financial accounting

Professional Ethics and financial statement disclosure: In a constructionist perspective Abstract
This essay addresses the relationship between professional ethics and financial statement disclosure. The public should change its view on the objectivity of accounting profession because in no means can anyone be absolutely objective. The reason to this will be articulated thoroughly in the essay. Then how to maximize relative objectivity is discussed and the conclusion is that being honest and credible as the premise, trying to state details in financial statements on a broader level as possible. The ultimate aim of disclosing financial information on companies is to enhance the welfare of the people in a society. But accountants fall into a dilemma about how to provide report about a company. For accounting professionals, there is still a lot of things to do and a long way to go.

Introduction
Our society has found its own way in directing professionals to do what they are supposed to do. In financial accounting, the basic rule for accountants is to be objective in describing a corporate’s financial and operational condition. But, the question comes out as what exactly objectivity is. We cannot discuss professional ethics without address this issue firstly. This essay will begin with this question. Following this, it will discuss the ultimate function of financial statement disclosure. Finally, it will look at the impact of accounting profession on an organization in a constructionist perspective.

No absolute objectivity exists,only relative one persists.
Financial accounting has always been considered as a reflection of the situation and circumstances of an enterprise, which is long and deeply believed and taken for granted that this reflection or accounts be objective or without personal emotions. All the stakeholders expect real information of the company they are concerned with from accountants so that the can decide what to do about their investment or else. And that’s why we need lots of professional accountants for our society and an accountant can never really lose his job in our market.

However, the accounting profession is increasingly being investigated and intervened by government in many developed countries. Arthur M. Wood made the following statement: This is a critical time in the history of the accounting profession. The cause of this crisis is in fact that investors and depositors are losing faith in the ability of the accounting profession to perform the job that has historically been its unique function:assuring the integrity of the financial information on which our capitalistic society depends(Ruth D. Hines, 1988, p.260).
The unique function of accounting profession has been to guarantee the integrity in financial information, to assure the reality. So the public expect to see the whole of a company, the whole capital market and even the whole society. And then the main task for accountants will be to provide the whole reality.

Reality is an idea. It’s presented as information, which is transmitted by people. What is should be noted is that people spread information after the reality is processed in their minds and thoughts, then conveyed in different people’s different ways. All the steps are concerned with people, and how cannot subjectivity be involved with people’s minds and thoughts be concerned? How can absolute objectivity exists with subjectivity persists? The objectives of the financial statement need to be redefined clearly(TK Cowan, 1965, p.791). Objectivity can and must be founded upon intersubjectivity(J McKernan, 2000, p.22). Accountants are connected with their findings by accounting codes and principles that create one-sided aspects to look at the world(Gareth Morgan, 1988, p.482). No one can grasp the whole reality of an organization,an event and the interrelationships among entities(Brian P. Shapiro, 1997,p.170). We listen, we see and we feel them from only one angle, one perspective, which is the basis for our understanding under the help of everyone’s own experience and knowledge, inevitably. We demand objectivity from accountant because we assume they could be objective but we never thought if whether this assumption can be realized in reality. No. Assumption is assumption after all, like many others in social science such as perfect rationality, market clearing, etc.

The point is, accountants can only be relatively objective.The possibility of objectivity in accounting has been defended(John, 2007, p.161). many financial accounting disclosures may be properly viewed as epistemologically objective facts, even though they have an ontologically subjective mode of existence(Tom Mouck, 2004, p.530). Being relatively objective requests accounting professionals to be honest at the first place, to account what they saw or heard, whether it is true or false. They should not fabricate numbers in financial statements in the interests of someone concerned at the cost of anyone else’s benefits. In this case, to overstate profits or reduce expenditures are ethics-betrayed. Even though no one can completely get rid of subjectivity in accounting, accountants can come up with different ways to deal with the limitations(BP Shapiro, 1998, p.652). One solution is trying to represent circumstances in a broader level instead of narrow ones. For example, in the statement note, covering as much as information about the company’s bid last year so stakeholders can know the details thoroughly.

The function of financial statement disclosure
Financial statement, as is seen from the name, states the financial situations of a company. Investors, creditors and others users of the information evaluate the company in their own perspective and then make right(hopefully)decisions. Investors and creditors, for example, can decide whether or not to invest or lend their money to the company. If they learned from the financial statement and believe that it’s a good company which will gain profits for them in the future, say the company has investment value, they will invest or lend more money to this company and in return, the company will be better developed. On the other hand, if investors and creditors learned from the financial statement that the company is facing or will face a problem which leads the company to a situation without investment value, say the company is no more competitive in the market, they will withdraw their money from the company. Through this process, the market can achieve a health condition that will function effectively. Then when an effective market is formed, it will help keep good and competitive companies and repel bad and inefficient ones. Its a positive circle which enhance the productivity of society and gain more products for people in the society. More products and a better market can lead to the well-being of our society, which is the ultimate aim for development.

