1.
The evolving role of accounting

Accounting is everywhere. Why? How did this all come about?

Unit learning outcomes

By the end of this unit, you will be able to:

  • show an awareness of the evolution of the accounting profession so that you are able to appreciate how the role has developed
  • reflect on a definition of accounting for contemporary society
  • clarify what is meant by accountability and explain what this means in relation to accounting
  • distinguish between the main characteristics of financial and management accounting.

1.1 Introduction

Accounting affects many aspects of our lives, mostly without us realising it, often influencing our behaviours and those of organisations. For example, you may create budgets to ensure your spending does not exceed your income or access to funds. To understand accounting and its power, this chapter helps you to appreciate its historical roots, explore a contemporary definition that will form the basis of the remaining chapters of this book, and establish what accountability is and its relation to accounting. We will also consider the differences between financial and management accounting.

Pause to reflect

  • As an individual, what are you accountable for and who are you accountable to?
  • What do you communicate to them to show you are accountable for your actions?
  • How do you feel when others don’t take accountability for their words and actions?

1.2 A short history of accounting

Accounting’s origins can be traced back to ancient civilisations, where some of the very earliest written records are of transactions made. It appears that ‘the exact location of the developments of accounting cannot be entirely associated with one civilization or nation because these developments took place over some time and possibly in different civilizations’.1

As trade developed beyond local communities, people started to use money as a form of measurement. In whatever form money is recognised (including shells and gold and silver coins), what differentiates it from other similar materials is the fact that the values that it represented were recorded in accounting records.

The introduction of tax strengthened the role of accounting as a way of representing transactions in a commonly agreed form. A need to check or verify the records created for merchants resulted in the emergence of the audit.

Industrial Revolution
During the 1800s the UK, the US, and several other European economies were marked by a move from a reliance on agriculture to an economy characterised by systematisation of production processes for example, through factories and mechanisation of tasks. This was accompanied by developments in transport including railways, sea, and airplanes facilitating the transportation of goods and people more reliably than in the past. Whilst this period gave rise to many inventions and increased wealth it was also a period of colonialisation and gave rise to significant social inequalities.

While modern accounting is often considered to have developed during the Industrial Revolution, accounting has a far longer history with similar approaches evolving in different countries.

A brief timeline of accounting

8000–5000 BCE
Earliest evidence of accounting from Mesopotamian civilisations showing lists of transactions.2
4000–3000 BCE
Archaeological evidence from Iran shows that clay tokens were used as part of a bookkeeping system, and money had made an appearance.
610 BCE
The Quran states that followers should keep records of their indebtedness (sura 2, ayah 282) serving to codify existing practices. However, the terms ‘accounting’ and ‘accountant’ were not used until much later. Zakat, or the practice of giving 2.5% of savings and assets to the poor, required the development of accounting practices in the Islamic state. As a result, concepts of classification and periodicity developed to support this practice.
1800 BC–95 CE
The Bible makes several references to keeping accounts as a control device but does not describe the mechanics of accounting. However, it does describe an early ‘audit’ or inspection.
400 BC
Systems had been developed to check movements in and out of storehouses. As tax became increasingly important, so did the need for reliable methods of recording payments, increasing the reliance on accounting systems. The term ‘audit’ comes from the Latin word ‘audire’ – to hear – and refers to the verbal accounts given of these movements.
1494
The Italian friar and maths teacher Luca Pacioli first described a system of double-entry bookkeeping being used by merchants in his book Summa de Arithmetica, Geometria, Proportioni et Proportionalita. While bookkeeping was in widespread use, there were many different versions in circulation before the publication of Pacioli’s book. The book explained how to record entries systematically in a way that enabled the merchants to audit their books. Bookkeeping was explained using five simple facts (or axioms) and three principles (or postulates). The publication of the Summa de Arithmetica is commonly viewed as marking the start of the accountancy profession.3 It is estimated that around 2,000 copies were made of Pacioli’s book,4 of which several remain, including a digitised version.

