Question

What does the statement "Financial Accounting: Intended for those "on the outside looking in" mean? Explain how this statement ties to ethics in accounting.

Answer 1

Outsider to financial accounting : The outsider to financial accounting of an organisation includes :

• Investors
• Bankers
• Creditors
• Suppliers

The use of financial accounting to the outsiders are :

1. Financial Decisions : The outsider investors highly depend upon the financial statements to ensure that their investments are safe.
2. Granting Loans : The bankers always check financial accounting of the company to ensure themselves wheather the organisation will be able to pay the loans or not.
3. Creditor Invested in Solvency : The solvency of an organisation ensures the creditors for repayment of their debts from the organisation. They look into financial accounting to see that their money is safe.

Most of the outsiders are concerned about the performance of the organisation, which would keep the firm profitable and solvent. Most of the users of financial accounting tries to find the clues to the future performance.

Financial statements and ethics

The outsiders are not involved in day to day activities of an organisation so they are not aware about the actual performance of the entity in terms of performance. And the decisions about the investments and credit terms are therefore taken only after the study of financial statements of the organisation.

These financial decisions by outsiders will only be correct when the financial statements are 'true and fair'.

Therefore, it will be ethically and legally incorrect to present financial accounting information with "material misstatement " or to do "window dressing" which will lead to losses to outsiders and their trust in the organisation will be lost and they will hesitate in investing.