Three Primary Accounting Problems

While accounting is a common process for recoding financial data, it is not without its problems. Companies must overcome the inherent problems in the accounting process to ensure they accurately report financial information. Accounting has three standard characteristics: relevance, reliability and consistency. In each of these characteristics are the primary problems of accounting. Failure to avoid these issues can result in falsely reported financial information.

Relevance

Relevance means that accounting presents financial information with predictive value. For example, a company reporting its earnings for a period provides an indicator that the company can track this information accurately in the future. Irrelevant accounting information does not have this value. Additionally, the infoamriton may be of low quality. This indicates a higher probability of untimely and ineffective information reported for future accounting periods.

Reliability

Reliability provides stakeholders with accounting information that is representational, faithful and neutral. Stakeholders can make their own assumptions about the company when reviewing financial data. Companies can bend the rules a bit by attempting to present information in a more positive manner than is really true. A lack of verifiability with accounting information is typically the biggest problem with this characteristic. Stakeholders who cannot verify information may deem it unreliable.

Consistency

Companies that constantly change reporting method or the way they present information may be less reliable than other firms. Stakeholders typically have consistency expectations that information prepared in the current period will be the same in future periods. While some changes are no doubt necessary and needed, random changes with no specific purpose weaken the consistency of accounting information.

Considerations

Other problems may exist in accounting. Violations of the cost principle, aggressive accounting techniques, material misstatements and inaccurate reporting methods are just a few common problems. These issues may distort financial information and mislead investors. If this occurs, a company may be subject to penalties of fines from government oversight committees. Prevention of these errors comes from regular audits of financial information. Auditors can then make requests to correct the data as prepared.

References

• "Intermediate Accounting"; David Spiceland et al.; 2007