Users and Their Needs in Accounting

Introduction

Companies are required to publish the financial results of business operation on a periodic basis. This can either be monthly, quarterly, semi-annually or annually. This requirement is necessary because it provides various stakeholders of a company with information that relates to the overall performance of the company. The key statements that are of concern to the stakeholders are a statement of financial position, income statement, cash flow statement, and the statement of changes in equity. These statements have two significant roles (Davis, Menon and Morgan, 1982, p. 314). First, they report the financial situation of a company. Secondly, they indicate how an entity has performed over a period of time. Thus, accounting profession focuses on the identification, estimation and dissemination of financial and economic information of an entity (Gibson, 2010, p. 28). This paper seeks to develop an argument on why satisfying multi-users’ needs is quite easy in accounting. The concepts explored include the process of induction, conceptual framework and social construction among others.

Discussion

To evaluate the reasons why satisfying multi-users and their needs is quite easy in accounting, it will be important to first discuss various users and their needs in accounting. Secondly, it will be necessary to analyse different qualities of accounting information (Gill and Chatton, 1999, p. 67). Finally, the section will present the data how the conflict of interest that arises from the needs of various users is resolved (Vance, 2003, p. 26).

Users and their needs

Analysing the needs of various users in accounting helps an accountant clearly know who the information targets and the purpose of the information. The users have different needs and the accounting information presented should adequately address them (Arnold, 2007, p. 107). The users of accounting information are broadly classified into two types, which cover internal users and external users. It must ne mentioned that the first type represents the people within the reporting company. The internal users require the financial information for decision making. The external users are large in number and they represent the group that is outside the reporting company. Based on the two categories of users, accounting can be classified as well, in particular, into financial accounting and managerial accounting (Khan and Jain, 2006, p. 98). The needs of internal and external users are discussed below (Porter and Norton, 2012, p. 5).

Investors

The investors provide capital to an organisation. Thus, they are concerned about the returns they will receive from their investments. Besides, the group should take into consideration the exposure of their investment to risk, namely, the example of an insurance company that deals with life insurance business (Weiss, 1998, p. 15). The investors will require information that will enable them to decide on whether to increase their investment in the insurance company or disinvest in it (Siddiqui, 2005, p. 19). Thus, the information that they require is adequately provided in the financial statements (Ashbaugh-Skaife, Collins and Kinney, 2007, pp. 163-167). The investors can look at the profitability of the organisation over time as provided in the income statement. In addition, they can monitor dividend payments and investment ratios of the company after some time. Finally, the investors can review the capital structure of the company to enable them to assess the risks, which their investments are exposed to (Haber, 2004, p. 79).

Lenders

This group is made up of financial institutions that provide loans to the insurance company. The lenders are concerned about the ability of the company to pay the loan instalments in time. Such instalments are comprised of interest and the principle amount. Thus, the lenders will require information that relates to profitability, liquidity and solvency of the company. This data can be found in various financial statements of the company (Smith and Smith, 2003, p. 39).

Customers and debtors

The customers and debtors have the going concern of the business because they intend to have a long-term interest in the products of the company. In the case of insurance business, the customers will depend on the products of the company. Thus, they will want to know the ability of the company to meet their needs (Wai, 1986, p. 620).

Employees

The employees of the insurance company will be concerned about the ability of the company to generate profits in the future and the ability of the company to remain stable in their operations over a long period. Also, they will be interested in the overall financial strength of the company. Moreover, the employees will be interested in the employee benefits offered by the organisation such as retirement benefits. Finally, they will be concerned about the salaries and benefits of the managers (Sikka, Wearing, & Nayak, 1999, p. 47). The information that relates to employees is often provided in the annual reports of most companies (Morgan, 1988, p. 480).

Competitors

The competitors in the same insurance business will be concerned about how the company competes in the market. They would want to know whether it is involved in fair and legal competition or unfair competition. Besides, they will also be concerned about the level of growth and the financial position of the company. To achieve these objectives, the competitors will compare the financial performance of the company against their performances. Furthermore, they will evaluate the financial strength of the organisation and identify the next possible course of action that the company will take (Fahey, 1999, p. 37). This will enable the competitors to come up with strategies that allow them to compete fairly in the market and gain a large market share. Accounting provides the competitors with the necessary financial data for their reviews.

Management

The management falls under the category of internal users. It uses managerial reports to determine whether the objectives and goals of the company are met. Thus, the team reviews the performance of the business on a frequent basis against the targeted performance to ascertain if there are variances in performance (Fraser, 1990, p. 132). Such analysis enables the management to come up with the ways of improving the operation. Further, the management will require the reports to ascertain if there is a need to change the direction of the company (Shaoul 1997, p. 480). This can be achieved by carrying out comprehensive analysis of the strength, weaknesses, opportunities and threats (SWOT) that the organisation faces. Such analysis evaluates the ability of the company to perform well and survive in the market. Therefore, the managerial accounting reports generated on a regular basis will serve the interest of management (Solomons, 1991, p. 292).

