Accountability Definition and Importance

06/05/2021 0 By indiafreenotes

To account is to give a description or depiction of something that happens or happened. Accountability would therefore be taken to literally mean the process of giving an account of an event. The tricky part; about it, is that for the people to whom the account is being given, the accuracy and probity of the story is very important. To achieve this, accountability usually moves hand in hand with seven other principles. These include, “delegation, responsibility, disclosure, autonomy, authority, power and legitimacy.” :Chansa (2006).

Accountability is when an individual or department experiences consequences for their performance or actions. Accountability is essential for an organization and for a society. Without it, it is difficult to get people to assume ownership of their own actions because they believe they will not face any consequences.

Accountability, in terms of ethics and governance, is equated with answerability, blameworthiness, liability, and the expectation of account giving. As in an aspect of governance, it has been central to discussions related to problems in the public sector, nonprofit and private (corporate) and individual contexts. In leadership roles, accountability is the acknowledgment and assumption of responsibility for actions, products, decisions, and policies including the administration, governance, and implementation within the scope of the role or employment position and encompassing the obligation to report, explain and be answerable for resulting consequences.

In governance, accountability has expanded beyond the basic definition of “being called to account for one’s actions”. It is frequently described as an account giving relationship between individuals, e.g. “A is accountable to B when A is obliged to inform B about A’s (past or future) actions and decisions, to justify them, and to suffer punishment in the case of eventual misconduct” and more. Accountability cannot exist without proper accounting practices; in other words, an absence of accounting means an absence of accountability. Another key area that contributes to accountability is good records management.

Accountability is especially important in the world of corporate finance and accounting. Otherwise, investors and the public can lose faith in the trustworthiness of corporate financial reports, which has happened following high-profile accounting scandals in the past. Without checks, balances, and consequences for wrongdoing, the integrity of the capital markets would not be able to be maintained, damaging those markets’ ability to perform their vital social functions.

Corporate accounting scandals in the late 90s and early aughts, the global financial crisis and the rigging of interest and exchange rates have all served to erode public trust in financial institutions. Such scandals usually result in tougher regulations, and indeed there are compliance departments and entire armies of regulators and private watchdogs working to make sure that companies report their earnings correctly, trades are executed in a timely fashion, and information provided to investors is timely, informative, and fair.

But many leaders have called for the creation of a new culture of accountability in finance one that comes from within.

Importance of Accountability

The separation of ownership from management can cause conflict if there is a breach of trust by managers either by intentional acts, omission of key facts from reports, neglect, or incompetence. One way in which this can be avoided is for entities (in their entirety) to act with transparency and be accountable to the shareholders and other stakeholders. Therefore apart from just being a component of corporate governance, there are many advantages of accountability.

Firstly, it is a key to economic prosperity. If there is poor accountability by players in the economy, stakeholders may lose the confidence they have in it and hence become reluctant to put in their best. For instance; for some developing countries, lack of accountability may lead to a fall in the participation rate in their development programmes by their cooperating partners a situation that leads to further deterioration in the development process. Accountability is also a key to performance measurement. The more accountable corporate governors are, the more likely it is that results of performance measurement processes are going to be a true and fair representative of the performance being measured.

Accountability is a very important pillar of corporate governance. Without it, the agency problem would be hard to defeat. With it, the confidence of stakeholders is increased. It is achieved through faithfulness in various aspects of corporate governance especially reporting. The strength and accuracy of the reporting is also strengthened by various standards and regulations.

Examples of Accountability in Action

There are several examples of how the world of finance tries to implement accountability. An auditor reviewing a company’s financial statements is responsible for obtaining reasonable assurance that the financial statements are free from any material misstatements caused by error or fraud.

Accountability forces an accountant to be careful and knowledgeable in their professional practices, as even negligence can cause them to be legally responsible. As an example, an accountant is accountable for the integrity and accuracy of the financial statements, even if errors were not made by them. Managers of a company may try to manipulate their company’s financial statements without the accountant knowing. There are clear incentives for the managers to do this, as their pay is usually tied to company performance.

This is why independent outside accountants must audit the financial statements, and accountability forces them to be careful and knowledgeable in their review. Public companies are also required to have an audit committee as a part of their board of directors who are outside individuals with accounting knowledge. Their job is to oversee the audit.