The Reliability Of Accounting Information And Its Significance For Evaluating Corporate Performance Essay.

The basic element of the information system is accounting

Question:

"All users can rely on accounting information for Illuminating the true performance of a Company". Critically evaluate this statement and provide examples to illustrate your answer.

The current study intends to analytically evaluating the statement that states that “All users can rely on accounting information for illuminating the true performance of a company”. The current progression of accounting directs the way towards the illustration of the information system that can link all the organizational framework of a corporation. In this case, the system of accounting system can be considered to be the basic element of the information system.

As rightly put forward by Biondi and Zambon (2013), the fundamental component of the financial information is essentially the sub system of accounting information. This necessarily includes collects, evaluates and maintains data of specific business transactions and as a final output presents specific information in the form of financial declarations or else in other forms of reporting. Founded on accounting documents, it can be proved that business transactions did occur.  All the corporations have the need to maintain records, as per the regulations and international accounting standards. These days, accounting need to have a modern else wise an advanced role to deliver consulting actions to the managers. However, at the multinational as well as large sized corporations, this role of accounting can help in undertaking controlling actions. The controlling actions refer to implementation of methods and processes that can assist in ensuring validity as well as accuracy of financial assertions. Nonetheless, at small as well as medium sized enterprises, this type of controlling actions is not properly instituted. Certainly, the fundamental aspect includes record keeping actions and then evaluating actions founded on the amassed data.

Baker and Burlaud (2015) asserts that record keeping can also be automated using information technology and the accountants can have more time to evaluate the information and comprehend the new possibilities as well as enhancements. Essentially, the first move in this procedure includes estimation of the present state of affairs of accounting procedures in the business concern. During this time, it is important to explore the managers as well as the firm’s external stakeholder’s information requirements, in a bid to discover what information needs to be prepared by the accounting function, level of specification, and the time of period. Essentially, the output of accounting is necessarily the financial pronouncements that are founded on the financial data. A corporation might want all the members of the staff and partners to take a dynamic part in the life of a corporation, to think about the probable enhancements opportunities. According to Deegan (2013), accounting process needs to collect and arrange the accounts properly in a specific form for all the internal and external stakeholders as it is obligatory according to professional and legal directive. Owing to globalization, there is greater interest to offer similar financial description, in a bid to acquire new financiers and to be transparent in the transnational level. For the purpose of meeting this need, the International Accounting Standards Board illustrated and defined International Accounting Standards and the International Financial Reporting Standards that are necessarily professionally accounting regulations with the intention of ensuring harmonization of financial reports at the global platform (Deegan 2016). In essence, the legal directives also provide specific directions and explain the way in which records need to be maintained by th firm at the national level as per the professional regulations. Since the corporations have the liberty to select between probable methods, the decisions also need to be documented and at the same time publicized with mainly the financial declarations particularly in the form of important notes to the financial pronouncements.

The importance of record keeping and evaluation actions

As rightly put forward by De Ayala (2013), “The Case of water industry in England and Wales” explains that assuming outcomes at face value refers to the fact that provisions of private sector were necessarily cheaper than public sector provisions. This article mentions that different forms of analysis and methodology of research rarely permit cause of the variance that needs to be instituted. They permit a comprehension as regards cost structure of the segment, pattern and trends of demand, scope of management action and long term implications. Thus, the information regarding management actions and their long term insinuation, cost structure of different sections of corporation and patterns and trend of demand can help in deducing the authentic outlook of financial performance of a firm.  Accounting tools that can provide a source of substantiation to study upshots of corporate behaviours, evaluate public policy dispute and problem definitions as well as solutions can help in gauging factors affecting financial performance.

