Adolf J. H. Enthoven
Accounting, as an information system, is not as yet a cohesive and unified discipline. The need for more uniform treatment of information in all areas of accounting is well recognized; the benefits are sounder economic and fiscal policies, and better planning and control. Such advantages are of particular importance to developing countries. The author discusses the scope and methods of standardization in social, government, and enterprise accounting, and within the overall accounting framework; and he suggests how improved international accounting standards and conventions might be attained.
A greater degree of standardization in accounting would be of particular benefit to developing countries. They are often faced with deficient and disorganized economic and financial data, and may lack, at all levels of the economy, both effective accounting systems and related administrative skills. Because of limited natural, financial, and human resources, their governments may need to undertake increasingly centralized cost-benefit analyses and to involve themselves, through planning and control systems, in all socioeconomic activity.
Effective uniform standards of accounting are therefore required throughout the economies of developing countries—in enterprise accounting, government administration, social accounting, in national and international evaluations of industrial structures, in project and sectoral appraisals, and in the assessment of capital markets and development finance.
We should first make clear the scope for standardization in accounting. Standardization generally aims to simplify and unify all aspects of accounting information systems in order to improve the reliability and consistency of information. It involves establishing methodological standards of definition and terminology; criteria for the identification, collection, measurement, and processing of data, and for the layout of accounts and tables; procedures for integrating information into cohesive accounting models; and standards for evaluating and communicating such information.
STANDARDIZATION BY FUNCTIONS
One way to approach standardization is to examine the particular function or branch involved, whether it be enterprise, government, or social accounting. Although all three work with the same socioeconomic raw material, they use it differently for their specific functions.
Enterprise accounting deals basically with microeconomic planning and control. It is increasingly concerned with the more sophisticated management techniques—operations research, for example—necessary in taking decisions in an enterprise. However, a distinction must be made between financial accounting and management (or cost) accounting although both deal with the administration of micro-economic activities. Financial accounting is primarily concerned with providing outsiders with financial information. Because of this it largely describes—in a manner complying with statutory requirements—the enterprise’s economic activity in its immediate past. Management accounting is less governed by such constraints. Since its function is to provide information for operational decisions, it has to correspond more closely with economic reality. In practice, unfortunately, management accounting is often practiced little differently from conventional financial accounting.
Although income determination is the central function of enterprise accounting, it is also closely linked to the normal presentation of balance sheets and infortion about the sources and uses of funds within the enterprise. Income determination, indicating the enterprise’s activities and use of resources, is needed for rational decision making (e.g., investment policy), taxation, reporting on stewardship, and the preparation of social accounts.
However, what “income” is, and how it should be measured, still causes a major schism within the accounting profession and between accountants, on the one hand, and economists and statisticians on the other. For example, should real or money income be measured; should capital gains be treated as income?
Here, then, is a clear need for standardization; we need an interdisciplinary concept for income measurement which would be widely accepted by accountants and economists alike. This would benefit all people who use public and private enterprise income measurements—either in collecting data from enterprise revenue and expense statements for national (social) accounting purposes, or in the preparation of national economic, fiscal, and monetary policies.
The unfortunate truth is that, at present, enterprise accounting lacks consistency in both its current practice and its theory, which is often merely the sum total of prevailing practices. This makes it extremely hard to compare and assess financial statements; to pinpoint capital needs; to construct effective budgets; to measure the overall efficiency and performance of enterprises and industry; to design and appraise effective industry, sector, and national economic plans; and to set out reliable social accounts. None of these activities—so important to developing countries—will be much improved until comprehensive and consistent patterns of thought, borrowing from other disciplines, are applied to the process of standardizing accounting principles and practices.
Standardization of enterprise accounting should also be matched by standardization of company legislation. Since the function of accounting has a major bearing on capital market activities, finance, and capital formation, the laws affecting commercial reporting, disclosure requirements, and overall company operations should themselves be standardized. Furthermore, accountants—whether working independently or under government supervision, in either the public or private sector—themselves need legislative protection for their activities. Finally, legal status should be given to both the accounting profession and to an accountant’s report in standardized form.
