CAEA 3224: ACCOUNTING THEORY AND PRACTICES

HISTORICAL DEVELOPMENT OF ACCOUNTING & CURRENT ISSUES IN FINANCIAL REPORTING

Prepared for:

PUAN SUHAILY BINTI SHAHIMI

Group Members:

No Name Matric Number

1 INTAN NAJWA BINTI ABDULLAH CEA 120028

2 NOR ADLI SYAHIRAH BINTI ABDULLAH CEA 120066

3 NORAMIRAH BINTI SAMSUL SAHARUDIN

CEA 120067

4 NUR SAIYIDAH BINTI MARDI CEA 120077

5 LIE JUN HAO CEA 120040

TABLE OF CONTENT

CONTENT PAGE

Abstract 2

1.0 INTRODUCTION 2-4

2.0 HISTORICAL DEVELOPMENT OF ACCOUNTING

2.1 FOUR ACCOUNTING PERIODS

2.1.1 The Age of Record Keeping

2.1.2 The Birth of Double Entry Accounting

2.1.3 The Age of Stagnation

2.1.4 The Age of Scientific Accounting

2.2 DEVELOPMENT OF ISLAMIC ACCOUNTING

2.3 DEVELOPMENT OF ACCOUNTING IN MALAYSIA

4-6

6-7

7

8-9

9-10

10-11

3.0 CURRENT ISSUE IN FINANCIAL REPORTING

3.1 Flexibility of Accounting Standard

3.2 Historical Cost Vs Fair Value

3.3 Integrated Reporting

11-13

14

15

4.0 CONCLUSION 16-18

References 19-20

Appendices 21-23

ABSTRACT

[1]

Accounting history starts with stewardship function where a steward would look after the

wealth of his owner and would be required to account for resources under his management.

Stewardship function means that accounting control of the resources management done by an

agent. The steward has only control of his owner’s wealth. Today it means the control of the

management of shareholders’ resources by company directors. In ancient times, audit

originally was a hearing whereby a steward would submit to an oral investigation to verify

the legitimacy of transactions. Basically, there are four phases in accounting development

history. It begins with the age of record keeping, subsequently followed by the age of double

entry accounting, the stagnation age, and the scientific accounting age.

Dynamic business environment nowadays has developed some major issues facing in

financial reporting. We identified three components that bring about the issues: 1) flexibility

of accounting standards; 2) historical cost vs fair value for valuing the components of

financial statements; and 3) disclosure of both financial and non-financial information in

integrated reporting.

1. INTRODUCTION

The history of accounting explains a long evolution of accounting systems from the past until

now. Chronologically, the history of accounting has been divided into four periods. The first

period appeared in 12002 known as the record keeping age; second, the double entry

accounting age (1202-1494); third, the stagnation age and; finally, the scientific accounting

age. Islamic accounting development indicates that accountability to God and the community

for all activities is paramount to a Muslim’s faith, which is contrary to traditional accounting.

As for the state of Malaysia, accounting developed in response to the government policy to

eliminate racial economic predominance and the accounting development has been supported

by Malaysian accounting bodies until now. Both Islamic and Malaysian accounting are

[2]

examples of accounting development in the current era of accounting, which is the scientific

accounting age.

In preparation of financial statements, most countries adopt International Financial

Reporting Standards (IFRS), particularly the UK, meanwhile some adopt Generally Accepted

Accounting Principles (GAAP), particularly the US. The issue of ethical consideration arises

as these standards introduce choices in accounting methods that every business entity can

apply. This flexibility allows them to misapply creative accounting techniques to achieve a

particular goal in reporting their financial performance in a specific period. For this reason,

year 2001 and 2002 reflected the collapse of large corporations such as Enron, Worldcom,

and Parmalat. During the bankruptcy crisis in these years, public considerably lost their

confidence in the financial reporting prepared by professional accountants, audit reports

issued by qualified independent auditors as well as regulations governing the work of

professional accountants.

