Financial Reporting - Essay Example

The recent financial crisis as well as the leading corporate scandals of past however, cast a doubt over the information presented in the financial statements. It has been argued that the financial statements do not provide the information which can satisfy the requirements of the shareholders and investors. The overall quality of reporting and the loopholes in the existing regulations and standards therefore provide an opportunity to the managers to report the matter in a manner which may not satisfy the overall requirements of the shareholders and investors.

( Weil,2011). This paper will discuss as to whether the annual report of a limited company satisfy the needs of shareholders and other investors. Annual Reports and Financial Reporting Every limited liability company is required to present its annual financial statements outlining the position of its assets and liabilities, profit and loss as well as the cash flow position. Apart from the three key financial statements, annual reports of the firms also include notes to the accounts which provide different estimates and explanations of how different estimates were made and under what assumptions and standards.

Standards set out by International Accounting Standards Board as well as the US GAAP are two of the major standards which are being followed by the firms internationally. Except US Generally accepted accounting principles, standards outlined by IASB are followed internationally where US GAAP is followed by American companies. Though there are some critical differences between the two set of standards however, there are extensive efforts being undertaken to converge both the standards and develop a unifying and single standards to be followed by all the firms globally.

It is also important to note that the every limited liability company has to submit its annual accounts to the regulatory body as well as to present them to the shareholders. As such annual reports serve as the most important document through which shareholders can actually assess the performance of the management and assess the long term and short term future of the firm. (Jones, 1998). The recent financial crisis as well as the corporate scandals like Enron and WorldCom however, created an strong debate as to whether the financial reporting made in the annual reports actually serves the interests of the shareholders and other investors or not?

Financial Reporting and Shareholders’ Interests Despite the fact that there are extensive set of rules and regulations under which annual accounts of the limited liability companies are made however, the failure of the firms to disclose all the information has initiated a debate as to whether the annual reports provide the kind of information which serves the interests of the shareholders and other investors. One of the important concepts to be explored in this regard is the agency problem which outlines that the managers make decisions which may not necessarily be in favor of shareholders and add value to the firm.

Under this assumption, the information presented in the annual reports therefore may entirely represent the interests of