Role of Accounting in Economy

Role of Accounting in Economy

The objective of this work is to discuss the basic theories of accounting focusing on capital and money as well as the role of accounting in the economy.

Accounting's role is central to decision making in the economy. The work of Hoggett, Edwards and Medlin (nd) states that accounting "is a service activity" which uses "words and symbols to communicate financial information useful for decision making." It is related that the terminology and symbols used in accounting "have developed from the earliest known accounting records." (Hoggett, Edwards and Medlin, nd) the accounting profession has "evolved in response to society's need for economic information to help people make economic decisions." (Hoggett, Edwards and Medlin, nd)

DEFINITION

Accounting is stated to have been referred to as the "language of business." (Hoggett, Edwards and Medlin, nd) Accounting has been further defined "as the process of identifying, measuring, recording and communicating economic information to permit informed judgments and economic decisions." (Hoggett, Edwards and Medlin, nd) Accounting's primary purpose of accounting is stated to be assisting individuals in making economic decisions. Accounting information "provides the basis for making decisions about resource allocation. To be useful, data must be identified, measured, recorded, classified, summarized and communicated to potential users." (Hoggett, Edwards and Medlin, nd)

II. POTENTIAL USERS of ACCOUNTING INFORMATION

Hoggett, Edwards and Medlin state that the primary objective of accounting is the provision of information in the form of reports "which can be used by internal and external decision makers." (Hoggett, Edwards and Medlin, nd) Reports which are prepared for the benefit of decision makers external to the entity are referred to as 'financial accounting'. These users include "investors, or creditors of the entity." (Hoggett, Edwards and Medlin, nd) Inside users includes members of management who use the "same financial statements as outside decision makers, plus internal reports and summaries prepared specifically for it." (Hoggett, Edwards and Medlin, nd) Accounting reports may be in one of two forms:

1) special-purpose reports; and 2) general-purpose reports. (Hoggett, Edwards and Medlin, nd)

Special purpose reports are designed to meet the "needs of a specific users group" while general-purpose reports are designed for the "general use of external users." (Hoggett, Edwards and Medlin, nd)

III. ROLE of ACCOUNTING in the DECISION-MAKING PROCESS

The role of accounting in the decision-making process is one that is central. "Financial accounting information focuses on actual events." (Hoggett, Edwards and Medlin, nd) the accountant is able to significantly assist in the areas of:

1) budgeting;

2) investigating;

3) interpreting; and 4) communicating results used by both external and internal decision makers.

Stated as the difference between management and financial accounting is the reference to:

1) the main users of the reports;

2) the types of reports produced;

3) the frequency of reports;

4) the content and format of reports; and 5) External verification. (Hoggett, Edwards and Medlin, nd)

IV. ROLE of ACCOUNTING in the ECONOMY

In a speech given by Rene Ricol, President of the International Federation of Accountants entitled: 'The Role of Accountancy in Economic Development" presented to the United Nations Conference on Trade and Development on June 16, 2004, Ricol states that in order to "...achieve sustainable economic growth in any economy, there must be a sound and reliable financial system. In order to obtain market confidence" the following characteristics are required in the systems:

High quality, transparent financial reporting based on a robust set of internationally accepted standards;

Codes of conduct for all participants in the financial reporting process with ongoing monitoring of compliance;

Good governance policies;

Regulatory structures that result in high quality performance of all those involved in financial reporting. (Ricol, 2004)

Ricol sates further that the financial information credibility is "...directly linked to economic development. When the public is not confident in the financial reporting process or in the financial information released as part of that process, they are discouraged from making investments. This, in turn, prevents capital market growth. In light of recent crises around the globe, the accounting profession, together with regulators, financial institutions and others face an uphill battle in building confidence in financial information." (2004)

Ricol states in relation to the audit area that "...actions were recommended in two primary areas:

1) Reducing threats to auditor independence; and 2) Strengthening audit quality control processes. (Ricol, 2004)

In regards to corporate management and governance, it is related in Ricol's speech that the task force called for corporate boards to "demonstrate greater accountability for the information, financial management and internal controls necessary to produce trustworthy information. Sound corporate governance policies are especially important in emerging economies, directly impacting investor confidence and economic growth." (Ricol, 2004)

V. ACCOUNTING'S CENTRAL ROLE in the ECONOMY

Accounting clearly plays a central role in the economy through "building confidence in financial information and financial infrastructure." (Ricol, 2004) According to Ricol the accounting profession "cannot afford to look the other way and focus on capital markets in developed countries." (Ricol, 2004) Additionally stated by Ricol is that the accountancy profession needs to "reach out to nations without a well established profession as they will play critical roles in determining our future." (2004)

Ricol states that predictions have been made that approximately 95% of the population growth in the world will take place in nations that are yet developing and that the financial systems in these countries can be sustained through the "international accountancy community working "in collaboration with governments, regulators, analysts, development agencies funders, and others." (2004)

Finally, it is stated by Ricol there it is critical that "good quality accounting and auditing infrastructure" be present in the economy and that this infrastructure have "due respect and recognition in regulatory and legal environments." (2004) Transparency in reporting is also noted to be of vital importance. This is stated to required "...both the expertise at the national level, the capacity to train and continue to develop members of the profession, and the cooperation and coordination with other bodies both nationally and internationally." (Ricol, 2004)

V. APPLICATION of ACCOUNTING PRINCIPLES