As correctly mentioned by Tinker (1991), in the article “The Accountant as Partisan”, the arbitrariness of particularly signification, yet intends to retain rational basis for warranting social exercise. The paper begins by criticising David Solomon’s notion of representation faithfulness and can make the world mean, practical reflexivity intends to warrant actions in terms of heightening social contradictions. Näsi et al. (2014) mentions in the article “Whatever Happened to Prudence?” greater utilization of the fair value as the foundation of accounts can remove any kind of problem of too much prudence in the idea that overall market values can become susceptible to manipulation. However, this appears a rather green expectation. It is important   be subjective in order to determine fair values since there is in implementing prudence to particularly historical cost-founded figures. As per Singleton-Green (2016), it depends in assessors and not the standard setters to mention the definite principles that can govern the process of enumeration. Morales and Sponem (2017) argues in the article titled “The fab four’s solo careers” previously some assessors permitted several business concerns operating in the same industry to utilize different policies of accounting, however, this might become more difficult to justify in the upcoming period. SSAP 2 mentions that revenue as well as profits need to be contained in the P&L account at  the time of realisation that was considered as prudent. However, the notion of prudence that was regarded to be fundamental in specifically SSAP 2 is observed to be of lesser importance in FRED 21. Quinn Jr (2014) asserts that a business concern needs to regularly assess the accounting policies in order to ensure that they are most suitable for providing a true as well as fair view. Nevertheless, frequent alterations might not help in the process of comparability, but FRED 21 does not consider consistency to be as a conclusion in itself. Thus, the notion of consistency can be witnessed to be less important in FRED 21 than in particularly SSAP 2. Therefore, the requirements of this disclosure refer to the fact that the directors of the corporations have the need to enumerate the impact of different estimation mechanisms in a bid to evaluate materiality. Majority of the figures in accounting statements are essentially estimates and ASB is necessarily compelling business concerns to enumerate the overall range of diverse values that can be utilized. As such, this might be a very small step away from requirement of a disclosure of that particular range that can help users assess different techniques of estimation and its influence on different financial declarations. Biondi and Zambon (2013) in the article “Will the Accounting Standard Board (ASB) split up the Fab Four” mentions SSAP 2 is historically utilized for the purpose of devising accounting policies while FRED 21helps in selection of appropriate policies from the ones that are available. This study helps in understanding the fact that regular updating is necessary for a consistent standard of accounting and both FRED 21 and SSAP 2 can continue to play significant role singly.

Modern role of accounting

Baker and Burlaud (2015) mentions in the article titled “Introduction: the true and fair view in British accounting” that true and fair view is important in British accounting and the operational significance cannot be considered to be the only significance that can be attributed to the concept and has wider connotation. Essentially, there are regulations and directives that can define the concept and has significance at the operational level. Particularly in the European harmonization context, it can be witnessed that in an attempt to transfer a specific formula containing words cannot make certain that the formula that is signified can be transferred. Singleton-Green (2016) asserts in the article titled “A European true and fair view” that crucial nuances as well as shadings of meanings cannot support translation.  This necessarily refers to the fact that translation might mislead and thus, translation need to be provided. It can be hereby identified that current experiences as well as utilization of true and fair view in particularly the UK can be critically illustrated and associated to wider European perspective. The common drift in this particular argument is that nations tend to interpret true and fair view in the framework of national culture, national accounting institution and national GAAP. Thus, it can be hereby stated that accounting can be considered to be very essential for the purpose of enumerating profit as well as loss and to arrange and present financial statements. Accounting reliability indicates towards financial that have the need to be verified and utilized and consistently by financiers as well as creditors producing the same results (Gaffikin 2014).