How accounts impact an organization and society:the reflexive construction of reality
If the public take a definition or description of reality, for example, a set of financial statements, to be reality, then they will react according to it, and thereby perpetuate, and in doing so, confirm that account of reality. Having acted on the basis of that definition of reality, and having thereby caused consequences to flow from that conception of reality, those same consequences will appear to social actors,in retrospect, to be proof that the definition and description of reality on which they based their actions, was rational and true(see Hines, 1988a). For a better understanding of the reflexive construction, I will give a example. Say there’s information in a set of financial statements implicate cash flow trouble of a company, which is actually true but not so seriously lead to bankruptcy, for the company will definitely get a lot of money at the end the the first quarter this year. But the accountant only disclosed the financial problem of the company without conveying anything about the situation this year. Then the investor and creditors will be panic and request their money back or liquidation,which precipitates and accelerate the failure of the company. So a new definition of reality, once understood by the public, will be realized in the consequences, because individuals will react according to it(Ruth D.Hines*, 1991, p.323).

Then there comes a dilemma. If accountants provide a clean report about a firm which subsequently goes bankruptcy or provide a qualified statement and precipitate the failure of a firm which may otherwise get through the trouble it faced with before, they will, in both situations, be blamed by manager, investors, creditors or other stakeholders(Lew Perren, 2000, P.398). We cannot easily tell in which condition is the accounting professionals obey professional ethics. In the light of the discussion above, it is suggested that a socially desirable stance for researchers is to see truth as “what it is better for the public to believe” rather than as the “accurate representation of reality”(Rorty, 1980). It places much higher qualifications for accountants, because this means they have to decide which way is better after evaluating the conditions of a company.

Conclusion
In conclusion, being honest and credible as the premise, trying to state details in financial statements on a broader level as possible is a solution for accountants to be relatively objective in conveying financial information on a company. The ultimate aim of disclosing financial information on companies is to enhance the welfare of the people in a society. Accountant are supposed to inform the public of “what would be better for the stakeholders to believe”instead of “accurate representations of reality”.

References:

Hines, Ruth D. "Financial accounting: in communicating reality, we construct reality." Accounting, Organizations and Society 13.3 (1988): 251-261.
Cowan, Tom K. "Are truth and fairness generally acceptable?." The Accounting Review 40.4 (1965): 788-794.
McKernan, John, and Patrick O’Donnell. Cognitive objectivity in accounting. Working paper, 2000.
Morgan, Gareth. "Accounting as reality construction: towards a new epistemology for accounting practice." Accounting, Organizations and Society 13.5 (1988): 477-485.
Shapiro, Brian P. "Objectivity, relativism, and truth in external financial reporting: what 's really at stake in the disputes?." Accounting, Organizations and Society 22.2 (1997): 165-185.
McKernan, John Francis. "Objectivity in accounting." Accounting, Organizations and Society 32.1 (2007): 155-180.
Mouck, Tom. "Institutional reality, financial reporting and the rules of the game." Accounting, Organizations and Society 29.5 (2004): 525-541.
Shapiro, Brian P. "Toward a normative model of rational argumentation for critical accounting discussions." Accounting, Organizations and Society 23.7 (1998): 641-663.
Hines, Ruth D. "The FASB 's conceptual framework, financial accounting and the maintenance of the social world." Accounting, Organizations and Society16.4 (1991): 313-331.
Perren, Lew, and Paul Grant. "The evolution of management accounting routines in small businesses: a social construction perspective."Management Accounting Research 11.4 (2000): 391-411.
Rorty, Richard, Michael Williams, and David Bromwich. Philosophy and the Mirror of Nature. Vol. 401. Princeton, NJ: Princeton University Press, 1980.

References: Hines, Ruth D. "Financial accounting: in communicating reality, we construct reality." Accounting, Organizations and Society 13.3 (1988): 251-261. Cowan, Tom K. "Are truth and fairness generally acceptable?." The Accounting Review 40.4 (1965): 788-794. McKernan, John, and Patrick O’Donnell. Cognitive objectivity in accounting. Working paper, 2000. Morgan, Gareth. "Accounting as reality construction: towards a new epistemology for accounting practice." Accounting, Organizations and Society 13.5 (1988): 477-485. Shapiro, Brian P. "Objectivity, relativism, and truth in external financial reporting: what 's really at stake in the disputes?." Accounting, Organizations and Society 22.2 (1997): 165-185. McKernan, John Francis. "Objectivity in accounting." Accounting, Organizations and Society 32.1 (2007): 155-180. Mouck, Tom. "Institutional reality, financial reporting and the rules of the game." Accounting, Organizations and Society 29.5 (2004): 525-541. Shapiro, Brian P. "Toward a normative model of rational argumentation for critical accounting discussions." Accounting, Organizations and Society 23.7 (1998): 641-663. Hines, Ruth D. "The FASB 's conceptual framework, financial accounting and the maintenance of the social world." Accounting, Organizations and Society16.4 (1991): 313-331. Perren, Lew, and Paul Grant. "The evolution of management accounting routines in small businesses: a social construction perspective."Management Accounting Research 11.4 (2000): 391-411. Rorty, Richard, Michael Williams, and David Bromwich. Philosophy and the Mirror of Nature. Vol. 401. Princeton, NJ: Princeton University Press, 1980.