CAEA 3224: ACCOUNTING THEORY AND PRACTICES

HISTORICAL DEVELOPMENT OF ACCOUNTING &

CURRENT ISSUES IN FINANCIAL REPORTING
Prepared for:
PUAN SUHAILY BINTI SHAHIMI
Group Members:
No

Name

Matric Number

INTAN NAJWA BINTI ABDULLAH

CEA 120028

NOR ADLI SYAHIRAH BINTI ABDULLAH

CEA 120066

NORAMIRAH BINTI SAMSUL SAHARUDIN

CEA 120067

NUR SAIYIDAH BINTI MARDI

CEA 120077

LIE JUN HAO

CEA 120040

TABLE OF CONTENT

CONTENT

PAGE
2

Abstract
1.0 INTRODUCTION

2-4

2.0 HISTORICAL DEVELOPMENT OF ACCOUNTING

2.1 FOUR ACCOUNTING PERIODS
2.1.1 The Age of Record Keeping
2.1.2 The Birth of Double Entry Accounting
2.1.3 The Age of Stagnation

4-6
6-7
7
8-9
9-10
10-11

2.1.4 The Age of Scientific Accounting

2.2 DEVELOPMENT OF ISLAMIC ACCOUNTING
2.3 DEVELOPMENT OF ACCOUNTING IN MALAYSIA
3.0 CURRENT ISSUE IN FINANCIAL REPORTING
11-13
14
15

3.1 Flexibility of Accounting Standard

3.2 Historical Cost Vs Fair Value
3.3 Integrated Reporting
4.0 CONCLUSION

16-18

References

19-20

Appendices

21-23

ABSTRACT
Accounting history starts with stewardship function where a steward would look after the
wealth of his owner and would be required to account for resources under his management.
[1]

Stewardship function means that accounting control of the resources management done by an
agent. The steward has only control of his owners wealth. Today it means the control of the
management of shareholders resources by company directors. In ancient times, audit
originally was a hearing whereby a steward would submit to an oral investigation to verify
the legitimacy of transactions. Basically, there are four phases in accounting development
history. It begins with the age of record keeping, subsequently followed by the age of double
entry accounting, the stagnation age, and the scientific accounting age.
Dynamic business environment nowadays has developed some major issues facing in
financial reporting. We identified three components that bring about the issues: 1) flexibility
of accounting standards; 2) historical cost vs fair value for valuing the components of
financial statements; and 3) disclosure of both financial and non-financial information in
integrated reporting.
1. INTRODUCTION
The history of accounting explains a long evolution of accounting systems from the past until
now. Chronologically, the history of accounting has been divided into four periods. The first
period appeared in 12002 known as the record keeping age; second, the double entry
accounting age (1202-1494); third, the stagnation age and; finally, the scientific accounting
age. Islamic accounting development indicates that accountability to God and the community
for all activities is paramount to a Muslims faith, which is contrary to traditional accounting.
As for the state of Malaysia, accounting developed in response to the government policy to
eliminate racial economic predominance and the accounting development has been supported
by Malaysian accounting bodies until now. Both Islamic and Malaysian accounting are
examples of accounting development in the current era of accounting, which is the scientific
accounting age.

[2]

In preparation of financial statements, most countries adopt International Financial

