What is accounting?

Many people associate accounting with numbers. Is it really all about numbers? No — accountants do far more than that.

Depending on who you ask, you will get a different definition of accounting. This is probably because there are so many different fields within it. Generally, accountants collect financial data, then process and report factual information about a subject matter to the people who need it. A subject matter might be the financial position and results of an entity, the costs of production, and so on. Users rely on this information to make decisions. In modern practice, accountants may also go a step further and help propose solutions or make the decisions themselves.

Is accounting only about numbers?

Many people think accountants only crunch numbers. That might have been true half a decade ago, but the profession has evolved over time to meet the changing needs of the people who use financial information. While numbers are still a significant part of the job, accountants now provide a great deal of qualitative information too.

Some of the fields of accounting you will most commonly come across are financial accounting, cost accounting, auditing and tax. Each looks at a different subject matter, but all share the same purpose: giving users reliable information to act on.

Field of accounting	What it focuses on
Financial accounting	Reporting an entity's financial position and results to external users.
Cost accounting	Measuring the costs of production and internal activities.
Auditing	Providing independent assurance on an entity's financial statements.
Tax	Determining and reporting an entity's tax obligations.

Who do accountants report to?

Accountants are tasked with reporting the truth. Yet, many a time, the truth is not in line with the interests of the person paying for the work. This tension exists in public practice (accounting firms) as much as in private practice (the accounting department of a company). Accountants are trained to act in the interest of the people who use financial information. Even so, it is not uncommon for a new accountant to find themselves in a dilemma: to report, or not to report?

The way an accountant answers that question comes down to ethics — a theme we return to at the end.

What is financial accounting?

Financial accounting is one of the major fields of accounting, and the one most commonly seen in the papers. Its objective is to report a true and fair view of an entity's financial health, which makes it crucial to capital markets. Quality financial information reduces the risk borne by investors because it helps them make informed decisions. Investors rarely have direct access to a company's financial data, so they rely on its financial statements instead.

Imagine you have a dollar to invest. How would you decide which company to back? You would probably compare the financial statements of the candidates, then pick the best performer. But if every company prepared its financial statements in its own way, those comparisons would be almost impossible.

That is why the profession has its "law" book: the financial reporting standards (in some jurisdictions these are called generally accepted accounting principles). The standards govern how a transaction is recorded, how it is summarised and aggregated with similar transactions, and how it is ultimately presented in the financial statements.

Like law, each jurisdiction has its own standards. Because of globalisation, though, many national standards are closely aligned with the international benchmark, the International Financial Reporting Standards (IFRS). Most accountants will, at some point, meet a situation where the standards do not seem clear enough for a particular transaction. That is precisely when they have to exercise professional judgement, guided by ethics.

What is auditing?

To further strengthen the reliability of financial statements, we have auditors, who provide assurance on those statements. So who are the auditors? They are an independent party who checks the accounts of an entity and then issues an assurance report stating that the financial statements prepared by the company are true and fair in all material respects.

What happens if the auditors find an error? They discuss it with the company — usually the in-house accounting department — so that it can be corrected. Some matters are judgemental, and those can take time to resolve. If the auditor ultimately disagrees with the final statements and the disagreement is material, they say so in the assurance report. That is what we call a qualified report. A qualified report does not necessarily mean the company did anything wrong; it may simply reflect a difference in judgement.

Are auditors fraud investigators?

There is a well-known expectation gap in audit: many people assume auditors are fraud investigators. They are not. Although the larger audit firms have in-house fraud teams, general audit procedures are not designed to catch fraud. A fraud investigation demands far more effort than a normal audit.

A typical financial statements audit is risk-based rather than exhaustive. In practice, that means:

• The auditor first performs a risk assessment of the entity and its accounts.
• Testing then concentrates on the items judged to carry the most risk.
• Not every single transaction is examined, so the assurance offered is reasonable rather than absolute.

This is a deliberate design of the audit, not a shortcut. Providing absolute assurance would require examining everything, which is neither practical nor the purpose of a normal audit.

What does it take to be an accountant?

The three things you must have to be an accountant are integrity, integrity and integrity. The work demands a high standard of ethics and integrity, so sometimes accountants have to say no to lucrative rewards. Defending the integrity of financial information is part of the duty they owe to the people who rely on it.