The purpose of this essay is to illustrate the complexity meanings of financial reporting reflect the reality and it can be the creator of social reality. Financial reporting should have an objective “truth” and “fair” view and prepare a faithful presentation for shareholders to deal with the investment. Accounting theory need to continuous change its standards or models in order to meet the future needs. This easy also discuss this statement which relate to the sustainability issues in the Australian business activities. As an innovation, sustainability reporting will combine with the traditional financial reporting to serve the stakeholders. But there is not a common standard to design the sustainability reporting, it cannot reflect the actual performance.
Financial reporting plays a key role in current world, especially in business activities. Most firms prepare their performance through their financial statements. With the development of human being, there is a big innovation happened in financial reporting. Human being start to adopt sustainability in the reporting in order to satisfy the future needs. Sustainability is an innovation theory which meets the needs of present human being without bring negative effect to the future generation (WCED 1987, P.40). After several years research work, sustainability theory not only used in environmental improvement, but also can influence on the economy, society and culture (Bob, Bill &Geoff 2002, p.189). In recent years, the theory of sustainability becomes the global issue which affects the process of accounting and practice. Especially in ethical and social fields, sustainability theory leads human being to critical thinking about the nature of “truth” and “reality” in financial statements.
Once upon a time, sustainability has most impact on the environment issues. Now, Australian firms start to adopt the sustainability theory in the business activities. In Australia, the innovative sustainability reporting is prepared by many famous Australian companies. The traditional financial reporting is the process of preparing and presenting financial information for the decision making (Picker et al. 2009, p.700). And the purpose of the new innovative sustainability reporting is tried to find out the ‘reality’ for the sustainability in the Australian business. Is the sustainability reporting reflecting the reality? Or it is the creator of reality?
This essay is organized as follow:
Financial reporting: reflection of reality
Financial reporting is the financial statement which consists of statement of financial position, comprehensive income, changes in equity and cash flows. Every firm provides financial information for decision making. The report (AASB 2008) noted that financial reporting is base on the actual result of firm’s performance and provide a true and fair view of objective data for financial analysis. The ‘true’ and ‘fair’ view means that the financial reporting provides financial information which is useful and accurate. In the framework of AASB (2009), it indicated that a useful and accurate financial statement must satisfy several qualitative characteristics: relevance, understandability, comparability, and reliability.
A financial statement should easy to understand and compare, the users can review the past events by read the financial reporting easily and clearly. The data in the reporting should reflect the social reality without misleading information and the report designer should have responsibility for the result by the fake information in the report. Only when the financial reporting meets the four qualitative characteristics, the financial reporting is reflect the reality. The financial reporting provide a true and fair view, it is an objective financial statements without individual’s opinion (Hines 1988, p.252).
The reason why financial reporting needs to be a faithful presentation is, if the report is subjective and include fake information, it will mislead the users in their decision making. This kind of action violates the nature of accounting. For the “truth” and “reality” in the financial statement, accounting can treat the whole earth as an entity. In Hines’s (1988) article, she describes that, everything can be measured in accounting and accounting is not created by human being, it exists in the world natively (Maines & Wahlen 2003, p.6). Human being can use the financial statement to evaluate the entire earth as the amount prepared and presented in the financial reporting. For an instance, the water in the river, Hines (1988, p.252) indicated that when it become the asset of whole organization, when the organization is sold, the water in the river become the reality of organization. Everything set up the full picture, there is what human called the objective view of truth and fair.
Finally, the financial reporting can reflect the reality when the report meets the four qualitative characteristics: relevance, understandability, comparability, and reliability. A truth and fair financial statement can provide correct and reliable information for the shareholders in their investment activities. All the information supply by the financial reporting should be objective without influence or mislead by personal opinion. Every shareholder will have the same information, there is what accounting is, a faithful presentation which reflect the social reality.
Financial reporting: creator of our perception of social reality The nature of accounting is to record basic transactions or negotiation in the financial statements. Financial reporting and accounting are the reflection of reality. As the AASB framework (2009) shows, a useful and accurate financial reporting should provide information reflect the reality and faithful presentation. A group of people realize that reality should be objective. The reality will be the same; no matter the person has different level of education, different education and culture (Gray 2006, p.798). However, another group of critical researchers argue about this opinion, they believe that accounting should continuous change for the sake of variable future needs. With the development of human society, traditional accounting theory will meet more challenge than before.
