Accountability, representation and control are frequently perceived as the three different entities ; nevertheless, they are three interrelated subjects which form the base of the organisation. They function on the assorted facets of the accounting which is a diversified field and can be studied under these three caputs in more item. I have tried to light the major facet of all these three subjects with regard to accounting and so how these issues are applied in the recent economic fiasco. To get down with first I would wish to convey the impression of answerability and so representation and so control and in conclusion, the recent fiscal failures.
Accountability: An Introduction
“ Accountability breeds duty ” . This celebrated quotation mark by Steven R. Covey gives the significance of answerability in instead general footings. The construct of answerability can be defined as the procedure through which a individual is held answerable for his actions and deeds.. Under the umbrella of the organisation the impression of answerability can be stated as the phenomenon through which whether a individual at the higher degree of hierarchy or at the lower degree is accountable for his plant and services that he renders to the organisation. Accountability from the organisational position bears great importance as it is the step through which the public presentation of the organisation and a individual functioning can be judged and analysed. Accountability has different signifiers which can be studied and understood by the findings of John Roberts ( 1991 ) . He tries to research different modern-day signifiers of the answerability and the possibilities in which accounting can be perceived. First, the individualizing signifier of answerability can be studied in which the answerability contributes in doing the realisation of the image an single perceives about it. ( John Roberts, Page No. 358,1991 ) . This position helps a individual to smooth his senses and action thereby bettering his image that is noticed by others. Second position of answerability that Roberts illustrates is the socializing signifier in which a individual can better its public presentation and efficiency by interacting with some of the experient people in the organisation. Accountability institutionalizes the usage of accounting through which it operates in the organisations and houses.
How Accountability Works?
Accountability within the organisations chiefly works through three different degrees of accounting. They are scrutinizing, direction accounting and fiscal coverage ( Lightfoot, 2009 Accountability,2009 Available on hypertext transfer protocol: //blackboard.le.ac.uk/webapps/portal/frameset.jsp? tab_id=_2_1 & A ; url= % 2Fwebapps % 2Fblackboard % 2Fexecute % 2Flauncher % 3Ftype % 3DCourse % 26id % 3D_3872_1 % 26url % 3D ) ) . Fiscal coverage and direction accounting facet of accounting has been dealt in item in representation and command portion severally. The 3rd and more applicatory signifier in which answerability holds in the organisations is the auditing in which companies histories are checked and verified by some bureau or authorization assigned for it is covered in item here. When it comes to organisational position the application of answerability expands. From the yesteryear there has been a pattern in concern and organisations to keep the histories of each and every dealing that takes topographic point in the organisation. In modern epoch this system has become more advanced and transparent. The organisations can be judged or held responsible economically on the evidences of the histories or fiscal statements that they produce. This involves the construct of scrutinizing of company histories. Audit serves “ as a critical economic procedure and play an of import function in functioning the public involvement by beef uping the answerability and reenforcing the trust and assurance in fiscal coverage ” ( ( Available on hypertext transfer protocol: //www.icaew.com/index.cfm/route/139474/icaew_ga/Technical_and_Business_Topics/Thought_leadership/Audit_Quality_Forum/Agency_theory_and_the_role_of_audit/pdf, 2005 ) ,2005 ) . Auditing of histories are by and large performed by the people employed by the proprietor of the company, these individuals are called hearers, agents or stewards. They by and large work in the involvement of the company with focal point on the economic public presentation of the establishment. This phenomenon is called as bureau theory which suggests that because of the information asymmetries people employ agents or stewards who works for the benefit of the company. Auditing gives a clear thought of histories and besides imparts the right information to the stockholders. In UK, the scrutinizing system was enforced after the application of Company Law Act 1985 where each and every registered company were supposed to bring forth an one-year audit. ( Available on hypertext transfer protocol: //www.icaew.com/index.cfm/route/139474/icaew_ga/Technical_and_Business_Topics/Thought_leadership/Audit_Quality_Forum/Agency_theory_and_the_role_of_audit/pdf,2005 ) .
Interplay between Accounting and Accountability
Accounting can be defined as “ the procedure of identifying, mensurating and pass oning the fiscal information about the entity to allow informed judgements and determinations by users of information ” . ( American Accounting Association as quoted in Atrill and McLane, Page No.5, 2002 ) . Initially there were cruder signifiers of accounting first one was dual entry system which was a binary system method used for entering the events in which all the debits and credits were represented in the tabular signifier and the second was bookkeeping which was the care or the sum-up of all the fiscal minutess taken topographic point. ( Arizona, 2001 ) . Accountability frequently comes to play where there is some accounting failures or disagreements and the company or the individual bring forthing the history is held responsible.
