Free «Critical Evaluation of the need for Accounting Standards» Essay Sample

Accounting standards in any business make an essential part that calls for attention and recognition of which failure would translate to great loss and financial crisis. In connection to this, there is a need for accounting standards. So to speak, accounting standards are needed or rather required in order that there may be fairness and consistency in the description of financial performance and basically it deals with the financial statements. In the modern world, the accounting standards used are generally termed as Generally Accepted Accounting Standards, abbreviated as GAAP. GAAP entails the conventions, rules and standards that accountants are entitled to use by means of following them in recording and summarizing transactions all geared at preparing financial statements (Blake & Lunt, 2001).

As such, there is a need for these standards owing to the fact that many of the financial statements would put a requirement to the users to learn the rules of accounting for each company in order to use the statements. In line with this, the comparison of the statements between companies would prove to be difficulty without the accounting standards. Financial statements or information puts a requirement that the assembling and the reporting should assume an objective structure (Blough, 1980). Since the information is required by third parties who rely on it in order to make decisions, there is a need to be assured of a data report that is free from the bias and inconsistency whether calculated or not.



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In this regard, the Accounting standards are required in order to ensure that bias and discrepancy is dealt with for reasons of the fact that the information is used to make important financial decisions. Given to any financial accounting, the auditor or in simple terms the one preparing the report should ensure that the transaction and report is done in accordance to the GAAP set of standards. Again, application of GAAP would ensure that cases of fraud are not reported and thus the continuity of a business is assured. Financial statement of any company or business is an indication its financial status or performance. In the same line of thought, if the financial statements are biased, the financial position will too be predisposed (Blake & Lunt, 2001). Likewise, if the reporting is incoherent, it would translate to an inconsistent and inaccuracy in the business financial position. Following this point, decisions made will be unrealistic together with the fact that those that rely on the information as third parties would receive a distorted picture and the state of financial information. As a consequence, judgments made will be inaccurate hence, wrong decisions made and losses realized in the business.

Having stated the need for accounting standards, there is also the need for the principles on which the accounting standards are based on. For instance, if the standards are based on biased and unstable principles, then the Accounting standards will be biased resulting to inconsistency in the reporting of financial information. In this context, the GAAP standards or in short accounting standards are based on several principles that are adhered to. They entail issues like regularity which is defined as conventionality to enforced rules and laws. Also, there is the principle of sincerity whereby the accounting unit is restricted to reflect in good faith the reality of the financial status of the company (Benston, 2006).

In consistent with this, the principle of consistency is required of which the fixed method of accounting treatment of an item is applied to all. The principle of non-compensation is aimed at ensuring that the full details of the financial information are provided ensuring that for instance, revenue is not compensated by an expense and other such like issues of finances. Following this point, is also the principle of forethought whereby the truth should be shown as it is without trying to make things to appear prettier than they are supposed to be. Another important principle on which accounting standards are based is the principle of continuity whereby the expectation on the business is for it not to be interrupted.

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Besides this, the principle of periodicity is applied which states that each accounting entry should be allotted to a certain period of time and split accordingly. Moreover, there is the principle of Utmost Good Faith of which all the information concerning the firm is required to be disclosed before the insurance policy has been taken to the insurer (Blough, 1980). The principle of materiality or full disclosure is also an underlying factor of accounting standards which requires that all the information and financial position of the firm is made a disclosure of in the records.

At this point, it is essential to state that the authenticity and the accuracy of accounting standards are determined by the accuracy of the principles on which the standards are based on. Especially, at the advent of modernization, there has been a need to have the principles on which the accounting standards are based to be revised in order to incorporate knowledge based principles. Accordingly, there have been some failures that have been realized in particular with the US GAAP which has caused major accounting scandals and financial crisis. Therefore, it should be taken into account the need for accounting standards and the corresponding need for quality principles on which they are based (Benston, 2006). This would provide reliable and dependable information to investors, creditors and lenders who greatly require the information along with providing reliable state of the market economy.


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