Defining accountability and accounting
What is accountability?
Accountability is a word that we often hear, but may not understand the meaning of. It is often used in terms of politicians and businesses in terms of the consequences of their decision making, or the idea that people must be accountable for their actions. But what exactly does this mean? When faced with an unfamiliar word, a first place to start is often the dictionary:
Therefore, accountability is about owning and being responsible for your decisions. Why is that important when studying business? No matter what your role in a business – whether that be as an owner, manager, or in marketing, human resources, production, sales, logistics – the decisions we make every day affect a business’s (or organisation’s) performance. Accountability is about ensuring that decision makers think carefully about their choices, using all available information – financial and non-financial – to help the business (or organisation) achieve its objectives.
A note about the terms business and organisation
This textbook will primarily use the term business – meaning entities that operate with the goal of making a profit. There are also not for profit entities (NFPs) and other types of organisations. All organisations around the world generally conduct accounting in the same way, so while this book most commonly uses the term business, the principles of accounting just as easily apply to other types of organisations. In my (Amanda’s) experience – students are best able to learn to understand the fundamentals of accounting when imagining businesses, the word organisation can create some confusion.
What is accounting?
The definition of accounting has changed over time. Definitions of accounting can be purely about the technical nature – that accounting is a method by which we record the transactions that a business (or entity) engages in. This might mean that if you were describing an accountant – you’d be describing someone whose role it is to practically implement this recording method.
Fifty years ago – you would have been correct. However, advancements in computing technology means that accountants don’t do much of the nuts and bolts of technical accounting. As a result, the role of accountants has changed and in this textbook, we will use a broad definition of accounting:
Accounting and accountability
As we can see from the definition above, accounting helps businesses ensure accountability because accounting helps us describe how a business has allocated its scarce resources – its cash and its assets. As a decision maker (in any part of a business) understanding accounting is going to be critical to help you make the best decisions for the business, and also potentially people and the environment affected by the business’s activities.
Making good decisions will see you rewarded well, making poor decisions may result in you being shown the door!
Real life examples
David M. Solomon – CEO of investment bank Goldman Sachs in the USA – had his pay increased to US$35m in November 2021 after guiding the business to record profits in 2021 (Nguyen 2022).
Brian Hartzer was the CEO of one of Australia’s largest financial institutions – Westpac. He was fired because while in charge, the bank failed to detect 23 million breaches of anti-money laundering laws in the form of illegal transactions. Some of those transactions were related to child exploitation. As the person in charge of all bank operations, the concept of accountability meant that with such a significant breach of the law – he had to be fired.
Accountability is also different depending on the type of business structure that you have. Below is a summary of the main business structures seen in modern business.
Types of business structures
There are several common types of legal business structures and the varying business structures having differing types of accountability. While the accounting concepts for the various types of businesses are essentially the same regardless of the legal structure, the terminology will change slightly depending on the organisation’s legal structure, and it is important to understand the differences.
There are three broad categories for the legal structure of an organisation: sole proprietorship, partnership, and corporation. A sole proprietorship is a legal business structure consisting of a single individual. Benefits of this type of structure include ease of formation, favourable tax treatment, and a high level of control over the business. The risks involved with sole proprietorships include unlimited personal liability and a limited life for the business. Unless the business is sold, the business ends when the owner retires or passes away. In addition, sole proprietorships have a fairly limited ability to raise capital (funding), and often sole proprietors have limited expertise—they are excellent at what they do but may have limited expertise in other important areas of business, such as accounting or marketing.
A partnership is a legal business structure consisting of an association of two or more people who contribute money, property, or services to operate as co-owners of a business. Benefits of this type of structure include favourable tax treatment, ease of formation of the business, and better access to capital and expertise. The downsides to a partnership include unlimited personal liability (although there are other legal structures—a limited liability partnership, for example—to help mitigate the risk); limited life of the partnership, similar to sole proprietorships; and increased complexity to form the venture (decision-making authority, profit-sharing arrangement, and other important issues need to be formally articulated in a written partnership agreement).
A corporation is a legal business structure involving one or more individuals (owners) who are legally distinct (separate) from the business. A primary benefit of a corporate legal structure is the owners of the organisation have limited liability. That is, a corporation is “stand alone,” conducting business as an entity separate from its owners. Under the corporate structure, owners delegate to others (called agents) the responsibility to make day-to-day decisions regarding the operations of the business. Other benefits of the corporate legal structure include relatively easy access to large amounts of capital by obtaining loans or selling ownership (shares), and since the shares are easily sold or transferred to others, the business operates beyond the life of the shareholders.
|Types of Business Structures|
|Number of Owners||Single individual||Two or more individuals||One or more owners|
|Ease of Formation||Easier to form||Harder to form||Difficult to form|
|Ability to Raise Capital||Difficult to raise capital||Harder to raise capital||Easier to raise capital|
|Liability Risk||Unlimited liability||Unlimited liability||Limited liability|
Accountability of different business structures
In terms of direct accountability because of a financial relationship – a sole proprietor is likely only accountable to themselves as the sole owner of the business – but a partner is accountable to other partners. Managers of a corporation are accountable to the shareholders. In large publicly listed corporations, those shareholders may number into the millions and are represented by a Board of Directors.
However, with an expanded definition of accountability than just a direct financial relationship, businesses may also be accountability to customers, employees, regulators and numerous other external stakeholders – and not just for accounting or business related issues – but other social issues as well. That is, businesses are being asked to be socially responsible. A contemporary example is social media influencers – they are becoming more and more accountable to their fans and followers for not only their businesses, but also personal behaviour. We’ll cover more on social responsibility and reporting in the final chapter of this book.
Carnegie, G., Parker, L., Tsahuridu, E. (2021). It’s 2020: What is Accounting Today?, Australian Accounting Review, 96(31), 65-73. doi: 10.1111/auar.12325
Nguyen, L. (2022). Goldman Sachs awards its C.E.O. a raise to $35 million after a record year. The New York Times, [online] Available at: https://www.nytimes.com/2022/01/28/business/david-solomon-goldman-sachs-pay.html [Accessed 8 February 2022].
Oxford English Dictionary. (n.d.). Accountability. In Oxford English Dictionary, Retrieved 8 February 2022, from https://www.oed.com/