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    Accounting Principles and Policy

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    What are the additional relationships between policy and consequence?
    How are accounting principles incorporated into policy and practice?
    Is accounting an "objective" profession? Why or why not?

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    1. What are the additional relationships between policy and consequence?

    This question is somewhat ambiguous. It is not clear if it means policy in general, or accounting policy specifically. It seems, though, that economic and financial policies have additional consequences (i.e., social and environmental) to consider.

    It is well established that neither conventional accounting numbers nor conventional economic measurement captures all the consequences of economic actions. In particular, the form of accounting, which is used at the micro-level (to manage and direct organizational behavior and to assess the success or failure of organizations) and at the macro level (to guide national and international policy making and to assess the effectiveness of those policies) virtually ignores anything, which does not have a price, attached to it. As prices only arise through the transfer of private property rights of a "thing", those "things" over which private property rights and related policies do not exist (for example, clean air) and those aspects of transactions which tend not to be impounded in the price (for example, aesthetic considerations) are largely ignored by society's principal driving and assessment mechanisms. Accounting principles and policies ignore environmental "accounting" consequences.

    The consequences of this are obvious - important economic and business decisions (i.e., policy driven) are made with little or no explicit concern for the externalities that arise from those decisions. It becomes inevitable that decisions will be made, policies formulated and activities undertaken, which may well maximise private economic and financial benefits but which may also create social and environmental costs. This appears to have happened and environmental, economic and social problems which society currently faces are the outcome. These problems create an impetus for developing tools for sustainability-orientated decision-making, with full cost accounting being one such alternative (for more see http://www.accaglobal.com/publications/accountingandbusiness/281399).

    In brief, full cost accounting is one way in which externalities can be identified. Externalities arise where the activities of one group of people has an impact on another group and when that impact is not fully accounted for by the first group. For example, the cost of health care (i.e., policy driven) which arises from pollution induced respiratory disease is not borne by the organizations who emit pollution and are therefore externalities from the perspective of the pollution emitters. Full cost accounting seeks to identify the external impacts associated with activities and to estimate the size of these impacts. While externalities may be of a social and/or environmental nature, a research report, Full Cost Accounting: An Agenda for Action (1), takes a look at environmental full cost accounting only (for more see http://www.accaglobal.com/publications/accountingandbusiness/281399).

    2. How are accounting principles incorporated into policy and practice?

    On October 19, 1999, the American Institute of Certified Public Accountants' (AICPA) Council designated the FASAB as the accounting standards-setting body for federal government entities under Rule 203 of the AICPA's Code of Professional Conduct. Rule 203 provides, in part, that an AICPA member shall not (1) express an opinion or state affirmatively that the financial statements or other financial data of any entity are presented in conformity with GAAP or (2) state that he or she is not aware of any material ...

    Solution Summary

    This solution explains the additional relationships between policy and consequence, and how accounting principles are incorporated into policy and practice. It then provides arguments about whether or not accounting is an "objective" profession, including examples.