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Objectivity
The objectivity principle says that whenever possible, accounting entries should be
based in fact -- that is, on information that can be objectively proved -- rather than on
information that's open to interpretation. Such interpretations, after all, are really just
opinion. Objectivity goes hand in hand with two other bedrock accounting principles
reliability, which is the degree to which you can trust that accounting entries are
accurate, and verifiability, which is the likelihood that different accountants looking at
the same information would produce the same results.
Example
! prime e"ample of the objectivity principle in action is in the reporting of asset
values on a company's balance sheet. Say your company bought a plot of land five
years ago for #$%,%%%. &ou could ask five e"perts in commercial real estate to tell you
what it's worth today, and you might get five different opinions. They'd all be e"pert,
informed opinions -- but they'd still be opinions. The only thing that can be said with
objective certainty about the value of the land is that you paid #$%,%%% for it five years
ago. So that's the figure that will appear on your balance sheet, for as long as you own
the land.
http://www.myaccountingcourse.com/accounting-principles/objectivity-
principle
Objectivity Principle
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. 'n 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. (y
making financial statements more relevant and reliable, the objectivity principle
makes the financial information more usable for investors and creditors.
The objectivity principle e"tends to internal auditors and )*! firms as well. !lthough
auditors must adhere to +!!S, 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. 'f management or current shareholders wrote reports and audits, they
would tend to be too optimistic and not rely on pure facts.
Examples
- ! company is trying to get financing for an e"tra plant e"pansion, 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. ,ost likely the bank will reject this
financial statement because an independent party did not prepare it. 'n other words,
this income statement violates the objectivity principle.
- -im is an accountant who is the ).O of .isher )orp. /e leaves the company after he
is offered a partnership position in 0/' and !ssociates, an audit firm. !fter si"
months of working at the firm, he is assigned to the head auditor position on the
.isher )orp audit. This is a violation of many +!!S rules, but it is also a violation of
the objectivity principle.
- 1ancy is an accountant in charge of preparing financial statements for (ig (en, 'nc.
1ancy asks for (ig (en's records to support its payables and receivables, but (ig (en
says it will be too much work to get. (ig (en 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.