The stewardship function in accounting

“Stewardship” is a concept of ethics. It expresses the responsibility of an individual, group or company towards the safekeeping of resources and honest dealings for future generations or for third parties who are not directly in a position of authority over the acting parties. In accounting this means that there a moral duty to present accounts that do not mislead.

The stewardship function is an attempt to enforce the professional responsibilities of accountants against the influence of interference. An accountant should not cook the books even if his boss tells him to. He should not accept work that is an attempt to defraud the tax authorities, shareholders, workers, customers or the community. These other groups who should be seen as invisible clients of the accountant are termed “stakeholders.”

Valuation and costing methods are a focus of the stewardship function of Accounting. Companies that are insolvent can present themselves as viable businesses by revaluing their assets. An obvious misevaluation would be a fraud and so those implementing such a policy could be sent to gaol. However, accountancy includes a number of practices that legally adjust the values of company assets. The stewardship concept urges accountants to choose costing methods appropriate to the successful operation of the company and not be guided towards those methods that misrepresent its financial position.

A bank may have made a loan to another bank and received bonds in exchange. The borrowing bank then fell into trouble and looked for ways to reduce its debt. Once the borrower started offering debt-for-equity swaps to its bondholders, the value of those bonds fell. The holding bank should then re-value its assets to the new value, this is the current cost, or the market value. However, it may choose to keep the price it paid for those bonds as their recorded value, this is called the book value. In this case, the bank would be misrepresenting its true asset position, while still telling the truth.

Market value is does not indicate honesty. Companies have a range of options to bump up their asset values by placing theoretical values on intangible assets like “goodwill.” Some assets may not make any money, but could be attractive to a specialist buyer, thus giving that asset a higher value than it deserves on paper. A good example of this is a website. In the tech stock bubble at the turn of the century, loss-making web-based companies attracted high valuations. Any company that had a website could then claim that the current market value of that site was way beyond what it cost to set up.

The stewardship function of Accountancy stresses that accountants should always err on the side of caution when recording asset values. IF anything, they should aim to undervalue assets so that they can avoid accusations of falsely inflating values and misrepresenting the company’s solvency.