Question

Accounting provides information that is valuable to decision makers. Increasingly, companies are reporting outside the financial reporting framework for a number of important issues – corporate social and environmental performance. Identify a corporate social and environmental issue, and briefly evaluate how this issue illustrates the weaknesses of traditional financial reporting.

Answer 1

1) Cost - A major disadvantage of a traditional accounting system is how expensive it can be. Completing accounting tasks with a traditional accounting system takes lots of time and is labor-intensive. An automated accounting system not only saves users time that could be spent on making the business more successful but also saves the company money. While a traditional accounting system is less expensive as far as up-front cost is concerned, in the long run, an automated accounting system is much less expensive and time-consuming while at the same time being much safer to store critical business data.

2)Data Entry Errors - While a traditional accounting system seeks to improve data entry errors with its multiple entry processes, data entry errors are still much more likely with a manual system. With a traditional accounting system, users are forced to enter data twice which is labor-intensive and time-consuming. With an automated accounting system, though, users do not need to spend so much time entering data and the system can help them find and eliminate errors before they become a major issue for the company.

3) Historical Costs: The financial statements are prepared on the basis of historical costs or original costs. The value of assets decreases with the passage of time current price changes are not taken into account. The statements are not prepared keeping in view the present economic conditions.

The balance sheet loses the significance of being an index of current economic realities. Similarly, the profitability shown by the income statement may not represent the earning capacity of the concern. The increase in profits may be due to an increase in prices or due to some abnormal causes and not due to increase in efficiency. The conclusions drawn from financial statements may not give a fair picture of the concern

4)Subject to fraud. The management team of a company may deliberately skew the results presented. This situation can arise when there is undue pressure to report excellent results, such as when a bonus plan calls for payouts only if the reported sales level increases. One might suspect the presence of this issue when the reported results spike to a level exceeding the industry norm.