How Accounting Influences the Society - Coursework Example

Accounting and the Society [Student’s Name] [Course Title] [Tutor’s Name] 16 August 2011 Introduction Accounting entails a process that involves identification, measurement and communication of economic information in order to enable making of sound judgments and decisions. Therefore accounting is highly associated with accountability. During their normal business activities, organizations are in some way externally accountable to various members in the society. Private and public companies are accountable to their shareholders and other stakeholders such as employees, suppliers and customers. On the other hand, the local authorities are accountable to the local electorates and respective government departments. Accountability is achieved through the use of accounting information. Accounting as a process provides records of the assets owned by a business and reports on the financial position of a business. These reports are normally used by the media to criticize on the performance of a firm. However, a business is not only accountable to its owners in terms of finance but it has a role to play in the society. Therefore, accounting plays a central role in the society. However, in order to realize this role we have to evaluate it from a social point of view. The society is segmented into four groups namely: economic, social, political and organizational. Effective functioning of the society is established by use of accounting information which ensures communication between the four groups. Accounting information is therefore essential in societal establishment (Nrupalia, n.d.). For instance, the allocation of scarce resources in the society is effectively carried out by use of accounting information. Accounting has had a long history which transcends the economic principles to the social domains. This paper examines into detail the ways in which accounting influences the society. This perspective is taken towards the concepts surrounding the evolution of the accounting profession. This careful evaluation takes into consideration the three other segments of the society that are intertwined. All the four segments must work in harmony in order for accounting information to be useful. Accounting as a craft has changed over the years. It has adopted new forms in the society as well as devices and roles (Chapman, Cooper and Miller, n.d.). The paper addresses the aspects of accounting information that are used by the media to criticize a corporation. A further evaluation of the ways in which a corporation can ensure social accountability is discussed in form of corporate social responsibility (CSR). Literature Review Accounting has major social and economic implications. The measurement rules that are embedded in accounting are essential in determining the state of the society. These measurement rules are used to determine the allocation of benefits and burdens in the society (Miranti, 1993). Miranti (1993) further argues that scholars have had different opinions on the social dimension of accounting. Accounting in the society can be effectively analysed through social accounting. Social accounting investigates ways of capturing and communicating social, economic and environmental values (Harji, 2008). This is accomplished by use of non-monetized traditional inputs, social and environmental inputs. These inputs are used to provide information that enable to understand the organizational dynamics. It also provides valuable insight into the economic, social and environmental effects resulting from the decisions made by the management. Consequently, an organization is better empowered to gauge the social value that it contributes to the society. Harji (2003) further affirms that accounting has potential benefits for organizations. This is can be accomplished by measuring the level of success in terms of social impacts. It can also be evaluated by means of environmental suitability. Accounting, organizations and institutions are interrelated and dependent on each other (Chapman, Cooper and Miller, n.d.). Accounting can be viewed as both technical and social. This implies that accounting roles merge with the social relations that it generates. The alterations made by accounting are fundamental in the social and economic relations. It has grown intertwined in the social science agenda. The study of accounting encompasses the social psychological dynamics that are commonly referred to as behavioral accounting. Social scientists such as Marx and Weber view accounting as a tool that helps in shaping the social and economic relations that define a society. Chapman, Cooper and Miller (n.d.) affirm that it will be difficult to comprehend the linkages that exist between accounting, organizations and institutions. However, this can be enhanced through increased research on the multiple roles of accounting. Socio-economic accountability Accounting is significantly influenced by social, economic and political factors. These include: nature of enterprise ownership, business activities of the organization, sources of finance, the taxation system and the social climate among others. Accountability and the use of accounting information have been instigated by emergence of corporations, separation between ownership and control and the rise of market for securities. The introduction of the clause of limited liability meant that the shareholders had limited resources in the case of liquidation of a firm. The use of accounting information was a welcome reprieve. It provided a means for regulation as well as a determinant for the amount of resources that the shareholders were prepared to commit to the firm. This cushioned the shareholders from accrual of major losses. The use of limited liability also empowered entrepreneurs who had minimal access to essential capital for start-up. The investors were not directly involved in the enterprises but necessitated a regular access to information on the enterprise. This was bridged by use of accounting information. The continued expansion, growth and complexity of firms necessitated additional sources of finance. This was mainly realised through issue of shares or equity investment and loans. This was the cradle of the capital markets. Stock exchanges were established with a view to trading investments without liquidating the firm. The availability of information to a wider audience was enhanced. This attracted potential investors in the buying and selling of shares. The emergence of trade unions has further emphasised on disclosure of information to other groups such as consumers, government agencies and members of public. This is aimed at attracting the participation of parties that are bound to be affected by a corporation’s decisions. They are prone to externalities arising from the establishment of corporations such as pollution