Objectivity principle definition

April 13, 2021

What is the 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 their
opinions and biases.

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 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.