Accounting originally served a stewardship function, as a result of the
separation of ownership and control of resources. First wealthy
landowners, and later company shareholders, hired managers or ‘stewards’
to run their properties and businesses. The landowners and shareholders
owned the resources, but the stewards and managers controlled them. As
the business owners could not always be on hand to watch their stewards
or managers perform their duties, they required the stewards to make
regular reports on their activities, using accounting to prepare the figures.
This is what we call financial reporting. The separation of ownership and
control has grown wider and wider throughout the last century, as
companies increased in number, and became larger and more complicated.
Their owners became an increasingly distant and diverse body, often
buying and selling shares on stock exchanges with no direct dealings with
the company at all. As the opportunities to hide or manipulate information
have therefore also increased, financial reporting by businesses to their
owners has required more and more regulation.
Step by step with the increased demand for financial reporting, demand
has arisen for independent audits to check the reported information.
Recent accounting and auditing scandals such as that involving Enron and
Arthur Andersen have thrown the problems with financial reporting into
the spotlight.2
Alongside the growth in financial reporting, has been the development of
the use of accounting for the benefit of the business managers themselves.
The practice of using accounting information as a direct aid to
management arose later than financial reporting, but is no less important.
Increasing business complexity and changes to the economic environment
have meant that more and more sophisticated systems of collecting and
recording information are required.
In contrast to financial accounting, this information is used to help make
decisions about the future, not just report on past events. Different types of
information, and different tools with which to analyse it, are required.
Finally, as accounting has been recognised as a social science, the impact of
the use of accounting information (whether as an aid to management, or
for financial reporting purposes) on the employees of the business has been
widely explored. Managers or employees who are paid salary bonuses
based on figures provided by accounting systems may change their actions
as a result of the incentives (or disincentives!) this provides.
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