As for valuation of financial items, there are two options, either historical cost or fair

value. In a positive light, the historical cost reflects real economic events and less subject to

manipulation by management while the fair value is more relevant as it reflects current

economic conditions. However, both approach are criticized because the historical cost does

not always give relevant information while the fair value is exposed to reliability issue.

Nowadays, more pressure exerted on a business entity to report their business

activities that have taken place in a particular year to the public. They are becoming more

alert about their responsibility towards the social and environment. For this reason, in

Malaysia, every company is required to give a mandatory disclosure of corporate social

responsibility (CSR) since 2007. In addition, to avoid stakeholders from making wrong

[3]

economic decisions, it is also mandatory for companies to report non-financial information,

for instance, subsequent events in their report. Hence, an integrated reporting emerges.

This paper explains how the accounting evolving from one phase to another phase and

discusses the issues in financial reporting as stated above.

2. HISTORICAL DEVELOPMENT OF ACCOUNTING

2.1 FOUR ACCOUNTING PERIODS

2.1.1 The Age of Record Keeping

Accounting arose as a result of an oral tradition of stewardship. In ancient societies, estate

supervision was under a steward which was recognized as the ruler’s proxy. It was an

important position in that most stewards were members of the lord’s central council. The

position was often occupied by ambitious clergy or law graduates. The aim of record keeping

was to maintain integrity and discover misappropriation. For example, auditors gathered to

physically check records against volumes harvested.

Clay tablets are some of the most ancient records, which dating from 2500BC. The

Sumerian civilisation are reflected in the records showing a series of transaction involving

grain. The Code of Manu, which reflected Hindu thought, provided for a periodical audit of

trade relating to Kayasthas castle in Bengal. A number of chapters in the Quran recommends

the need for orderly accounts regarding transactions involving debt.

The clay tablets with signatures by sealing dating from 2400BC to 700AD in

Mesopotamia indicate attachment to written record keeping.

In Egypt, Egyptians used papyrus (paper) to record transaction. Pharaohs operated

stores accounting recording receipts and disbursements which was regularly audited. That

time, scribes, acting as bookkeepers, must behave wisely because if any irregularities

[4]

disclosed by royal audits, they would be punished. The records recorded by the scribes were

important as they reminded owners of the quantities of stores held and enabled them to

control the activities of their stewards.

In Greece, ‘public accountant’ has real authority to control the government’s

finances. The control of public receipts and disbursements, and financial affairs was under

one assembly known as an Athens Popular Assembly. In terms of its contributions to

accounting development history, Greek contributed the introduction of coined money.

In Rome, the families head were responsible to keep accounts of the government and

bank. They had two types of accounting book: 1) a daybook known as ‘adversaria’, which

was used to record daily household receipts and disbursements; and 2) a cashbook known as

‘codex accepti et expensi’, which was used to record monthly postings. Rome people had

obligations to send their asset and liabilities statement for the purpose of taxation and to

determine civil rights. For this reason, it was important for them to record their household

disbursements. Moreover, Rome maintained a system of checks and balances for

governmental receipts and disbursements.

In ancient times, stewards had considerable powers were personally liable for any

omission and commission errors. Nevertheless, from the mid 14th century, their control

became less direct as written accounts became more widespread.

From the 14th to the late 15th century, written forms of accounting became more

common. Documentation became prevalent than ceremonial oath taking. However, problem

occurred as Roman numerals in narrative form have neither zero nor place values and it

cannot do addition, subtraction, division and multiplication. This inhibited double entry

bookkeeping development. Therefore, Arabic numeral was used because it was easier to add,

remove or alter an Arabic figure. But, some argued that the use would cause fraud easily

[5]

because the figures can be altered. These two numeric systems were used together for some

400 years until the Arabic numerals prevailed.

2.1.2 The Birth of Double Entry Accounting

The earliest double entry records are from a bank ledger from Florence of 1211 and books

from Genoa in between 1340-1466. Florence was a hub of a European banking network while

Genoa was an oversea trading centre. In Italy, civilisation took place where writing,

arithmetic, commerce, capital investment, credit transactions became features of its society.