Historical position of Accounting
The subject of outgrowth of accounting and some other new Fieldss in accounting which has helped in doing the inefficiencies of the single seeable and therefore keeping them responsible utilizing the techniques of accounting viz criterion costing and budgeting. Furthermore, the writers have underpinned the impression of bettering the single public presentation by utilizing these signifiers of accounting that emerged over the old ages. The surveies of the accounting past reveal that the construct of accounting has changed over the old ages as per the nature and the demand of the altering concern scenario ( Miller and O’Leary 1987 ) . One advantage of analyzing the construct of accounting from historical position is that a individual can analyze where the accounting construct went in strife with regard to the demanding environment and these positions can be elucidated and worked out at nowadays.
Representation an Overview
Representation from the horizon of accounting can be farther studied as fiscal accounting is an of import subdivision of accounting which deals with the accounting outside the organisation as company. This comes under the fiscal facet of accounting. Fiscal statements or studies can be defined as “ … the [ tool ] which provide a image of the fiscal place and public presentation of the concern ” . ( Atrill and Mclaney,2008: Pg No. 38 ) There are assorted aims of bring forthing fiscal statements such as informing the investors or creditors about the current placement of the company, to maintain a record of all the economic minutess taking topographic point within the company, to assist directors in taking determinations etc. ( Lightfoot, Chapter No.7 Representing accounting 2009 ) . There are three signifiers of fiscal statements produced viz. hard currency flow which is the net motion of the hard currency taking topographic point over a period of clip frequently referred to as the difference of hard currency in and hard currency out ( Atrill and Mclaney,2008 ; Geoffrey Lightfoot Chapter 2 Representation of histories and representation of theories of accounting. ,2009 ) , the income statement which is besides called as net income and loss statement and is the statement of gross revenues and related costs ( Atrill and Mclaney,2008 ; Geoffrey Lightfoot,2009 ) and eventually the balance sheet which is the sum of assets and sum owed externally ( Geoffrey Lightfoot, Chapter 2 Representation of Accounts and representation of theories of accounting: PageNo 5 ) . All three facets form the footing of the fiscal coverage of the organisation. These are the methods which every company follows while bring forthing their fiscal statements.
Uses of Accounting: Creative accounting
Companies frequently use these in a deceitful manner to bring forth histories. These sorts of histories are called as originative histories and the pattern is called originative accounting ( Atrill and Mclaney,2008 ) . It can be defined in a more specific manner as “ … the change in the accounting regulations that raises concerns over the quality of published fiscal statements that is in line with what company wants others to see instead than what is just and true sing the fiscal place and public presentation ” . ( Atrill and Mclaney,2008 ) .There are chiefly four methods of originative accounting which an organisation can follow. First, is the exaggerating grosss in which companies tend to overstate the grosss ( entire sum of money that a company receives by selling off goods or supplying services ) . This is a nucleus issue reported in many of the recent fiscal failures. Second is the rub downing disbursal in which the managers handle the hereafter costs of assets ( anything that can supply the money in the present or future ; it can be touchable or intangible ) skillfully which can in return make it possible to deduce a consistent net income figures in the hereafter. Third is the concealment or concealment of any losingss or liabilities ( aid to do fiscal statements look in a great place. There has been a figure of cases in the yesteryear of organisation that this signifier of originative accounting has been adopted by the companies such as Enron Corporation failure was chiefly because of this where they tried to conceal their falling assets values ( Atrill and Mclaney,2008: Pg No.183 ) . The impression was to stand for the company accounts statements in a falsified manner so that it may look healthier. Last, it can be exaggerating assets which are projecting the high values of plus than the just market value which is once more a specious method of accounting. These patterns are really much reported in the companies in recent yesteryear. But the major axial rotation back in the history of accounting came after the Enron failure broke out in the twelvemonth 2001 which caused the investors to lose money, a jurisprudence was passed in the US in the twelvemonth 2002 called the Sarbanes and Oxley Act ( SOX ) whose chief aim is safeguarding the involvement of the investors by wholly revolutionizing the fiscal coverage system ( Ritto,2008 ) . This jurisprudence helps in maintaining a cheque on the recording derived functions ( that derive their value from the underlying assets ) minutess. ( Cunningham,2006:40 ) Key characteristic used by Enron Company to hammer its histories. Furthermore, many of these subjects have been argued