Qualities of accounting information

There are a number of qualities that enable the accounting information to satisfy the needs of various users. Induction is the process of receiving accounts who are commencing their duties on accounting systems. Actually, the organisation’s representative should introduce new employees both to the organisation and other fellow employees, informing them the accounting traditions, events, and customs of the company. The first quality is that the accounting information is relevant meaning that it is presented in a way that it is able to influence the decision of a user (McLaney and Atrill, 2008, p. 37). Besides, the information makes it possible for the users to endorse past events and forecast future events easily. Further, the accounting information presented is often material. Thus, it should not change materially in the event that errors or falsifications are established. This can be achieved through reinventing the conceptual framework of operations.

The second quality is that accounting information gives a faithful representation of the financial position of the entity (Mintz and Morris, 2011, p. 136). This implies that the accounting data is complete, neutral, and free from errors (Walton, 1993, p. 53). An accountant may face prosecution or may be penalised in the case that financial reports they present do not meet these qualities (Sikka, and Dunn, 1999, p. 27). Thus, all financial reports prepared have these qualities. Besides, the accounting standards provide rules that must be followed when preparing the financial statements. The standards also ensure that the accounting reports suit the needs of various users (Hines, 1988, pp. 657-662). This creates uniformity, reliability, and consistency in the financial reports generated.

The problem of conflict of interest

Based on the evaluation of various users of the financial reports, it is clear that they view the financial reports differently. Notably, the users have different interests in the financial statements, which may lead to conflict of interest among the users (Brigham and Ehrhardt, 2009, p. 86). Such conflict will arise if the interest of one group contradicts the interest of another one and is often based on the creation and distribution of wealth (Deegan, 2009, p. 207). An example of the conflict of interest is the agency problem that arises from the difference of interest between the managers and the shareholders of a company.

The accounting information plays a significant role in resolving the conflict by applying the social construction process (Shim and Siegel, 1999, p. 36). In the case of agency problem, the shareholders will review the benefits received by managers against the policy of the company (Alexander, 1997, pp. 59-80). The second category of conflict of interest is between the debt providers and the shareholders of the company. They face the risk that the capital they provide will not be used as intended (Berry, Capps, Cooper, Hopper and Lowe, 1988, pp. 95-107). Thus, the accounting will provide the data on the use of the capital provided (Collier, 2009, p. 65; Tinker, 1991, p. 280). Therefore, the accounting information provided on a periodic basis serves the interest of various users (Hines, 1988b, pp. 251-161). It further helps to resolve conflict that may arise between the users through disclosure of the required information (Deegan and Unerman, 2011, p. 56).

Weaknesses of accounting in satisfying the needs of various users

Accounting is viewed in the society as a way of communicating the progress of an organization and performance of an organization to the society. The society is considered to be a complex interrelationship between various groups which interact daily. These groups require a variety of information for their functioning. Therefore, accounting provides the groups with information regarding the performance of the entity. Therefore, accounting is a useful way of communication in the society. It guides in allocating capital in a given society. However, it can be pointed out that accounting only discloses some information that relate to a company. This happens to be a very small proportion of all the information about the company (Nikolai, Bazley and Jones, 2011, p. 78).

Further, it can be pointed out that the accounting records of an organization are prepared on the basis of true and fair view. This implies that the accounting information presented is free from material errors and omissions. However, the concept of true and view cannot be justified. This implies that accounting as a means of reporting to various groups in the society has a number of deficiencies. Further, it can be noted that accounting report facts because numbers do not lie. However, the reliability of these numbers cannot be justified.

Accounting theories

There are a number of theories that guide the accounting profession. However, these theories are not concrete and are open to change by various groups in the society. Thus, the theories are constructed based on the notion of reality on the peoples view on how accounting should be. Therefore, there is no objective way of coming up with the accounting theories. Further, the interpretation of accounting information changed frequently. This also reduced the significance of accounting in satisfying the users’ needs.

Further, accounting is subject to gross manipulation by the users. It can be noted that the users can order an accountant to prepare reports that suit their needs. Therefore, an accountant can be able to manipulate the books of account to suit an individual. This reduces the objectivity of accounting and its usefulness and satisfying users’ needs. Besides, it can also explain why the major scandals occur in a country.

Conceptual framework

Accounting is not quite objective and concrete. There has been significant challenges in coming up with the theories that underpins accounting. The main accounting under pinning such as prudence concept and consistency concept has a number of gaps that create room for manipulation. Therefore, there has been a continuous process and various bodies set up to improve the underpinnings of accounting (Noreen et al., 2010, p. 58).

Conclusion

In conclusion, accounting is viewed in the society as a way of communicating the progress of an organization and performance of an organization to the society. The society is considered to be a complex interrelationship between various groups which interact daily. There are several internal users and external users of the accounting information. They have different needs and interests in the financial information of a company. Sometimes, the needs of the several users of accounting information conflict. However, in some cases, the needs overlap, which implies that they may have similar requirements. This makes it easy to satisfy different needs in accounting. Finally, it is observed that the qualities of accounting information enable the presented financial information to satisfy various needs of users easily. However, despite being relied upon various, accounting has failed in several areas.

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