However, some scholars argue that origins of double entry accounting come from China and

was brought to Italy by the explorer, Marco Polo. Others also claim that the accounting

system originated in India in the form of Bahi-Khata; system of bookkeeping still practiced in

parts of India.

Nevertheless, the technique of double entry was publicized by Luca Pacioli, the

Italian friar, in the book Summa of 1494. He merely reported a method adopted by merchants

in Venice in the time of the Italian Renaissance, hence, he did not invent double entry

accounting. It was well established in Italian banks of the period, who financed maritime

operations, in particular, the Cristian crusades to recapture Jerusalem from Arab possession.

Thus, the progress in accounting was a consequence of the economic activity.

In order to record transactions more systematically, this technique changed from

single entry to double entry. The trial balance also provided a mechanism that allowed

records and the balancing books to be checked arithmetically. Double entry allowed internal

control to facilitate specialization of duties between bookkeepers. Therefore, it mitigated

errors plus, fraud were harder to accomplish. Then, following Pacioli’s Summa of 1494

recommendation, entering values of all assets and liabilities opens a merchant’s books.

Operations are then recorded, first in a memorandum, and then expressed as debits and

[6]

credits in a journal before being recorded in a ledger account. However, Pacioli’s book

showed little concern in trading performance or profit calculation because the merchant

enterprises were short-term period ventures and involved cash.

2.1.3 The Age of Stagnation

Within 1500- 1800, there were few improvements in accounting techniques and single entry

still dominated record keeping with listing inventories, receipts and payments account.

Businesses were small with few transaction involved and hence, the use of double entry was

not justified and it prolonged the use of single entry. Thus, although the double entry system

was known, the volume of commerce did not justify the change and the learning of new

techniques for those involved. The ability of double entry to summarize and report the

success or failure of a business was not valued at this time. The periodicity and matching

concepts were not appreciated. The depreciation concept did not exist and the writing off of

bad debts was not practiced as it was thought better to maintain a record of all debts

regardless of their quality. Thus, the profit and loss account was introduced as a tool for

closing account book but, much less for profit calculation.

Books were closed to the profit and loss account on three occasions: the death of the

merchant; the dissolution of a partnership; or when the ledgers were full and new books were

required to be opened.

It should be understood that the need for a statement of annual income was not as

pressing as it is today. The business was small with little distinction between ownership and

management. Most merchants were owner managers and familiar with every aspect of their

trades. There was little interest in making investment public and merchants considered their

business as their own private affairs. In addition, partnerships involved members of the same

extended family. These are the factors for stagnation in accounting development.

[7]

2.1.4 The Age of Scientific Accounting

Professional experts started learning methods to modify profits in order to meet the

expectations of their owners by the 19th century. Double entry system was insufficient to cater

for growing industries and many companies collapsed brought the demand of new accounting

practices. The problems of recognition, measurement and accountability first encountered by

the United Kingdom due to the Industrial Revolution. The problems emerged because at that

time, it was necessary to split management from ownership, which particularly true in

companies that were big in scale. Industrial operations demanded huge capital amount, which

was raised by a scattered group of shareholders, the owners, who expected information and

demanded accountability. The challenges faced by accountants such that they had to

differentiate between revenue and capital, transactions of private and business, measure the

value of fixed assets, decide depreciation rates and methods, set aside provisions, and write

off bad debts.

Business and industrial revolution issues during this period affected accounting

practices. Development of railway companies as typical enterprises generated during the

Industrial Revolution. The new companies could not depend on family connections only, but

they had to go to investors, which were strangers to them, in order to obtain capital funding.

Promises of profits and dividends were given but, they were not always possibly delivered.