Today’s double-entry continues to be based on Pacioli’s work.

1854
The world’s first professional body was created and the term ‘chartered accountant’ was recognised through the grant of a Royal Charter to a group of accountants in Glasgow who formed the precursor to the Institute of Chartered Accountants in Scotland (ICAS). As the Industrial Revolution progressed and business organisations grew in complexity, the demand for accountants also grew and further professional bodies were recognised.
1909
Ethel Ayres Purdie became the first woman to be admitted to the London Association of Accountants (LAA), a body of accountants that had been formed to provide a more inclusive membership than other professional membership bodies of the time.5 The LAA was a forerunner of what is now known as the Association of Certified and Chartered Accountants (ACCA).
1920
Mary Harris Smith secured entry to the Institute of Chartered Accountants in England and Wales (ICAEW), following a protracted campaign to become the first female chartered accountant. It was only after the Sex Disqualification (Removal) Act in 1919 that she was finally admitted, age 75, following over 30 years of running her own accounting practice.
1948
An obligation to prepare group accounts for UK companies was introduced, requiring consolidated accounts for groups of companies for the first time. The move was replicated in many other countries including New Zealand, Australia, India and Canada among others.
1970s
Major accounting failures resulted in the demand for better accounting rules (standards). The UK led the way in Europe with the establishment of the UK Accounting Standards Committee (later Board) which issued accounting standards called Statements of Standard Accounting Practice (SSAPs) that formed the basis of UK accounting disclosure until 2005 when they were replaced by International Accounting Standards (IAS) following adoption across the European Union. These developments paved the way for the international accounting architecture that we are now familiar with.
1976
The Corporate Report was issued by the Institute of Chartered Accountants in England and Wales. This pioneering document extended reporting to social and environmental aspects. It inspired what became the IASB Conceptual Framework for Financial Accounting, led the way in non-financial reporting, and highlighted the need for increased transparency and engagement with interested parties.
1994
John Elkington coined the phrase triple bottom line accounting. Triple bottom line accounting seeks to present financial impact as well as impact on people and the planet and is often referred to as the 3Ps (profit, people, planet). Despite challenges with consistency and measurement, this has led to the development of sustainability reporting standards.
2004
Accounting for Sustainability (A4S) was established by HM King Charles III in 2004, when he was The Prince of Wales, ‘to help ensure that we are not battling to meet twenty-first-century challenges with, at best, twentieth-century decision-making and reporting systems’.
2005
The International Accounting Standards Committee (IASC) was created in 1973 by an international agreement between the professional accountancy bodies in Australia, Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom and the United States, and became the International Accounting Standards Board (IASB) in 2001. It sets financial accounting reporting standards, International Financial Reporting Standards (IFRS), that have been adopted by numerous countries.
2009
The IASB released the standards for small and medium-sized entities (SMEs). While not mandatory, the standards seek to address some of the criticisms of applying IFRS to smaller entities, including the administrative burden. To date around 80 jurisdictions have adopted IFRS for SMEs.
2010
Following the King Code of Governance for South Africa (King III), all listed companies were required to prepare integrated financial reports. These reports provide details on the six capitals:
  • Financial capital: the funds and other financial resources available to an organisation
  • Manufactured capital: the physical assets and infrastructure that an organisation owns or controls
  • Intellectual capital: the knowledge, skills and intangible assets that an organisation possesses or creates
  • Human capital: the people and their capabilities, well-being and motivation that an organisation employs or engages
  • Social and relationship capital: the relationships, networks and reputation that an organisation has with interested parties, including society and providers of capital
  • Natural capital: the natural resources and ecosystems that an organisation depends on or affects.

The International Integrated Reporting Framework came under the auspices of the IASB and International Sustainability Standards Board (ISSB) in 2022.

2013
The European Accounting Directive removed the requirement for smaller companies to be audited. This step was a response to calls for reduced compliance costs for small businesses.
2021
The International Sustainability Standards Board (ISSB) was created to address the pressing need for sustainability reporting standards. The first standards address climate reporting.
The future of accounting
Accounting is now moving into new areas, including sustainability reporting that can help report on and change behaviours. It remains important that users of accounting information can continue to trust the work of accountants.

