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Incorrect Accounting May Lead to Financial Problems

Questions:

1. Read the following quotation from Miller and Reading (1986, p. 64). If constituency support is necessary before particular accounting approaches become embodied in accounting standards, does this have implications for the ‘neutrality’ and ‘representational faithfulness’ (qualitative characteristics that exist in various conceptual framework projects around the world) of reports generated in accordance with accounting standards?

“The mere discovery of a problem is not sufficient to assure that the Financial Accounting Standards Board will undertake its solution … There must be a suitably high likelihood that the Board can resolve the issues in a manner that will be acceptable to the constituency—without some prior sense of the likelihood that the Board members will be able to reach a consensus, it is generally not advisable to undertake a formal project”.

2. As Watts and Zimmerman (1986, p. 7) state, Positive Accounting Theory ‘is concerned with explaining [accounting] practice. It is designed to explain and predict which firms will and which firms will not use a particular accounting method … but it says nothing as to which method a firm should use’. Do you think that this represents an ‘abrogation’ of the academics’ duty to serve the community that supports them?
 

This principle states that the accounting information should be developed free of influences on the results of operations of the company. A problem usually found in accounting, which can lead to financial problems, is the wrong accounting.  Some features are based on the full disclosures in accounting procedures and the international financial reporting standards (Andreaus, Costa and Parker, n.d.).  A reporting entity in question shall not describe its statements of financials not until it fully complies with the Australian Accounting Standards. It is important to not that accounting errors and disclosures may lead fraud, financial misappropriation and challenges in cash flows. Accounting is a challenging phenomenon and regulators of accounts should take drastic actions and measures to ensure accurate reporting of financial systems (Christian and Lüdenbach, 2013). IFRS and AASB as regulatory bodies should ensure that goals are put in place for maximum disclosure of accounting situation for other users of accounts like external auditors and investors willing to follow the advice of the financial statements.

When an individual does not maintain an updated financial information company makes accounting errors or failures in the reporting of the relevant information required, a company may have a significant financial loss and barely notice. Practices such as these can also lead to tax audits and fines for misreporting of funds. This problem is called incorrect accountingIn Some cases when representing communication it  means that the Act gives the auditor so you can do your job, such as those by which requests data (see clause 6 of Article 207 of the Commercial Code) or convenes social bodies (for example, those provided in paragraph 8 of Article 207 or Article 437 of the same code) 

On the other hand, Miller and reading should have emphasized on other communications are the ways through which the auditor and accountants has revealed the results of their work. These can facilitate Whistleblowing , Reports to government authorities , instructions: the accounting, records, correspondence, account vouchers , the Control, The opinions or reports on,the financial statements  compliance with the regulations , the way they carry and retain accounting, accounting vouchers, correspondence, minutes books and share registration d) internal control and The certificates issued on the basis ledgers (Epstein, Jermakowicz and Epstein, 2008).

Certifications and Opinions in Financial Accounting

It is important to clarify the difference between certification and the views or opinions, because the current tax legislation appears not distinguish between them. 

The certifications are possible, especially when referring to verifiable facts in full, for which it is not essential to have a professional fair trial or discretionary framed within the limits of the merely reasonable. The opinion or opinion is the result of professional judgment on information prepared by third parties based on the application of its own criteria and examined by the public accountant using test procedures in the extent and timing it considers appropriate. 

According to miller and reading it opinion means the expression of a professional judgment, ie a judgment or concept, whether a representation or statement meets the parameters that must be submitted (Lerner et al., 2001). There may be several reasons for which an opinion is expressed rather than a certification, including: First, the depth of the work performed, as it can or not based on it certainty is acquired, Second, the nature of things, since some do not support certainty, Third, the qualitative character of what is judged and affirms (Lerner et al., 2001). The rights to inform and to opine are recognized in several international agreements and legislation of almost all countries as well as IFRS the international financial reporting standards. Consecrated these two categories is necessary to be able to differentiate between them (McPhail, n.d.).

It is important to make clear on two additional aspects of the right to correct and factual information. It is the right of the community to receive truthful and impartial representation of the companies especially the listed companies. According to miller and reading this is appropriate (McPhail, n.d.).

The accuracy of the information is limited to facts or financial statements of fact that can be verified and correctly represented. Instead, impartiality involves the interpretive dimension of events, which includes evaluative elements and is halfway between fact and opinion. Indeed, the choice of a factual situation and the name that is given already implies a valuation of it. This requirement does not mean, as one might think at first, the cancellation of the right of the stakeholders  to express their views on the facts reported. Partial information, which does not differentiate between fact and opinion in the presentation of the financial statement , underestimates the recipient public, does not provide the ability for readers or listeners to choose and prosecute freely, and acquires the markings of an authoritarian attitude, all of which it is contrary to the social role that media to the free formation of public opinion (Mintz, 2014).

However, the information must distinguish two aspects: what is reported and how it is done to ensure that there is neutrality and representation faithfulness. An opinion on financial statements is a document by which a public accountant expresses a conclusion about how the states in question, according to an accounting basis, the financial position of the company, the result of its operations, changes in its equity and its cash flows. Miller and Reading argument constituency support is necessary for neutrality and representational faithfulness in accordance to financial accounting standards. 