by a figure of writers who have studied these subjects in item and have drawn assorted illations ( Chwastiak and Young 2005 ; McSweeney1997 ) . McSweeney has tried to concentrate on the genuineness of the fiscal studies that a company produces and termed it as “ representational fidelity ” ( McSweeney1997 ) . These writers suggest that there are assorted conditions in which these fiscal studies can non be trusted. McSweeney ( 1997 ) analysed two texts derived from US Financial Accounts Standards Board ‘s statement of fiscal accounting construct No.2: qualitative feature of accounting information ( 1980 ) , and Tom Lee ‘s Cash Flow accounting ( 1984 ) . ( McSweeney1997: Pg No 694 ) . In both of these texts McSweeney tried to repeat that the representational fidelity can be achieved merely if the fiscal studies that are published should fit with the economic dealing, events and fortunes that it purports ( McSweeney1997: Pg No 695 ) . Furthermore, he argues that the representational fidelity depends upon how good informed the reader is, if the reader has all the information so he can judge the genuineness and fidelity of the representation himself. In add-on to that he besides gives the impression that the representation may be imprecise or in other words the accounting representations can non ever be accurate, it may change but the inquiry here is how much this discrepancy must be considered. McSweeney affirms that feeling can be a effect of pick or to be ineluctable ( McSweeney1997: page no 697 ) .However, subsequently on in the article when he surveies the 2nd text of Tom Lee in which Lee suggests that the Cash flow accounting can be a solution which offers accurate fiscal coverage without ambiguities.
However, there are some writers who remain misanthropic in attack when it comes to discoursing the one-year studies that the companies produce ( Chwastiak and Young,2005 ) . They suggest that companies frequently do non care when it comes to projecting the net income maximization in the one-year studies. The fiscal studies are regarded as the dominant discourses which are ever concerned to picture the net income maximization without sing any other facets like the Earth jeopardies, human and carnal jeopardies etc. He name these patterns silencing of unfairnesss ( Chwastiak and Young,2005 ; Page No.534 ) .
Control can be defined as the method by which something is monitored or dominated. From organisational position the construct of control involves direction accounting which is the subdivision of the accounting that deals with the niceties of direction in the companies. It involves the impression of corporate administration which includes all the procedures used to derive control over a firm.Control involves chiefly two cardinal characteristics viz. future planning and determination devising. Control can be accessed by the directors who have the related expertness in the relevant field nevertheless, Armstrong investigates that there has been a alteration in the recent direction system which contradicts with the findings of the F J Taylor of scientific direction which opines that the directors frequently have related experience in their relevant field and besides Henri Foyal who besides strengthens this position ( Armstrong,2001 ) . However, he farther suggests the techniques in direction system that wholly revives the direction system covered in item in latter portion of the essay.
Meanss and Measures of Control
There are chiefly two ways through which organisational control can be achieved. First is the budgeting and the other one is cost accounting.
Often control in the companies is achieved through proper hereafter planning. This involves the budgeting where the hereafter planning sing the budgets of the companies are predicted and calculated and so the discrepancies from the deliberate public presentation and existent public presentation is calculated ( Atrill and McLaney, 2008 ) . As budgets are a kind of representation we can see the merger of both the Fieldss that is representation and control in one field. The chief purposes of budgeting are the monitoring discrepancy, synchronism of activities in the organisation, be aftering resource allotment ( Geoffrey Lightfoot, Chapter4 Management Control and Control of Management 2009 ) . Additionally, it besides helps in the judgement of director ‘s public presentation where it serves both as the step of answerability and control every bit good ( Geoffrey Lighfoot, Chapter 5 Management Control and Labour Processes 2009 ) Directors are besides involved in the procedure of hazard direction where they can be held accountable in foretelling the difference between the prepared budget and the discrepancies. This is an of import factor of failure of fiscal establishments. Budgetary control form can be farther surveies under two control systems:
Feedback control system: – In this system foremost the budget is prepared and so the comparing between the existent public presentation and the prepared budgetary public presentation are juxtaposed and so the 3rd measure is the response to the discrepancies and exerting control. It is a really utile step by which the senior degree direction exercising the control and answerability over the junior degree of directors in their budget readying hence, pressing towards the aims of the concern ( Atrill and McLaney,2008 ; Glautier and Underdeum, 2001 ) .
