Interpretational Accounting

Think of a situation where, in Mahabharata, the great narrator “Sanjay” is narrating the running commentary of the war “Kurukhetrya” to blind King “Dhritorastrya” out of his interpretation to emulate emotional swing, not depicting, exactly what is happening out there. Deviating from facts but instead of making fully fictional, making it Marketable Facts. Though thankfully the context of epic is different. In daily life we often are not exposed to real facts or realities instead we are exposed to Portrayed Reality or Marketable Facts. Accordingly, we draw our interpretation which is way different than actual facts. The apparent disconnect between real and interpretational narration, could be sensational work of Art but not Accounting.

Being Accountant and having knowledge of Accounting it is imperative to use Accounting language appropriately to depict real flow of events along with time scale.?Now a days Accountants are blamed and even punished severely for non-standard, untrue narrations of facts in Accounts, of course where ever apprehended and examined. To me in some cases it has gone beyond proportion. However, I agree with the basic principal of deterrent and strict adherence of norm and standard, considering the importance of Accounting Reports at large to all stake holders, but there is an increasing habit of portraying the stream of events through the spectacles of interpretation in current accounting ecosystem, leading to gross misreporting eventually. Accountants are not to be blamed for this always as they are also victim to situations. Still some additional responsibilities do come in.

Few areas of avoidable Accounting interpretation:

1.????Related Party Transactions: The reporting of related party transactions is to be dealt with strictly as per accounting standard. There is an increasing trend to take a route to be beyond the boundary of related party net.?In the process a very important trail of transaction can be missed out. Eventually the enterprise comes to distress and then the trail leads to extended relation just outside the net of relative realm, where interpretation rules the outcome.??

?2.????Purchase and Sale recording: The fundamental two transaction flow is based on change of ownership which is substantiated only by exchange of commercial documents. No interpretation can establish these transactions neither any other facts other than substantiating back up documents that too within said cut off. Any subjectivity of interpretation should not be guiding principal of sale and purchase.

?3.????Accrual: The Accrual basis is the pillar of modern Accounting. The same is based on business continuity principal. The continuity is also based on facts and real transactional commitments not based on any interpretation or inappropriate representation.

?4.????Deferrals: The impact of deferred liability or returns again to be weighed on real transactional back ground rather than any mis-conceived idea. Ideally the incidence and future impact is to be examined on the strength of accrual benefit. If that relation is not very clear, then interpretation will set in.

?5.????Accounting system: Often we have a notion that if a company has any multidimensional Accounting system then that is more reliable than regular rudimentary accounting module. However, Accounting system is completely dependent on Business model upon which it is running. If that is not very transparent and most importantly transparent to all stakeholders, interpretation will sneak in, be it state of an art accounting system or routine daily book system.

?6.????Events occurring after Balance sheet: This is an often used term auditors are looking for to evaluate validation of transactions taken place within period of audit. There is obviously an element of interpretation, which will come if no incidences are reported. This is the difficulty or additional responsibility of Accountants. However here comes the importance of Business understanding which will help to analyse Accountant to decipher the follow up of the transaction. Accountants are required to be much more involved and they can not be within the closed circle of record keeping and responsibility fixing.

?7.????Contingencies:?Another area of difficulty is contingencies which are not clear on the date of Accounts preparation. Often it takes a routine path to disclose contingencies for the Business in question but contingencies are not always coming from litigation. It can be out of very routine Business line if the Business are not following a transparent pattern. The issue of interpretation on contingencies come in when transactions are in large scale non-standard and always become unique. In Accounting, uniqueness always creates a trail of contingency which is to be handled carefully.

?8.????Routine: Any repetitive routine operation should not be left on the merit of simplicity. It has to be recorded with same diligence as a new transaction every time. Accounting does not warrant any operation as acceptable or avoidable depending upon its occurrence. Only important issue here is recording the flow unbiasedly.

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We can keep on adding points on this issue of interpretational Accounting. However, interpretation should be coming post the transaction is recorded. Interpretation of Accounts will be there always but Accounting should not be guided by interpretation. That should be based on hard facts. Unfortunately, Accounting remains to be very mundane, non-flamboyant aspect of Business operation which is devoid from any glamour of intellectual interpretational thought, however outcome of Accounts may create lot of intellectual stimuli for investment, expansion, divestment etc. We have to create the distinction between facts based Accounting and then based upon that building a futuristic plan which can be a complete game changer. ??