An Accountability View of Accounting
Guidance for Accounting Practice

By Ann L. Watkins

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While we have been long-time supporters of accounting education, if we were creating a new business school today, we would not have separate undergraduate or graduate accounting programs.

Technology, globalization, and the increasing power of other professionals, coupled with the loss of professionalism, were identified as threats to the profession. Legislation following the most recent corporate failures seems to have forestalled this gloomy prediction by creating a strong demand for accounting services and, with them, accounting graduates.

With the pressure off, so to speak, it might be tempting to set aside the accounting “crisis” that had absorbed the profession and academia for 20 years. There is probably no better time, however, for the profession to give careful thought to the responsibilities of accountants that extend beyond what is legislated. If we are to avoid a similar crisis in the future, we must identify some rationale for accounting as a distinct profession. To accomplish this, it is necessary to recognize competencies that are unique to accounting. A proper grounding of accounting in these unique competencies will provide better guidance for the shape and rationality of accounting practice in the future.

Threats to the Profession

Technology. Information preparation and dissemination has become far less costly; in many instances it is available virtually in real time. Innovative software has provided information in a format that facilitates financial statement analysis and enables individuals to make assessments of business performance in ways not previously available. Advances in technology have placed greater emphasis on providing financial statement information that is relevant.

Globalization. Advances in technology have helped promote global economies. Business organizations have begun competing in markets absent national or political delineations. The complexity of operating in global markets has exposed companies to greater uncertainty and risk. Accountants are now expected to think beyond mere accounting standards and to assist businesses in managing these risks in a positive way.

Concentration of power. Contributing to this challenging environment is the more intimate relationship between listed companies, major market decision makers, and analysts. Several consequences relevant to accounting include: 1) a decreased reliance on historical financial statements; 2) greater demand for nonfinancial information; and 3) a shift away from the traditional financial reporting model to a database-type financial reporting model. In many instances, accounting professionals are competing with other professionals in providing this information.

Loss of professionalism. Prior to the Sarbanes-Oxley Act of 2002 (SOX), the profession responded in various ways to the challenges of a dynamic business environment. The response of the Big Four was to expand their consulting services. In 1993, accounting and auditing services represented 51% of total revenue for the then Big Five; by 1999, accounting and auditing revenue represented only 33% of their total fees.

In his plenary speech given at the 2003 annual American Accounting Association meeting, Arthur R. Wyatt testified to the diminishing focus on accounting professionalism over his 40-year career. [Editor’s note: Wyatt is a former managing director, accounting principles, of Arthur Andersen and chair of the firm’s United States committee on professional standards. He was also a member of FASB and served as chair of the AICPA’s Accounting Standards Executive Committee (AcSEC) from 1977 to 1979, as vice president of the AICPA, and as vice president and president of the American Accounting Association (1991–1992). He is a retired professor of the University of Illinois.] There was an ever-increasing emphasis on those services that provided revenue growth and profitability. Eventually the pressure to fill positions in the consulting areas “led to policy changes that eliminated the six-week accounting course for new hires and also eliminated the requirement that new managers in the consulting area had to pass the CPA examination.”

An Accountability View of Accounting

Although these “threats” to the profession do not seem so ominous, they are present all the same. One starting point in addressing them is to better understand the role of accounting information. To accomplish this, one must consider the unique competencies accounting comprises. One could, for example, select from among the elements of decision usefulness, stewardship, control, fairness, attestation, relevance, reliability, representational faithfulness, and accountability for the grounding norms for both accounting information and accountants’ competencies.

To the extent that each of these norms has some relevance to some users of accounting information, and to the extent that other professionals and other cultures may choose from among these same norms, it seems necessary to give a finer sense of what we mean by “accounting information.” In other words, what is it that accountants can, at least in theory, do better than other information providers? If we look to the profession, decision usefulness, understood in the context of predicting future cash flows in the interest of investors and creditors, is often the official (and textbook) answer to the question of the reason for accounting. An accountability view of accounting might offer a useful grounding with respect to maintaining a better sense of the profession through an ever-changing business environment.