Reporting Standards (IFRS), particularly the UK, meanwhile some adopt Generally Accepted
Accounting Principles (GAAP), particularly the US. The issue of ethical consideration arises
as these standards introduce choices in accounting methods that every business entity can
apply. This flexibility allows them to misapply creative accounting techniques to achieve a
particular goal in reporting their financial performance in a specific period. For this reason,
year 2001 and 2002 reflected the collapse of large corporations such as Enron, Worldcom,
and Parmalat. During the bankruptcy crisis in these years, public considerably lost their
confidence in the financial reporting prepared by professional accountants, audit reports
issued by qualified independent auditors as well as regulations governing the work of
professional accountants.
As for valuation of financial items, there are two options, either historical cost or fair
value. In a positive light, the historical cost reflects real economic events and less subject to
manipulation by management while the fair value is more relevant as it reflects current
economic conditions. However, both approach are criticized because the historical cost does
not always give relevant information while the fair value is exposed to reliability issue.
Nowadays, more pressure exerted on a business entity to report their business
activities that have taken place in a particular year to the public. They are becoming more
alert about their responsibility towards the social and environment. For this reason, in
Malaysia, every company is required to give a mandatory disclosure of corporate social
responsibility (CSR) since 2007. In addition, to avoid stakeholders from making wrong
economic decisions, it is also mandatory for companies to report non-financial information,
for instance, subsequent events in their report. Hence, an integrated reporting emerges.

[3]

This paper explains how the accounting evolving from one phase to another phase and
discusses the issues in financial reporting as stated above.
2. HISTORICAL DEVELOPMENT OF ACCOUNTING
2.1 FOUR ACCOUNTING PERIODS
2.1.1

The Age of Record Keeping

Accounting arose as a result of an oral tradition of stewardship. In ancient societies, estate

supervision was under a steward which was recognized as the rulers proxy. It was an
important position in that most stewards were members of the lords central council. The
position was often occupied by ambitious clergy or law graduates. The aim of record keeping
was to maintain integrity and discover misappropriation. For example, auditors gathered to
physically check records against volumes harvested.
Clay tablets are some of the most ancient records, which dating from 2500BC. The
Sumerian civilisation are reflected in the records showing a series of transaction involving
grain. The Code of Manu, which reflected Hindu thought, provided for a periodical audit of
trade relating to Kayasthas castle in Bengal. A number of chapters in the Quran recommends
the need for orderly accounts regarding transactions involving debt.
The clay tablets with signatures by sealing dating from 2400BC to 700AD in
Mesopotamia indicate attachment to written record keeping.
In Egypt, Egyptians used papyrus (paper) to record transaction. Pharaohs operated
stores accounting recording receipts and disbursements which was regularly audited. That
time, scribes, acting as bookkeepers, must behave wisely because if any irregularities
disclosed by royal audits, they would be punished. The records recorded by the scribes were

[4]

important as they reminded owners of the quantities of stores held and enabled them to
control the activities of their stewards.
In Greece, public accountant has real authority to control the governments
finances. The control of public receipts and disbursements, and financial affairs was under
one assembly known as an Athens Popular Assembly. In terms of its contributions to
accounting development history, Greek contributed the introduction of coined money.
In Rome, the families head were responsible to keep accounts of the government and
bank. They had two types of accounting book: 1) a daybook known as adversaria, which
was used to record daily household receipts and disbursements; and 2) a cashbook known as
codex accepti et expensi, which was used to record monthly postings. Rome people had
obligations to send their asset and liabilities statement for the purpose of taxation and to
determine civil rights. For this reason, it was important for them to record their household
disbursements. Moreover, Rome maintained a system of checks and balances for
governmental receipts and disbursements.
In ancient times, stewards had considerable powers were personally liable for any
omission and commission errors. Nevertheless, from the mid 14 th century, their control
became less direct as written accounts became more widespread.
From the 14th to the late 15th century, written forms of accounting became more
common. Documentation became prevalent than ceremonial oath taking. However, problem
occurred as Roman numerals in narrative form have neither zero nor place values and it
cannot do addition, subtraction, division and multiplication. This inhibited double entry
bookkeeping development. Therefore, Arabic numeral was used because it was easier to add,
remove or alter an Arabic figure. But, some argued that the use would cause fraud easily

[5]

because the figures can be altered. These two numeric systems were used together for some
400 years until the Arabic numerals prevailed.
2.1.2