The group who support the reality is objective belong to the functionalism. Financial reporting should be objective and maintain the status quo. Another group of critical researchers believe that accounting need radical change and the financial reporting can be the creator of reality. In Baker’s (2006) article, he noted that internet accounting need new accounting models and standards. There is an increasing use of internet, and then firms should create new business models to suit the new business. If firms cannot create new models to satisfy the task from the new business activity, the firms will receive a negative result. For another instance, pollution cannot record as a part of entity in the accountant’s view. But human can set up the common standard to definite and record the pollution. The pollution can be record as an item may be in the liability or equity (Hines 1988, p.254). This is what researchers called creator of social reality. In general, human can design the standards which agree by most people, the financial reporting will be the creator of our perception of social reality.
Sustainability debate: traditional financial reporting and innovative sustainability reporting In Australia, many famous Australian companies start to adopt sustainability reporting with the financial reporting. This is an innovation to attempt sustainability theory in the reporting. The sustainability reporting is synthetic reporting on the aspects of economy, environment, society and culture, such as: triple bottom line and corporate responsibility reporting (GR 2011, P.3). In GR’s (2011) guideline, it is noted that a “real” sustainability reporting should reflect both the positive and negative results by the organization’s performance.
The purpose of sustainability reporting is providing a fair and reasonable presentation about organizations’ sustainable development in their historical events. The sustainability reporting should have the ability to show the sustainability performance which respect to laws and standards, comparability with other firms and the contributions in sustainability development. Compare with the traditional financial reporting, the sustainability reporting can provide more information about the entire organization’s performance in different areas. It will give stakeholders a chance to see the full picture about an organization, not just in the financial performance.
As a result of innovative sustainability reporting come out, in Parker’s (2005) article, he indicated that there are two groups of people have different opinion about the relationship between financial reporting and sustainability reporting. One group is called Augmentation and another group of researchers is Heartland. The Augmentation support that financial reporting should have the primary position, the sustainability reporting should just in the helping role. The Heartland group disagrees with the augmentation, because the sustainability reporting serves stakeholders who have a larger service range than the traditional financial reporting. However, sustainability reporting does not have a common standard.
The GR just provide a sustainability reporting guideline as a suggestion for these firms who want to adopt the sustainability report. For an instance, in the BHP Billiton’s (2011) report, it noted that the performances of its sustainability development like: zero harm, health, safety, environment and community. All the results show that BHP Billiton does very well in its sustainability business operation. However, there is not show the actual detailed information about their sustainability performance. This phenomenon proved that the sustainability reporting just reflect part of reality. But it will give a positive impression for its stakeholders and reverse the negative result from past events (Gray 2006, p.803). Moreover, sustainability reporting still has a long way to go.
Human can adopt the sustainability in the accounting area and it has a new name which called sustainability accounting. The core of sustainability accounting is the governance of allocate resource (Gray 2010, p.15). In the current world, most business and political forces allow firms use unsustainable resource during the producing period in order to acquire more profit. In the short term growth, their strategies can obtain a lot of profit by lower cost. However, in the long term growth, their strategies will produce many hidden troubles in the future. Human being cannot covert the profit and ignore the plans may produce disastrous influence of future.
That is the reason why human need sustainability accounting to control and manage the cost during the allocation period. The old accounting theory need to change in order to follow the current needs. The sustainability accounting theory will adopt sustainable development in the new methods of recording information and innovative functions of disclosure information can reflect the economic, environmental and social impacts in the sustainability reporting (Burritt & Schaltegger 2010, p.829). Sustainability theory can help accounting continuous change or create its new models and standards to satisfy the new environment.
Sustainability accounting guide a new way for future development. To reach the stability level of development, public need to know our actions’ result clearly. Human should answer this question from a big picture and prepare details solutions for each part. Sustainability guide human being cannot loss one’s benefits for the others. Sustainability reporting will continuous improvement in order to meet the future need of human when they adopt sustainability in Australian business activities.
Ethical and social fields
In the ethical and social fields, for the purpose of achieve the sustainability in the Australian business; human need to concern about the current sustainability issues (Wells 2011, p.44). For instances, nearly two month ago, the Australian government lay off 1000 ironworkers in order to reduce the budget deficit (Langford 2011). After this event happened, another teacher laid off plan cause the group of NSW public teachers’ indignation (Sydney Morning Herald 8 Sep 2011). Government cannot depend on these plans to achieve the goal of development. The continuous downsizing plan can turn the negative economic performance to positive in a short moment. But for the long term period, the continuous downsizing plan will bring worse situations for the government decision. Government need to use sustainable development strategy in the decision making.
Discussion and Conclusion
In conclusion, financial reporting provides a “truth” and “fair” view of presentation for the shareholders to deal with their investment. It is a reflection of social reality. The combination of financial and sustainable reporting guide human being in a new direction: creation the social reality. Human being need to adopt sustainability in the development of accounting theory in order to meet the future needs. There is not a common standard for the sustainability reporting. The current sustainability reporting ignores the actual performance. The long research journey is just getting started.
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