Questions in International Financial Accounting and Theory - Essay Example

?INTERNATIONAL FINANCIAL ACCOUNTING AND THEORY QUESTION ONE Introduction Corporate governance is defined by Sheridan, Jones and Marston, 2006) as the way companies are controlled and it involves a specific system which guides the manner in which a given company is directed. Corporate governance also describes the manner in which company management, board, stakeholders and shareholders relate to each other so that conflict of interest is mitigated. The developments in the corporate governance of the United Kingdom companies have led to influential changes which have stimulated similar amendments in the corporate governance of the European Union in general and that of the United States. The development of corporate governance in the UK since 1991 up to 2011 is assessed in this paper with a discussion on the various reports which are involved in the changes in the governance of companies in the UK. There were many corporate governance failures within UK companies such as Maxwell communications in the mid and late 1980s which included risky acquisitions, large debts and missing company assets. This led to the setting up of a committee in May 1991 which was chaired by Sir Adrian Cadbury to investigate the failures in corporate governance of companies with an aim of making recommendations for necessary changes to the control of companies. Shelmerdine and Walter (2001, p. 142) assert that the aim of the committee was to perform a thorough investigation of the corporate governance system in British Companies so that relevant suggestions would be provided in their report to ensure that the confidence of investors on the British Companies was regained. The Cadbury report which was released in December 1992 recommended that the companies which were listed in the report had to provide their annual accounting reports which had to be reviewed by auditors for verification and compliance. The Cadbury report also recommended for a remuneration committee for each company to cater for the rights of the shareholders of British companies as said by Pendleton (2005, p. 107). The Greenbury Committee which was formed after the Cadbury Committee produced its report on corporate governance in 1995. The Greenbury committee was created in response to the need for a review of the remuneration of company directors. The Greenbury report which followed the guidelines of the Cadbury report made recommendations for the improvements on the control of the remuneration of company executives. Therefore the report recommended that the remuneration committees of companies should comprise at least three non-executive committee members to make decisions on executive remuneration package. According to Sheridan, Jones and Marston (2006, p. 419), the Hampel committee which was created to recommend changes in the corporate governance of British companies released its report in 1998. The report recommended corporate governance which protected the interests of investors. The Hampel report acted to endorse the recommendations of earlier reports on corporate governance so that improvements were made. More developments in the corporate governance of the UK companies were demonstrated by the 1999 Turnbull Report which provided company directors guidance for internal control of companies which followed a combined code of early reports. The report defined the obligation of directors in relation to providing proper internal controls that ensured quality in auditing and reporting the annual financial reports as demonstrated by Pendleton (2005, p. 113). The Higgs Report of 2003 was based on the review of the effectiveness of non-directors in execution of their roles within companies. The Higgs report was in support of the existing guidelines of corporate governance and created a guidance that was based on the review of previous scandals in British companies. The guidance of the Higgs Report was amended in December 2009 by the Institute of Chartered Secretaries and Administrators (ICSA). The Draft guidance of the ICSA was launched in July 2010 and is playing an important role in the improvement of the effectiveness of board members in the corporate governance of companies. Conclusion The developments in the corporate governance within the UK companies which was made possible through the investigations of various committees whose reports have caused positive changes in the management of companies. The developments in the corporate governance of British companies include prevention mismanagement of company funds, remuneration of executives, consideration of investor interests and improving the effectiveness of company directors. QUESTION TWO Introduction A financial statement is a term that is used to describe a formal record of the financial performance of a company as defined by Muller (2011, p. 326). Financial statements are important sources of information for the stakeholders of a company or business which is essential for appropriate decision making. The effectiveness of financial statements in the provision of useful information is discussed in this paper which also presents a discussion on the level at which the financial statements serve the needs of various stakeholders in light of the necessity for widening their scope. Linsmeier (2011, p. 409) says that financial statements, which companies are obliged to prepare at regular periods, are useful sources of information for both external and internal business purposes. Internally, financial statements provide useful information for employees and company management. The management of companies specifically requires financial statements for decision making. The strategic plans and the setting up business goals are based on the report obtained from a company’s financial statements. Muller (2011, p. 326) asserts that the importance of financial statements is demonstrated by their usefulness in the provision of information for comparison of financial data with the macro environment, evaluation of the market performance, forecasting and assessing the competitiveness of the company within the industry in which it operates. The shareholders of accompany comprise of the investors of a company and they should be provided with adequate financial information in form of financial statements to enable them evaluate the progress of the company. Linsmeier (2011, p. 413) argues that shareholders are not provided with sufficient accounting information because companies usually provide summarized profit and loss accounts to the shareholders which prevent them from adequate evaluation of the financial