The managers and the accountants from the early 19th century in railways industry showed

sudden business collapse examples because these people applied creative accounting

technique that gave the illusion of profits. These failures were mainly caused by the problems

in accounting: 1) to differentiate between revenue and capital; and 2) to allocate depreciation

to an expense. These two issues were very relevant in railways industry during this time as

[8]

the industry’s capital investment was high. The Railways Act 1867 was passed by the UK

government to overcome illusory profits problem. The act required railway companies to

have compulsory audits. In addition, they can only pay dividends once they get audit

certification. The following year, the companies had obligations to issue standardised

accounts.

Implications towards accounting existed because of these growing businesses. They

emerged new accounting recognition and measurement problems. The adoption of the

historical cost less depreciation method together with prudence, going concern, and matching

concepts was introduced to enable the accounting problems such as fixed assets valuation to

be resolved by the end of the 19th century.

Figure 1: The Flows of Historical Development of Accounting

2.2 DEVELOPMENT OF ISLAMIC ACCOUNTING

Culture is the way of life i.e., religion, that influences accounting. Different culture demands

different accounting system. Islam is different from Capitalist ideology, so it must have its

own accounting system. Therefore, Islamic accounting is different from traditional

accounting.

Islamic cultures have brought implications on the accounting development such as: 1)

Islamic accounting moves toward ‘zakat’ maximization to focus on the society welfare; 2)

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R e c o r d K e e p in g

A g e

T h e B i r t h o f D o u b le

E n t r y A c c o u n t in

g

S t a g n a t ion A g e

S c ie n t ifi c A c c o u n t in g A g eD e v e lo p m e n t o f I s la m ic A c c o u n t in gD e v e lo p m e n t o f A c c o u n t in g in M a la y s ia

compliance with the Islamic Syariah as Muslims are bound to do this; 3) a balance between

individual character and social character would be created since Muslims are of a community

who looks after the welfare of others; 4) a company feels motivated to engage in escaping

humans from the economic, social, and intellectual factors oppression, and rescuing the

environment from human exploitation; and lastly 5) since Muslims aim to enter into Jannah

(heaven) by performing good deeds in this world, Islamic accounting opens a pavement

between the world and the hereafter (Saufi & Mustapha, 2012)..

2.3 DEVELOPMENT OF ACCOUNTING IN MALAYSIA

In Malaysia, the politics of multiculturalism has become the main focus in studies of

accounting development. The definition and the content of development in the 1970s and the

years after that was mentioned in the New Economic Policy (NEP) which expressed out two

main objectives of socio economic development for national unity. They are, i) the

eradication of poverty irrespective of race; and ii) the restructuring of society.

Malaysian Institute of Certified Public Accountants (MICPA), Malaysian Institute of

Accountants (MIA), and Malaysian Accounting Standard Board (MASB) have been playing

important role in accounting development in Malaysia are

MICPA has been developing the accounting profession in Malaysia by providing

accounting graduates with an avenue to become a Certified Public Accountant (CPA) since

1958. MICPA has been a cornerstone in the setting of accounting standards since then and

has played a technical advisory role for Malaysian regulatory bodies responsible for carving

out the business and financial landscape of this nation since its formation (MICPA). 

MIA was established to regulate and develop the accountancy profession in

Malaysia. The establishment of MIA was under the Accountants Act, 1967. The profession

[10]

credibility is the responsibility of MIA and hence, MIA is the one to provide education and

quality assurance (MIA).

Lastly, the Malaysian Accounting Standards Board (MASB) is an independent

authority established under the Financial Reporting Act 1997 (the Act) to develop and issue

accounting and financial reporting standards in Malaysia. The MASB, together with

the Financial Reporting Foundation (FRF), make up the frameworks for financial reporting in

Malaysia (MASB).

3. CURRENT ISSUES IN FINANCIAL REPORTING

3.1 Flexibility of Accounting Standards

International Accounting Standards Board (IASB) developed International Financial

Reporting Standards (IFRS) as accounting standards for financial reporting, which differ

from Generally Accepted Accounting Principles (GAAP) introduced by US. IFRS is

principles-based, while GAAP is rules-based (Elena, Catalina, Stefana, & Niculina, 2009).

