Accountability

What Is Accountability?

Accountability is when an individual or department experiences consequences for their performance or actions. Accountability is essential for an organization and for a society. Without it, it is difficult to get people to assume ownership of their own actions because they believe they will not face any consequences.

Understanding Accountability

Accountability is especially important in the world of corporate finance and accounting. Otherwise, investors and the public can lose faith in the trustworthiness of corporate financial reports, which has happened following high-profile accounting scandals in the past. Without checks, balances, and consequences for wrongdoing, the integrity of the capital markets would not be able to be maintained, damaging those markets' ability to perform their vital social functions.

Corporate accounting scandals in the late 90s and early aughts, the global financial crisis and the rigging of interest and exchange rates have all served to erode public trust in financial institutions. Such scandals usually result in tougher regulations, and indeed there are compliance departments and entire armies of regulators and private watchdogs working to make sure that companies report their earnings correctly, trades are executed in a timely fashion, and information provided to investors is timely, informative, and fair.

But many leaders have called for the creation of a new culture of accountability in finance — one that comes from within.

Examples of Accountability in Action

There are several examples of how the world of finance tries to implement accountability. An auditor reviewing a company's financial statements is responsible for obtaining reasonable assurance that the financial statements are free from any material misstatements caused by error or fraud.

Accountability forces an accountant to be careful and knowledgeable in their professional practices, as even negligence can cause them to be legally responsible. As an example, an accountant is accountable for the integrity and accuracy of the financial statements, even if errors were not made by them. Managers of a company may try to manipulate their company's financial statements without the accountant knowing. There are clear incentives for the managers to do this, as their pay is usually tied to company performance.

This is why independent outside accountants must audit the financial statements, and accountability forces them to be careful and knowledgeable in their review. Public companies are also required to have an audit committee as a part of their board of directors who are outside individuals with accounting knowledge. Their job is to oversee the audit.