The concept of Confidence Accounting
“The accountants are in a habit of using loads of information for their purpose and use mostly fixed numbers for their calculations. All this leads to an uncertainty is quite hard to judge and define. ”
The type of accounting that is practiced almost all over the world these days is primarily risk based. In such an accounting procedure, many odds and unlikely probabilities are bound to confront the accountants and auditors.
The accountants are in a habit of using loads of information for their purpose and use mostly fixed numbers for their calculations. It’s an untold truth in the financial sector that annual report of any company engulfs within itself an huge amount of uncertainty. All the more such an uncertainty is quite hard to judge and define.
This is quite evident from the fact that investors tend to overlook the annual reports of the companies and concentrate on consumer sentiments and other related factors. For them, the work done by accountants in preparing an annual report is just routine work that conceals more and reveals less.
The fault lies in the adherence to fixed numbers while preparing such reports. You just pick up a financial report of any sizeable company. You would be confronted with so many explanations and foot notes that you would just throw that report away in desperation. What a colossal waste at the end of day!
Here is where ‘confidence accounting’ comes into picture. To put it in a simple manner, it means that accountants have to say with confidence regarding what they are doing. Presently, the accountants leave many things unclear for the sake of simplicity, which is never there.
For example, we have often heard about the phrase ‘turnover of a company’. When looked closely this phrase entails so much improbability and unpredictability that you cannot hold any accountant responsible for whatever wrong may happen to his calculations.
So, accountants should not talk in terms of fixed numbers but in terms of clearly drawn-out ranges in which their estimates would fall. They ought to present their audited results in a probabilistic fashion.
That would be the start of ‘confidence accounting’ that has become the need of the hour. It must be ensured by the auditors and accountants that the distribution functions developed by them don’t lead to wrong impressions and fictitious results.
Author - DeeKay
Tags - Finance, Economy
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