Assessment of Recent Developments in Financial Reporting - Essay Example

?Assessment of Recent Developments in Financial Reporting Introduction The major purpose of financial reporting has always been to provide financial information in an accurate and transparent manner. Accurate financial reporting is one of the methods to track, review and monitor the financial performance of the company. This helps in delivering financial information in a positive manner with the help of the accounting standards laid down by the various boards and organization and the legal requirements. Legal requirements are essential for the accurate and financial reporting are quite important to understand the impact of financial reporting on the organizational outcome. This study will understand whether legal enactments and obligations are sufficient to perform financial activities in an ethical and logical manner. Drafting the financial reporting takes a lot of accounting knows how and also the thorough knowledge of legal obligations. The author of the study would lay emphasis on the accurate conduct of financial activities with guidance from the standards laid down by the accounting standards and the legal requirements. The need of these accurate financial reporting and also the critical evaluation of the effectiveness of the legal requirements in the preparation of the financial statements would be covered in the study. Finally, the study will conclude whether the legal requirements of the particular country are sufficient for the companies to perform the accounting and financial activities. International Accounting Standards Board &Financial Accounting Standards Board The establishment of International Accounting Standards Board, Financial Accounting Standards Board boards was in the year 1973 and was set for the primary purpose of formulation of regulations which would also help in the education of the users, stakeholders and management. Along with international convergence the company the board also focuses on the quality of financial reporting (Liu, 2011). International Financial Reporting Standard IFRS on the other hand will focus on the development of the accounting framework, which will help in the betterment of the company. IFRS is one of the major accounting standards board, which are responsible for checking whether the accounting standards developed by them are effectively executed and implemented within the system for the betterment of the organization or not (Allen, McAndrews and Strahan, 2001). The UK Company Act The UK company act is formed under the Companies Act 2006 and governed by Insolvency Act 1986. help in the development of high quality accounting standards, which are highly compatible with the business environment that can be used for the regional and cross border investments (Allen, McAndrews and Strahan, 2001).It is also responsible for the development of accounting framework, which is accountable for the construction of the organizational structure and also preparation of consolidated financial statements for the benefit of cross listed companies (Liu, 2011). Generally Accepted Accounting Principles Generally Accepted Accounting Principles (GAAP) is one of the standard frameworks which serve as guidelines for performing financial accounting activity (Liu, 2011). These include conventions, standards, rules and regulations which are known as general accounting standard. Financial & Legal Requirements in Stock Exchange There are several legal and financial regulations and requirements which are applicable for the stock exchanges of different countries. The stock market is regulated by several disclosure standards which help in transparent business operations and also encourages shareholders in smooth investing activities. For example the London Stock Exchange has several listing rules and regulations which assesses the shareholder’s issuer eligibility and also ensures that these regulations are made. There has been major fluctuation in the stock market movement in the past six months because the overall market has been extremely sensitive vulnerable to the sensitive pricing of the stock indices. In the past six months there has been slowing down of the economy due to the slow annualized growth rate which is at 3.1 percent (Sivy, 2003). This slow growth rate has been persistent in the last two quarters of UK economy due the different factors like fiscal cliff deals, sluggish growth rate of organization etc (Sivy, 2003). Comparison between Shareholder’s Requirements & Legal Guidelines of Financial Reporting Shareholders regard financial reporting as means of financial disclosure and also means of reduction of financial information asymmetry. This is done for improvement in the corporate governance method. Shareholder’s give too much specialized attention to accountability and transparency which have lead to stimulating changes within the organization. Shareholders lay too much emphasis on corporate governance and accounting standards laid down by the board. However, shareholder’s regard the laying down of financial regulations and the development of accounting standards more important than the legal requirements which leads to potential conflicts. The legal obligations require the management to establish rules from a different perspective to that of the shareholders which gives rise to several potential conflicts and various other problems. Thus, it is the conflict between the shareholders and legal requirements that lead to several accounting discrepancies. The shareholders require common size analysis which is benchmarking technique for the performance of the other companies. This helps the shareholders to lay emphasis on the financial structure of the company but the legal requirements lay emphasis on the trend analysis which helps in comparing financial performance of the company. Financial Information Required by Investors The UK legal requirements have laid down the following of certain rules and regulations which if not followed stringently would hamper the productivity of the organizations. The cross border investments require the analysis of shareholder value, profits which are relative to the international and domestic transactions These accounting standards are generally been adopted by leading companies to remove the varied complexities set within the organization (Schinckus, 2006). The necessity of the globally recognized accounting standards is essential to understand and prepare the financial statements to solely match the set financial framework from the investor’s perspective. Critical Assessment of the impact of the legal guidelines of the regulatory systems on the organizations Financial reporting and the assessment of the legal requirement go hand in hand while the preparation of financial statements and also the conduct of financial activities. These legal requirements fluctuate with the changing needs and requirements of the organizations and also with the emergence of certain events. The Enron accounting fraud led to the development of the Sarbanese Oxley Act of the year 2002. This made the organization cautious and laid down several foundations and policies to prevent financial reporting fraud and lead to smooth facilitation of the accounting activities to prevent internal control. The legal exposure of certain business organization face occurs due to rapidity of the changes within the organizations and also in the business environment. However, the inclusion of legal requirements have a considerable effect on the development of financial accounting framework within the organization and it is also time consuming and costly. This is because the internal auditors have to take adequate time in understanding the new legal requirements and then applying to the organization and it would require the chartered accountants to assessing the accounting procedure within the organization and also the impact of the legal requirements on the organizational outcome. The