Confidence Accounting -
Challenging The Perceived Notion

Although the financial statements of an entity are useful for analyzing its financial position and performance by the users such as the owners and investors, management, suppliers, lenders, employees, customers, the government, and the general public, but the informations are expressed in terms of numbers based on precise calculations. No matter how precise the calculations may be, the numbers expressed envelopes inside many probabilities and uncertainties which is extremely hard to judge and define specifically. Also the numbers reflected in the financial statements comes with inherent ifs and buts (footnote explanations, etc) which work as a protective gear for the auditors.

Form the investors' point of view; the numbers reflected in the financial statements are something that hardly bothers them with regard to the future of the concern. Most of the investors tend to forget that business exist with uncertainties and probabilities and those who does, for them it's really very hard to predict precisely simply because financial statements reflects all that has happened and that could be expressed in terms of money only. This accounting procedure conceals within itself all kinds of probabilities and uncertainties. The numerical concept of accounting and auditing may well be the root cause of many current problems and complexities that becomes incomprehensible for many. This made accounting and auditing subject to much criticism over time. The numbers reflected were incapable of reflecting reality, the chances of making money or the probability of losing money.

Here comes the role of Confidence Accounting challenging the perceived notion. Confidence accounting advocates the usage of 'Probability Distributions' rather than 'Discrete Values'

Probability Distributions are function that describes the likelihood of obtaining the possible values that a random variable can assume. While the concept of probability gives us the required mathematical calculations, distributions help us actually visualize what's happening underneath.

Discrete Values are values that can be counted within in a finite amount of time in auditing and accounting.

Accountants would present uncertainties as ranges to investors and managers, rather than as discrete numbers.

The proposal for confidence accounting calls for adopting more clarity to accounts by reducing the size and complexity of annual reports and presenting uncertainties as ranges to investors and managers, rather than as discrete numbers. The result at the end would provide a more precise audit report with clarity, reduced footnotes and less complexities. For the investors, the audited accounts would be presented in a less complex manner showing ranges. Over time, investors could evaluate an audited firm on the basis of how closely historic accounts fell within the stated ranges. By reflecting the distributions, the interest of the investors will be better served, reduced unreasonable expectations and minimised criticism of the accountants' role.