The Birth of Double Entry Accounting

The earliest double entry records are from a bank ledger from Florence of 1211 and books
from Genoa in between 1340-1466. Florence was a hub of a European banking network while
Genoa was an oversea trading centre. In Italy, civilisation took place where writing,
arithmetic, commerce, capital investment, credit transactions became features of its society.
However, some scholars argue that origins of double entry accounting come from China and
was brought to Italy by the explorer, Marco Polo. Others also claim that the accounting
system originated in India in the form of Bahi-Khata; system of bookkeeping still practiced in
parts of India.
Nevertheless, the technique of double entry was publicized by Luca Pacioli, the
Italian friar, in the book Summa of 1494. He merely reported a method adopted by merchants
in Venice in the time of the Italian Renaissance, hence, he did not invent double entry
accounting. It was well established in Italian banks of the period, who financed maritime
operations, in particular, the Cristian crusades to recapture Jerusalem from Arab possession.
Thus, the progress in accounting was a consequence of the economic activity.
In order to record transactions more systematically, this technique changed from
single entry to double entry. The trial balance also provided a mechanism that allowed
records and the balancing books to be checked arithmetically. Double entry allowed internal
control to facilitate specialization of duties between bookkeepers. Therefore, it mitigated
errors plus, fraud were harder to accomplish. Then, following Paciolis Summa of 1494
recommendation, entering values of all assets and liabilities opens a merchants books.
Operations are then recorded, first in a memorandum, and then expressed as debits and
[6]

credits in a journal before being recorded in a ledger account. However, Paciolis book
showed little concern in trading performance or profit calculation because the merchant
enterprises were short-term period ventures and involved cash.
2.1.3

The Age of Stagnation

Within 1500- 1800, there were few improvements in accounting techniques and single entry
still dominated record keeping with listing inventories, receipts and payments account.
Businesses were small with few transaction involved and hence, the use of double entry was
not justified and it prolonged the use of single entry. Thus, although the double entry system
was known, the volume of commerce did not justify the change and the learning of new
techniques for those involved. The ability of double entry to summarize and report the
success or failure of a business was not valued at this time. The periodicity and matching
concepts were not appreciated. The depreciation concept did not exist and the writing off of
bad debts was not practiced as it was thought better to maintain a record of all debts
regardless of their quality. Thus, the profit and loss account was introduced as a tool for
closing account book but, much less for profit calculation.
Books were closed to the profit and loss account on three occasions: the death of the
merchant; the dissolution of a partnership; or when the ledgers were full and new books were
required to be opened.
It should be understood that the need for a statement of annual income was not as
pressing as it is today. The business was small with little distinction between ownership and
management. Most merchants were owner managers and familiar with every aspect of their
trades. There was little interest in making investment public and merchants considered their
business as their own private affairs. In addition, partnerships involved members of the same
extended family. These are the factors for stagnation in accounting development.
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2.1.4

The Age of Scientific Accounting

Professional experts started learning methods to modify profits in order to meet the
expectations of their owners by the 19th century. Double entry system was insufficient to cater
for growing industries and many companies collapsed brought the demand of new accounting
practices. The problems of recognition, measurement and accountability first encountered by
the United Kingdom due to the Industrial Revolution. The problems emerged because at that
time, it was necessary to split management from ownership, which particularly true in
companies that were big in scale. Industrial operations demanded huge capital amount, which
was raised by a scattered group of shareholders, the owners, who expected information and
demanded accountability. The challenges faced by accountants such that they had to
differentiate between revenue and capital, transactions of private and business, measure the
value of fixed assets, decide depreciation rates and methods, set aside provisions, and write
off bad debts.
Business and industrial revolution issues during this period affected accounting
practices. Development of railway companies as typical enterprises generated during the
Industrial Revolution. The new companies could not depend on family connections only, but
they had to go to investors, which were strangers to them, in order to obtain capital funding.
Promises of profits and dividends were given but, they were not always possibly delivered.
The managers and the accountants from the early 19 th century in railways industry showed
sudden business collapse examples because these people applied creative accounting
technique that gave the illusion of profits. These failures were mainly caused by the problems
in accounting: 1) to differentiate between revenue and capital; and 2) to allocate depreciation
to an expense. These two issues were very relevant in railways industry during this time as