and social costs (Dobija and Indulska, n.d.). All the developments above have contributed led to increased emphasis on accountability. However, the social and economic developments have increased the need for new methods of accountability that is challenging to accountants. The fundamental perspectives have shifted towards social responsibility and accountability. So far, there exists no direct link of accountability between a business and members of the general public. A business has to undertake measures to establish the link. This is potentially disastrous when businesses are allowed to handle social matters. This drawback has made accountants to develop both corporate social and socio-economic accounting. The methodologies and measurement processes applied are very different from traditional methods. Ways in which reported profit is used in the society The accounting information is used by various stakeholders who include: equity investors, loan creditors, employees, business contacts, consumers and the community (Dobija and Indulska, n.d.). This has necessitated the issuance of different accounting reports. There are external reports that are targeted at the society. These reports usually convey information relating to the social contribution of the firm. Internal social accounting should also be conducted on the employees. This will contain information pertaining to job satisfaction and job opportunities. Information on the existing management could be useful to trade unions. Employee accounting will help improve the process of collective bargaining. Socio-economic accounting entails ordering, taking measurements, carrying out analysis and disclosing the social and economic outcomes of both government and entrepreneur activities. This is conducted at both the micro and macro levels. Micro level of measurement reports the impacts of organizations on the environment while the macro level discloses the economic and social performance of the nation. Socio-economic accounting also involves human capital and the society. The two subjects are essential in measuring the value of capital and the periodic change in financial categories. They also communicate economic information to stakeholders and protect the capital laid out in human capital and human assets. Human capital as perceived by T.W. Schultz refers to the attributes of a population that are valuable which can be utilised through use of appropriate investment. This capital is inseparable from the holder. The acquisition of human capital requires a dedication of physical resources and monetary capital. Corporate Social Responsibility (CSR) Corporate social responsibility involves a firm’s cooperation with stakeholders to develop innovative products that are economically viable. This entails integration of processes and services within core businesses which leads to improved environmental protection and social conditions. The long-term success of businesses is dependent on the good relations that exist between institutions, groups and individuals. The consumers have high expectations on the goods and services produced by a business. The goods are expected to reflect socially and environmentally friendly behavior at competitive prices. This provides a good platform on which companies can gain a competitive advantage by demonstrating corporate social responsibility (CSR). The access to capital also depends on the esteem gained from customer satisfaction. CSR is normally propagated on two accounts: public policy and business. The impacts of the business are normally large and may either deviate to the positive or the negative. The business is continuously under scrutiny from the government and the wider society. This means increased expectations on the business. The costs or benefits of operating the business should be taken into account. These costs and benefits may include: the costs of adopting new approaches or the benefits accrued by improving the value of the brand. CSR is usually a concern of the central management. It places firms in a better position to manage risks and opportunities. Corporate social responsibility fosters an understanding of issues pertaining to sustainable development. Consequently, a firm is able to respond and address these issues in its’ business strategy. It also plays a great part in determining the impacts of the business on the labor conditions, the local communities and the economies. This will assist in ensuring the business maintains the good interests of the general public. Corporate social responsibility instruments contain internationally recognized goals and statutes regarding human rights, environment and anti-corruption. The corporate sector has significant potential to impact political, social and environmental systems (Hohnen, 2006). The major advances in information communications technology such as the internet and mobile phones have created a platform for information exchange. Accessibility to discussions involving corporate activities is now much easier. This has the capability to internally alter management, reporting and change. It also increases the accessibility of the firm to NGOs and the media. They are then able to assess the practices of the business. The cost of capital can easily be offset if a business adopts a good CSR. The responsiveness of the market will increase as consumers and investors will tend to have increased interest in support of responsible business practices. A business can utilize a CSR to improve on its corporate governance, transparency, accountability and ethical standards. The requirement of corporations to maintain high social and environmental standards helps in building a sense of community. This is essential in aligning a shared approach to problems that affect the society in common. The increased awareness of legislative and regulatory measures enables CSR to offer flexibility to firms in streamlining their actions to coincide with the established statutes. The benefits accrued from using a CSR approach in a business are uncountable. The risks of business disruptions are greatly reduced; new opportunities are realised; innovation is enhanced and the efficiency is improved. Organizations can greatly increase their reputation by performing well in CSR. The reputation is founded on basis of trust, credibility, reliability, consistency and quality. Good CSR enhances an organization’s ability to obtain employees. The feedback obtained from stakeholders can be utilised to improve innovation in the organization. New products developed as a result of improved innovation can then be used to competitively position the company in the market. CSR provides strategies that encourage the adoption of recycling for instance, energy recycling. This in turn increases the efficiency of operations and saves huge costs. The supply chains are enhanced through the adoption of similar business