Any organization is composed of a group of individuals working with various resources to accomplish a given common goal. Organizational structure defines the lines of power and authority among the individuals which in turn allocates specific levels of duty to each party. Accounting is vital in enacting the levels of responsibility that each party carries within an organizational structure (Safa, 2012). An accounting framework for any entity will ensure that accurate and dependable data concerning revenues and costs is collected from each level of administration. The collected information comes in the form of financial reports that inform departmental managers on the amount of revenues that their sections have collected and the levels of expenses incurred to come up with the revenues. As the accounting framework works up the hierarchy of the organizational structure, the overall manger gets information on how the entire entity has been performing in terms of revenue and costs.
Accounting extends behind brick and mortar in the sense that those delegated with the role of preparing accounting reports carry the responsibility of reflecting the real organizational state in terms of revenue and expenditure (Safa, 2012). Apart from the financial information that accounting reports portray to departmental and overall managers, shareholders, and the public, they also reveal the transparency of workers when coming with them. As such, managers can easily pick out departments that operate with utmost transparency and those lagging behind. It follows that well-prepared accounting reports must look attractive, concise and easy to understand. Moreover, they must reflect the unique features of the concerned entity more so when it comes to planned expenditure, real expenditure, and revenues. Also, they must be fully analytical, prepared at regular intervals and on time to boost their relevance to the running of the entity (Safa, 2012).
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Executive compensation contacts consist of various agreements between business organizations and their managers aimed at motivating them to work in the best interests of the organizations (Lewellen, Loderer, & Martin, 1986). Such contracts may come in form of deferred payments that work well for investment horizons and ultimately benefit the concerned entity. Other types of agreements may involve lucrative pension offers and bigger salaries that are fixed despite how a given organization performs. Such make managers comfortable and limit the risk that they will be snatched by competing entities.
On top of that, contracts may comprise of performance bonuses and stock options that may see executives make investment decisions that will ultimately add value to the entity. Other aspects of executive contracts may involve work tenure where younger age leads to longer tenures while old age will result in shorter ones (Lippert & Moore, 1994). It is prudent to note that inasmuch as compensation agreements are meant to benefit an organization, they can also have conflicting results on decisions made by executives. For instance, deferred payments can also cause managers to make decisions that may risk a firm’s future survival.
The results of compensation contracts must be accounted for to measure their impact. Rather than using time and cash flows, compensation contracts are accounted based on accruals (Umobong, 2015). Accruals have a better chance of reflecting how a given company is performing as well as predict future earnings that it is likely to make. This is because accruals result from factors directly under the control of managers (Sloan, 1992). Additionally, GAAP and IFRS accounting guidelines allow managers to make professionally guided predictions on how they perceive a given firm will perform in future. As such, managers are allowed to apply discretionally accruals that offer well-thought forecasts of what profits their firms are likely to make in future (Umobong, 2015). However, managers may tend to report opinions that favor their earnings within contractual agreements.
