U50081 Financial Accounting Theory L1: Accountability in Accounting Accountability defined: the giving of an account encompassing, both the

e account itself and the process followed in providing that account to stakeholders. Recently defined as: giving of an ethical, social or environmental account PLUS financial account. Theoretical framework and accountability: Agency theory Shareholder-centred Accountability Stakeholder accountability: to what extend a company has discharged its duty of accountability to stakeholders. Analyse what & how companies report on particular issues & the quality of that reporting Examine why company reports what they do. What is the concern? The lack of completeness of reporting. Traditional mechanisms of delivering accountability include: Corporate governance regulations BOD FR and disclosure Audit committees External audit Institutional investors How to improve accountability? Need for other measures Mandatory reporting guidelines Better developed audit guidelines A mandatory audit requirement for MNCs A radical overhaul of corporate governance systems Usefulness of Financial Reporting in Assessing Accountability: Management is accountable to the entitys capital providers for the custody and safekeeping of the entitys economic resources and for their efficient and profitable use. Managements responsibilities include, to the extent possible, protecting the entitys economic resources from unfavorable effects of economic factors such as price changes and technological and social changes. Management also is accountable for ensuring that the entity complies with applicable laws, regulations, and contractual provisions. Managements performance in discharging its responsibilities, often referred to as stewardship responsibilities, particularly is important to existing equity investors when making decisions in their capacity as owners about whether to replace or rePage 1 of 3

appoint management, how to compensate management, and how to vote on shareholder proposals about managements policies and other matters. Because managements performance in discharging its stewardship responsibilities usually affects an entitys ability to generate net cash inflows, managements performance also is of interest to potential capital providers who are interested in providing capital to the entity.

What is the auditors accountability in the Enrons case? It will always happen that some managements will overstate their income, or understate their liabilities, or otherwise engage in earnings management. The question is not why they do it. The question is why the gatekeepers have failed to detect it? Accountants accountability in general? It will always happen that some managements will overstate their income, or understate their liabilities, or otherwise engage in earnings management. The question is not why they do it. The question is why the gatekeepers have failed to detect it ? Imagine visiting a dentist for some surgery. The dentist charges 200, but botches the surgery and inflicts life-long discomfort, pain and further expense. Just when you are getting ready to sue the dentist for negligence you learn that the dentist's liability is 'capped' and that your maximum compensation cannot exceed 2,000, or say 10 times the fee paid. Such a 'cap' on liability has been introduced to indulge accountants acting as company auditors. The liability concessions given to auditors cannot easily be denied to doctors, surgeons, dentists, engineers, butchers, supermarkets and producers of food, drink, medicine, automobiles, cigarettes, or anything else. This will be the beginning of the end of the consumer protection principle: that the wrongdoer should suffer the consequences of his/her negligence. The Companies Act gave accountants "proportional liability", under which auditors can only be held liable for losses arising from their own negligence. Contrary to the auditing industry's propaganda, auditors are not held liable for the negligence of others. For example, following the Nick Leeson frauds and the collapse of Barings Bank, liquidator KPMG sued auditors, Deloitte & Touche, for 791 million. The court decided that even though Deloitte were negligent the loss suffered by the bank was mainly attributable to its management's failures to institute proper internal checks and controls. Deloitte were held liable for only 1.5 million.

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This point has been driven home by the trial of Arthur Andersen for its involvement in the Enron demise and other allegations of improper behaviour by auditors and supposedly independent boards of directors. Both the auditors and the other gatekeepers had plenty of warning that they were entering very treacherous waters. Both the auditors and the securities analysts failed the shareholders of Enron. The auditors did not withdraw their certificate until just about a month before the company failed, when they belatedly decided that three years of earnings had to be restated. And of the 20 or so securities analysts following Enron, up until the date of bankruptcy, only one at the last minute put a sell recommendation on the stock.

Conclusion: Stewardship/accountability is inherently linked to agency theory and is a broader notion than resource allocation as it focuses on both past performance and how the entity is positioned for the future. It should therefore be retained as an objective of financial reporting to ensure that there is appropriate emphasis on company performance as a whole and not just on potential future cash flow. Stewardship/accountability has implications for financial reporting as been discussed earlier.

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