The concept of limited liability was a contentious point in the politics of the mid-19th century. The Limited Liability Act 1855 was passed in the teeth of bitter opposition, and one Member of Parliament described the Act as a 'rogues' charter'. Mindful of the potential for abuse which lay within this legislation, and mindful too of the necessity to safeguard the interests of shareholders and investors in these companies, Parliament eventually restated the doctrine of stewardship in a legal form. It made the disclosure of information to shareholders a condition attached to the privilege of Joint Stock status and of Limited Liability. This information was required to be in the form of annual Income Statements and Balance Sheets. We may say briefly, however, that the former is a statement of the profit or loss made during the year of the report, and the balance sheet indicates the assets held by the firm and the monetary claims against the firm.
Financial accounting is concerned with the emergence of these two accounting statements as vehicles for the disclosure of information to shareholders in Joint Stock companies. The unwillingness of company directors to disclose more than the minimum information required by law, and growing public disquiet as to the usefulness of the information contained in financial accounts culminated in the extension of disclosure requirements in the United Kingdom by means of the Companies Act, 2006. It is evident that the 2006 Act will be but one step in the history of public involvement in this problem which effectively began in 1844, and which has conferred upon accounting information an important social role.
Parallel developments have taken place also in the United States, where since the early 2000s there has been a continuous discussion on ways to improve the disclosure of information. The Securities and Exchange Commission has been concerned with the problem of the sufficiency of information disclosed at the time when new issues are sold to the public, and together with the Stock Exchanges and the accounting profession via the Financial Accounting Standards Board, it has been concerned with the adequacy of financial information regularly disclosed by companies. For some years, also, the European Economic Community has been trying to move towards a standardization of accounting practices both as regards disclosure and consistency of practices. The Companies Act 2001 which implements the requirements of the EEC Fourth Directive is discussed later.
The legal importance attached to financial accounting statements stems directly from the need of a capitalist society to mobilize savings and direct them into profitable investments. Investors, be they large or small, must be provided with reliable and sufficient information in order to be able to make efficient investment decisions. Herein lies one of the most significant social purposes of financial accounting reports. In a changing society, increased recognition that employees have a legitimate right to financial information is evident in the legislation passed or proposed in several European countries.
A more important influence in the demand for the disclosure of financial information to employees stems from the growing strength of the worker participation or co-determination movement. This aspect of accounting will be examined later.
(3) Management accounting is also associated with the advent of Industrial Capitalism, for the Industrial Revolution of the 18th century presented a challenge to the development of accounting as a tool of industrial management. In isolated cases there were some, notably Josiah Wedgwood, who developed costing techniques as guides to management decisions. But the practice of using accounting information as a direct aid to management was not one of the achievements of the Industrial Revolution: this new role for accounting really belongs to the 20th century.
Certainly, the genesis of modem management with its emphasis on detailed information for decision making provided a tremendous impetus to the development of management accounting in the early decades of this century, and in so doing considerably extended the boundaries of accounting. Management accounting shifted the focus of accounting from recording and analysing financial transactions to using information for decisions affecting the future. In so doing, it represented the biggest surge forward in seven centuries.
The advent of management accounting demonstrated once more the ability and capacity of accounting to develop and meet changing socio-economic needs. Management accounting has contributed in a most significant way to the success with which modern capitalism has succeeded in expanding the scale of production and raising standards of living.
(4) Social responsibility accounting is an entirely new phase in accounting development which owes its birth to the social revolution which has been underway in the Western world in the last few years. Social responsibility accounting widens the scope of accounting by considering the social effects of business decisions as well as their economic effects. The demand for social responsibility accounting stems from an increasing social awareness of the undesirable by-products of economic activities, and in this connection, one may point to the public attention which has been given to environmental problems over the last few years. Increasingly, management is being held responsible not only for the efficient conduct of business as expressed in profitability, but also for what it does about an endless number of social problems. Hence, with changing attitudes, the time-honoured standards by which performance is measured have come into disrepute. There is a growing consensus that the concepts of growth and profit as measured in traditional Balance Sheets and Income Statements are too narrow to reflect what many companies are trying, or are supposed to be trying to achieve.
The emerging role of accounting as a social science
The social sciences study man as a member of society; they share a concern about social processes, and the results and consequences of social relationships. In this respect, the usefulness of accounting as a social science depends on the benefits which it may bring to society, rather than on the advantages which it may confer to its individual members. We would say, therefore, that although an individual businessman may benefit from the availability of accounting information, what is much more important is that society as a whole should... see: The Emerging Role of Accounting As a Social Science