The function of accounting is not solely limited to the production of the basic financial statements of the organization. Aside from balance sheets, income statements, statements of cash flows and statements of retained earnings, other accounting representations include annual reports (World Finance 2013) and management representations which support the basis for audits (Public Company Accounting Oversight Board 2015). Annual reports are detailed representations of the company’s financial conditions for a year of operations. Although annual reports also include these aforementioned financial statements and the various explanations that support the quantitative data therein and the approaches to arrive at them, these reports reflect the company’s governance, its plans, and strategies and how the company was able to achieve them, its values, culture, and business practices. These reports provide stakeholders a description and explanation of the activities and decisions of the company, which contribute to and produce the company’s financial performance. Thus, these reports contain a comprehensive description of the company’s operations. This additional information, assumptions, and methodologies are regarded essential disclosures which interested parties need (World Finance 2013). As such annual reports contain information that satisfies the informational needs of the various stakeholders of the firm. On the other hand, management representations are written statements from management that form part of the audit of the financial statements (Public Company Accounting Oversight Board 2015). These written representations become evidence for the auditors so that they could provide a sensible basis for their opinions regarding the financial statements of the firm.
This paper examines the other accounting representations of the enterprise and their importance to accountability. The concepts of accountability and representations are explored through these statements to match how the stakeholders use the information provided in these other accounting documents.
Importance of Other Accounting Representations
The information given in annual reports and management representations is intended to provide stakeholders of what they need to know. Therefore, these documents are explanatory tools that answer the concerns of stakeholders as such must reflect accountability. Young (2006) recognized that various groups take interest in an enterprise and that their interests are different from one another, and to an extent conflicting. Thus, to provide a clear understanding of the financial reports, these financial statements serve the investors’ and creditors’ interests more than the other identified individuals whose lives are affected by the enterprise. Investors need to determine if the company is able to achieve profitability so that they could earn from the use of their capital. Creditors and lenders have to know if the company is able to pay its obligations and likewise derive profit through loan interest. The other stakeholders’ interests were set aside to allow the use of a common language in as far as the financial statements are concerned. In a capitalist view, profit is the most relevant (Chwastiak & Young 2003). However, as the annual reports and management representations go beyond providing the quantitative picture of the firm’s conditions, the circumstances involved to create the financial performance of the firm appear significant information for those whose lives are affected.
Meanwhile, management representations complement auditing procedures (Public Company Accounting Oversight Board 2015). As forms of evidence to the audit findings and the opinions formed by the auditor, the financial statements become reliable. The significance of reliability in financial statements provides an increased assurance of objectivity. And thus, a reliable financial report reflects accountability as it attempts to answer and support these answers with evidence.
Aside from accountability, annual reports and management representations exemplify the image of the company. As financial statements also embody the image of the enterprise (Armstrong 2002), annual reports and management representations signify its mission and vision to the public as these contain expressions of practice, values, and culture. These statements describe and explain the enterprises’ assumptions and methodologies that contributed to the financial performance of the firm. Readers of these statements learn about the company strategy which stakeholders may be interested to determine if their individual outlooks are consistent with those of the organization. These documents mirror the operations and the directions of the firm and thus, provide a sketch of its image.
The Accountability and Representation of Annual Reports
Beyond the financial statements, the strategies and decisions of the company can be gleaned from annual reports. Reliability of information would have required the relevant circumstances which brought about the need to expose what the company has done to arrive at the financial condition. Most often than not, annual reports do contain success stories (Chwastiak & Young 2003) – a rosy picture of the events gone by in the past year despite instances of struggles and mistakes. But who would want to air their dirty laundry in public? What is indicated in annual reports would just be a collective description of the vain efforts to protect primarily the interests of investors and creditors? Although annual reports may be detailed enough, the detail only pertains to circumstances closer to the final outcomes and not the complete account of the ill-fated incidents. Moreover, the company’s image would have been affected especially when there is an unfortunate turn of events. Despite that profitability is the main goal, secondary values of image or reputation may be of concern to investors and creditors. The Enron Scandal, for example, is no longer operating despite being one of the world’s major supplier of natural gas, electricity, and communications in 2000 (Fox 2003). Its accounting scandal has obviously lost trust and confidence from investors and creditors. Thus, annual reports are also tools for preserving the image of the company and those who have a stake in it.
