made by Saadry Dunkel

Company Financial Statements

Author: Saadry Dunkel
Date: 23.11.2010
Title: Accounting is essentially highly subjective. Contemporary debates in the field of accounting revolve around the advocacy of competing images and the way accounting is implicated in the construction of social reality
Harvard Referencing Source System:
Saadry DUNKEL. 2010. Accounting is essentially highly subjective. Contemporary debates in the field of accounting revolve around the advocacy of competing images and the way accounting is implicated in the construction of social reality. [ONLINE] Available at: [Accessed 07 April 15].

Accounting is essentially highly subjective. Contemporary debates in the field of accounting revolve around the advocacy of competing images and the way accounting is implicated in the construction of social reality.

Elliott and Elliott define accounting as “the art of communicating financial information about a business entity to users [.] The art lies in selecting the information that is relevant to the user and is reliable.” (Elliott&Elliott 2009) Accounting is a social science that is “attempting to survive in a changing environment” (Davis, Menon and Morgan. (1982)). It’s been a long time since governments and public companies have understood that accounting needs to become more objective [1]. Despite many attempts to make accounting an objective science, it remains “highly subjective. Contemporary debates in the field of accounting revolve around the advocacy of competing images and the way accounting is implicated in the construction of social reality.” (Davis, Menon and Morgan. (1982)) Accountants have understood that “recognizing how images and assumptions shape the understanding of context” (Davis, Menon and Morgan. (1982)) can help them to “develop [ ] new ways of approaching” (Davis, Menon and Morgan. (1982)) their profession. This essay will attempt to describe these images and their influences on accounting standards, as well as many issues which arise from these debates; finally it will present the implication in constructing a social reality throughout examples of the accounting standards.

Accounting has been shaped by four images: “a historical record, a descriptor of current economic reality, an information system, and as a commodity.” (Davis, Menon and Morgan. (1982)) The historical record incorporates the idea of objectivity by representing financial information in a “faithful record of the actual exchange events of an entity, with an emphasis on information that is reliable, verifiable and quantifiable.” (Davis, Menon and Morgan. (1982)) In other words, the accountant has to evaluate which information is reliable and relevant, then he must summarize it, and finally present it in the financial report provided that this information is verifiable and quantifiable. Because the accountant has to make this choice he is not objective anymore. Morgan argues that such a system prevents proper views of reality “presenting […] the situation in limited and one-sided ways” (Davis, Menon and Morgan. (1982))preventing to take in account certain aspect of “the transaction such as opportunity cost, replacement cost, etc.” (Davis, Menon and Morgan. (1982)) Thus, “the only event to be recorded is, while objective, also exclusive”. (Davis, Menon and Morgan. (1982)) Also, the reality of accounting has changed over the years; first, it was seen as “attempts […] to make sense of practice in terms of universal principles […] such as objectivity, consistency, conservatism, and verifiability” (Davis, Menon and Morgan. (1982)) Now Davis emphasis that the new concern is to maximize resources, increase wealth and ultimately take into account the social cost and benefits among other things.

Moreover, objectivity has to be neutral for it to be trusted. Accountants have the responsibility and control of almost all of the world’s transactions. Thus, one must understand the ethical responsibility which lies on the accountants. One should know that recent research claims that “money laundering [is] estimated to be anywhere between US$ 750 billion and a trillion dollars” (Mitchell, Sikka and Willmott. (1998)) and suggests that “such a large amounts cannot easily be laundered without the […] involvement of accountants.” (Mitchell, Sikka and Willmott. (1998))

This leads to the second image, which sees “accounting as a current economic reality”. (Davis, Menon and Morgan. (1982)) With the scandal of Enron, the downfall of Lehman brothers, and recent financial crisis, one has to realize that accounting has a very important impact on the economic markets. Zeff talks about “economic consequences […] of accounting reports on the decision making behaviour of business, government, […] investors and creditors.” (Zeff 1978) The accountant has a choice to reflect either the economical reality or the historical price in the construction and presentation of the balance sheet and the income statement. However, in order to be more accurate the current and future prices should be taken into account for they represent more accurately the value of the assets. Davis explains that “current and future prices affect enterprise behavior, and advocate the development of accounting statements […] which reflect these prices rather than the historical prices” (Davis, Menon and Morgan. (1982)) he defends that one of the major problems resides in the income and the method of valuation of price.

One can understand that because companies are profit-seeking organizations, they will try to reassure their shareholders, as much as possible, in order to make more profit. The idea is to emphasize the positive part and to hide, shadow or sometimes not reveal the bad figures or information. In contrast to the historical view, which records the actual price, the economic reality offers a variety of valuation methods, which depend on the point of view of the accountant. These could be “replacement costs” or “net realizable values”, as suggested by (Davis, Menon and Morgan. (1982)). Economic reality gives an opportunity to chose from a range of different valuation methods, therefore it allows to “play” with numbers, so that for example the manager by choosing the method that makes the profits look bigger, shows the shareholders a better view of the company then there would be if he had used another valuation approach, thus justifying his bigger bonus payment.

Thus, those methods of valuation play a key role when dealing with the presentation of the figures in the financial statements. Furthermore, Zeff explains that the presentation of those financial statements is also important because it affects the users. For example, the “foreign exchange currency translation and the accounting for unsuccessful exploration activity in the petroleum industry have relied heavily on economic consequences” (Davis, Menon and Morgan. (1982)) Thus, choosing what to account for and what to disclaim can have an important impact on the economy.