Fundamentally, for users to rely on the accounting information for gauging the financial performance of business concerns, it is important to have reliable financial information. This is because if the decision makers cannot rely and trust financial statements, then the entire process of financial reporting becomes a futile exercise. Jaggi (2015) argues that in order to present financial condition and reveal true performance of firm, financial information needs to be verifiable, neutral and need to have representational faithfulness. Deegan (2016) mentions that financial information needs to be verifiable at the time when multiple as well as independent dimensions are utilized to arrive at the same outcome. In other words, the assessors as well as the third parties can enumerate and assess the accounts of the financial statements and arrive at the identical results. This way the financial information can be verified and used by users for understanding true performance of a firm (Laitinen 2014). Besides this, representational faithfulness that simply refers to representation of reality in the financial statements is also very important as this can help in reflecting the true performance of business concerns. In addition to this, financial information provided in the pecuniary declarations need to be neutral in order to be reliable. Collier (2015) asserts that unreliable information from material misstatements and omissions in financial assertions can mislead users. For example, a corporation is prosecuted for damages by a rival corporation; settlement of the same can again threaten the overall financial assertions. Essentially, non-disclosure of the particular information can make the financial pronouncements untrustworthy for the users. By characteristics, the financial information that are prepared as well as presented by the management of corporations remain somewhat biased to some extent as the management of these business concerns intend to see the concern to improve (Melnyk et al. 2014). This indicates towards the fact that financial information pronounced in the declarations is more likely to overstate the earnings and understate the undesirable incidents (Deegan 2013).

International accounting standards

In conclusion, it can thus be mentioned hereby that neutrality requires the company management to prepare entirely unbiased financial pronouncements. For instance, a specific corporation with specific regarding a probable lawsuit need to necessarily report about the same in the notes section of the financial statements. This is so because withholding this specific information can lead to presentation of unreliable financial statements to all the financiers, creditors as well as other all other users of the financial information. Therefore, based on observations and findings of prior research it can be said in conclusion that information can be said to be reliable in case if a specific user of the same can rely upon it to be materially perfect and if the same faithfully reflects all the information that it necessarily purports to deliver. Significant misstatements or else omissions in specifically the financial assertions can lessen the overall reliability of the financial information that are included in the pronouncements.

References

Baker, C.R. and Burlaud, A., 2015. The historical evolution from accounting theory to conceptual framework in financial standards setting. The CPA Journal, 85(8), p.54.

Biondi, Y. and Zambon, S. eds., 2013. Accounting and business economics: Insights from national traditions. Routledge.

Clegg, S.R., Kornberger, M. and Pitsis, T., 2015. Managing and organizations: An introduction to theory and practice. Sage.

Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

De Ayala, R.J., 2013. The theory and practice of item response theory. Guilford Publications.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Deegan, C., 2016. Financial accounting. McGraw-Hill Education Australia.

Gaffikin, M., 2014. The Development of Accounting Theory (RLE Accounting): Significant Contributors to Accounting Thought in the 20th Century. Routledge.

Jaggi, B., 2015. RESEARCH IN FINANCIAL ACCOUNTING ACCOUNTING THEORY II (26: 010: 652) Fall 2015.

Laitinen, E.K., 2014. Influence of cost accounting change on performance of manufacturing firms. Advances in Accounting, 30(1), pp.230-240.

Li, W., 2014. Problems of Fair Value Accounting Theory in Practice. Journal of Hubei Water Resources Technical College, 1, p.010.

Melnyk, S.A., Bititci, U., Platts, K., Tobias, J. and Andersen, B., 2014. Is performance measurement and management fit for the future?. Management Accounting Research, 25(2), pp.173-186.

Morales, J. and Sponem, S., 2017. You too can have a critical perspective! 25 years of Critical Perspectives on Accounting. Critical Perspectives on Accounting, 43, pp.149-166.

Näsi, S., Saccon, C., Wüstemann, S. and Walton, P., 2014. European accounting theory: evolution and evaluation. The Routledge Companion to Accounting, Reporting and Regulation, pp.54-71.

Quinn Jr, E., 2014. The evolution of accounting theory in response to market changes. International Journal of Academic Research in Business and Social Sciences, 4(10), p.509.

Singleton-Green, B., 2016. Discussion of “articulating accounting principles: Classical accounting theory as the pursuit of ‘explanation by embodiment’”. Journal of Applied Accounting Research, 17(2), pp.136-138.

Singleton-Green, B., 2016. Discussion of “articulating accounting principles: Classical accounting theory as the pursuit of ‘explanation by embodiment’”. Journal of Applied Accounting Research, 17(2), pp.136-138.

Tinker, T. 1991. The accountant as partisan. Accounting, Organizations and Society, 16(3), pp.297-310.