[8]

the industrys capital investment was high. The Railways Act 1867 was passed by the UK
government to overcome illusory profits problem. The act required railway companies to
have compulsory audits. In addition, they can only pay dividends once they get audit
certification. The following year, the companies had obligations to issue standardised
accounts.
Implications towards accounting existed because of these growing businesses. They
emerged new accounting recognition and measurement problems. The adoption of the
historical cost less depreciation method together with prudence, going concern, and matching
concepts was introduced to enable the accounting problems such as fixed assets valuation to
be resolved by the end of the 19th century.

R e c o rd
K e e p in g
A g e

T h e B ir t h
o f D o u b le
E n try
A c c o u n t in
g

S t a g n a t io
n A ge

S c i e n t i fi c
A c c o u n t in g
A g e
D e v e lo p m e n t
o f Is la m ic
A c c o u n t in g
D e v e lo p m e n t
o f A c c o u n tin g
in M a la y s ia

Figure 1: The Flows of Historical Development of Accounting

2.2 DEVELOPMENT OF ISLAMIC ACCOUNTING

Culture is the way of life i.e., religion, that influences accounting. Different culture demands
different accounting system. Islam is different from Capitalist ideology, so it must have its
own accounting system. Therefore, Islamic accounting is different from traditional
accounting.
Islamic cultures have brought implications on the accounting development such as: 1)
Islamic accounting moves toward zakat maximization to focus on the society welfare; 2)
compliance with the Islamic Syariah as Muslims are bound to do this; 3) a balance between
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individual character and social character would be created since Muslims are of a community
who looks after the welfare of others; 4) a company feels motivated to engage in escaping
humans from the economic, social, and intellectual factors oppression, and rescuing the
environment from human exploitation; and lastly 5) since Muslims aim to enter into Jannah
(heaven) by performing good deeds in this world, Islamic accounting opens a pavement
between the world and the hereafter (Saufi & Mustapha, 2012)..
2.3 DEVELOPMENT OF ACCOUNTING IN MALAYSIA
In Malaysia, the politics of multiculturalism has become the main focus in studies of
accounting development. The definition and the content of development in the 1970s and the
years after that was mentioned in the New Economic Policy (NEP) which expressed out two
main objectives of socio economic development for national unity. They are, i) the
eradication of poverty irrespective of race; and ii) the restructuring of society.
Malaysian Institute of Certified Public Accountants (MICPA), Malaysian Institute of
Accountants (MIA), and Malaysian Accounting Standard Board (MASB) have been playing
important role in accounting development in Malaysia are
MICPA has been developing the accounting profession in Malaysia by providing
accounting graduates with an avenue to become a Certified Public Accountant (CPA) since
1958. MICPA has been a cornerstone in the setting of accounting standards since then and has
played a technical advisory role for Malaysian regulatory bodies responsible for carving out
the business and financial landscape of this nation since its formation (MICPA).
MIA was established to regulate and develop the accountancy profession in
Malaysia. The establishment of MIA was under the Accountants Act, 1967. The profession
credibility is the responsibility of MIA and hence, MIA is the one to provide education and
quality assurance (MIA).
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Lastly, the Malaysian Accounting Standards Board (MASB) is an independent

