Accountability

A situation where an individual or company is responsible for the outcomes of a particular activity

What is Accountability?

Accountability is the concept of answerability by an individual or a department for the performance or outcomes of specific activities. Essentially, the accountable party is responsible for the execution of the desired role.

 

Accountability

 

The principal party delegates roles to other parties but remains liable if an action is not executed well or in the event of a loss. It is commonly practiced in the financial sector and the business world in its entirety.

For example, the two elements of accountability can be seen in a case where an accountor delegates the power to the accountee, but it is the accountor who takes responsibility and goes the extra mile to put measures in place to prevent future reoccurrence of a mistake. The concept is further dependent on the ethical behavior of the party held to account for the activity and influence of regulations.

The benefit of accountability is that it assures that an auditor’s presented an accurate and fair view of a company’s financial health. The auditor is, therefore, legally and criminally liable for fraud or breach of contract resulting from the audited financial statements. Accountability commands care, knowledge, and skills during accounting practice since a slight omission or an act is tantamount to professional negligence.

The accountor gives the mandate and delegates the power, while the accountee receives power.

 

Summary

  • Accountability refers to a situation where an individual or company is responsible for the outcomes of a particular activity.
  • Accountability on checks and balances guarantees the integrity of capital market investment activities.
  • Agencies with structured accountability can realize legitimacy and a high level of governance, as well as better financial positioning.

 

Understanding Accountability

Accountability helps to improve the quality of financial reporting. In essence, the integrity of the capital markets depends on credible checks and balances. The accountability objective is the basis for constructive dialogue between investors and management. It shows how the management utilizes the resources with which it is entrusted.

Shareholders are also interested in the concept of accountability in a company’s operations. Public companies have a fiduciary responsibility to their shareholders by ensuring accurate and timely reporting of earnings for the year and proper execution of trade.

They also ensure proper communication of information by having established channels of communication where important information is communicated to shareholders, potential investors, and the public. A reasonable level of care and accuracy is needed to curb possible errors – failure to which the company may incur a penalty. If they suffice, the responsible party is held accountable.

 

Roles of Accountability

The view of accountability continues to broaden in modern times. Shifts in the socio-political environment are driving the changes in accountability relationships. As a result, accountability relations in the financial sector are becoming diversified.

They come as a result of notable developments – such as the role of media, the emergence of participatory democracy, and the growing need to keep investors and the public up-to-date and directly involved in a company’s activities. In the case of structured accountability, business agencies now realize legitimacy and a high level of governance and financial positioning are needed to continue to exist.

Some of the key roles of accountability include:

 

1. Improve a company’s governance

Accountability, alongside other key underpinnings, such as integrity and transparency, has proven to be the driving force behind a good governance arrangement. Reporting the returns on a portfolio of investments in an accountable and transparent manner reduces the chances of corporate mischief, implying that the administration of a company is based on good governance.

 

2. Provide oversight

The two elements of accountability ensure that responsibility is delegated and not merely forsaken. It suggests that there is a hierarchy in which the principal retains the consequences of the responsibility. However, the powers that are necessary to achieve objectives usually limit the allocation of roles to other parties.

 

3. Maintain and enhance legitimacy

A clear legal ground for various accountability mechanisms can generate the legitimacy of a company. If the actions of a company bear legitimacy in the eyes of investors, it can effectively use the granted independence.

Conversely, a company’s independence will be short-lived if its activities lack legitimacy. Companies are accountable for their financial activities to safeguard legitimacy and maintain autonomy.

 

4. Improve performance

Although accountability is mostly concerned with financial monitoring, it is also concerned with using internal controls to enhance performance. A sound management system defines the rules and actions against which reviews are subjected.

It, as a result, minimizes the scope for ad hoc and, instead, enhances financial performance. For example, the condition under which a company may be subjected to litigation is captured by a structured judicial review. Thus, a well-designed accountability mechanism can help strengthen a company’s independence.

 

Examples of Accountability

Accountants are accountable for the quality of financial reporting in any company. However, there are situations when the financial statements may be manipulated for selfish gains. It is the reason why financial statements are subject to independent external accountants.

Independent auditors possess enough knowledge and experience to detect any loophole in financial statements. Publicly listed companies are required to get their financial statements audited every year. They are also required to involve audit committees as part of the board of directors to oversee and enhance transparency.

 

Related Readings

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Business Ethics
  • Fraud Triangle
  • Internal vs External Financial Reporting
  • Evidence in an Audit

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!