Then, the third image describing accounting as an information system is best presented by the diagram of Sterling.
Diagram taken from the article (Davis, Menon and Morgan. (1982))

Diagram taken from the article (Davis, Menon and Morgan. (1982))

It explains how the accountant selects information that is quantifiable and useful to be redistributed to the users. Previously, the “AICPA [2] described accounting as: the art of recording, classifying, and summarizing in a significant manner […] transactions and events […] and interpreting the results thereof.” (Davis, Menon and Morgan. (1982)) This interpretation allowed accountants to be more flexible in their presentation and interpretation of the information used for decision-making. Now the Financial Accounting Standards Board has defined that accountants should “provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit and similar decisions”. (Davis, Menon and Morgan. (1982)) The information needed to be based on a more or less objective interpretation of every transaction; now the information is selected based on its utility or level of usefulness. This introduces another problem – how does one decide what is useful? – accounting is becoming less and less objective and is falling into the interpretation of the accountant. Following this logic, the users might have a better insight of what is useful for them than the accountant. Because of this, accountancy is described as being highly subjective.

Because there exists a demand and a supply for financial information, “accounting information is seen as an economic commodity” (Davis, Menon and Morgan. (1982)) and such a commodity must be regulated “in order to obtain a better allocation of resources in the economy” by “standard settings” (Davis, Menon and Morgan. (1982)). In other words, the fourth image explains the origin of the International Accounting Standards Board and the Financial Accounting Standards Board in the US. Their aim is to provide a proper conceptual framework and eventually to promote it internationally. Thus, the government is indirectly forcing companies to follow those regulations dictated by the IASB or FASB, by making each company represented in the market to publish annual reports. Those annual reports have an impact on the company, the employees and on the current and future investors. Depending on the situation of the company, the annual report can reassure the investors or make them worry about the situation (well-being) of the company; and this will have an impact on the market. For example, if the company announces a good turnover the investors could be motivated to buy more shares from the company. On the over hand, if the company announces that it has decreased the price of earnings per share, the investors might decide to sell their shares. These financial decisions will have a repercussion on the value of the company in the market.

Finally, the social impact of these images can be seen not only from the outside environment of the company but also from the inside. Indeed, accountants tend to forget the importance of the labour forces and see them as just a cost to be paid (the salaries of employees). While gathering information for financial decision-making, the accountant ignores all information concerning the employees. Looking at the Annual report of GSK [3], one can see that there is no information regarding the labor forces. This is a real problem because they are the ones suffering from any decision that the director or the board takes. On their hand, they carry all the obligations and risks without any compensation, retribution or security. Thus, those images have also an important social impact on the company. For example, in those past years, many companies have decided to close down their factories in France because it was too costly; this has had a dramatic effect on the labor forces. Those decisions have left hundreds of workers in the streets. Those workers have no diplomas and they cannot do anything else than what they have been doing because they do not know anything else.

Moreover, the creation of new accounting standards will have an impact on social reality [4]. In other words, social reality can be explained by the indirect agreement of a concept by a group or a community, such that it becomes a shared reality or a reality taken for granted. In fact, accounting is often implicated in the construction of social reality every time a new accounting standard is published. When the IASB and FASB are publishing a new accounting standard the accounting community will have to take it for granted and will have to use it according to those principles. An example to illustrate that is the IAS 36 (Impairment of Assets) the objective of which is “to ensure that assets are carried at no more than their recoverable amount and to define how recoverable amount is determined.” (Deloitte 2010) All assets can be impaired except for inventories, deferred tax assets, financial assets, etc… Accounting standards are guidelines to help accountants make decisions. However, those standards are often imposed and not submitted to the vote of the general population.

To conclude, accounting is evolving, it is moving towards the creation of a global conceptual framework. However, the profession should understand the importance it has on the social reality and help the system to become more ethical, reliable, and most of all objective. Images such as the historical record (cost), current economic reality, information system, and commodity; have provided accountants with a better understanding of their profession but more images will eventually appear; more financial difficulties. The idea is that accountancy must learn from their past mistakes and makes itself in the future; moreover, it should evaluate its situation periodically to understand where it is going. Indeed, just like a marketing or financial decision accounting profession should plan, implement, control, and evaluate its reforms.



Barry Elliott and Jamie Elliott (2009). Financial Accounting and Reporting. 13th ed. England: Pearson Education Limited


Microsoft ® Encarta ® 2009. © 1993-2008 Microsoft Corporation. Objectivity. Last accessed 23 November 2010


Edward Stamp. (1981). Why can accounting not become a science like physics?. Abacus. 17 (n°1), p13-27.

Gareth Morgan. (1988). Accounting as reality construction: Towards a new epistemology for accounting practice. Accounting, Organizations and Society. n°5 (88), p477-485.

Stanley W. Davis, Krishnagopal Menon and Gareth Morgan. (1982). The images that have shaped accounting theory. Accounting, Organizations and Society. 7 (n°4), p307-318.

Stephen A. Zeff. (1978). The rise of economic consequences. Journal of Accountancy. December (78), p56-63.


Online Annual Reports [PDF]

GlaxoSmithKline Plc, Annual Report 2007 [online] Available at: [Accessed 23 November 2010]

[1] See Britannica Dictionary 2009: Objective represent the reality: relating to, or being an object, phenomenon, or condition in the realm of sensible experience independent of individual thought and perceptible by all observers: having reality independent of the mind.

[2] The American Institute of Certified Public Accountants

[3] GlaxoSmithKline Plc

[4] Definition found on is distinct from biological reality or individual cognitive reality, and consists of the accepted social tenets of a community.