financial accounting roles

financial accounting roles

Exploring the Evolving Roles of Financial Accounting in Modern Business

1. Introduction to Financial Accounting

Management yearly conveys to stockholders and the investing public its own report of the firm’s performance. Such a report is referred to as the firm’s financial report. The third source of relevant data is economics. Through macroeconomic analysis, we attempt to measure the firm’s performance in the economy. It is logical, then, in studying the role of accounting to know the expectations of financial accounting that are expressed by each of these stakeholders: accountants, managers, stockholders, and other stakeholders. In what follows, some of these expectations are described and specified. No claim is made that the expectations are universally and uniformly possessed by the described stakeholders. Firms have varied roles to perform and so do their accounting/management systems. Furthermore, individuals occupying similar roles may differ in their expectations of accounting and hence accounting, in effect, is affected by these differing moral expectations. Nonetheless, in understanding the role of financial accounting, the recognition of these expectations of accounting should be helpful.

Financial accounting has been a part of our business system since the days of the ancient Medes, Persians, and Phoenician merchants. Though modern man now possesses a myriad of aids to help him in his activities, these aids are the product of, and subject to, the accounting practices that have existed through the years. The respective roles of accounting, management, and economics should be complementary in evaluating organizational performance. In performing their tasks, the accountants use a method that they and the community have agreed upon for evaluating and recording financial transactions. These data are left to management for its external and internal reporting responsibilities.

2. Traditional Roles of Financial Accounting

It is possible to view financial statements as a standard information environment produced by the data processing and reporting behavior of the firm. Such output will be used and interpreted by many parties. These include parties external to the firm such as investors, creditors and their professional advisors as well as by parties internal to the firm such as labor, management and government. On this basis, it might be concluded that from a practical business perspective, the design of financial accounting systems does have significant fundamental economic implications that warrant broad consideration.

Traditionally, financial accounting has been seen as having three primary roles. First, it is a broad organizational system providing feedback based on the score-keeping function of accounting. The “score” is measured through the records and reports of the activities of the business. Input will include not just financial information but operational data also since all input required for assessment must be captured by the system and reported for use by parties external to the firm. Secondly, financial accounting is conceptualized as supporting and facilitating external resource allocation decisions of investors, creditors and their professional advisors. The future-oriented assessors require objective information with which to develop a basis for decision making. Third, it serves as an instrument of decision control over the allocation and use of scarce resources for those parties who are not directly carrying on the day-to-day operations of the business.

3. Emerging Trends and Technologies in Financial Accounting

The new accountant must be, in addition to being a capable record-keeper, a master of modern technology, an expert in the problem areas of business tracking, and able to handle sophisticated tax nemesis. Thus, to keep up with the pace of change and to prepare accounting graduates for financial acculturation, accounting educators must develop ways and means of computing education of the accounting function, which in large measure is the prelude of the business education continuum. The effective use of modern advances in computer technologies, particularly as they apply to computerized accounting systems, has become an essential if accounting, taxation, management science, and other business discipline educators and support personnel are fleet enough to keep up with the pace of change.

There is no denying the impact that new trends and technologies are having in building appropriate and inventive solutions in all areas of technology from finance to operations. Financial accounting, and the finance functions generally, have not been left behind. They are subjects to the whirlwind of change that is sweeping through modern business, and business-related education. There has been rapid and phenomenal progress in computer technology and in the uses to which such technology has been put. Notably, one of the huge emerging markets for computing interconnectivity involves accounting communications. New forms of transaction processing and new forms of financial data communication and research have seen significant expansion and development such that new, faster, safer, and more efficient relationships have been developed amongst internal and external users of financial accounting data.

4. The Future of Financial Accounting: Opportunities and Challenges

For this intelligence to be meaningful, however, it is essential that the traditional financial statement also presents reliable and relevant information. And herein exists a major challenge for the future of financial accounting now, and in particular, for its transition to the digital age. Let us consider an example: if society demands and business seeks to supply information on sustainability and related corporate goals and performance measures disclosed via the XBRL technology of financial accounting, financial accounting academics, preparers, standard setters, accountants in business and government, and other financial statement users need to address, in a cooperative fashion, a myriad number of complex, technical, theoretical, multi-jurisdictional, and social issues that need to be resolved, harmonized, and standardized.

What accounting practice will look like in the future is uncertain. However, a number of issues and opportunities for the development of financial accounting exist, which are important for society and business to consider. To begin, the non-fair value and fair value facets of financial accounting should be optimized in an integrated fashion to balance the costs and benefits of each of the various dimensions of accounting. In the non-fair value category, past scholars have identified sustainability-related accounting and financial accounting as being of particular importance. Intelligence related to sustainability is important for decision-makers as society is both asking and has all but demanded accountability for what it values in business performance beyond financial short-term performance. Due to its depth, reach, capacity, and its ‘related party’ orientation, however, we argue that financial accounting is more likely to supply accurate, reliable, and relevant intelligence relative to environmental, societal, governance, and some aspects of human resources accounting than sustainability-related narrative reported outside of the historical record maintained by an integrated report comprising financial and sustainability information.