authority established under the Financial Reporting Act 1997 (the Act) to develop and issue
accounting and financial reporting standards in Malaysia. The MASB, together with
the Financial Reporting Foundation (FRF), make up the frameworks for financial reporting in
Malaysia (MASB).
3. CURRENT ISSUES IN FINANCIAL REPORTING
3.1 Flexibility of Accounting Standards
International Accounting Standards Board (IASB) developed International Financial
Reporting Standards (IFRS) as accounting standards for financial reporting, which differ
from Generally Accepted Accounting Principles (GAAP) introduced by US. IFRS is
principles-based, while GAAP is rules-based (Elena, Catalina, Stefana, & Niculina, 2009).
IFRS requires professional judgments that are very likely to cause different
interpretations by different entities for the same transactions (FASB, 2002). The entities have
freedom to decide what accounting method to adopt in processing similar transactions. Thus,
diversified processing formats are formed and comparability concerns emerge. IFRS has
higher flexibility compared to GAAP. It creates more financial reporting manipulations
chances as it is subject to interpretation by different individuals (Li, Liu, & Luo, 2013).
Both GAAP and IFRS have accounting choices that accountants can employ in
preparing financial statements. Hence, a reporting entity can choose any accounting method
that best reflects its economic transactions. However, it is difficult to compare firms within
the same industry. For example, one may apply a straight line depreciation method while
another company may apply a double declining balance depreciation method. The
depreciation amounts would be different if they were to use different method. This is allowed
by the accounting standards.
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Nevertheless, the main issue we want to highlight is that, various accounting choices
in these accounting standards enable a creative accountant to apply creative accounting
techniques because of the flexibility of the standards. Although GAAP and IFRS have
principles that accountants must follow, there are some ways that they can employ to present
good bottom line figures. Accountants have knowledge in accounting rules and use the
knowledge to manipulate financial data in a business (Amat, Blake, & Dowds, 1999). An
entity can decide which accounting method best suits its organisational needs that gives its
preferred image. It can be seen as a means of reporting favourably on stewardship and
performance of business operations in a particular year.
However, it should be noted that creative accounting is not necessarily bad. It
depends on the intention of the financial report preparers. An unpredictable event that brings
misfortunes to a company may occur anytime, for instance, disasters that happened in
Malaysia Airlines (MAS) this year. Creative accounting techniques enable the company to
apply them to hide a particular bad year of the company. Problems only arise if the company
applies creative accounting techniques that violate the accounting standards until it becomes
fraudulent financial reporting. Accountants may manipulate financial data to produce nice
financial report. This is known as window dressing. The investing public lose confidence in
financial reporting sytem and accountability due to the collapse of big corporations. During
the year 2001 and 2002, accounting environment has gone through a big challenge where
there are a lot of companies collapsed such as Enron, Worldcom, and Parmalat in Italy. These
incidences have made the public no longer believe on the system of the financial reporting
that done by the accountant. The trust of the shareholders toward all the corporate managers
and the accounting firm collapsed in the same time as one of the Big Fives Arthur Anderson
involved in these incidents. The collapse has brought serious implications on financial for
stakeholders such as investors, employees and the public. For this reason, a credibility crisis
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rises. Consider the collapse of Enron Corporation and its auditors firm, Arthur Andersen,
which was one of the Big 5 accounting firms in 2001. Enron used Special Purpose Entity
(SPE) as tools to commit accounting fraud. The corporation misused the accounting rule that
allows a company to not recognize SPE in its financial report if the third party owns it or at
least has 3% ownership. Enron wanted to cover its high debt to avoid the investment grade
goes down that eventually causes banks to recall their loans. The SPEs CFO borrowed huge
amounts of money using Enrons stocks as collateral to offset its overvalued contracts. Hence,
Enron managed to convert its assets and loans burdened with debts into income. Plus, Enron
transferred more stock because the SPE took over. Nevertheless, Enron did not report those
assets and loans in its financial reports, which in fact, financed by huge debt amounts. This
misled the shareholders that the corporation was performing well in its operations (Li, 2010).
For this reason, ethical issues in financial reporting emerge. The Enron scandal has led to the
establishment of Sarbanes-Oxley Act on 30 July 2002 which aims to protect shareholders
from fraudulent accounting practice.
To conclude our argument regarding the flexibility of the accounting standards, we
prepare Figure 2 below, which shows the flows of how the accounting standards flexibility
could lead to fraudulent financial reporting and hence, raise ethical issues.

