
The net income of the company is the result from an investment that are made within the particular period of time. It is released from the business risks and are accredited to the owner’s equity. The expectations of the investor are based on uncertainty. It become facts when the results are released from risks associated with the investment. For any type of business investments, the determination is based on the whether the assets are subject to business risks. At the times when the investment activities are continued, it is measured using the historical cost method. The historical cost method is considered to be objective as it allows the recording and reporting of all assets at their acquisition costs prior to depreciation. However, this method of accounting excludes the opportunity cost of older assets, which again makes the way for subjectivity in accounting.
The subjectivity have advantage over objectivity in relation with the recording of goodwill. The goodwill represents the difference between the market price and the value in use. The market price is generally the price at which the assets are quoted in the distribution market for an asset. The value in use refers to the present value of the future cash flows that are expected from the best use of the assets, which is then discounted using the discount rate prevailing at the date of measurement. In addition, the value in use of goodwill also reflects the subjective value which is reported by the entity. The goodwill is considered to be one of the important intangible assets of the firm. However, the valuation of goodwill is subjected to suspicion because its value is highly dependent on the judgement of the measurer. The objectivity of the goodwill is only recognized at the time of purchase. The subjective goodwill should not be reported in the financial statements as its reports and earnings cannot be verified and accounted for. The subjective goodwill can only be reported if it is calculated on bases of depreciation.
Aifuwa, Embele and Saidu, (2018), argues that the objectivity principle requires the financial professionals to provide evidences for all the transactions that are reported in the financial statements. The IFAC (International Federation of Accountants) has set out the code of ethic for the financial professionals which include confidentiality, objectivity, integrity, professional competence and behavior. These ethics are to be followed by both public accounting professionals and the accountants in business. The accounting objectivity has a greater impact on the quality of financial reporting. The Accounting is considered to be the objective discipline as it requires the entity to ensure faithful representation of the information in the financial reports. The faithful representation is one of the major characteristics of the financial reporting. The financial statements should represent all economic events without any form of manipulations and should reflect high level of balance and objectivity.
The objectivity principle in accounting forces the accounting professionals not to compromise their business judgement because of conflict of interest, bias or any other form of undue influence (Svanberg, Ohman and Neidermeyer 2019). Those accounting professionals will produce quality reports who holds high objectivity than those who impair the objectivity. The study also suggests that the objectivity in accounting positively affects the quality of the financial reports (Aifuwa, Embele and Saidu, 2018).
Mabil, (2019), investigates the effects of accounting ethics in relation with the quality of financial statements and reports. Generally, the ethics in financial accounting revolves around the objectivity principle of accounting. The accounting professionals are expected to prepare and evaluate whether the supporting documents exists for verifying the financial information disclosed are present. The failure of accountants in adherence to ethical standards may invalidate their credibility. Corporate scandals and organizational collapses are the results of failure to ensure the objectivity in accounting. Poor judgements, errors and unethical behaviors of the management or the accountants may result in financial scandals. Independence in accounting exists when the professionals perform their responsibilities with objectivity, which in turn increases the reliability of the financial statements. The standards laid down by the governing bodies indicates that the internal auditors and accountants must be objective in carrying out their activities (Yosep, 2016). The study concluded that the objectivity principle has a positive impact on the financial reports’ quality. The evolution in roles of internal accounting may serve as an important mechanism for improved objectivity.
The professional principle of objectivity imply that the accounts are require to apply the business judgements while performing the internal as well as external audits (Kiradoo 2020). According to Martin and Waring, (2018), the financial accounting comes to align with the subjectivities and is accepted unproblematically. Accounting has become an integral part of any form of business, as it is made compulsory for the public entities to prepare and report the financial statements of the company disclosing the transactions carried out during a particular year. The objectivity in accounting allows the investors and other stakeholders to take important economic decision in relation with the company. Accounting can be considered as an intellectual discipline justifiably due to its objectives, philosophy and theories. It is also said to objective discipline due to the fact the financial statements are need to be supported with the effective evidence and facts for backing up the information provided in the reports. The accounting forms the part of a discipline because one needs to be trained for performing the responsibilities of the accountant.
Conclusion
Accounting has become a discipline as it had the function of bringing the economic decisions under the organizational disciplines. Some of the accountants believe that the accountants base the financial information on the grounds of subjectivity. However, in true sense, the accounting information presented in the financial statements are objective as they can be used to backup the information. The argument made by researchers on the subjectivity principle is that the financial accountants make their reality known by providing a meaning to the information on the basis of their opinion. However, the biasness of the accountant would then reflect inaccurate or incorrect information about the actual economical position of the company. One of the main objectives of the financial reporting is to provide financial information to the stakeholders so that they make their own economic decisions (Bala, Amran and Shaari 2018). Thus, it becomes essential for the entity to disclose the correct information so that the other stakeholders can take their decisions. The objectivity principle ensures the verifiability of each financial transactions reported on the financial statements. The financial accountants are also required to make necessary assumptions while preparing the financial statements. It is for this reason that the accounting system is considered as subjective in nature. However, in reality, the financial accounting is more objective than subjectivity as large amount of information presented in the report should be supported by the documentary evidences.
References
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