Feedforward control system: – In this system expectancies are made as to where the prepared budget can travel incorrect. In this type of calculating pattern it is possible to cognize the short approachs of the prepared budget and so actions would be taken on those countries and improved budget can be prepared ( Atrill and McLaney,2008 ; Glautier and Underdeum,2001 ) .
Triping based bing method ( ABCM )
This is another method which serves as a step of planning and control. This involves the allocation of the costs and the services. This was formulated as a step to revamp the disused procedure of the cost direction system that involves the inefficiency of specifically foretelling the production and services costs or convey the utile information for determinations. This is once more an country where the construct of control and answerability is related as the director ‘s public presentation can be measured based on the determination devising of inaccurate informations. ( Glautier and Underdeum, 2001 ) .This is the technique that Armstrong see in his paper as a modeling procedure which was developed to control the inaccuracy of the old accounting systems which comprises of individual allotment base to the operating expense costs. ( Armstrong,2001 ) .
Senses of Control
Senses of control imply assorted factors which can impact the organisation working and its public presentation. It can be distributed into two Fieldss viz. internal control or direction control which are the procedure formulated to convey the sensible confidence as respects to the attainment of the aims of the organisations and external control ( Cunningham,2006 ) . These can be farther classified in to two classs. They are as follows:
Bureaucratic Control: – It refers to the usage wages, policies and regulations that augments the public presentation of the employees in the organisation. ( Available on hypertext transfer protocol: //www.strategic-control.24xls.com/en112 accessed on 09.12.2009 )
Clan Control: – It implies the usage of the informal steps to heighten the efficiency of the employees working in the organisation. ( Available on hypertext transfer protocol: //www.strategic-control.24xls.com/en112 accessed on 09.12.2009 )
The 2nd type of control mechanism is external control in which the operation of the organisation is affected by some external factors. This involves market control procedure which employs the use of monetary value competition to judge the end products. For market control system to run there must be a sensible grade of competition in goods or services it should be possible to clearly advert the demands. ( Barnat, 2005 ) .
Fiscal Institution failure
All the three issues that we have discussed are the major factors which comes into drama in the recent prostration of fiscal establishment. Financial crunch or the recession of 2008 was chiefly due to the failure of fiscal establishments. A fiscal establishment can be defined as an establishment which provides fiscal services to its clients. The recent failure of market was chiefly caused due to the autumn of Lehman ‘s brother which was planetary fiscal participant and dealt in a scope of fiscal services like investing banking, fixed income gross revenues, research and trading. It was in the month of September 2008 that it filed for bankruptcy with $ 639 billion assets and $ 619 billion in debt, its bankruptcy surpassed all the other reported bankruptcy like that of Enron and World.com. ( http: //www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp? viewed=1,2009 ) . The ground of the failure of Lehman brothers was that during the economic system roar clip in US in the twelvemonth 2005, it owned a interest in the ownership of five mortgagors ( acquired ) including some of those who had tarnished image of recognition history such as BNC mortgage, and Aurora Loan services, which were major subprime loaners at the same clip Lehman besides reported a record high of gross net incomes in the old old ages enabled it to mount the net income rate 56 % from 2004 to 2006. After the recognition crisis broke out in 2007, it continued to its policy of lend more money in acquisition ( Mortgage back securities ) in order to hike up more net incomes. But due to recognition crunch Lehman brother had to endure losingss ( hypertext transfer protocol: //www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp? viewed=1,2009 ) . It was here that the higher managerial governments must hold been held accountable. The statement of Chwastiak and Young seems relevant here that the fiscal entities are merely concerned with the net income maximization. Second, the 2nd factor of failure of Lehman brothers its high purchases value ( use of debt to strengthen the investing in order to maximize the net income ( loss ) ) ( hypertext transfer protocol: //www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp? viewed=1,2009 ) ) . Here the job with the entering derived functions can be seen in which the Lehman failed. The 3rd factor was the hazard direction failure in which the senior direction failed in measuring the hazard of the hereafter and hence, failed from the internal control position. Besides this there are other illustrations besides like the failure of Merrill Lynch, Arthur Andersen etc. that failed to follow with the three issues viz answerability, representation and control.
These three subjects are really critical in regard to the organisations as it forms the three pillars on which the operation of an organisation is based. However, frequently these issues are overlooked and the companies suffer losingss and finally market collapses thereby sabotaging the public involvement. However, after the recent failures and crisis the authoritiess have taken up controls over economic system in the recession hit states and are seeking to resuscitate the planetary market scenarios. However, it can non be achieved until these issues are purely considered with conformity.