Another perspective of annual reports as offered by Chwastiak and Young (2003) is the attempt to exclude the awry decisions which have led to the success of the enterprise. In the interest of profit, the social responsibility of the firms is set aside. Corporate annual reports of the various companies particularly those which operations involve the exploitation of natural resources and human capital was criticized to include the blatant disregard for the social consequences of business decisions. This disregard was muted in the annual reports (Chwastiak & Young 2003). The intention is assumed to be that of preserving an image and keeping the stakeholder’s interests. However, this representation fails to hold accountable for the societal ills that resulted from these business decisions. The silenced truth appears in Chwastiak and Young’s arguments (2003) as the negligence of the company to recognize their irresponsibility. The object of the irresponsibility may be the first and most obvious accountability of the enterprise but the effects do not appear to be limited, particularly with the destruction of natural resources. These annual reports then are regarded to be self-serving and short-sighted. It is self-serving because the enterprise is only concerned about the interest of its investors and creditors, which interest ensures the existence and continuing operations of the firm. It is short-sighted as those immediately affected, of course, the more significant stakeholders, are only regarded. The neglect of the interests of society’s general welfare seems unconvincing.
The Accountability and Representation of Management Statements
As they are by definition provided by management, management is held accountable to produce the explanations that affected the financial conditions of the company. Managers use their expertise and make decisions that produce the financial performance of the firm. Commissioned to translate and execute the mission and vision of the company’s founders, the managers formulate strategies and policies that shape the operations of the firm. It is expected that their actions and decisions conform to the desires of the people who hired them – the owners of the firm. These managers are first accountable to the owners as they were entrusted to direct the fate of the company. Their work performances are measured against the attainment of goals, usually financial, as the owners being investors too are concerned with profit. Thus, managers expectedly prioritize the interests of investors. As an outcome, the managers receive favor through rewards (Armstrong 2002). And because of these rewards, it is obvious that managers serve the interests of the owners/investors. Management representations then are expected to provide evidence which seeks to preserve the personal interests of the managers themselves. Rarely a manager, if not none, would implicate oneself in audit findings. The instincts of self-preservation are regularly expected at the forefront of the actions of a manager. One’s image and reputation would rarely be sacrificed as this would have serious legal and/or ethical implications.
Meanwhile, the manager’s accountability to the auditor is simply that of compliance to procedures. A wily and manipulative manager may provide a fabricated misrepresentation. Given the authority to craft and execute decisions, this kind of manager should be able to provide vindicating evidence. For an ethical manager, on the other hand, the accountability should be extended to the auditor’s opinions strengthen the corporate claims in the interest of the owners/investors.
Other accounting representations include annual reports and management representations as evidentiary support to audit opinions. These representations are important to accountability as annual reports narrate, explain, describe and detail the surrounding circumstances to the financial performance of the company and management representations strengthen the corporate claims. However, annual reports at times fail to provide a completely objective picture of the financial condition of the firm as it aims to serve also the interests of investors and creditors. Certain annual reports seem to disregard the social responsibilities of the enterprise and highlight only ones which should cater to what the investors and creditors need to know. As to how this need to know is derived is out of the picture. Annual reports fail to be accountable to other stakeholders like society in general, employees or customers perhaps. For management representations, since managers are tasked to carry out the directives by the owners/investors of the enterprise, it is most probable that the interests of the owners/investors are prioritized. The rewards which may be provided in doing so question the objectivity of the manager to put out statements that do not run corollary to these interests. In both accounting statements, there is the possibility of bias. Due to this likelihood, those who prepare accounting statements must exercise objectivity and balance of interests, if not all of the stakeholders but at least not a monopoly of any of these stakeholders.
Armstrong, P 2002. Management, Image and Management Accounting. Critical Perspectives on Accounting, Vol. 13. pp 281 – 295.
Chwastiak, M and Young, J 2003. Silences in Annual Reports. Critical Perspectives on Accounting. Vol. 14, pp. 533 – 552.
Fox, L 2003. Enron: The Rise and Fall, Wiley & Sons, p. 113.
Public Company Accounting Oversight Board 2015. AU Section 333 Management Representations, viewed 22 June 2016 from https://pcaobus.org/Standards/Auditing/Pages/AU333.aspx.
World Finance 2013. Annual Financial Report, viewed 22 June 2016 from http://finance.mapsofworld.com/financial-report/annual-financial-report.html.
Young, J 2006. Making Up Users. Accounting, Organization & Society. Vo. 31, pp. 579 – 600.