A cco u n ti
ng
S ta n d a rd
s

A c co u n ti
ng
C h o ice s

C re a tiv e
A cco u n ti
ng
Te ch n iq u
es

IFR S :
Prin c ip le sb a se d
GA AP:
Ru le sb a se d
[13]

Fra u d u le
nt
Fin a n cia l
Re p o rtin
g

E th ica l
Issu e

Figure 2: The Flows of Fraudulent Financial Reporting

3.2 Historical Cost VS Fair Value

Historical cost only recognize actual transactions, which this approach records assets and
liabilities at purchase price. Therefore, the approach is less subject to manipulation as they
are recorded objectively. Nevertheless, the historical cost approach has criticisms in spite of
its usefulness. Nowadays, accounting is not about stewardship function only. Users of
financial report, for instance, shareholder wants to know the trends of their investments,
which can be seen from the companys net assets (Abu Bakar & Said, 2007).
The historical cost reflects the transactions real value. But the method is inaccurate
for decisions making purpose if any material subsequent change takes place. In addition, as it
does not consider the effects of price increases on the market, a regular undervalued assets
may occur. For this reason, the company that adopts the historical cost does not always reflect
the most relevant information in its accounts for the users to make decisions with (Diana,
2009).
As for fair value approach, it records assets and liabilities at fair value on balance
sheet and recognizes as either gains or losses in income statement. The fair value is relevant
because it reflects current economic conditions with respect to economic resources and
obligations (Laux & Leuz, 2010). However, like the historical cost, the fair value approach
also has its disadvantages. If markets are liquid and transparent, there would be no
controversy in fair value estimates. The estimates are more reliable for the purpose of
decision making. But not all markets are liquid. Many assets and liabilities have no active
market. In this case, the fair value estimates depend on the forecasted cash flows and
appropriate discount rates. More judgements are required to estimate the fair value and hence,
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the estimations are less reliable (Bies, 2005). The estimations largely depend on assumptions
made by management and are exposed to measurement error. This has the potential to mask
deliberate miscalculation and manipulation of the numbers. Fair value pension accounting
reflects the issue.
3.3 Integrated Reporting
The development of integrated reporting is specifically designed to enhance and consolidate
existing reporting practices to move towards a reporting framework that gives the information
needed to the stakeholders and other users to assess organizational value in the 21 st century.
Integrated Reporting concerns more not only about financial information of financial
statement but also non-financial information such as corporate social responsibility (CSR)
and subsequent events. Integrated reporting is about integrating material financial and nonfinancial information to let the investors and other stakeholders to understand how an
organization is really performing.
It should be highlighted that companies should be responsible not only to the
shareholders but to societies. Therefore, companies should provide information and address
specifically how their current activities that mostly use natural resources are impacting on
social, economic, and environmental aspects in a corporate social responsibility report
(CSSR). By providing information about social and environmental performance, it implies
that management has an accountability for social and environmental performance, as well as
economic performance. This, in return, would bring good public reputation on the business in
order to ultimate increase business profit.
In addition, during the subsequent period, business continues and events could take
place that have an impact financial statements for the prior year. Some of these events, for
instance, a major customers bankruptcy, could affect the amount reported in the statements
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and hence, affect the decisions making of the stakeholders. For this reason, it is important to
report the events in the integrated report.

4. CONCLUSION
During the age of record keeping, accounts were deficient in both content and form.
Merchants recorded all revenues and disbursements but did not recognize income. With
regard to form, there was no systematic relationship between accounts. Indeed, they
committed simple accounting by memorizing, especially in illiterate societies. Moreover,
auditors in this age performed audits by hearing annual recitals of inventories on hand that
eventually caused income smoothing. Written single entry records contained receipts and
payments or inventories records which interspersed with chronological narratives. People
from this age quantified the records in physical volumes instead of currency values thus,
income and performance concept cannot be applied. Clay tablets in Mesopotamia are the
simplest forms of accounting.
Italy, particularly in Genoa and Florence; is the country where the earliest double
entry accounting records are found. Much trade from Europe and the Muslims world focused
on the Italian peninsula. However, some scholars argue about this accounting system origins.
Some claim that its source comes from either India or China. More importantly, it was an
Italian friar that promoted the extensive application of double entry accounting by
summarizing the record keeping system principles in his book Summa 1494.
Double entry practice spread slowly throughout the period of stagnation period. It
was most appreciated for its organizational and balancing functions. For this reason, the
purpose of the profit and loss account was more towards closing the ledger accounts.
[16]