strategies. A company that utilizes CSR effectively can easily adopt itself to social, economic and regulatory environment. The relationship between the stakeholders and the business is improved. Therefore, CSR is fundamental in building social capital (Hohnen, 2006). Reasons and Ways through which the news media use reported profit as a basis for criticizing corporation The objective of financial reporting and financial statements are derived from the needs of the external users of accounting information. News media is one of the external users of accounting information. Stating the objectives of financial statements would be simpler if all the external users had the same needs and interests, but this is not the case. Because “general purpose financial statements” serves a variety of users, the needs of some of the users receive more emphasis than the needs of the others. The reported profit is an item that appears on these statements and due to the existing conflict of interest; the corporation anticipates criticism from all corners. News media forms the general public. It reports the views from the general public in unbiased manner and therefore it does not represent any particular group of external users of the accounting information and in specific the reported profit. There are many reasons why the news media use reported profit as a basis for criticizing corporation. Through the reported profits the investors and other stakeholders of the corporation are able to determine and evaluate its performance. Every rational investor makes an investment in the corporation with the hope that it will produce a positive return. If the reported profit is lower than what the investors were expecting then they will use it as a sign for dismal performance on the part of the corporation. On the other hand if the reported profit is high, the investors will be expecting dividend payment. The news media will criticize the corporation if it does not declare dividends despite a huge reported profit. The management of the corporation is not the owner of the corporation. All the shareholders in a corporation cannot participate in the day to day running of the affairs of the corporations. The shareholders elect a board of directors during its general meeting to manage the corporation on their behalf. Therefore, the management of the corporation is in an agency position of making decisions that will be in the interests of all the stakeholders. However, conflict between the management and the shareholders may arise because the managers place their own interest ahead of those of the shareholders. Such conflicts may be as a result of: Management granting themselves huge salaries and other benefits at the expense of the shareholders. This forms the basis of criticism as the corporation cannot pay huge salaries and other privileges to its management without reducing its profits. This is true because such privileges constitute a cost chargeable to the income statement thus reducing the reported profit for the period. Management pursuing expansionary policies simply to increase the corporation’s size even where this expansion does not enhance the earning per share. Retained earnings of a corporation are obtained from the reported profit. This retained earnings form an internal source of finance for the corporation. The news media will therefore use the reported profit to determine how much of the reported profit have been transferred to the retained earnings and hence determine the use into which this retained earnings have been put into. Depending on the outcome, the news media will have the basis of its criticism for the corporation. The management, in order to maintain its position “paint” unrealistically rosy picture of the corporation’s performance. That is, the concept of representational faithfulness does not exist. For instance, the equity funding scandal of 1973 in which audacious fraud and other hocus-pocus committed by the management remained hidden from stockholders and from the government regulatory authority for as long as 9 years. It was ultimately revealed that the corporation reported profit was non existent and that more than one million USD of its assets had been faked. There are many ways through which the news media use reported profit as a basis for criticizing corporation which include: Neutrality: the reported profit should not be biased. The news media will criticize the corporation if the reported profit is not neutral and is in such a way that is intended to attain a predetermined result or to induce a particular mode of behaviour. This is criticized as it could be damaging to the needs of the creditors and other major user group for such information in the reported profit. Representational faithfulness: the news media will use the reported profit to determine whether there is agreement between the measures resulting to the reported profit and the real world. For instance, the corporation will be highly criticized if it is discovered that the reported profit was high as a result of reporting sales say amounting to 180 million in its income statement when actually the sales amounted to say 140 million. Verifiability: the news media will use the reported profit to criticize corporation if there is no consensus between different measures. The reported profit must be verifiable from the exchange transactions of the company. For instance the actual cost of production can be used to provide a reliable data and which is usually charged against the gross profit and eventual determination of reported profit. Conclusion Accounting is a fundamental process in the normal day to day activities of a firm. Accounting is influenced by the social, economic and environmental factors. Accounting information pertaining to a business is normally used by various stakeholders. The media may use such accounting information to criticize a corporation. However, this is unwarranted as it is biased towards the reports on the financial position of the corporation. This has created the need to address the disparities by use of alternative accounting methods such as corporate social and socio-economic accounting. REFERENCES Chapman, C.S., Cooper, D.J. and Miller, P.B., n.d. Linking Accounting, Organizations and institutions. [pdf] Available at: [Accessed 16 August 2011] Dobija, M. and Indulska, M., n.d. Accountants and Accounting for Human Resources Accountability and Intellectual Entrepreneurship. [pdf] Available at: Harji, K., 2008. Accounting for Social Impact. [pdf] Available at: [Accessed 16 August 2011] Hohnen, P., 2006. Corporate Social Responsibility: An implementation Guide for Business. [pdf] Available at Miranti, P.J., 1993. Patterns of Analysis in Accounting History. Business and economic history, 22(1): 114-126. Nrupalia, n.d. Accounting and its role in Society. [pdf] Available at: [Accessed 16 August 2011] Read More