Essay on Issues and Problems That Shape Contemporary Accounting Practices

Published: 2021/11/15
Number of words: 2322

Introduction

Financial records and analysis in business is necessary in a bid to assess how well an organization is doing within an industry. Poor financial records might be an indication of unprofessional accounting practices within a firm (Cooper, Everett and Neu, 2005). The essay examines issues and problems that have contributed towards the shaping of contemporary accounting practices. An examination of existing literature on the topic of discussion can help enlighten practice on the same. It is important to note that financial analysis and accounting is not a must for business but must be conducted for informed decision making (Messner, 2009). For instance, the need to know how resources are utilized within an organization necessitated for development of an acceptable accounting code. In the United Kingdom, the Financial Conduct Authority is responsible for setting up standards that should be followed within the market. Issues such as the stock exchange market crash in the twentieth century contributed significantly to establishment of accounting rules for various companies and businesses (Deegan and Unerman, 2011). In essence, the essay focuses on analyzing various aspects that have contributed to development and changes within contemporary accounting practices. Exploring what other authors have presented on the same might prove strategic towards gaining a deeper insight on the same.

Stock Market Crash

The stock market crash in 1929 marked an important time in the history of accounting as it boosted calls for accounting standards and regulations (Hines, 1991). It is important to note that the rate of unemployment in the economy was rising and production had already declined in many economies. The fact that banks had huge loans that could not be liquidated made it worse for the economy to operate. The need to assess how the market is doing and possible rise in future made it necessary to come up with accounting standards and regulations for companies and businesses (Unegbu, 2014). Disclosure of financial information to the public is essential in boosting accountability and other operations. The United States came up with the US Securities and Exchange Commission in 1933 to enforce public companies to disclose their financial data and other information. In the United Kingdom, the Financial Conduct Authority is responsible for regulating players within the industry (Messner, 2009). Failure to observe the set standards and regulations within an economy can attract dire consequences for a company. In essence, the stock market crash that happened in 1929 contributed significantly to development and enforcement of contemporary accounting practices.

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It is important for the essay to examine how the crash contributed to establishment of new rules regarding accounting and performance in various companies. Accounting information was required in various businesses to establish how well the organization was doing during the hard economic regime (DeRidder, 2005). Investors and other interested parties in business needed information on various operations and an interpretation of what the information implies for future practices of a company. The stock market crash marked an important time when the accounting standards and regulations were set in a bid to make informed decisions on organizational continuity. The lack of financial information made it difficult to value assets within the economy, which led to over-valuation of stock within the market (Unegbu, 2014). Over valuing stocks is an issue that can mislead investors and managers in a specific company in a significant manner. It is important to highlight that many investors and companies lost value for their stocks in the market leading to a Great Depression period. The stock market crash of 1929 illustrates one of the most challenging issues that led to development of accounting regulations and standards (Deegan and Unerman, 2011). The need to plan for future activities and detect any valuation issues during the stock market crash played a significant role in enforcement of contemporary accounting practices.

Financial Scandals

Financial scandals that have happened in various organizations in the pat have contributed significantly to shaping of contemporary accounting standards and practices. The ENRON case is an illustration of the need to avoid or combat financial scandals through proper accounting techniques (Healy and Palepu, 2003). ENRON lost billions of dollars in the past due to financial issues that led to its collapse in the market. Financial scandals results from intentional manipulation of accounting information that might affect the eventual decision making on a business or organization. There are many financial scandals that have happened in the pat and they should be utilized as learning incidences on the need for appropriate financial practices in business (Al-Htaybat, Hutaibat and von Alberti-Alhtaybat, 2019). Misleading information to shareholders and investors might attract dire consequences to a particular organization as illustrated in the ENRON case. Users of financial statements and accounting records require reliable information for detailed and informed decision making on other operations within the company (Cooper, Everett and Neu, 2005). The scandals related to financial information that have happened in various companies in the past contributed significantly to establishment of regulations and standards that can guide accounting practices. Failure to learn from previous financial experiences might be detrimental to efforts of improving accounting practices within any economy.

The need to provide crucial information and detect any malice in financial transactions of a company prompted many bodies to come up with standards that must be taken into account (Deegan and Unerman, 2011). For instance, ENRON used special purpose entities as an approach to hide their huge debts that led to a loss of billions of money for shareholders. Such scandals in business lead to failure and there is need to have guidelines that help investigate how financial operations are handled within an organization (Unegbu, 2014). Regulations in any field are enforced with a view o shaping practices and the code of conduct. Financial accounting regulations for companies are not a must but necessary to help guide shareholders and investors on the direction that should be taken. Financial scandals form the most compelling reason for enactment and establishment of rules to guide and govern the process of analysis. Various countries in the world have specific rules and regulations that help in shaping accounting practices (Healy and Palepu, 2003). ENRON should have been honest and disclose its information to shareholders in a bid to prevent huge losses that led to collapsing of the entire business. Financial scandals that have happened in the past in various organizations have contributed to development of new policies and regulations on the same in a significant manner.

Decision Making Process

Decision making process in various organizations should be based on reliable and valid information as presented by accounting records. Poor accounting practices within a firm can attract bad decisions, which can attract losses or a possible failure in the market (Deegan and Unerman, 2011). The urge to make the right decisions and avoid mistakes that can lead to failure prompted many organizations to come up with strategies that can boost transparent and eliminate fraud. There is a need for each business to consider conducting an accounting analysis on its operations to establish flaws that can make operations difficult. The decision making process is based on information provided by various departments in a particular organization (Al-Htaybat, Hutaibat and von Alberti-Alhtaybat, 2019). It is important to note that wrong information can mislead management on strategies that should be taken to improve operations within a given industry. Slow decision making in an organization can paralyze some operations or lead to failure in executing crucial operations. Faster decision making within a company promotes convenience and effectiveness in e ach operation (McBride and Verma, 2021). The process of making decisions on various matters within a firm prompted the development and enforcement of contemporary accounting practices. Managers with appropriate accounting information tend to make more informed decisions than those who lack information.

