Objective Truth in Financial Disclosure

Published: 2021-06-23 04:20:08
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Accounting activities usually result to financial statements that are relied upon by various stakeholders in the society. The reliability of the financial statements is determined on whether the statements are prepared using the agreed upon financial principles. One of them is objectivity in the preparation of the financial statements. Objective truth refers to whether the financial statements are based on evidence that supports the data that is presented in the financial statements. Objective truth is also important in auditing because the auditors are expected to base their opinion on the evidence that they find in the statements that they audit. The question is whether objective truth exists in the reporting activities. This research paper evaluates whether objective truth exists in the financial disclosures.

Objective truth exists if the financial statements are not based on bias, or unverifiable opinions. Everything that is reported has to be backed by evidence, and the evidence also needs to be unquestionable. The accountants thus are expected to ensure that whatever they enter in the financial statements is what can be verified by any other outsider doing the same job. This is important in that it enhances the reliability of the financial statements (Drachal, 2012). The outsiders have confidence in the financial disclosures because they are assured that the data can be verified. Additionally, objective truth in disclosures is enhanced by auditors who objectively verify the documents in organizations to confirm that whatever is reported is correct (Ryan, 2014).

There are various reasons why objectivity in financial statements not achievable. There are various principles and measures in financial disclosures that cannot assure objective truth. An example is when it comes to the value of assets. This could be inventory and fixed assets such as vehicles and buildings. The fact is that the value of these items is estimated and it is difficult to tell whether whatever is indicated in the disclosure is the exact truth (Cardoso, n.d). Some of the individuals who value the assets make decisions based on opinions and in other cases, they are biased because of various reasons. There are various assets that are reported using this procedure, and the results are that the information that is presented cannot be said to be the objective truth (Drachal, 2012).

Another area of interest is when it comes to reporting certain issues where evidence is easy to hide. An example is where an organization would be required to disclose that a lawsuit that is imminent would lead to outflow of a lot of funds from the company (Warren, & Reeve, 2007). Objective truth in disclosures requires that any of such incidences is reported so that the third parties get to make their judgments based on such information (Mattessich, 2002). However, the management and accountants are not likely to report such information since they are not sure whether the event will actually take place and in other cases, they are sure that such a report would adversely affect the value of their business and even lead to its closure. This is why shareholders may just be shocked when they get such information far much later (Bouten et al, 2012).

Objective truth also requires that accountants verify several documents before making an entry. An example is where the accountant looks at a receipt and also the orders made to ensure that there is a matching of evidence. In case there is a mismatch, then further evaluations can be made. In most of the accounting procedures, the accountants do not evaluate several evidence that is presented to them (Wustemann, & Wustemann, 2010). There are many people involved in expenditure and can present documents that need verification, but this would be so hectic and time-consuming. When the accountants base their evidence on the documents handled to them without consulting the third parties, then the disclosure cannot be said to be the objective truth (Drachal, 2012).

There are various instances where subjectivity is allowed in financial reporting. An example is where accountants are required to value the intangible assets. Items such as goodwill are important, especially when making efforts to sell a company (Warren, & Reeve, 2007). The information about goodwill is only known by the company and not the outsiders, and this means even if the wrong information is provided, there would be no way of verifying whether what is reported is the truth (Cardoso, n.d). Many accountants would easily work with the management to come up with a figure that favor their activities. They are likely to report more goodwill so that they can get more payment from the buyer of the business. In such a case, the disclosure cannot be the objective truth because self-interests are greater than the necessity to report the truth (Mattessich, 2002).

Financial reports are prepared on the basis of various assumptions. There are also forecasts and many estimates that have to be made in the reporting process. An example is an estimation that the doubtful debts are to be of a certain percentage of the sales that are to be made. Another assumption is the depreciation of assets where a certain asset is estimated to depreciate at a given rate or is expected to last for a specified number of years. All these items are subjective and cannot be objectively verified (Bouten et al., 2012). There is always a great chance that the assumptions made in terms of percentage of depreciation and the percentage of debts that are not likely to be paid are all wrong. As such, it is conclusive that such wrong projections make the objective truth nonexistence in the reporting process (Ryan, 2014).

