Blackwell Reference Online

Extract

Financial accounting emerged in response to managers need to communicate to owners whether the latter's capital has been preserved intact and whether investments have yielded income, and, if so, how much. Accounting is a tool by which management fulfils its stewardship function toward stockholders: management accounts for how it safeguards and manages the owners' resources. Seen from this perspective, accounting is a monitoring mechanism either demanded by stockholders or volunteered by management to minimize the diversion of resources to activities that do not serve the owners' purpose. Over time, however, accounting has evolved to play an additional role that transcends this stewardship function: providing information for consumption and investment decisions. Thus, stockholders require reporting not only to obtain an agreed measure of performance, but also to obtain information on the basis of which they can make future decisions. The latter can also be referred to as signaling. Unlike finance, the discipline of accounting currently lacks anything approximating a theoretical underpinning. An accounting theory must accomplish two objectives: (1) describing and explaining accounting practices as an equilibrium phenomenon within a market with diverse constituencies; and (2) paving the way for the normative improvement upon what currently exists. The fact that constituencies (investors, ... log in or subscribe to read full text