legal requirements like licensing and patenting also need certain monitoring for the preparation of the financial perspective. This is because the legal requirements for patenting and copyright preparation are different for various countries. However, implementation of various legal requirements have not been successful because of several reasons like improper accounting oversight and lack of following the guide through of chartered accountants who make strong opinion formation thoroughly with respect to the financial requirements of the organization. The Department of labor had convicted several companies of non compliance to accounting standards. It had also established several rules and regulations for improving the transparency in Union Corporation and removal of corruption in high level of management (Tomasic, Bottomley and McQueen, 2002). Apart from these scandals there have been various reasons for the establishment of the legal enactments and requirements which have helped in preparation of financial statements. The establishment of unified accounting standards along with the legal requirement help in the reduction of financial information asymmetry which would facilitate the exchange procedure (Lee, 2006). This also helps in the structured capital flows and other financial transactions. The legal requirements of different countries would help in the smooth international mobility of capital and financial flows. The different legal requirements of Uk economy coupled with the different boards like IASB and IFRS lay down accounting guidelines and contribute significantly to the corporate in their organizational outcome and also the betterment of the economy. The preparation of financial statements is of utmost importance to the corporate organizations because it facilitates cross border investments which is essential for the growth and development for the organizations. There are varied legal, regulatory requirements for functional and non functional trade within and outside the region for the necessary integration of the singular capital market (Schinckus, 2008). The rules and regulations of the UK financial associations help in acknowledging the varied significant discrepancies in the financial and accounting information which would be disadvantageous to investors (Beck, Kunt and Levine, 2002). The legal requirement orders the companies to make full financial disclosure but the inclusion of small details in the footnotes leads to confusion in the volume trading system which curbs down the earning potential and also reflects that the organization require their own accountings standard apart from the legal requirements (Beckett, Hewer and Howcroft, 2000). Legal requirements only helps in checking whether the rules and regulations are being followed or not but technically the art of executing the financial activities with the help of external rules and regulation becomes easier for the organizations. In spite of the stringent rules and regulations of the government and other regulatory organizations there have been repeated attempts of fraud accounting and money laundering costs (Beke, 2011). The US legal requirements reveal specific requirements for different organizations which subsequently reduces the financial disclosure requirements. Different organizations follow different universal accounting methods and which may have minimalistic impact in given financial transactions since most of them are unified accounting standards but have a consequent impact on the trading volume and return volatility (Higson, 2003). The emergence of the legal requirements of specific countries including UK has been only to curb down the money laundering and circulation of money within the financial community system. IFRS adopt certain methodologies to disseminate certain financial information and then match it whether they are accurate and tally with the IFRS and GAAP guidelines (Accounting Standard Board, 2000). The contained financial information helps in concentrating on the earning announcements which affect the large volume financial and non financial transactions (Djankov, et al., 2008). These legal requirements also consider whether the preparation of accounting statements is in compliance with the necessary rules and guidelines prepared by these accounting associations. In UK, the companies adhering stringently to the accounting framework will be rewarded and recognized. The performance is assessed and by certain professional bodies along with national accounting professionals with the sole objective of the betterment of the economy. This also promotes the professional development of the staff of the organization. This is one of the best examples where the legal requirements of the company coupled with the accounting requirements of the accounting boards enhance the performance of the company and promotes community development. The harmonization and synchronization in the accounting standards is necessary for the covering the gaps in the financial accounting differences and also to maintain their very own accounting standards and practices (Ortiz, 2005). The sudden increase in the needs of the organization has led to the development of legal rules, regulations and also dissemination of financial and accounting information (Lumpkin, 2010). Sarbanese Oxley Act of 2002 The Sarbanese Oxley act was introduced by the US government for the benefit of the accounting professionals and securities market. This act gives the authority to the accounting professional bodies regarding the methods in which the accounting and financial transactions are performed. This act also helps in the discretionary consulting services which are permitted by the financial auditor (Labor Law Department, 2004). The substantive testing of this act has been profound on the trading volume but in spite of the repeated enactment of the US and other government to curb down the financial pressure. It contains certain financial information which helps in evaluating the system and also detects the financial material weakness. The consulting activities prohibited under the Sarabanese Oxley act and other enactments give us actual proof that there are varied unsystematic errors in the transactions which lead to the flawed reasoning and decision making (Jorissen, Britton and Orissen, 2007). The inclusion of the varied financial regulations and guidelines by the varied US government and helps in the current financial interpretation of the underwriting the cot process and also helps in removal of complication to a certain extent only (Jovanovic, 2008). Conclusion Thus, it is observed that even legal guidelines, rules and regulations are not sufficient for the prevention of the errors and complexities in the business systems. The adoption of several unified accounting standards and methodologies by several companies has helped in the removal of mismanagement and also led to the improvement in the managerial decision making and s varied other managerial crisis. The legal requirements are just a method of checking whether the financial reporting requirements for the public trading companies are in compliance with the rules and regulations. However, the legal requirements are not enough to check whether the organizations are performing accurate financial and accounting transactions and they also require certain guidelines from external regulations. Reference List Accounting Standard Board, 2000. Statement of Principles. [pdf] Available at: < http://www.cpaireland.ie/docs/default-source/Technical-Resources/Financial-Reporting/statements-of-principles-for-financial-reporting.pdf?sfvrsn=0 [Accessed 19 October 2013]. Allen, F., McAndrews, J. and Strahan, P., 2001. E-finance: An Introduction. [online] Available at: < http://fic.wharton.upenn.edu/fic/papers/01/0136.pdf > [Accessed 19 October 2013]. Beck, T., Kunt, A.D. and Levine, R., 2002. Law and Finance: Why does Legal Origin Matter? 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