Another problem is the ability to verify the documents that are used prepare the financial statements. There are chances that the employees in the various organizations fake documents so that they benefit financially. An example is where they have receipts that are inflated so that they can benefit from the excess money that is paid (DeMaria, 2012). They also collude with third parties that issue such verification documents to ensure that even if efforts were made to verify the information was made, then it would be impossible to guess that there was a presentation of faked documents. This means that objective reporting is usually compromised by the fact that the expenses incurred in organizations are not paid or incurred by trustworthy individuals who can fully assure that whatever is reported is the objective truth (Ryan, 2014).

Some of the future events facing a company may not be objectively reported regardless of whether the accountants are aware that the events may happen. An example is where it is expected that the sales will reduce in the following year, owing to a change in technology or entry of a new firm in the industry. Such information may only be available to the management and the other employees from the company, hence it is not reasonable to report the same since it adversely affects the future of the company (Bouten et al, 2012). Such information would make the company lose contracts, fail to get loans from the lenders and in other cases, the potential investors may be turned away. The results are that the management reports the sales revenue without taking into consideration the information that they already have. This means that whatever is reported in such statements is not the objective truth (Tanlu & Moore, 2010).

In other cases, companies may be forced to make adjustments in the way they report so that they achieve certain goals. Some of the reporting strategies are not illegal, though they may be termed as unethical. An example is where management engages in the conservative reporting strategies to ensure that the income that is reported is very low. The effects of this is that the tax that such companies pay to the government are lower (DeMaria, 2012). Conservative reporting is not wrong, but the fact is that such techniques end up violating the objectivity principle, and the reports from such activities cannot be termed as objective truths about the financial position of the company. There are various other ways that the companies can use to conceal important information that misleads the users without violating the accounting principles. These gaps in the accounting principles make it difficult to have reports that present objective truth (Tanlu & Moore, 2010).

In recent financial reports, there have been environmental and social reports. Companies are expected to give information about how their activities affect the society and the environment. However, many companies are aware that such reporting would harm their reputation such that the customers, society, and government would take actions that would adversely affect the companies (DeMaria, 2012). This is why most companies make up information that can never be verified because it is qualitative in nature. When companies give information about how they have reduced the consumption of non-green sources of energy by certain percentages, it is obvious that there are no methods that can be used to measure such performances. The accountants and the management are subjective in whatever they report for the sake of protecting their reputation (Warren, & Reeve, 2007).

In conclusion, it is evident that objective truth never exists in the financial disclosure. The generally accepted accounting principles were put in place to ensure that companies would report their performance while valuing the objectivity principle, because this can ensure that there is accuracy or the financial statements hence would make the accounts more reliable. The various principles and procedures that are recommended in a great way promote a move towards objectivity of disclosure (Wustemann, & Wustemann, 2010). However, it is impossible to achieve objective truth in the financial disclosures. There are many loopholes that are left by the accounting principles that make employees in a company have the chances of presenting incorrect information that is never likely to be the truth. In other instances, there are no clear ways of reporting the truth because there are no methods of getting the correct values of certain aspects of business operations such as depreciations (Riahi-Belkaoui, 2002). The fact that the principles leave the accountants with the option of being subjective means that it is impossible to achieve objective truth. The dangers associated with objective truth in financial reporting is another issue that makes it compelling to be biased in reporting. This is why one can conclude that there cannot be objective truth in financial disclosure.

References

Bouten, L., Everaert, P., & Roberts, R. W. 2012. How a Two-Step Approach Discloses Different Determinants of Voluntary Social and Environmental Reporting. Journal of Business Finance & Accounting, 39(5-6), 567-605. doi:10.1111/j.1468-5957.2012.02290.x

Cardoso, R. L., Barcellos, L. P., & Aquino, A. C. n.d.. Evidences of Vagueness in the Accounting Standards and Their Consequences for the Principles- versus Rules-Based Debate. SSRN Electronic Journal. doi:10.2139/ssrn.2423775

DeMaria, F. M. 2012. Auditing the truth, or so you thought. African J. of Accounting, Auditing and Finance, 1(4), 374. doi:10.1504/ajaaf.2012.052138

Drachal, K. 2014. Is There a Feedback Mechanism in Accounting? European Financial and Accounting Journal, 2014(1). doi:10.18267/j.efaj.116

Mattessich, R. V. 2002. Accounting Schism or Synthesis? A Challenge for the Conditional-Normative Approach. Canadian Accounting Perspectives, 1(2), 185-216. doi:10.1506/pfg3-ghnh-yhkb-upwn

Riahi-Belkaoui, A. 2002. Behavioral management accounting. Westport, Con...

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