Extensive government involvement in national affairs is now normal in industrialized and developing countries alike. It has created a demand for sound systems and techniques of accounting, essential for the responsible and effective administration of, for example, public finance or fiscal policy. Government accounting deals with the collection, measurement, processing, communication, control of, and accountability for, all receipts and expenditures and related activities in the public sector. The distinctive aspects of accounting information, classification, and procedures applicable in government sector transactions make it desirable to treat this as a separate—but interrelated—branch of accounting, although governments make extensive use of the records of entries, techniques, and procedures used in enterprise accounting.
A standardized system for recording, measuring, and processing information in the government sector is necessary to ensure (a) effective coordination with other branches of accounting; (b) greater accountability, e.g., compliance with legal provisions and budgetary commitments; (c) greater efficiency in management, planning, and policy; and (d) greater validity in domestic and international comparisons, analyses, evaluations, and measurements (for example, Fund and UN statistics).
An improved classification system for government transactions is of extreme importance for giving a clear and effective outline to the government’s activities, for making governmental and national economic appraisals, and for their effective integration with the system of social accounts. The conventional classification system, which mostly consists of listing receipts by various types of taxes, and stating expenditures by object, is not very meaningful and prohibits effective planning, decision making, and managerial and economic analysis.
A better system shows government receipts and, particularly, expenditures classified by economic categories, and split into current and capital items (for example, current expenditure on goods and services, interest payments, and social security payments). Services should also be functionally classified (for example, community service or social service expenditure); and particular functions further classified into “programs,” “activities,” and “projects.”
However good a standardized government accounting classification model, it may yet need refinement and improvement to unify the accounting framework. However, it is not only the system of classification that needs standardization, but also the data that have to be classified. Often the identification, valuation, and recording of data, which is to be transformed into information, is poorly carried out; standardization to make data more useful is a difficult but vital task.
The government budget, in which government accounting is reflected, sets forth the financial program for the year; it should thus be an integral part of a country’s economic development plan. Budgeting is increasingly becoming a decision-making process and an exercise in planning to ensure the effective allocation and application of resources to economic needs and objectives. This change from conventional government budgeting to plan-oriented budgeting challenges traditional historical cost accounting standards and procedures.
Budgeting also increasingly utilizes the refined quantitative decision-making techniques used in management accounting; it examines the costs (inputs) and benefits (outputs) of particular economic functions, programs, and projects. Thus budgeting tries to assess how limited resources can be allocated to many possible competing claims. To compare such claims, a standardized information and classification system is necessary to ensure realistic and accurate measurement. An authentic set of inputs and outputs must be collated into a coherent decision model, which has to take account not only of present and future income and expenditure flows but also of external effects on the economy. Such processes present a tremendous challenge to accounting which, at present, finds difficulty in coping with the demand for the more standardized accounting structures and procedures required.
Accounting also plays a part in taxation; its role affects both the formulation of tax structures and policies and tax administration. It should assist in choosing the most suitable forms of taxation and in ensuring that more equitable and effective tax policies and procedures are carried out. The effective administration of a tax system depends on the development of a sound body of accounting standards and practices covering, for example, expense deductions and depreciation. Furthermore, standardization would facilitate the application of computers to taxation.
The third branch of accounting, social (or macro) accounting, aims to describe systematically and quantitatively the structure and activities of an economy, region, or sector during a certain time span, and also of stocks (assets and liabilities) at a particular time. All economic transactions between groups of individuals (households), business enterprises, government agencies, and with the outside world, are dealt with. The mass of quantitative data is recorded, measured, processed, and consolidated into various systems designed to display the principal national aggregates (such as national product and income), and their interrelations, in accounts and tables. Units dealt with—whether an industry, sector, or the whole economy—are much larger in social than in enterprise or government accounting.
Both aggregate and individual data recorded in social accounts are needed for measuring economic progress and for the design of national—and even international—economic, monetary, and fiscal harmonization policies; they also play an essential role in setting national goals, in economic planning and budgeting, and in structuring econometric models required for such purposes.
Standardization of social accounting, itself, has in fact progressed fairly adequately; we find that the system of classification (into sectors, accounts, and transactions), and the procedures used are quite well harmonized. However, when information from governmental and enterprise accounts is needed in the preparation of social accounts, tremendous gaps occur. Above all, when we realize that the source of a large proportion of social accounting information (especially in national income and product accounts) comes from business operations it is obvious that the three accounting branches should be more cohesively coordinated.
