The Role of accounting in an Organisation

Introduction

Accounting is often described as the “language of business” because it provides a systematic method for communicating financial information to a wide range of stakeholders. In modern organisations, where operating environments are increasingly globalised, digitalised, and complex, accounting serves as a critical tool for ensuring transparency, accountability, and informed decision-making. The purpose of this blog is to examine the role of accounting in organisations, highlighting its purpose and scope, the influence of ethics and regulatory compliance, and the contribution of the accounting function to decision-making, stakeholder engagement, and societal expectations. By critically analysing these elements, the blog demonstrates that accounting is not simply a technical exercise in recording transactions but a strategic function that underpins organisational sustainability.

The Purpose and Scope of Accounting in Complex Environments

The primary purpose of accounting is to provide relevant, reliable, and comparable financial information that can guide decision-making. Atrill and McLaney (2019) argue that accounting enables businesses to record, classify, and summarise transactions in a way that offers clarity to both internal and external stakeholders. Within complex operating environments, this role expands significantly.

Key Purposes of Accounting

1. Stewardship - Accounting demonstrates how managers use resources entrusted to them.

2. Decision-making - It provides data to evaluate profitability, liquidity, and solvency.

3. Accountability and transparency - It ensures organisations disclose performance to investors, governments, and the public.

4. Regulatory compliance - Companies must adhere to International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP).

Scope of Accounting

The scope of accounting extends beyond bookkeeping into diverse areas:

• Financial Accounting - Preparing income statements and balance sheets.

• Management Accounting - Assisting managers with budgets, cost analysis, and forecasts (Drury, 2015).

• Auditing and Assurance - Ensuring accuracy and compliance.

• Sustainability Accounting - Reporting on environmental, social, and governance (ESG) issues.

For example, MAS Holdings, Sri Lanka’s leading apparel manufacturer, relies on management accounting to monitor production costs across global operations while also reporting on sustainability metrics demanded by international buyers. Similarly, Dialog Axiata PLC uses accounting information to attract investors by presenting transparent financial reports that align with IFRS standards.

Thus, accounting’s scope is not confined to numbers but extends to governance, strategy, and long-term value creation.

Ethics, Regulation, and Compliance: Constraints or Safeguards?

Accounting operates within a highly regulated environment. Organisations must comply with legal frameworks, ethical guidelines, and international standards to maintain credibility. However, whether regulation and ethics are viewed as constraints or safeguards remains a debated issue.

Regulation and Standards

• The International Accounting Standards Board (IASB) develops IFRS, ensuring comparability across countries.

• Local regulatory bodies such as the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) enforce standards at the national level.

• Compliance reduces risks of fraud, misreporting, and misleading stakeholders.

Ethics in Accounting

Ethical conduct is critical in maintaining public trust. According to ACCA (2021), integrity, objectivity, professional competence, confidentiality, and professional behaviour are the five fundamental principles for accountants. Ethical breaches, such as earnings manipulation or overstating revenues, can destroy reputations.

Constraints vs. Safeguards

While regulation ensures credibility, some businesses perceive it as restrictive:

• Constraints: Compliance costs are high, especially for small firms. Detailed reporting can slow down operations.

• Safeguards: Ethical and regulatory frameworks protect organisations from scandals, penalties, and reputational damage.

For instance, the Enron scandal (2001) highlighted how lack of ethics and oversight can collapse a corporation, leading to tighter global regulations (e.g., Sarbanes - Oxley Act in the US). Similarly, Tesco’s 2014 accounting scandal, where profits were overstated, demonstrated how unethical practices damage stakeholder trust and shareholder value.

In reality, regulation and ethics should be viewed as safeguards that strengthen long-term sustainability rather than mere constraints.

The Accounting Function in Decision - Making and Stakeholder Needs

Accounting plays a central role in informing decisions at every organisational level. From strategic planning to operational control, managers depend on financial data to allocate resources effectively.

Accounting and Organisational Decision Making

Accounting provides quantitative and qualitative insights that influence both operational and strategic choices. Financial statements allow managers to assess profitability, liquidity, and solvency, which guide investment, financing, and dividend policies (Elliott & Elliott, 2017). Management accounting, through budgets and forecasts, supports short-term operational control. However, the reliance on historical data can sometimes limit forward-looking decisions, raising questions about whether accounting fully captures future uncertainties.

• Strategic: Helps boards decide on mergers, expansions, or divestments.

• Operational: Guides pricing, cost-cutting, and efficiency improvements.

• Financial: Determines dividend policies, debt management, and investment planning.

