Objectivity Financial Accounting

Objectivity Definition 

To define objectivity, one needs to understand that the principle emphasises that financial and accounting information must be independent and free of prejudice to be reliable. In other words, financial reporting, such as a company’s financial statements, must be based on data rather than on subjective beliefs.

Professional accountants must, without a doubt, voice their opinions in some areas, but the objectivity principles state that opinions cannot be the main basis for accounting treatment.

Objectivity Meaning

In the context of accounting, objectivity is the premise that an organisation’s financial statements should be based on reliable data, known as the objectivity principle. The purpose of this principle is to prevent an organisation’s management team and accounting department from presenting financial statements that are skewed by their personal beliefs and biases.

Objectivity Principle

• According to the objectivity principle, accounting information and financial reporting should be neutral and supported by evidence when they are prepared 
• To put it another way, accounting information must be based on study and facts rather than solely on the preparer’s subjective opinion
• The objectivity concept is intended to improve the relevance and reliability of financial statements by making them less subjective 
• The concept of relevance indicates that financial statements can have both predictive and feedback value, supported by the literature 
• This indicates that the financial accounts are accurate and can be used to forecast the organisation’s future performance 
• It is implied by the concept of reliability that a variety of sources may validate financial information and that all relevant financial information is supplied
• Financial information is presented in the financial statements in both a good and unfavourable light, to put it another way 
• The objectivity principle is encompassed by the two concepts of relevance and dependability, respectively
• Because it makes financial statements more relevant and dependable, the objectivity principle improves the use of financial information for investors and creditors by increasing its relevance and reliability 
• Internal auditors and accounting companies are all subject to the objectivity principle, as are their clients
• Even though auditors are required to conform to established criteria, they must be completely independent of the organisation they are auditing 
• In this way, it is possible to verify that financial reporting and audits are conducted objectively 
• Auditors’ reports should be independent because investors and creditors rely on them for information
• If management or existing shareholders prepared reports and audits, they would be overly optimistic and not rely solely on the truth

How Does Objectivity Work?

• Financial information that the investment community can rely on when evaluating an entity’s financial results, cash flows, and financial condition should be produced by employing an impartial viewpoint while creating financial statements
• It is necessary for outside auditors’ clients to prepare financial statements according to the objectivity principle so that the auditors can utilise evidentiary material to verify that the information contained in the statements is correct
• Compliance with the concept is easier for businesses with an excellent record archiving system
• This makes it easier for auditors to locate information that supports the aggregate balances indicated in the financial statements
• Another point of view from which to consider the objectivity principle is from the auditor’s perspective
• Suppose an auditor has recently worked for a company and has been assigned to handle that company’s audit
• In that case, they may not be objective regarding the following audit report, depending on the nature of the auditor’s previous relationship with the customer

Examples of Objectivity in Accounting 

1. It was discovered that an Indian firm, Satyam Computer Services, had fabricated accounts in order to increase its profit margins in 2009. The crime was admitted to by Ramalinga Raju, the head of Satyam Computers, and it is believed to be the largest accounting scandal in Indian history. Falsifying financial statements by entering bogus orders and subsequently inflating accounts receivable violates the Objectivity Principle and is punishable by imprisonment. The accounts that you enter into your books must be impartial and verifiable for them to be accepted.
2. ABC Limited has applied for financing with a financial institution. As a collateralized loan, the loan must be accompanied by audited proof of the collateral to be accepted. To begin the loan documentation process, the company was required to provide the audited financial statements of its assets. Those will be kept on hand as a form of collateral. If the company fails to comply with these requirements, it is highly possible that the loan will not be granted to the organisation. The objectivity principle states that all assets shown in the books should be supported by appropriate evidence and should be subjected to regular audits.

Conclusion 

The objectivity principle emphasises that financial statements should be objective, i.e., the accounting information should be unbiased and free of any external or internal influence when it comes to accounting. This contributes to the credibility and usefulness of financial statements in the appraisal process. Auditing is the examination of a company’s financial records by internal and external auditors of the organisation. Auditors must exercise extreme caution when reviewing records, and they must back up their findings with appropriate documentation, such as receipts, bills, and other papers. Consequently, auditors rely heavily on the objectivity principle and ensure that each record is objective and accurate to a significant degree.