Objectivity principle

The objectivity principle is the concept that the financial statements of an organization be based on solid evidence. The intent behind this principle is to keep the management and the accounting department of an entity from producing financial statements that are slanted by the opinions and biases of the company.

For example, if management believes that it will shortly be the beneficiary of a massive payout from a lawsuit, it may accrue the revenue associated with the payout, even though the evidence states that such an outcome might not occur. A more objective viewpoint would be to wait for more information to accrue before making such a determination. Another form of bias that can skew financial results is when management owns a large stake in the company, and so has an interest in reporting optimistic results for the business, even though a more objective view would result in the reporting of more conservative results.

By using an objective viewpoint when constructing financial statements, the result should be financial information that the investment community can rely upon when evaluating the financial results, cash flows, and financial position of an entity.

Outside auditors need their clients to produce financial statements under the objectivity principle, so that the auditors can use evidentiary matter to verify that the information in the statements is correct. It is easier for a business to comply with the principle if it has an excellent record archiving system; this makes it easier for auditors to locate information that supports the aggregate balances noted in the financial statements.

Another way of viewing the objectivity principle is from the viewpoint of the auditor. If an auditor recently worked for a company and has now been assigned to manage the audit of that business, he or she may not be objective about the resulting audit report, depending on the former relationship with the client.

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