activities of the company. Balance sheets should provide adequate information on the assets, liabilities and the shareholder equity to help the investors find out if the performance of the company meets their expectations. Muller (2011, p. 332) illustrates that cash flow statements are usually provided to the company management for decision making on future activities and the involved expenses. The cash flow statements are financial statements which should also be provided to the investors so that they would be able to determine the liquidity of a company at a given time. As a result, investors will have a chance of accessing timely information on the performance of their investment. The expenses and sales of a company in form of income statements should also be provided to all stakeholders of the company to meet their information needs for the assessment of the performance of the company. Conclusion Financial statements include balance sheets, profit and loss accounts, income and cash flow statements. These statements provide very useful financial information to the stakeholders of a company depending on their information needs. Internally, the management of a company requires financial statements to obtain relevant and accurate information for strategic planning and making business decisions. Shareholders of a company also require financial statements to enable them to evaluate the performance of the company so that they are allowed to make correct investment choices. The scope of financial statements should be expanded in order to provide sufficient information on the financial operations of accompany rather than summaries of profit and loss accounts. QUESTION THREE Introduction The Global Accounting Standards which are set by the International Accounting Standards Board are voluntary standards which do not fall into the governing authority of any state as opposed to the national accounting standards as explained by Beke (2010, p. 36). This paper discusses how the global accounting standards impacts on the business activities, processes and success or failure on multinational companies. The international accounting standards have helped multinational companies to increase the efficiency and accuracy of their accounting systems. Marrero and Brinker (2007, p. 16) explain that it is through the international accounting standards that the accounting procedures of companies which have subsidiaries across the world in many countries are simplified. Companies are not obliged to follow the accounting standards of the host country. As a result of adoption of the global accounting standards, confusion of the accounting systems and financial statements is eliminated from the operations of international companies. Marrero and Brinker (2007, p. 17) assert that the international accounting standards help multinational investors to make appropriate decisions on international investments. International trade and partnership with international corporations is made possible through the guidance of the global accounting standards. The standards therefore provide a basis through which international investors compare the performance of various companies across the world in order to decide where to invest. The globalization of the world economy has led to the internationalization of various companies through international mergers and acquisitions. This illustrates the usefulness of international standards for multinational companies’ executives in making their investment decisions. According to Beke (2010, p. 42), international accounting standards are beneficial to multinational companies because they set a unified framework of accounting and business ethics that all business cultures across the various societies and countries should follow. The business norms and cultures are diverse and vary from one country to another. For example some cultures accept bribery in business dealings while others consider it to be a business taboo. The unified code of business ethics therefore simplifies the process of solving business disputes between companies as a result of unethical practices. This is due to the international standards of the ethics of accounting which does not favor one country or culture over another. Additionally, the compliance of international companies to various legal frameworks across the world is guided by the international standards for business accounting. Conclusion The creation of international standards has impacted positively in the international business of multinational companies. The international accounting standards are integrating the international economy by allowing multinational investors make the right investment decisions on international partnerships and investments. Additionally, the legal ethical issues in business accounting are easily handled by the application of international standards as opposed to the national accounting standards which vary from one county to another depending on the business culture of a specific society. Moreover, the accounting procedures and systems of a multinational company are simplified by international standards. Companies with subsidiaries and operations in various countries are not obliged to comply with the national accounting standards which would cause confusion of the accounting systems of their branches. References Beke, J. 2010, "Accounting Management by International Standards", International Journal of Business and Management, vol. 5, no. 5, pp. 36-43. Linsmeier, TJ 2011, 'Financial Reporting and Financial Crises: The Case for Measuring Financial Instruments at Fair Value in the Financial Statements', Accounting Horizons, 25, 2, pp. 409-417. Muller, V 2011, 'Value Relevance Of Consolidated Versus Parent Company Financial Statements: Evidence from the Largest Three European Capital Markets', Accounting and Management Information Systems, 10, 3, pp. 326-350. Marrero, J, and Brinker, T. 2007, 'Are Accounting Standards Uniform? Recognizing Cultural Differences Underlying Global Accounting Standards', Journal of Financial Service Professionals, 61, 1, pp. 16-18. Pendleton, A 2005, 'How Far Does the United Kingdom have a Market-based System of Corporate Governance? A Review and Evaluation of Recent Developments in the United Kingdom', Competition and Change, 9, 1, pp. 107-126. Sheridan, L, Jones, E, and Marston, C 2006, 'Corporate Governance Codes and the Supply of Corporate Information in the UK', Corporate Governance: An International Review, 14, 5, pp. 497-503. Shelmerdine, J. and Walter, M. 2001, "A review of corporate governance in the UK", International Financial Law Review, no. 02626969, pp. 141-148. Read More