It is through accounting information that most individuals or investors decide to spend their money on a particular project. Investment decisions are made based on accounting information that is made public as required (Day, 2000). The right accounting information is a step towards assessing the viability of the investment before making an appropriate decision. The success of a business in any industry highly relies on practices experienced, especially on finance and other accounting operations. For instance, the management at ENRON misled many investors into the business, which later attracted billions of losses early in the 21st century (Chau and Liu, 2020). In essence, contemporary accounting practice has changed and developed due to the need for people to make the right decisions. Both investors and shareholders need accounting information to make the right decisions regarding investments. The need to make informed decisions within an industry has contributed significantly to enforcement of appropriate accounting practices (McBride and Verma, 2021). For instance, financial reporting is important as owners can use the information to assess organization growth in a particular industry. Making a new investment without assessing accounting records on the same might be a step towards failure in the market.

Identification of Potential Legal Issues

Accounting information regarding a particular organization can be useful in detecting and identifying potential legal issues. It is through legal issues that companies spend millions of dollars avoiding litigation or as compensation for violating the law (Day, 2000). Legal violations in business can attract dire consequences including closure of business. Failure to identify legal issues within the operations of a company can lead to further challenges in operating within the given industry. It is important to note that various economies in the world have established rules and regulations that govern accounting practices (Radu, 2017). Disclosing of financial information to the public can help detect where a firm has failed to honor the set law. Companies that report their accounting information have better chances of identifying legal issues within its operations. Failure to conduct an audit report on statements of a business can be detrimental to administering of honest accounting practices within an economy. Solving legal issues within a firm is as important as maintaining good relationship with other institutions and businesses within an economy (Chau and Liu, 2020). The need to identify legal issues that affect business operations has contributed significantly to shaping of contemporary accounting practices that have been enforced.

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Companies that evade tax within an economy commit fraud to an extent of attracting legal action. It is through appropriate accounting practices that such matters can be brought to light. Evasion of tax can lead to closure of business or hefty fine from relevant authorities (Wiesen and Cohen Commission, 1978). Equally, underpaying employees is a serious offence that should be handled in a court of law. It is through accounting reports that honesty and transparency in various organizations can be administered (Chau and Liu, 2020). Practitioners in the field use accounting information presented as a strategy to identify legal challenges that exist for a particular business. Accountants should be at the forefront of administering honesty as a strategy to promote financial analysis. Equally, the information can help identify violations that have been conducted by the company regarding business operations in a particular market. In essence, it is through reliable and valid accounting information that legal issues within an organization can be detected (DeRidder, 2005). Failure to identify legal violations within an organization might attract dire consequences for both the management and the company itself. The problem of identifying legal issues in various firms led to establishment of contemporary accounting practices, which have shaped business operations in a significant manner.

Conclusion

To sum it up, accounting practices within business are meant to improve honesty and the scope of operations. The essay explores issues and problems that have contributed to shaping of contemporary accounting practices. For instance, the stock market crash of 1929 contributed significantly to enforcement accounting practices for various companies. Over valuation of company stocks and other wrong information might mislead investors when making important decisions. The regime marked an important time in history when companies saw the need to disclose their information on operations to the public. Another issue that led to establishment of accounting practices is decision making. Making of important decisions in business requires accounting information to avoid mistakes. Equally, identification of legal issues and financial scandals that has been experienced before have contributed significantly to development and shaping of contemporary accounting practices. For instance, ENRON experienced a downfall due to wrong and incorrect financial reporting that misled investors in the market.

References

Al-Htaybat, K., Hutaibat, K. and von Alberti-Alhtaybat, L., 2019. Global brain-reflective accounting practices. Journal of Intellectual Capital.

Chau, H. and Liu, K., 2020. Development of Accounting Practice in Industrial Era. Journal La Bisecoman1(6), pp.1-12.

Cooper, D.J., Everett, J. and Neu, D., 2005. Financial scandals, accounting change and the role of accounting academics: a perspective from North America. European Accounting Review14(2), pp.373-382.

Day, R., 2000. UK accounting regulation: An historical perspective. Bournemouth University School of Finance and Law.

Deegan, C. and Unerman, J., 2011. Unregulated corporate reporting decisions: considerations of systems-oriented theories. Financial accounting theory. London: McGraw-Hill.

Deegan, C. and Unerman, J., 2011. Unregulated corporate reporting decisions: considerations of systems-oriented theories. Financial accounting theory. London: McGraw-Hill.

DeRidder, J., 2005. Evolution of accounting since Luca Paciolo. Essays in Economic & Business History23(1), pp.14-19.

Healy, P.M. and Palepu, K.G., 2003. The Fall of Enron: Journal of Economics Perspectives. Volume17, p.13.

Hines, R.D., 1991. The FASB’s conceptual framework, financial accounting and the maintenance of the social world. Accounting, Organizations and Society16(4), pp.313-331.

McBride, K. and Verma, S., 2021. Exploring Accounting History and Accounting in History.

Messner, M., 2009. The limits of accountability. Accounting, Organizations and Society34(8), pp.918-938.

Radu, F., 2017. The necessity of an accounting history. Management Strategies, Year X, nr34, pp.153-158.

Unegbu, A.O., 2014. Theories of accounting: evolution & developments, income-determination and diversities in use. arXiv preprint arXiv:1411.4633.

Wiesen, J.L. and Cohen Commission, 1978. Securities acts and independent auditors: what did Congress intend? A research study.

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