IFRS requires professional judgments that are very likely to cause different

interpretations by different entities for the same transactions (FASB, 2002). The entities have

freedom to decide what accounting method to adopt in processing similar transactions. Thus,

diversified processing formats are formed and comparability concerns emerge. IFRS has

higher flexibility compared to GAAP. It creates more financial reporting manipulations

chances as it is subject to interpretation by different individuals (Li, Liu, & Luo, 2013).

Both GAAP and IFRS have accounting choices that accountants can employ in

preparing financial statements. Hence, a reporting entity can choose any accounting method

that best reflects its economic transactions. However, it is difficult to compare firms within

the same industry. For example, one may apply a straight line depreciation method while

another company may apply a double declining balance depreciation method. The

[11]

depreciation amounts would be different if they were to use different method. This is allowed

by the accounting standards.

Nevertheless, the main issue we want to highlight is that, various accounting choices

in these accounting standards enable a creative accountant to apply creative accounting

techniques because of the flexibility of the standards. Although GAAP and IFRS have

principles that accountants must follow, there are some ways that they can employ to present

good bottom line figures. Accountants have knowledge in accounting rules and use the

knowledge to manipulate financial data in a business (Amat, Blake, & Dowds, 1999). An

entity can decide which accounting method best suits its organisational needs that gives its

preferred image. It can be seen as a means of reporting favourably on stewardship and

performance of business operations in a particular year.

However, it should be noted that creative accounting is not necessarily bad. It

depends on the intention of the financial report preparers. An unpredictable event that brings

misfortunes to a company may occur anytime, for instance, disasters that happened in

Malaysia Airlines (MAS) this year. Creative accounting techniques enable the company to

apply them to hide a particular bad year of the company. Problems only arise if the company

applies creative accounting techniques that violate the accounting standards until it becomes

fraudulent financial reporting. Accountants may manipulate financial data to produce nice

financial report. This is known as window dressing. The investing public lose confidence in

financial reporting sytem and accountability due to the collapse of big corporations. During

the year 2001 and 2002, accounting environment has gone through a big challenge where

there are a lot of companies collapsed such as Enron, Worldcom, and Parmalat in Italy. These

incidences have made the public no longer believe on the system of the financial reporting

that done by the accountant. The trust of the shareholders toward all the corporate managers

and the accounting firm collapsed in the same time as one of the Big Five’s Arthur Anderson

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involved in these incidents. The collapse has brought serious implications on financial for

stakeholders such as investors, employees and the public. For this reason, a credibility crisis

rises. Consider the collapse of Enron Corporation and its auditors firm, Arthur Andersen,

which was one of the ‘Big 5’ accounting firms in 2001. Enron used Special Purpose Entity

(SPE) as tools to commit accounting fraud. The corporation misused the accounting rule that

allows a company to not recognize SPE in its financial report if the third party owns it or at

least has 3% ownership. Enron wanted to cover its high debt to avoid the investment grade

goes down that eventually causes banks to recall their loans. The SPE’s CFO borrowed huge

amounts of money using Enron’s stocks as collateral to offset its overvalued contracts.

Hence, Enron managed to convert its assets and loans burdened with debts into income. Plus,

Enron transferred more stock because the SPE took over. Nevertheless, Enron did not report

those assets and loans in its financial reports, which in fact, financed by huge debt amounts.

This misled the shareholders that the corporation was performing well in its operations (Li,

2010). For this reason, ethical issues in financial reporting emerge. The Enron scandal has led

to the establishment of Sarbanes-Oxley Act on 30 July 2002 which aims to protect

shareholders from fraudulent accounting practice.

To conclude our argument regarding the flexibility of the accounting standards, we

prepare Figure 2 below, which shows the flows of how the accounting standards flexibility

could lead to fraudulent financial reporting and hence, raise ethical issues.

