Accounting is a valuable tool not only in businesses but also in day-to-day processes. It is crucial in financial decision-making. Virtually all businesses and financial institutions, as well as non-financial firms, have a functional department of accounting that is crucial to the organisation. The question of who benefits from accounting, as well as the purpose it serves, has been the subject of debate for many years on many academic levels. Consequently, as the debate reveals based on examples, accounting has one role, which is to satisfy the user’s needs.
Accounting: Who Benefits?
Though every endeavour in any organisation needs to be unbiased in terms of its target beneficiaries, accounting is one of the business activities that seems much focused on the user rather than the public. However, it is not so much open as to how the claim is true since many definitions of accounting do not reveal the said biasness associated with accounting. There are many definitions of accounting with one author defining it as being “concerned with collecting analysing and communicating financial information” (Dugdale, Jones, & Green 2005, p.66). The definition coincides with many literatures, which state that the main use of accounting is to provide information. According to Atrill and McLaney (2007, p.45), the most crucial role of accounting in an organisation or company is to provide important information for decision-making. Accounting is important in providing an important history of a company regarding the financial background (Christensen, & Demski 2003, p.19). This knowledge helps an organisation in planning and resource allocation. Most literatures on accounting recognise it as an important area in the success of a business (Alexander, & Nobes 2007, p.14: Elliot, & Elliot 2009, p.45). Almost the entire curriculum of accounting begins with a lecture on the history and importance of accounting with each using different ways to explain the reason for this. Who are the users of accounts information, and how do they use it?
These are important questions, which, when answered, will help in determining whether accounting is solely for the satisfaction of the user’s needs. Before this, it is important to look at the classification of accounting and the basis of the classification. Two main groups of accounting are recognised based on the user groups. These are financial accounting and management accounting. Management accounting satisfies “the needs of user groups internal to the company while financial accounting is mainly concerned with external user groups” (Riahi-Belkaoui 2004, p.28). A key difference between these groups is, “while management accounting provides information on the future and past company performance, financial accounting accounts for past company performance only” (Riahi-Belkaoui 2004, p.29). Management accounting is also unregulated, as it provides data on financial and non-financial matters while financial accounting is regulated and objective (Riahi-Belkaoui 2004, p.28: Deegan & Unerman 2007, p.45). Accounting collects information and synthesises it for the various groups that need it for the normal running of the business. Specially trained people who are employed by the business and ones who are answerable to the managers in the organisational hierarchy do this. They utilise skills learnt and accumulated over time to balance the financial equations of the company to come up with conclusions and suggestions.
Their interests are personal in the form of employment and wages. However, in some instances, they have the company’s interests at heart depending on the relationship with the other users. The policymakers use the information collected in making informed decisions about those entrusted with financial decisions in an organisation. The use of an accountant, therefore, is to provide sound financial advice based on information gathering to influence financial decisions. Accounting information can be presented at different times in a business calendar. The timing depends on the company or government policy. Decisions made by the company should be supported by data from financial and accounts analysts. This prevents financial disasters. To analyse the above statement, it is important to ask the crucial question of who uses accounting information. For information on accounting to be of any use, the accountant providing it must first be very clear on who the intended user is for the information being prepared, and how best it will be used (Riahi-Belkaoui 2004, p.31). The main users of the information on accounts or finance are the people directly linked with the business. These include managers, customers, competitors, owners, the government, lenders, suppliers, investment analysts, and community representatives (Dugdale, Jones, & Green 2005, p.89). The majority of these people are not inside the business but have a large stake in it.
Thus, the accounts information is crucial to them. From the above list of users of accounts information in a business, it is clear that they have different interests and perspectives. The interests of the various users may be conflicting. This may generate conflict between them. In an example, the owners of the business entrust it to managers expecting them to make decisions aimed at developing the business. The managers may however use their positions to enrich themselves by awarding large salaries, buying personal assets, and securing personal interests. Accounts information may serve the role of highlighting these problems by indicating how much each group is benefiting from the business. In the example above, the owners may use the accounting information to investigate whether the managers are following the laid down financial policy. In another example, competitors of a company may sabotage it with false financial claims made against it. To prove their innocence from any misdoings, companies need to keep their financial and accounts records safe and updated with a review and opinion from different accountants.
