Accounting is concerned with precision and financial statements are always accurate. Critically Examine.

There are many accounting standards in today’s accounting world. Therefore countries follow different accounting standards. In the United States of America securities and exchange commissions, regulates financial statements in Australian. In India the Institute of Chartered Accountants of India issue accounting standards. Now, as the world enters an era of globalization firms require accounting standards that are consistent. For this purpose the international accounting standards committee and the international accepted accounting principles are set. Hence, they ensure consistency and compatibility of financial statements around the world.

Accounting is usually set these days on empirical analysis. Empirical analysis is set of laws that are set on incidents that have taken place in recent times. For example managers are rewarded bonuses according to the performance of the business. Now if there is a risk that earning will not grow at a rate that is up to standard to managers there could be an incentive to improve profits by using accounting methods or concealing information that might not be in the curiosity of shareholders. This is known as the bonus plan hypothesis [Godfrey, 2002: 07] [Elliot, 2003: 96]. Take the example of the collapse of the company Enron. The collapse of Enron was led as it created partnerships to put debt off its books. It was calculated that that the collapse of Enron led to the loss of $60 billion in market capitalization. After the collapse as Enron filed for bankruptcy the Securities and Exchange Commission revised its guidance and rewrote it

In order to ensure accurate disclosure of financial transactions companies audit financial statements. Auditors are of  two types internal auditor and external auditor. Internal auditors are the auditors that belong to the firm itself. Since the investors for making decisions use the financial statements it is not enough that an internal auditor assesses the accounts. Therefore external auditors should also assess the financial statement. External auditors do not have any relation with the firm. That is they share an independent relationship with the entity. However there are possibilities that though the external auditors the financial statements in certain circumstance check the financial statements have found out to be biased. For example accounting firm Arthur Anderson was accused of overstating the profit of its client. The Securities and Exchange Commission claimed that Arthur Anderson purposely arranged artificial and deceptive audit reports for its client Waste Management Inc. In fact recently Chief executive officers of more than 700 publicly traded companies have personally attested to the accuracy of their companies accounting as prepared by the Securities and Exchange Commission in June 2002 (Carlson, 2002).

In the above essay I have discussed various factors that are against precision in accounting. But one should not forget the benefits of accounting and should appreciate it. Capital market participants are benefited that is they are protected from deception, frauds and scandals. Secondly accurate accounting helps the investors in investing at the right place. In other words accurate financial statements are too much essential for the efficient allocation of resources in the economy. Accurate accounting is benefited to the Government, as it is able to establish control over the economy in maintaining the distribution of wealth. Therefore maintaining accuracy of financial statements is a primary concern in accounting.

REFERENCES

• Carlson, C. 2002, ‘Telcos Brace to Recertify Accuracy of Accounting’. Available:  [Accessed 24 November, 2005].
• Godfrey, Maree, J. 2000, Accounting Theory.
• Elliot, B., Elliot, J. 2003, Financial Accounting and Reporting.
• Grewal, T.S., 2004, Analysis Of Financial Statements, Sultan Chand Educational Publishers, New Delhi.
• Grewal, T.S., 2002, Double Entry Book – Keeping, Sultan Chand & Sons Educational Publishers, New Delhi
• The Sarbanes – Oxley Act of 2002