Neutrality and Representational Faithfulness in Financial Accounting

The following article will present the two side of merely positivistic accounting and its influence has puts into bad light the development of accounting practice itself, in its attempt to eliminate valuable judgments. The accounting regulation and practice it in the positive approach is based on the accounting representation of reality facing compliance pragmatic purposes defined in specific environments where accounting systems are developed. International models of accounting systems adopted have generated negative effects on accounting environment(Unerman, Bebbington and O'Dwyer, 2007). Taking this into consideration an accounting system adopted must take into account that all countries are not equal and therefore have an environment, objects, features and different needs

The positivist approach to accounting was the stone in the shoe for some researchers of accounting science; this is because of their social nature(Mintz, 2014). They say it is more linked to normativity approach and this can be demonstrated through this article. it seeks to highlight the importance of the combination of these two approaches in the accounting field, making clear that it is not intended to link with each other.

Positivism in accounting is the observation of facts economically and objectively where accounting as is displayed; not supported as valid other knowledge, but those who gain from the experience, thus rejecting the idealist conception absolutely. The fact is the only scientific reality. Positivism can be used to present the true position of a firm. Accountants renounce what is futile but seek to know the facts and laws of phenomena but not the causes or is subordinated by judgment and observation

That's is the reason to achieve these laws and possess with a finite precision and certainty which allow, explain and predict the demonstrations taking in the accounting discipline. The positive general theory, has immersed elements (number, value, currency, time interval, economic objects, economic subjects, set, relations) which are common in all accounting systems, these are developed to solve environmental problems such as economic accounting.

In an accounting system general theory and the environment should be consistent, to meet the needs of users of information and thus make the system successful(Zingel, 2006). The following assessment reveals one of the great positivistic attitudes of accounting; this science comes to settle any value judgment in making accounting general theory, only refers to facts and investigations that may confront reality, it does not allow the interference of policy research.

Accounting regulation-Accounting regulation is a process that is based on real events for implementing standards, positive and regulations.

These standards, codes, decrees and laws are created in a very limited way, impossible better application of information according to the economic reality; that is to say; They are made mainly for bookkeeping and records of transactions of entities, sometimes ignoring important events that finally are reflected in the financial statements; and the accounting rule must be accepted adequately or more than adequate. The foregoing has focused on a positive theory.

The emission standards must comply with the accounting uniformity which can be used the inductive method, which applied the positivist field establishes four stages: a) observation and recording of events: b) analysis and classification of them: c ) generalized conclusions through inductive derivation, d) testing of the conclusions;.

The Impact of Adopting International Models of Accounting Systems

It is not quick to admit that accounting regulation should be complemented mostly based on research theories, since from the theoretical principles has been a key foundation to support positivism too. The realization of principles does not occupy an important place, when developed without taking into account the reality of the environment.

Accountants must not close our eyes to the investigation, since it more than simply the observation of facts that can be tested, opens the possibility of finding new paradigms that can change the future of accounting science. Today it is important to highlight the role of accounting, as this is a clear example of normativism, which allows you to record the social impact, through the issuance of judgments, which allow you to determine what could be or not; while positivism, traditional accounting is limited to a predetermined mechanical process, which leads to capture on paper cold figures, which in most cases are interpreted by different professional accountants.

The fundamental trend of accounting is empirical research, which has been considered as a new positive approach, always supporting accounting regulation in their empirical implications (Zingel, 2006). The legislative nature of the regulation and development of hypotheses are specific objectives are basic points which when explicitly treated, accounting theory plays a basic and important role. 

Conclusion

The positivist approach has to do with what is, was or will be, while the normative to admit what or should not be, good or bad, according to social, economic environment in which develop the accounting system(Zingel, 2006). Current students should be aware of the training they have received, and come to take steps to change that positivist thought which until now have had; should not be denied the ability to make value judgments, we must be more daring to express these views, and more when the professional field is, you can not continue to let other professionals continue to take the decisions which are the responsibility of accounting also because whoever plays better records, statements or balance sheets is the person who performs them, because it has the knowledge, and who has knowledge has power.  

References

Andreaus, M., Costa, E. and Parker, L. (n.d.). Accountability and social accounting for social and non-profit organizations.

Christian, D. and Lüdenbach, N. (2013). IFRS essentials. Hoboken, N.J.: Wiley.

D'Amico, V., D'Amico, T., Bukta, M. and Palmer, T. (2002). Principles of accounting. Toronto: Prentice Hall.

Epstein, B., Jermakowicz, E. and Epstein, B. (2008). Wiley IFRS policies and procedures. Hoboken, N.J.: John Wiley & Sons.

Hartman, L. (2002). Perspectives in business ethics. Boston: McGraw-Hill.

Lehman, C. (2002). Mirrors and prisms. Bingley, U.K.: Emerald.

Lehman, C. (2007). Envisioning a new accountability. Bingley: Emerald Group Publishing Limited.

Lerner, J., Cashin, J., Fulks, D. and Lerner, J. (2001). Principles of accounting. New York: McGraw-Hill.

McPhail, K. (n.d.). Accounting ethics.

Mintz, S. (2014). Accounting for the Public Interest. Dordrecht: Springer.

Osborne, S. and Ball, A. (2010). Social Accounting and Public Management. Hoboken: Taylor & Francis.

Ramirez, J. (2007). Accounting for derivatives. Chichester: John Wiley & Sons.

Unerman, J., Bebbington, J. and O'Dwyer, B. (2007). Sustainability accounting and accountability. London: Routledge.

Wöltje, J. (2008). IFRS. München: Haufe Verlag.

Zingel, H. (2006). IFRS. Weinheim: Wiley-VCH-Verl.

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