Accounting is a discipline which provides financial and other information essential to the efficient conduct and evaluation of the activities of any organization.
The information which accounting provides is essential for (J) effective planning, control and decision-making by management, and (2) discharging the accountability of organizations to investors, creditors, government agencies, taxing authorities, association members, contributors to welfare institutions, and others.
Accounting includes the development and analysis of data, the testing of their validity and relevance, and the interpretation and communication of the resulting information to intended users. The data may be expressed in monetary or other quantitative terms, or in symbolic or verbal forms.
Some of the data with which accounting is concerned are not precisely measurable, but necessarily involve assumptions and estimates as to the present effect of future events and other uncertainties. Accordingly, accounting requires not only technical knowledge and skill, but, even more importantly, disciplined judgment, perception and objectivity.
Within this broad field of accounting, certified public accountants are the identified professional accountants. They provide leadership in accounting research and education. In the practice of public accounting CPAs bring competence of professional quality, independence, and a strong concern for the usefulness of the information and advice they provide, but they do not make management decisions.
The professional quality of their services is based upon the requirements for the CPA certificate-education, experience and examination-and upon the ethical and technical standards established and enforced by their profession.
CPAs have a distinctive role in examining financial statements submitted to investors, creditors and other interested parties, and in expressing independent opinions on the fairness of such statements. This distinctive role has inevitably encouraged a demand for the opinions of CPAs on a wide variety of other representations, such as compliance with rules and regulations of government agencies, sales statistics under lease and royalty agreements, and adherence to covenants in indentures.
The examination of financial statements requires CPAs to review many aspects of an organization's activities and procedures. Consequently, they can advise clients of needed improvements in internal control and make constructive suggestions on financial, tax and other operating matters.
In addition to furnishing advice in conjunction with their independent examinations of financial statements, CPAs are engaged to provide objective advice and consultation on various management problems. Many of these involve information and control systems and techniques, such as budgeting, cost control, profit planning, internal reporting, automatic data processing, and quantitative analysis. CPAs also assist in the development and implementation of programs approved by management.
Among the major management problems depending on the accounting function is compliance with tax requirements. An important part of the practice of CPAs includes tax planning and advice, preparation of tax returns, and representation of clients before government agencies.
CPAs also participate in conferences with government agencies such as the Securities and Exchange Commission, and with other interested parties, such as bankers.
Like other professional men, CPAs are often consulted on business, civic and other problems on which their judgment, experience and professional standards permit them to provide helpful advice and assistance.
The complexities of an industrial society encourage a high degree of specialization in all professions. The accounting profession is no exception. Its scope is so wide and varied that many individual CPAs choose to specialize in particular types of service.
Although their activities may be diverse, all CPAs have demonstrated basic competence of professional quality in the discipline of accounting. It is this which unites them as members of one profession and provides a foundation for extension of their services into new areas.
Even this definition tends to understate the role of accounting in terms of its broad societal mission, for in a very real way accounting policies determine who gets rich and who stays poor.
This fact was recognized by Lord Ardwall as early as 1905 when, in addressing the Institute of Chartered Accountants and Actuaries, convened in Glasgow, he said, "there are really great public and national interests in their hands, because as auditors of public companies, as advisers to great captains of industries, they have an immense power to use for good if they so choose."
Paton and Littleton reiterated this conviction in 1940, saying "the social importance of accounting is therefore clear, especially in relating to the income statement, since dependable information about earning power can be an important aid to the flow of capital into capable hands and away from unneeded industries."
More recently, Toan has posed these provocative questions: "does the accountant by the way he keeps score help to shape and reinforce a particular style of management?" and "will those with different and more radical philosophies someday storm the conventions and conferences of the accounting . . . contending that the bias of accountants supports a pattern of behavior which they would like to see changed?"
Critics of our current economic system are quick to seize upon this point. Quigley, for example, decries those "falsified accounting techniques and mis-taken tax methods which encourage the process of environmental decay and conceal what is really happening."
Accountants have long separated the roles of providing information from the actual formulation of decisions. This view, however, is crumbling under the onslaught of information theory which holds that:
- Information conditions decisions, so that the role of providing infonnation cannot be viewed as being totally (or even significantly) independent of outcomes.
- Information systems are subject to systematic bias for several reasons, including the fact that by nature they are surrogates for reality and may fail to reflect fully the phenomena they purport to measure and report.
- Processors of information, however careful, exert influence upon and alter the messages they transmit.
- Information systems-by virtue of the enormous sunk cost in design, equipment, and training-tend toward entropism and inertia.
Accountants, obviously, are not the sole arbiters of resource allocation, but they share with other groups-such as the Congress, the Securities and Exchange Commission, management associations, and other regulatory agencies-the responsibility for distributing the nation's wealth.
Two imperatives flow from this reasoning: (a) accounting policies should be measured against social goals, and (b) the accountant should adopt a macro-economic view for policy purposes, one which rises above the client relationship.
Those who advocate a broad social perspective for accounting policy have welcomed the position taken by the newly formed Financial Accounting Stan-dards Board (FASB), which, as noted in Chapter 4, is the principal rule-making body for the accounting profession. Its by-laws contain this statement:
In any competitive enterprise system, necessary resources do not exist in unlimited quantities. Therefore there is a need to allocate these resources in the most productive manner within the framework of public policy and social needs. The existence of sound financial and reporting standards facilitates that allocation by providing to the suppliers of resources relevant and useful financial accounting information that is the basis of informed decision making.