One particular standardization problem lies in methods of quantifying and evaluating data. Once again the question is—how good is a classification scheme when the data it deals with are not uniformly measured? It is an essential function of all accounting to ensure that techniques, procedures, and data, at all levels of the economy, are accurate.
Although many basic techniques for the treatment of data are common to social, government, and enterprise accounting, the underlying procedures may vary. In social accounting current (market) values are used, capital gains and losses are not recognized, certain items—for example, research and development expenditure—are charged to the income account (as against the capital account in enterprise accounting), value added and intertemporal adjustments are necessary, and, in general, estimates involving subjective criteria are more widely utilized.
OTHER ECONOMIC ANALYSES
Since accounting procedures are also crucial in other spheres of economic analysis and policymaking the scope for standardization is not limited to the three branches discussed above.
Economic development planning utilizes, in the process of resource allocation, measurement tools which would themselves be more effective if subject to greater accounting standardization.
Among the most important are capital-output ratios, dynamic input-output analyses, and shadow pricing. Capital-output ratios—which reflect the relationship between capital investment and the likely resulting growth of real national product—serve as a crucial guide for economic policy. However, their use is restricted unless the composition and value of such items as fixed assets, inventories, and output can be accurately analyzed. Dynamic input output models—reflecting altered economic and technical conditions—also form an important element of planning. To be effective, cost inputs and outputs should be put on a standardized basis—preferably using current market or replacement value criteria. Shadow pricing attempts to price the various factors of production as if market equilibrium existed in an economy in order to try to show society’s preference for, and relative scarcity of, factors of production. It thus constitutes an important tool in framing a development plan. For all three development tools, deficiencies in measurement, and inconsistent or nonstandard data, may prevent developing countries from making more rational decisions.
Every plan consists of a series of activities or projects involving the production of specific goods and services. Appraising the feasibility and justification of such projects and their components requires extensive use of past, present, and future data, and their measurement in the form of direct and indirect benefits and costs. The necessary cost-benefit calculations demand information which has an economically realistic, comprehensive standardized content. It is desirable and feasible to use tables to incorporate information regarding, for example, standardized labor inputs per production process; raw material requirements, power, and fuel needs for each scale of output; and, installation costs. Such standardized capital investment and operating data improve the reliability of project studies and also requires greater uniformity in the classification and valuation system itself.
Other Socioeconomic Studies
Accounting will also play an increasingly important role in socioeconomic studies of problems of ecology, poverty, social security, and human resource development. Any examination of such areas demands effective cost-benefit analysis; there is great scope for standardizing the way in which the direct and indirect effects of any programs designed to tackle such problems are measured.
STANDARDIZATION IN A BROADER SOCIOECONOMIC CONTEXT
So far we have discussed the scope and methods for standardization within particular activities: enterprise, government, and social accounting. These accounting activities are, however, interrelated in that they form an overall framework. We, therefore, need to consider standardization in such a broader context in order to ensure consistency in both the theory and practice of the interrelated systems and activities.
The overall accounting system should indeed be concerned with general economic behavior with its own techniques helping in the solution of specific socioeconomic problems. Accounting as a discipline should thus be conceived of, and practiced as, a dynamic quantitative information system within the economic environment. It deals with the identification of data, its analysis, selection, measurement, evaluation, and its communication in the form of direct and indirect socioeconomic costs and benefits. As a result it facilitates the planning and control of activities and processes. All this must be done in accordance with certain fundamental criteria, such as usefulness, verifiability, and quantifiability.
EXISTING STANDARDIZATION SCHEMES
A number of schemes for standardizing accounting are already in practice.
The French “Plan Comptable Général”
This is a standardized plan for enterprises, but is also geared toward broader economic needs. Its major characteristics are a uniform terminology; a uniform classification of accounts; a standardized method of registration; and generalized rules of valuation, albeit on a historical cost basis only. It is designed to improve fiscal administration, to provide systematic information for social accounting, and to standardize company rules on the presentation of financial statements. Not only has the system proved extremely useful for social accounting and public administration but it has also been of great benefit to French national economic planning; to industries and industrial associations in making necessary economic analyses and forecasts; for structural analyses and for measuring and comparing industrial productivity; and, generally, for improving efficient enterprise administration. Many former French territories, and several other developing countries, have adopted this model in modified form.