For example, John Keells Holdings (JKH), a diversified Sri Lankan conglomerate, uses accounting data to evaluate the performance of its hotel, retail, and transport sectors before making capital allocation decisions.

Stakeholder Needs

Freeman’s (1984) Stakeholder Theory highlights that organisations must balance the needs of multiple groups, including investors, creditors, employees, customers, regulators, and society. Accounting information plays a central role in this balancing act:

• Investors - Assess profitability and risk.

• Creditors - Evaluate liquidity and repayment ability.

• Governments - Ensure taxation compliance.

• Employees - Understand job security and company performance.

• Society - Measure CSR commitments and ethical behaviour.

Accounting also meets societal expectations through sustainability and integrated reporting. As businesses face pressure to address climate change and social inequality, accounting expands into non-financial disclosures. For instance, Dialog Axiata publishes sustainability reports aligned with Global Reporting Initiative (GRI) standards, reflecting accountability beyond profit-making.

Critical evaluation of Accounting in Organisations

Accounting is often regarded as the foundation of rational decision-making within organisations. Its role, however, goes beyond financial stewardship to shaping strategies, building trust, and ensuring legitimacy in the eyes of multiple stakeholders.

Strengths

• Transparency and comparability: Standardised financial statements enhance investor confidence.

• Informed decision-making: Accurate data improves strategic planning.

• Stakeholder trust: Compliance with ethics builds credibility.

• Global integration: IFRS enables cross-border business collaboration.

Limitations and Challenges

• Complexity: Principles and standards are often difficult for small firms.

• Subjectivity: Judgements (e.g., asset valuation, provisions) may differ between accountants.

• Cost of compliance: SMEs may struggle with regulatory expenses.

• Short-term bias: Financial reporting sometimes prioritises shareholder returns over long-term societal needs.

Societal Needs and Expectations

In recent years, accounting has evolved to incorporate non-financial information through sustainability and integrated reporting frameworks (e.g., Global Reporting Initiative, Integrated Reporting ). This development reflects society’s expectation that organisations act responsibly, beyond profit maximisation. For example, Dialog Axiata reports on environmental sustainability and digital inclusion, meeting both stakeholder and societal needs. However, critics argue that sustainability reporting can fall into “greenwashing” if not accompanied by robust assurance mechanisms (Gray, 2010).

Balancing Perspectives

While accounting has clear strengths transparency, comparability, and informed decision-making; it must continue to adapt to a changing world. Organisations must integrate financial and non-financial reporting to satisfy not only shareholders but also the wider community. By embedding sustainability accounting, aligning with ESG frameworks, and prioritising ethical standards, accounting can evolve into a holistic function that informs organisational resilience, stakeholder confidence, and societal legitimacy.

Conclusion

Accounting remains a cornerstone of modern business practice. Its purpose and scope extend beyond financial reporting to encompass stewardship, transparency, and strategic decision-making. While ethical, regulatory, and compliance frameworks may appear to impose constraints, they function primarily as safeguards that protect organisations and enhance trust. The accounting function plays a pivotal role in addressing the diverse needs of stakeholders, from investors and creditors to governments and society at large.

Nevertheless, challenges remain, including subjectivity, compliance costs, and the risk of short-termism. To remain relevant in complex operating environments, accounting must continue evolving towards integrated reporting and sustainability-focused practices. Ultimately, accounting is not simply about “numbers” but about creating value, ensuring accountability, and fostering trust in the long-term viability of organisations.

References

• ACCA (2021). Ethics and Professional Standards. [online] Available at: https://www.accaglobal.com [Accessed 19 Sept. 2025].

• Atrill, P. and McLaney, E. (2019). Accounting and Finance for Non-Specialists. 11th ed. Pearson Education.

• Drury, C. (2015). Management and Cost Accounting. 9th ed. Cengage Learning.

• Elliott, B. and Elliott, J. (2017). Financial Accounting and Reporting. 18th ed. Pearson.

• IASB (2020). Conceptual Framework for Financial Reporting. International Accounting Standards Board.

• John Keells Holdings PLC (2023). Annual Report 2023. [online] Available at: https://keells.com [Accessed 19 Sept. 2025].

• MAS Holdings (2023). Annual Report 2023. [online] Available at: https://masholdings.com [Accessed 19 Sept. 2025].

• Tesco PLC (2014). Accounting Scandal Reports. [online] Available at: https://www.bbc.com/news/business-29329331 [Accessed 19 Sept. 2025].

• Dialog Axiata PLC (2023). Annual Report 2023. [online] Available at: https://dialog.lk [Accessed 19 Sept. 2025>.