In this assignment I will review the statement in question 3, ‘accounting only has one role which is to satisfy user needs’. I will research into what accounting actually is, what its role is, who are it users and how it is relevant to its users. I will also use various books, articles, lecture notes and a wide range of Internet sources to enable me to critically evaluate this statement.
Accounting can be defined as the summarising, measuring and communication of financial transactions, by doing this, accounting aims to enable its users to make informed decisions and reduce the risk of uncertainty.
Accounting has a vital role to play, as it is essential not only to internal users but also to external users in providing information on financial position to facilitate the decision-making process for the allocation of resources, as well as this accounting also has a wider role to play in the economy and society as a whole. An example of accountings role in society can be seen from the NCB accounts where accounting information was used to mislead the public and justify the closure of profitable coal pits and consequently, these actions had a significantly negative effect on social welfare, resulting in job losses, raised electricity prices and taxes for the British people. A more recent example of this is the accounting scandal involving Hewlett-Packard Co. their share prices fell following the news of the scandal and the company is likely to go bankrupt within the next few years, as a result jobs will be lost adding to the already growing issue of unemployment, this has a huge economic and social impact on society.
The users of accounting information are referred to as stakeholders. Stakeholders either have a direct or an indirect interest in the accounting information of an entity. Direct users use accounting information, as a tool to safeguard their own interests, for example owners, managers, suppliers, employees, customers and the government are all immediate users. Indirect users of accounting information for a different purpose, mainly to protect the interests of a direct user or to provide information on an entity, for example financial consultants, regulatory bodies and trade unions are all non immediate users. Historically direct users were given preferential treatment and accounting was for the entity itself and therefore only to satisfy internal user needs and mainly to enable management to make better informed decisions. This is known as the stewardship perspective, where the agent is accountable to the principal for the resources that they have been given responsibility for, therefore they must report on the allocation of theses resources through the use of financial accounting. Jensen and Meckling 1976
Conclusion:Financial accounting is used, as a decision-making tool although it can be said that it will never fully meet the needs of all its user groups and due to the complexity of financial accounting it could create confusion to the untrained eye, therefore is it really relevant to its users excluding those charged with governance? Also due to the subjective nature of accounting can its users really seek to place reliance on accounting information for decision-making purposes? Accounting information is absolutely vital to all the user groups even with its limitations however we have now established the significance of the wider role of accounting to the economy and society as a whole and that brings about a need for the policing of accounting to ensure its limitations do not adversely impact upon society.
Accounting has undergone much rapid growth and change; it is unlike science where theory is developed through observations, instead accounting lacks a theoretical base, which can give rise to the exploitation of loopholes. Over the years accounting has evolved from a time when society was simplistic but must now change with the times in order for its role to remain...