The role of chartered accountants in wealth creation for national and social development

--M. Farhad Hussain FCA

Accounting is an instrumental means of determining financial stability. Accountants are responsible for determining an organization’s overall wealth, profitability, and liquidity. Accountants are practitioners of accounting or accountancy. Without accounting, organizations would have no basis or foundation upon which daily and long-term decisions could be made. The budgets for marketing activities, profit reinvestment, research and development, and company growth all stem from the work of accountants. Accounting is one of the oldest and most respected professions in the world, and accountants can be found in every industry from entertainment to medicine.

Accounting is concerned with collecting, analyzing and communicating economic information. However in order to develop a broader understanding of accounting and the central role it plays in society, we need to consider it from a social perspective.

Individuals in society coexist by establishing relationships with each other. Another way of viewing society is by segmenting it into different groups or arenas, for example the social, economic, organizational and political arenas. In order to function effectively, these different arenas need to communicate and it is accounting information that facilitates this communication. Accounting information serves many important purposes, for example assisting users in making informed decisions, in relation to the effective allocation of scarce resources.

Therefore, accounting information can be seen to be a potent influence in society, which affects everybody. Accounting has a long history and it is practiced by people for people and therefore it is more of an art rather than a science. Unlike other professions, which have a body of theoretical knowledge to depend on to make decisions, accounting has evolved as a craft with few rules underpinning its practice and function.

However, society and business practice have changed. The growth of global business and the emergence of new sectors such as ecommerce have led to complex transactions being undertaken. This in turn has unearthed problems of subjectivity and inconsistency in the application of traditional accounting techniques. For example, changes in the nature of business assets to include intellectual property or the use of leasing have led to the question of how to account for these types of transactions? This fundamental change has led to loopholes in accounting and led to manipulations and scandals. The loopholes in conceptual framework can be illustrated by the collapse of Kmart where the blame was partly placed upon problems with FASB’s conceptual framework. However these manipulations and standards are reduced to a great extent by the various accounting frameworks, principles and standards.

Accounting theorists and researchers have also played a role in attempting to apply theory into accounting. The use of imagery has enabled theorists to explore the nature of accounting practices, by applying the characteristics of the image in the context of accounting.

Two contributors to the development of accounting theory, through the use of imagery has been David Solomon and Tony Tinker, Solomon was a strong advocate of neutrality in accounting and used images of journalist, speedometer, telephone and cartography to illustrate his way of thinking. He suggests that accountants should be like journalists, reporting the news and not making it. Accountants should function like a speedometer, in capturing the real economic speed of an entity.

In addition accountants should convey information impartially like a telephone. Solomon further suggests accounting should function like cartography n producing maps of economic reality. These images give us greater insight into how accounting should function in a real world.

Tony Tinker however argues against Solomon’s use of metaphors, as being unsuitable and problematic. Tinker suggests that journalists portray reality by disregarding some of the facts. Also according to Tinker, “Solomon’s automotive speedometer analogy poorly reflects financial reporting” and suggests drivers are likely to tamper with the pedometer to avoid being caught out. He also argues that the telephone doesn’t convey thought on but what people say, which leads to intentional and unintentional bias, as the telephone is selective. Tinker goes on further to criticize Solomon’s cartography metaphor and argues that maps don’t represent facts as there are distortions that effect our behavior. E.g. color and size.

As demonstrated by Solomon and Tinker no one image captures fully what accounting is all about. In my opinion different images in the debate provide different perspectives of accounting practices and introduce newer images to try to overcome contradictions and influence future accounting developments. The existence of such debates also represents the problematic nature of accounting and the loopholes in its theoretical development.

Accounting plays an essential role in economic development. High-quality corporate reporting is key to improving transparency, facilitating the mobilization of domestic and International investment, creating a sound investment environment and fostering investor confidence, thus promoting financial stability. A strong and internationally comparable reporting system facilitates international flows of financial resources while at the same time helping to reduce corruption and mismanagement of resources. It also strengthens international competitiveness of enterprises in attracting external financing and taking advantage of international market opportunities. In the wake of various financial crises continued efforts are being made towards improving the quality of corporate reporting as an important part of measures towards strengthening the international financial architecture. In this regard the implementation and application of internationally recognized standards, codes and good practices in the area of corporate reporting has been strongly encouraged as a reflection of the increasing pace of globalization and international economic integration. However, the effective adoption and implementation of such standards and codes remains a challenge for many developing countries and economies in transition as they lack some of the critical elements of corporate reporting infrastructure – from weaknesses in their legal and Regulatory frameworks, to lack of human capacity and relevant support institutions. In the face of these challenges there is a need for a coherent approach to building capacity in this area, as well as for tools to measure and benchmark progress and identify priorities for further actions.

Building an accountancy infrastructure is a complex process because it is part of an economy’s legal and regulatory system. It needs to be attuned to the interests of many stakeholders and the availability of financial, educational and human resources.

Capacity building helps reinforce proper legal frameworks and institutional  arrangements. It is concerned with developing and upgrading certain skills, competencies and performance. It is also about enhancing the capacity of individuals, groups or institutions that are to carry out corporate reporting, for it is reporting and transparency that often drive improvements.