For an example of a copilot, watch this video from EngineB.

Technology will help to support the work of accountants and their clients, with artificial intelligence and other tools changing the shape of accounting work, for example through copilots (artificial intelligence assistants).

Pause to reflect

  • Is it possible that accountants are taking on too much in their wider role?
  • Do accountants have the knowledge and skills to take on all these aspects?
  • What other knowledge and skills might they need?

Question 1.1

How did Pacioli’s book affect the practice of accounting? Read the statements and choose the correct option(s).

  • It described the principles of double-entry bookkeeping.
  • It introduced the concept of debit and credit to record transactions.
  • It standardised the format of financial statements and reports.
  • It developed the principles of auditing and internal control.
  • Pacioli’s book described the double-entry accounting method.
  • Debits and credits pre-dated Pacioli’s book.
  • Pacioli’s work described a balance sheet and a summary of accounts and laid the foundations for future standardisation.
  • Auditing and internal control developed alongside bookkeeping to serve as a check.

1.3 How do we define accounting?

Accounting has often been defined in technical terms (that is, defined in terms of how to do accounting), implying that it is a wholly objective process. It is commonly referred to as the ‘language of business’, yet the reduction of accounting to a business-oriented activity ignores its broader influence and is far too narrow when accounting is also fundamental to the reporting of non-business entities such as government in all its forms, charities, NGOs and civil society organisations. Accounting has important social and moral aspects that should be recognised in its definition. This has long been reflected in academic research and is now increasingly becoming part of practice-based discussions of accounting.

In this textbook we use the following definition of accounting:

Accounting is a technical, social and moral practice concerned with the sustainable utilisation of resources and proper accountability to stakeholders to enable the flourishing of organisations, people and nature.6

This definition embodies how accounting is a multidimensional practice and how it can, as a discipline, help organisations to thrive alongside people and nature, rather than in competition with them.

Accounting is a technical, social and moral practice

Garry Carnegie (2022) further developed this idea by explaining the three dimensions of accounting as follows:

  • Technical: How to do accounting?
  • Social: What does accounting do?
  • Moral: What should accounting do?

He asserts that in the past, accounting courses have spent too long focusing on how to do accounting without considering what it does and what it should do. Accountants need to understand these aspects to use accounting techniques effectively.

The term ‘social’ in this context refers to the impact accounting has on both organisations and society. Accounts are not just a record of what an organisation has done; they are also used in the organisation to influence behaviours, for example using key performance indicators (KPIs) or metrics to plan and guide performance. Accounting can also influence societal behaviour, for example through ethnicity pay reporting, carbon emissions reporting, and informing decisions in relation to investment, resource allocation and economic policy.

The moral dimension of accounting refers to the power of accounting as a social practice and the importance of reflecting on the ethical aspects of accounting techniques. Accounting and audit work must be trusted by society as the work cannot easily be replicated by others. Many different interested parties rely on accounts for their decision-making; for example, a bank might choose to lend money to a business based on its accounts, or a charity may be awarded grant funding based on its accounts.

Professional accountants, as members of professional bodies, must adhere to their professional codes of conduct in their work. The International Ethics Standards Board for Accountants (IESBA) Code of Ethics has been widely adopted and provides a principles-based approach to ethics with five fundamental principles:

  • Integrity: to be straightforward and honest in all professional and business relationships
  • Objectivity: not to allow bias, conflict of interest or undue influence of others to override professional or business judgements
  • Professional competence and due care: to maintain and enhance the knowledge and skills needed to perform professional services with diligence and quality
  • Confidentiality: to respect and protect the information acquired as a result of professional and business relationships, unless there is a legal or professional duty to disclose it
  • Professional behaviour: to comply with relevant laws and regulations and avoid any action that may discredit the profession.