The German Framework of Accounts (Kontenrahmen)
This system differs from the French in that it is aimed more at microeconomic activity and less at the needs of social accounting or economic planning. Essentially its purpose is to improve comparative industrial data. The system sets forth both standard accounting charts and also industrial flow charts—for integration with the accounting charts—which show all transactions taking place within the enterprise.
Standardization in the United States
Standardization of accounting in the United States largely focuses on three microaccounting aspects: “generally accepted accounting principles,” the layout of accounts, and a uniform pattern of reporting and costing, required by federal agencies for utilities and certain other industries.
More recently, the Government has outlined uniform cost accounting standards for defense contract purposes in order to ensure comparability, reliability, and consistency of cost data. Such standards will undoubtedly be extended to other public and private economic sectors.
Although each of the above models for accounting standardization contains elements worthy of consideration in developing economies, we feel generally that a more comprehensive uniform plan, along the lines of the French system, is most relevant and useful for them.
CONCLUSIONS AND RECOMMENDATIONS
Standardization of accounting has been criticized on economic and political grounds; it is claimed to be unwieldy, static, unimaginative, and very expensive, and is said to hamper accounting theory. Its advocates, however, claim it will ensure better comparability, more effective consolidation and integration, sounder economic and fiscal policies, better control, easier education and training, and the development of a more unified overall accounting theory.
A realistic appraisal of accounting standardization should take into account the objectives and methods of accounting in the whole socioeconomic process, and of the particular needs of developing countries for whom the advantages of standardization are more pronounced. The following section offers some suggestions for improvements in accounting standardization.
Identifying the Need for Standardization
The need for standardization should first be analyzed according to the particular branch of accounting concerned, the requirements of the users of the accounting information, and to the economic functions involved. More standardized accounting information will be useful for government administration, taxation purposes, economic planning, project appraisals, shareholders, financial institutions, management, trade unions, and for consumers. From such a comprehensive body of requirements, common characteristics should be identified and utilized.
Approach to Standardization
This should take place—both nationally and internationally—within an overall information system of accounting, composed of various subsystems applicable to all types of socioeconomic activities. Sound standardization therefore demands sound overall accounting theory and methodology.
Flexibility in Standardization Systems
A large degree of variation and flexibility—for example, between developing and developed countries—may prevail without hampering the objectives. Measurement, for example, may vary considerably in different detailed classification and evaluation models. Different value systems, futhermore, will dictate variations because of different needs, economic circumstances, data available, and skills at hand. Such diversity as may prevail should, however, not detract from the need to design effective current value criteria and standardized systems applicable to national and international operations.
Studies of Accounting Change
Before better standards and systems can be devised, extensive studies—involving all recognized accounting bodies working in close liaison with economists, statisticians, government administrators, and lawyers—are necessary. Furthermore, it is imperative that such appraisals be carried out in coordination with international agencies, such as the Fund and the World Bank Group. On an international scale, the implementation of standards, conventions, and systems of accounting may require a vast degree of technical assistance and transfer of knowledge.
The establishment of international standards and conventions would greatly assist in developing a methodology and curricula for accountancy training. It would also encourage skills needed in the economic development process and would facilitate the international transfer of accounting knowledge.
To conclude, a profound need exists for the development of effective international accounting standards and conventions for all the great range of socioeconomic activities with which accountants are concerned. The adoption of such standards would help to promote economic growth and development.
Social accounting already shows what can be done by standardization developed on an international basis; organizations such as the United Nations and the Organization for Economic Cooperation and Development have been very active in working up sound and systematic social account structures.1 Although systems in some countries (e.g., the United States) deviate from these international standards, the models are largely similar and can be easily compared.
However, an international body to coordinate all areas of accountancy, supported by professional and international development institutions, is urgently required to ensure better harmonization and to make accounting more effective in the economic development process.
See, for example, OECD, A Standardized System of National Accounts, Paris, 1959; United Nations, A System of National Accounts, New York, 1968.