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Figure 2: The Flows of Fraudulent Financial Reporting

3.2 Historical Cost VS Fair Value

Historical cost only recognize actual transactions, which this approach records assets and

liabilities at purchase price. Therefore, the approach is less subject to manipulation as they

are recorded objectively. Nevertheless, the historical cost approach has criticisms in spite of

its usefulness. Nowadays, accounting is not about stewardship function only. Users of

financial report, for instance, shareholder wants to know the trends of their investments,

which can be seen from the company’s net assets (Abu Bakar & Said, 2007).

The historical cost reflects the transactions real value. But the method is inaccurate

for decisions making purpose if any material subsequent change takes place. In addition, as it

does not consider the effects of price increases on the market, a regular undervalued assets

may occur. For this reason, the company that adopts the historical cost does not always

reflect the most relevant information in its accounts for the users to make decisions with

(Diana, 2009).

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Ethical Issue

Fraudulent

Financial Reportin

g

Creative Accounti

ngTechniqu

es

Accounting

Choices

Accounting

Standards

IFRS: Principles-basedGAAP: Rules-based

As for fair value approach, it records assets and liabilities at fair value on balance

sheet and recognizes as either gains or losses in income statement. The fair value is relevant

because it reflects current economic conditions with respect to economic resources and

obligations (Laux & Leuz, 2010). However, like the historical cost, the fair value approach

also has its disadvantages. If markets are liquid and transparent, there would be no

controversy in fair value estimates. The estimates are more reliable for the purpose of

decision making. But not all markets are liquid. Many assets and liabilities have no active

market. In this case, the fair value estimates depend on the forecasted cash flows and

appropriate discount rates. More judgements are required to estimate the fair value and hence,

the estimations are less reliable (Bies, 2005). The estimations largely depend on assumptions

made by management and are exposed to measurement error. This has the potential to mask

deliberate miscalculation and manipulation of the numbers. Fair value pension accounting

reflects the issue.

3.3 Integrated Reporting

The development of integrated reporting is specifically designed to enhance and consolidate

existing reporting practices to move towards a reporting framework that gives the information

needed to the stakeholders and other users to assess organizational value in the 21 st century.

Integrated Reporting concerns more not only about financial information of financial

statement but also non-financial information such as corporate social responsibility (CSR)

and subsequent events. Integrated reporting is about integrating material financial and non-

financial information to let the investors and other stakeholders to understand how an

organization is really performing.

It should be highlighted that companies should be responsible not only to the

shareholders but to societies. Therefore, companies should provide information and address

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specifically how their current activities that mostly use natural resources are impacting on

social, economic, and environmental aspects in a corporate social responsibility report

(CSSR). By providing information about social and environmental performance, it implies

that management has an accountability for social and environmental performance, as well as

economic performance. This, in return, would bring good public reputation on the business in

order to ultimate increase business profit.

In addition, during the subsequent period, business continues and events could take

place that have an impact financial statements for the prior year. Some of these events, for

instance, a major customer’s bankruptcy, could affect the amount reported in the statements

and hence, affect the decisions making of the stakeholders. For this reason, it is important to

report the events in the integrated report.

4. CONCLUSION

During the age of record keeping, accounts were deficient in both content and form.

Merchants recorded all revenues and disbursements but did not recognize income. With

regard to form, there was no systematic relationship between accounts. Indeed, they

committed simple accounting by memorizing, especially in illiterate societies. Moreover,

auditors in this age performed audits by ‘hearing’ annual recitals of inventories on hand that

eventually caused income smoothing. Written single entry records contained receipts and

payments or inventories records which interspersed with chronological narratives. People

from this age quantified the records in physical volumes instead of currency values thus,

income and performance concept cannot be applied. Clay tablets in Mesopotamia are the

simplest forms of accounting.

[16]

Italy, particularly in Genoa and Florence; is the country where the earliest double

entry accounting records are found. Much trade from Europe and the Muslims world focused

on the Italian peninsula. However, some scholars argue about this accounting system origins.