The Code of Ethics adopts a principles-based approach rather than a rules-based approach. The benefits of the principles-based approach include the following:

  • It involves an active consideration of the principles rather than a tick list approach.
  • It prevents a narrow compliance-based approach to ethics.
  • It retains the flexibility to adapt to new and evolving scenarios
  • It can be applied to each case based on the unique facts.

Pause to reflect

  • In what circumstances could a rules-based approach be more helpful than a principles-based approach?
  • Why are the fundamental principles so important for accountants?
  • What are some possible consequences of accountants not following a code of ethics?

Question 1.2

Accounting is a technical, social and moral practice. What are accountants concerned with? Read the statements and choose the correct option(s).

  1. How to do accounting
  2. What accounting does
  3. What accounting should do
  4. Who does accounting
  • 2, 3, 4
  • 1, 2, 4
  • 1, 2, 3
  • all of the above
  • This option does not consider how to do accounting.
  • This option does not consider the normative aspect, what accounting should do.
  • Accountants are concerned with the first three statements, according to Carnegie.
  • The definition isn’t concerned with who does accounting.

Question 1.3

Which of the following are fundamental ethical principles according to the IESBA Code of Ethics? Read the statements and choose the correct option(s).

  • professional behaviour, legality, confidentiality
  • objectivity, professional competence and due care, personal behaviour
  • integrity, legality, objectivity
  • objectivity, integrity, professional behaviour
  • While legality is not one of the five fundamental principles, it is included under the principle of professional behaviour.
  • Personal behaviour goes beyond the professional sphere.
  • While legality is not one of the five fundamental principles, it is included under the principle of professional behaviour.
  • The five principles are integrity, objectivity, personal competence and due care, confidentiality, and professional behaviour.

Case study 1.1 How accounting affects behaviour: The case of university league tables

This case study uses the examples of university rankings to illustrate how the use of a series of non-financial metrics has influenced behaviours both internally to the university and also of the intended users. While initially introduced to increase transparency and support informed decision-making for applicants, the process has resulted in several unintended consequences.

Watch the case study video or read the text below to gain insight into the behavioural impact of accounting measures.

You can look at two of the public rankings of universities mentioned in the case study video on the Top Universities and Times Higher Education websites.

Case commentary

University rankings are influential in driving the behaviours of applicants, which in turn drives fee income for universities. In some countries, students can only access scholarships to study internationally at ranked universities or programmes. As a result, there is significant competition between universities seeking to maintain and increase their rankings. In extreme cases, ranking data has been found to have been falsified, leading to prosecution for those involved, for example, in 2021 the Dean of Temple Fox Business School was found guilty of manipulating MBA data.7

However, the data on which rankings are based is often a proxy, for example for quality of teaching or a combination of indicators synthesised into one category, leading to the criticism that they oversimplify a complex dataset. Further, it is often unclear what methodologies have been applied. While some of the data may be publicly available, some ranking bodies require universities to submit datasets directly. This activity requires an investment in time to collate the data.

Ranking bodies have been criticised for potential conflicts of interest where they also provide advisory services.8 This is linked to methodological transparency. If the weighting of components in the ranking algorithm is unclear, then universities can feel compelled to purchase these services to enhance their positions. This is particularly the case where there are significant pressures on student recruitment.

Of course, rankings and league tables are not isolated in the university sector and can be found in many other sectors, for example investment banking, often diverting attention from new opportunities.9

Pause to reflect

  • Have league tables been important to you in your decision-making?
  • Do you think league table measures drive behaviours in a positive manner?
  • How does this case study make you feel about using league tables in the future?

Sustainability and accountability in accounting

In Carnegie’s definition of accounting, the second part focuses on the sustainable utilisation of resources and proper accountability to stakeholders to enable the flourishing of organisations, people and nature. In this section, we will look at each of these aspects.

What is sustainability?

