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Senior management
Financial 
accounting and cost 
accounting staff 
The accounts department as a whole produces 
management information for decision-making and 
control 
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PART C: ACCOUNTING AND REPORTING SYSTEMS, CONTROLS AND COMPLIANCE 
 
208
 
Importance of the relationship 
The accounts department is crucial to the organisation. 

If it provides the wrong information, managers will make bad decisions. 

If it confuses the data, important transactions might slip through the net, and fraud may result. 

There is a legal duty to ensure that accounting records are in good order. 
 
3
The regulatory system 
You should be able to outline the factors which have shaped the development of financial accounting.
3.1 Introduction 
You may be aware that there have been considerable upheavals in financial reporting, mainly in 
response to criticism. The purpose of this section is to give a 
general picture 
of some of the factors 
which have shaped financial accounting. We will concentrate on the accounts of limited companies 
because this is the type of organisation whose accounts are most closely regulated by statute or 
otherwise. 
The following factors can be identified. 

Company 
law 

Accounting concepts and individual judgement 

Accounting 
standards 

The 
European 
Union 

Other international influences 

Generally accepted accounting practice (GAAP)
3.2 Company law 
Limited companies are required by law (the UK Companies Act 2006 or CA 2006 for example) to 
prepare and publish accounts annually. The form and content of the UK accounts are regulated primarily 
by CA 2006, but must also comply with accounting standards. 
The Companies Act 2006 (TSO, 2006) requires companies to keep proper accounting records in order 
to be able to prepare financial statements. These statements are then required to be audited and an 
auditor's report appended (see Section 2.4 above), before being filed at Companies House. These 
financial statements are then available for inspection by members of the public. A company can be fined 
for failing to keep proper accounting records or for failing to file financial statements within the statutory 
period after the year end. 
3.3 Accounting concepts and individual judgement 
Financial statements are prepared on the basis of a number of fundamental accounting concepts (or 
accounting principles as they are called in the UK Companies Act 2006). Many figures in financial 
statements are derived from the application of judgement in putting those concepts into practice. 
It is clear that different people exercising their judgement on the same facts can arrive at very different 
conclusions. Other examples of areas where the judgement of different people may differ are as follows. 

Valuation of buildings in times of rising property prices 

Research and development. Is it right to treat this only as an expense? In a sense it is an 
investment to generate future revenue. 

Accounting for inflation 

Brands such as 'Jaffa Cakes' or 'Walkman'. Are they assets in the same way that a forklift truck is 
an asset? 
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CHAPTER 8
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THE ROLE OF ACCOUNTING