The Industrial Evolution that occurred in England posed new problems for
accountants. The railways companies were typical of the new enterprises generated by the
new industrial and scientific age. Creative accounting techniques were adopted to produce
illusory profits while dividends were paid from borrowing off-balance sheet. However, in
spite of some company failures, more successful enterprises overcame the recognition and
measurement problems. Therefore, prudence, going concern, matching concepts together with
the application of historical cost less depreciation as a standard measurement method were
introduced to overcome many issues, for instance, the fixed assets valuation.
Islamic accounting development shows influence of the religion on accounting,
where Islam influence the manner which Muslims conduct public and private lives.
Therefore, in Islamic accounting, pursuits of profits are not at the expense of the community.
The responsibility of accountants is not limited to what is being laid down by management
and profession but, compliance with the Syariah is also required. Thus, Islamic accounting is
contrary to traditional accounting.
Accounting development in Malaysia responded to the stages of economic
development. The pressures for political support building are seen to motivate the state into
creating a new Malay business and managerial class. This also responds to stages of economy
development from 1956 1995. The socio-economic and political conditions appear to have
implications for accounting regulation in Malaysia. Moreover, the development of accounting
in Malaysia involves many bodies in Malaysia such as MICPA, MIA, and MASB that play
their own functions separately.
Some argue that demands in the societal and environment are what brought the
needs in a particular time or age, which in response, caused accounting to develop.
Meanwhile, others claim that commerce evolution occurred due to the scientific accounting

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development since the only way for modern business to grow and respond to owners and the
public needs was through more accurate accounting techniques application. Nevertheless,
either way, the accounting history enables us to comprehend the history of economy and
business in general and hence, it may help next generation to have a better prediction what is
on the horizon as the global business evolution pace accelerates.
The ethical issues emerge because of flexibility of accounting standards. As far as
we know, appropriate accounting treatments in many certain areas are often vague. This
permits companies to use a significant amount of discretion in processing their economic
events. If they intended to manipulate the financial data of the events through creative
accounting techniques, then a fraudulent financial reporting is produced. This is where the
credibility of accounting profession is at stake. Stakeholders and the public start losing their
confidence in the profession. Consider the collapse of large corporations in the US such as
the Enrons case.
The problem with historical cost is that its accuracy and relevance are debated in
case a significant subsequent change happens after the transactions record. This valuation
approach only consider the real value of transaction as it occurred. As for fair value, a
problem arises because not all markets are active. In this case, the fair value estimates largely
depend on the discretion of the management, which as a result could lead to financial
manipulations.
Lastly, businesses or corporate activities use natural resources such as air and water.
Without ethical considerations, the activities would bring big issues in air and water
pollution. Therefore, a business entity must report the impact of their operations on the
environment. The accounting information provided in the CSRR ensures that the entity gives
the full real account on the circumstances. Moreover, the company cannot exclude any

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subsequent events that give significant impacts on the financial statements such that they
could greatly affect the decisions making made by the users of the report. For this reason, an
integrated report includes both financial and non-financial information.

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[20]

Appendices

Saufi, S., & Mustapha, N. (2012)

Elena, H., Catalina, M. C., Stefana, C. I., & Niculina, A. A. (2009)

[21]

FASB. (2002).

Li, Z., Liu, Q., & Luo, L. (2013)

Amat, O., Blake, J., & Dowds, J. (1999)

[22]

Li, Y. (2010)

Abu Bakar, N. B., & Said, J. M. (2007)

Diana, C. I. (2009)

Laux, C., & Leuz, C. (2010)

[23]

Bies, S. S. (2005)

[24]