The term ‘sustainability’ is ubiquitous and is used in many ways. In the context of understanding what accounting is, we adopt a longstanding definition of sustainability as development that

meets the needs of the present without compromising the ability of future generations to meet their own needs.10

This definition was originally used in the Brundtland report, which was named after its author, Norwegian Prime Minister Gro Harlem Brundtland, and is widely recognised as establishing the accepted definition of sustainable development.

What does accountability mean?

In simple terms, accountability means to be responsible for one’s actions. In accounting terms, the organisation is typically accountable to several different interested parties. Asking four related questions can help frame accountability:11

  • Who is accountable?
  • To whom are we accountable?
  • For what are we accountable?
  • How is accountability to be enacted?

The duty to provide an account is a key aspect of accountability. This may take many forms for example, verbal or written. Some common forms of accountability include personal, professional, legal, moral and political accountability. The different forms of accountability explain why some individuals feel accountable while others do not. For example, a person may be professionally accountable but not feel personally accountable for various acts.

Accounting is intrinsically linked to accountability and governance as shown by Figure 1.1. It provides the underlying tools for accountability and governance to develop. A need for accountability in organisations drives the development of governance processes, enabled by accounting tools to ensure that the desired aims are achieved.

The relationship between accounting, accountability and governance.

Figure 1.1 The relationship between accounting, accountability and governance.

Carnegie and Napier, 2023, with the permission of the authors.

‘Stakeholders’ or interested parties

The interested parties of an organisation include anyone who has an ‘interest’ in the organisation. This might include the employees, customers, suppliers, lenders or local community. The interested parties can be diverse, depending on the nature and scale of the organisation, for example whether it is a local municipality, non-profit organisation, membership organisation, or partnership. While there have been times when an organisation’s focus was on maximising profit for shareholders (an idea known as ‘shareholder primacy’), the focus on people and the planet has enjoyed a resurgence as the global community has been forced to consider sustainability-related issues and reporting the impact on the environment. This approach of seeking to maximise profit for all is known as ‘stakeholder capitalism’.

We acknowledge that the term ‘stakeholder’ is increasingly contested due to its colonial connotations, and we seek to limit its usage. However at the current time the term is used in journal articles and in several theories, for example stakeholder theory and stakeholder capitalism. In those contexts, we will continue to use the term ‘stakeholder’.

With so many different interested parties it is inevitable that there will be tension between the needs and priorities of different groups. How can organisations balance different interests when they are in tension? Consider the following examples:

  • Employees may seek higher wages, but shareholders may seek higher dividends. The tension is highlighted in the case where two large private rail companies paid a dividend while in pay disputes with their employees’ union.
  • Sustainable product sourcing can compete with the need to keep raw material prices low to maintain profitability and growth targets. H&M Group’s supply chain disclosure reflects its commitment to responsible practices.
  • provides an example.
  • Charities need to balance the needs of beneficiaries with the cost of raising funds. For example, in 2021–2022 the WWF spent about 25% of its income on fundraising. This could be seen as a form of investment in its operations.
  • Representing interest groups beyond shareholders is less common, however a company called Faith in Nature has put nature on its board. While this is unusual, it recognises the role of nature as an interested party in their natural toiletries company by embedding it into the governance processes.

This approach stands in contrast to the idea of shareholder primacy, which focuses on wealth-maximisation strategies for shareholders. Milton Friedman, the Nobel prize-winning economist, argued that managers had no obligations other than wealth maximisation.12

Profit maximisation has been embedded into IFRS, which focuses on providers of capital at the expense of a more diverse range of interested parties.

The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity.13

This approach is increasingly being questioned, as the broader role of accounting in society is recognised.

Pause to reflect

  • What would the implications be if the IFRS Conceptual Framework was expanded to reflect other interested parties?

Question 1.4

What does ‘stakeholder’ capitalism seek to do? Read the statements and choose the correct option(s).

  • Represent a range of interested parties in the decision-making process.
  • Maximise profit for all interested parties.
  • Focus on the needs of shareholders for a return on their investment.
  • Resolve all tensions in decision-making.
  • Stakeholder capitalism focusses on profit rather than the decision-making process.
  • It seeks to maximise the profit for all interested parties.
  • This approach is called shareholder primacy.
  • It is unrealistic to think that any approach can resolve all tensions inherent in decision-making.