Some claim that its source comes from either India or China. More importantly, it was an

Italian friar that promoted the extensive application of double entry accounting by

summarizing the record keeping system principles in his book “Summa” 1494.

Double entry practice spread slowly throughout the period of stagnation period. It

was most appreciated for its organizational and balancing functions. For this reason, the

purpose of the profit and loss account was more towards closing the ledger accounts.

The Industrial Evolution that occurred in England posed new problems for

accountants. The railways companies were typical of the new enterprises generated by the

new industrial and scientific age. Creative accounting techniques were adopted to produce

illusory profits while dividends were paid from borrowing off-balance sheet. However, in

spite of some company failures, more successful enterprises overcame the recognition and

measurement problems. Therefore, prudence, going concern, matching concepts together

with the application of historical cost less depreciation as a standard measurement method

were introduced to overcome many issues, for instance, the fixed assets valuation.

Islamic accounting development shows influence of the religion on accounting,

where Islam influence the manner which Muslims conduct public and private lives.

Therefore, in Islamic accounting, pursuits of profits are not at the expense of the community.

The responsibility of accountants is not limited to what is being laid down by management

and profession but, compliance with the Syariah is also required. Thus, Islamic accounting is

contrary to traditional accounting.

[17]

Accounting development in Malaysia responded to the stages of economic

development. The pressures for political support building are seen to motivate the state into

creating a new Malay business and managerial class. This also responds to stages of economy

development from 1956 – 1995. The socio-economic and political conditions appear to have

implications for accounting regulation in Malaysia. Moreover, the development of accounting

in Malaysia involves many bodies in Malaysia such as MICPA, MIA, and MASB that play

their own functions separately.

Some argue that demands in the societal and environment are what brought the

needs in a particular time or age, which in response, caused accounting to develop.

Meanwhile, others claim that commerce evolution occurred due to the scientific accounting

development since the only way for modern business to grow and respond to owners and the

public needs was through more accurate accounting techniques application. Nevertheless,

either way, the accounting history enables us to comprehend the history of economy and

business in general and hence, it may help next generation to have a better prediction what is

on the horizon as the global business evolution pace accelerates.

The ethical issues emerge because of flexibility of accounting standards. As far as

we know, appropriate accounting treatments in many certain areas are often vague. This

permits companies to use a significant amount of discretion in processing their economic

events. If they intended to manipulate the financial data of the events through creative

accounting techniques, then a fraudulent financial reporting is produced. This is where the

credibility of accounting profession is at stake. Stakeholders and the public start losing their

confidence in the profession. Consider the collapse of large corporations in the US such as

the Enron’s case.

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The problem with historical cost is that its accuracy and relevance are debated in

case a significant subsequent change happens after the transactions record. This valuation

approach only consider the real value of transaction as it occurred. As for fair value, a

problem arises because not all markets are active. In this case, the fair value estimates largely

depend on the discretion of the management, which as a result could lead to financial

manipulations.

Lastly, businesses or corporate activities use natural resources such as air and water.

Without ethical considerations, the activities would bring big issues in air and water

pollution. Therefore, a business entity must report the impact of their operations on the

environment. The accounting information provided in the CSRR ensures that the entity gives

the full real account on the circumstances. Moreover, the company cannot exclude any

subsequent events that give significant impacts on the financial statements such that they

could greatly affect the decisions making made by the users of the report. For this reason, an

integrated report includes both financial and non-financial information.

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Appendices

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Saufi, S., & Mustapha, N. (2012)

Elena, H., Catalina, M. C., Stefana, C. I., & Niculina, A. A. (2009)

FASB. (2002).

Li, Z., Liu, Q., & Luo, L. (2013)

[22]

Amat, O., Blake, J., & Dowds, J. (1999)

Li, Y. (2010)

Abu Bakar, N. B., & Said, J. M. (2007)

[23]

Diana, C. I. (2009)

Laux, C., & Leuz, C. (2010)

Bies, S. S. (2005)

[24]