The objectivity principle states that accounting information and financial reporting should be independent and supported with unbiased evidence. This means that accounting information must be based on research and facts, not merely a preparer’s opinion. The objectivity principle is aimed at making financial statements more relevant and reliable.
The concept of relevance implies that financial statements can have predictive value and feedback value. This means the financial statements are accurate and can be used to predict future company performance.
The concept of reliability implies that financial information can be verified by many sources with evidence and that all financial information is presented. In other words, the favorable and unfavorable financial information is presented in the financial statements.
The two concepts of relevance and reliability encompass the objectivity principle. By making financial statements more relevant and reliable, the objectivity principle makes the financial information more usable for investors and creditors.
The objectivity principle extends to internal auditors and CPA firms as well. Although auditors must adhere to GAAS, auditors must be independent of the company they are auditing. This helps ensure that the financial reporting and audits are done objectively. Since investors and creditors rely on auditor’s reports, the reports should be independent. If management or current shareholders wrote reports and audits, they would tend to be too optimistic and not rely on pure facts.
Examples
– A company is trying to get financing for an extra plant expansion, but the company’s bank wants to see a copy of its financial statements before it will loan the company any money. The company’s bookkeeper prints out an income statement from its accounting system and mails it to the bank. Most likely the bank will reject this financial statement because an independent party did not prepare it. In other words, this income statement violates the objectivity principle.
– Jim is an accountant who is the CFO of Fisher Corp. He leaves the company after he is offered a partnership position in DHI and Associates, an audit firm. After six months of working at the firm, he is assigned to the head auditor position on the Fisher Corp audit. This is a violation of many GAAS rules, but it is also a violation of the objectivity principle.
– Nancy is an accountant in charge of preparing financial statements for Big Ben, Inc. Nancy asks for Big Ben’s records to support its payables and receivables, but Big Ben says it will be too much work to get. Big Ben says to go with the numbers in the accounting system. This is a violation of the objectivity principle because the financial statements must be based on verifiable and reliable records– not someone’s opinion.