Flourishing of organisations, people and nature

Balancing the needs of organisations, people and nature reminds us of the triple bottom line concept developed by Elkington back in the 1990s. The components are often referred to as the 3Ps – people, planet, profit.

This video explains the concept of the triple bottom line.

Accounting is well placed to help organisations collect the relevant data and undertake analysis to support decisions that help to balance the 3Ps. This is why accounting is often referred to as a force for good. Yet we should be aware of ethical challenges that may be associated with expanding the boundaries of accounting into sustainability-related areas, including greenwashing, a lack of objectivity, and going beyond one’s professional competence.

For a more detailed exploration of some of the ethical risks, read this 2023 ACCA report, Ethical dilemmas in an era of sustainability reporting.

Pause to reflect

  • Do you think accountants are able to influence the sustainable use of resources in the organisations in which they work?
  • What needs to be included in a financial report to ensure organisations are held accountable to interested parties beyond those envisaged by the conceptual framework for financial reporting, including nature?

1.4 Financial and management accounting

Accounting is typically divided into two types, each with a different focus: financial accounting and management accounting. This book considers both financial accounting (Units 7–14) and management accounting (Units 15–20). The purpose of financial and management accounting differs:

  • Financial accounting: the process of recording and reporting financial performance over a set time period, for example a year. This is backward-looking. Users of financial accounts are external to the organisation and include investors, lenders, competitors, tax authorities, and others.
  • Management accounting: the internal accounting processes of an organisation to enable informed decision-making to take place around resource usage. For instance, this may include forecasting, budgeting, product costing and pricing, and investment decisions, among others. Management accounting can be both forward- and backward-looking.

Question 1.5

Which of the following DOES NOT represent how management accounting information is used in an organisation:

  • Management accounting information is used internally to inform decision-making.
  • Management accounting information is used only by the finance department.
  • Management accounting information can include projections of future performance.
  • Management accounting information can combine both financial and non-financial measures.
  • Management accounting information is used internally to inform organisational decision-making.
  • Management accounting information is used throughout the organisation, for example by marketing, sales, procurement, human resources and many other departments.
  • Management accounting information can be forward-looking.
  • Often management accounting information combines both financial and non-financial information into what is known as a ‘balanced scorecard’.

1.5 Summary

  • Accounting has been around for thousands of years.
  • Double-entry bookkeeping was codified by Luca Pacioli, who is often referred to as the father of accounting. The expansion of international trade meant that double-entry bookkeeping spread quickly.
  • International convergence of accounting rules has led to comparability in the accounts of entities adopting these standards. Most recently, sustainability standards have been developed to address the multiplicity of frameworks in operation.
  • Accounting is now defined as a technical, social and moral practice.
  • Accountability questions include who, to whom, for what and by what means.
  • There are many interested users of accounts, and their needs may be in conflict. IFRS financial reporting gives primacy to a narrow set of interested parties.

Further reading

The following handbook explores concepts of accountability from a variety of different perspectives. Chapters can be read individually.

Carnegie, G. D., and Napier, C. J. (Eds.). (2023). Handbook of accounting, accountability and governance. Edward Elgar Publishing.

For a more in-depth history of accounting, this book provides an accessible history of US corporate accounting:

King, T. A. (2006). More than a numbers game: A brief history of accounting. John Wiley & Sons.

References

  1. Zaid et al., 2004, p. 151 

  2. Robson, 1992 

  3. Sangster, 2016 

  4. Sangster, 2007 

  5. Walker, 2011 

  6. Carnegie et al., 2021 

  7. Basken, 2021 

  8. Chirikov, 2021 

  9. Ghose, 2024 

  10. Brundtland Report, 1987 

  11. Joannides, 2012, p. 244 

  12. Friedman, 1962 

  13. IFRS Conceptual Framework 1.2