Relevance Versus Reliability

In Theory of Accounting Measurement (Studies in Accounting Research 10, 1975), Yuji Ijiri discusses the importance of accountability as the foundation of accounting and contrasts this view with one of simply supplying quantitative information for economic decision-making. Ijiri, the Robert M. Trueblood University Professor of Accounting at Carnegie Mellon University, further develops the notion of an accountability view of accounting and offers additional distinctions between it and a decision-usefulness orientation for understanding the purpose of accounting and accounting systems. A primary difference speaks to the tensions that are always present when attempting to provide information that is both relevant and reliable. A decision-usefulness orientation of accounting places greater emphasis on the relevance of information provided to decision makers. The information flow is described as “unidirectional” in that it focuses on providing information to financial statement users that will facilitate their economic decisions.

From this point of reference, relevance becomes the dominant characteristic of accounting information, and subjective information becomes acceptable as long as it is useful to the decision maker. An emphasis on decision-usefulness of information might, for example, explain the trend in issuance of pro forma earnings reports in the late 1990s and the SEC’s somewhat delayed response to their increased use. The SEC’s final rule, “Conditions for Use of Non-GAAP Financial Measures,” was a result of the Sarbanes-Oxley Act and did not become effective until March 28, 2003.

If we accept the premise that there are incentives for bias in accounting information and that one primary goal of accounting systems is to reduce the room for that kind of bias, then reliability rather than relevance becomes the more significant quality of accounting information. The emphasis of accounting technology shifts from that of supplying information with predictive value to that of supplying information that is objective and verifiable.

Accounting as a Stewardship Function

With an accountability orientation of accounting, the emphasis shifts to developing a fair system of information flow between the accountor and the accountee. Ijiri describes this flow of information as “bidirectional.” The accountability view recognizes the stewardship function of management in financial reporting, its role in performance evaluation, and management’s desire to provide information that advances management’s interest. Under these circumstances, the qualitative characteristics of objectivity and verifiability are requisite as one way to facilitate fairness.

Nearly every transaction is likely to affect some third-party interest in addition to the parties immediately involved in the exchange. Therefore, accountability relationships and the need for accounting arise with every transaction. Viewed this way, one responsibility of an accountant is to identify these relations and service them in a manner that facilitates equity and propriety among the various affected parties. This suggests a duty that goes beyond one based upon providing information deemed useful to economic decision-making.

Accounting as Measurement

In Theory of Accounting Measurement, Ijiri also suggests that the central function of accounting systems is “accounting measurement,” with the discharging of accountability as its central outcome. A focus on providing information useful for economic decision-making fails to recognize that:

• The entity’s interest is closely tied to the content of the information released to the users, and
• The entity is actively interested in seeing that the information released is in its best interest.

Ijiri’s accountability view considers these issues. In addition, it “acknowledges that there must be some basis for the flow of information from the entity to the users and seeks the basis for the flow of information from the entity to the users in the accountability relationship between the entity and the users.”

That kind of a definition of the function of accounting brings into focus the relevance of accrual accounting and GAAP. It provides a major distinction between the information produced in an accounting system and that provided through other types of information systems.

If accounting systems are to facilitate accountability in this way, then the goal of accounting is to construct a “reality” of organizations that facilitates a fair representation of its activities. This is a concept that the profession seems to once have recognized and yet has lost sight of.

To better understand what threats may face accounting in the future, we need a better understanding of what accounting’s unique competence consists of. The profession might find better guidance by revisiting some earlier arguments and locating this competence in accountability rather than in information-usefulness. Decision-usefulness and accountability are not mutually exclusive outcomes for information production, but grounding accounting’s unique competence broadly in something like decision-usefulness places accounting in direct competition with other information disciplines in arenas where accounting has no distinct competitive advantage. Grounding accounting’s unique competence more narrowly in something like accountability creates a mandate that accounting and accounting alone is able to meet. Perhaps Ijiri says it best:

Our economy is founded upon a network of accountability. The function of this network depends upon a smooth flow of accountability information. In providing this information accounting can make a fundamental contribution to the economy.