Concept of Accountability in Financial Management

“Accountability breeds responsibility” – This is a famous quote by Dr. Stephen R. Covey gives the meaning of accountability in rather general terms. The concept of accountability can be defined as the process through which a person is held answerable for his actions and deeds. Under the umbrella of the organization the notion of accountability can be stated as the phenomenon through which whether a person at the higher level of hierarchy or at the lower level is accountable for his works and services that he renders to the organization. Accountability from the organizational perspective bears great importance as it is the measure through which the performance of the organization and a person serving can be judged and analysed. Accountability has different forms. First, the individualizing form of accountability can be studied in which the accountability contributes in making the realization of the image an individual perceives about it. ThisContinue reading

Convergence of Accounting Standards

The emergence of the accounting standards has been beneficial for the companies and the investors of the companies. The accounting standards help in the presentation of the financial information of the company in a format that can be understood by the investors of the companies. The investors of the companies are interested in the performance of the company and the financial results are referred to analyze the results. Therefore, the companies must be able to communicate information that is useful for the investors and the other related parties. The emergence of the standards has been helpful in introducing uniformity of the presentation in the companies. The investors have been benefited by the clarity of the information and the scope of the information. In the case of the companies, the management is able to garner more investments form the investors because of the clarity of the information. The clarity of theContinue reading

Qualitative Characteristics of Financial Information

Qualitative characteristics are the attributes that make financial information useful to users. The qualitative characteristics of financial information can be categorized as fundamental (relevance and faithful representation) or enhancing (comparability, verifiability, timeliness and understandability) based on how they influence the usefulness of financial information. Fundamental Qualitative Characteristics of Financial Information 1. Relevance Relevant financial reporting information means the ability of users (shareholder) to make a difference in their decision. Information regarding to economic phenomenon will help the users make a difference decision if it included predictive value and confirmatory value. Predictive Value: Information has predictive value if the value can be useful to the shareholder in predicting certain things that is related to future. Information which is highly predictable does not necessary has predictive value. For instance, depreciation of plant and equipment by using straight line method can be highly predictable every year, but it cannot assist in evaluating theContinue reading

Top Down Approach for Audit of Internal Controls

The purpose of using the top down approach for an audit of internal controls is to allow the auditor to take a systematic approach to identify risks and select which controls to test. The top down approach begins with the auditor forming a general understanding of the entity and the industry in which it operates. This is accomplished by looking at the company’s financial statements, and acquiring general business knowledge. The auditor then looks at the entity-level controls of the company to ensure that sufficient policies and procedures are implemented to recognize misstatements, due to error or fraud, in a timely manner so that material misstatements do not affect the financial statements. The two most important types of entity-level controls are those related to the control environment, and those over the period-end financial reporting process. Controls over the control environment should assess how management promotes ethical values and integrity, asContinue reading

Strategies to Resolve the Principal Agent Problem

The principal agent problem refers to difficulties of motivating one party the agent to act for the best interest of the other party the principal. In a company, the owners of the assets (the stockholder) are the principals and the managers of the company are the agents. The stockholders of the company authorize the managers to manage and use their resources to make profit for the stockholders. The cause of the principal agent problem is that the information asymmetry between the principal and the agent and the principal and agent have different interests. Generally, the Agents are the managers of the resources and have more information than the principals. In a company, the managers of the company will have more information about the company than the stockholders of the company. The agents may use this asymmetric information to get interest for themselves rather than the principals. In general, the principalContinue reading

Parts of a Cost Accounting System

Cost accounting is linked to tax accounting, financial accounting and managerial accounting because it is an important component of each discipline as cost accounting involves determining the cost of something, such as a product, a service, an activity, a project, or some other cost object. These costs are needed for several purposes. For example, the costs of products and services produced and sold are needed for both tax and external financial statements. In other words, tax and financial accounting depend on cost accounting to provide cost information. Information about costs is also needed for a variety of management decisions. For example, cost estimates are needed to determine whether or not a product or service can be produced and sold at a profit. Unit costs of a product (or service) are also needed for product pricing and product discontinuance decisions. In addition, accurate cost information is required to determine whether orContinue reading