This ensures that the company leaves no loopholes in its operations. Evidence from various studies indicates that accounting is useful to users. Some previous studies on the topic required users to classify business needs and decision-making tools in their order of importance. They found out that most of them ranked accounting as a major source of decision-making in business (Dugdale, Jones, & Green 2005, p.69). Businesses have provided accounting information that is greater than the expected minimum. This goes a step further to emphasise the importance of accounts to them. In the current business environments where companies are enlisted in the stock exchange, the pricing of their shares is influenced by the account’s information released by the organisation. When the company announces its accounting profits, there is often a change in the price and volume of the company’s shares traded. This, therefore, means that accounting is important to business investors, as it influences their decision-making. However, these are all users of accounts information who support the usefulness of accounting to users.
From a different perspective, despite the fact that accounting is a public good that allocates scarce resources with the interest of the society at heart, the targeted society that is protected through accounting still falls under the category of users. This includes individuals who are not linked to the organisation involved. Accounting enables managers to plan and efficiently carry out organisational duties. As primary decision-makers in a company, managers need adequate accounts information as a baseline for major decisions. For company owners, the main aim of evaluating the company’s accounts is to establish whether the venture is still profitable and that the existing policies are still working. They also need to establish the asset base of the company from the accounts. For future business owners, interest in an organisation is influenced by the financial and accounts statements. This means that the stronger the company’s accounts section, the greater its chances of attracting more investors. For most businesses, creditors, and banks, in addition to the owner’s capital, provide financing. These institutions need the accounting information to assess the ability of the company to pay them back and or to declare bankruptcy. The ability to run the day-to-day activities of the company is also investigated by these institutions.
The best tool to use here is accounting information. The employees of a company also need to know the financial status of their employers to ensure their job security. For this to happen, they must keep themselves updated on the accounts of the company. There are numerous reasons for government’s interest on a company’s accounts information. These include taxation measures against the company, the implementation of policies relating to the company, and rewarding professionalism. The government is also responsible for the protection of its citizens against any financial frauds through publication of financial accounts of a company. The law can prosecute those responsible. Another group of users that are external to the company are other businesses engaging in the same line of trade or even competitors. These groups utilise the accounts of a company to compare themselves, position themselves in the market, and to formulate competitive policies. The evidence above supports the statement that accounting serves to satisfy the user’s needs. Though there are many users of accounting information, all aim at satisfying their own interests and not that of other users. It is reported that different users have different use for accounts information. This supports the claim. Underwood (2001, p.34) states that the specific needs of accounts information user determine its objectives. Christensen and Demski (2003, p.77) tried to reconstruct mathematical models in their research explaining the use of accounting information. They followed the information to the final point of utilisation. The aim was to investigate whether the results reflected the situation in the economy.
From the above examples of accounting information users, it is evident that the most use of accounting information is by the users described as internal and external to the company. These include managers, owners, competitors, the government, consumers, and potential investors. Some studies have suggested that accounting is a social good serving to protect the interests of the society and the companies. However, this is insignificant since most of the users of accounting information are linked to the company directly or indirectly. They use the information for their own needs without consideration of the other users. This supports the statement that accounting has one role, which is to satisfy the user’s needs.
Alexander, D & Nobes, C 2007, Financial Accounting: An International Introduction, Prentice Hall, London.
Atrill, P & McLaney, E 2007, Management Accounting for Decision Makers, Prentice Hall, London.
Christensen, J & Demski, S 2003, Accounting theory: An information content Perspective, McGraw-Hill, London.
Deegan, S & Unerman, H 2007, Financial Accounting theory, McGraw Hill, London.
Dugdale, D, Jones, C & Green, S 2005, ‘Contemporary Management Accounting Practices in UK Manufacturing’, CIMA Research Publication, vol. 1, no. 13, pp. 66-89.
Elliot, B & Elliot, J 2009, Financial Accounting and Reporting, Prentice Hall, London.
Riahi-Belkaoui, A 2004, Accounting Theory, Harcourt Brace Jovanovich, New York.