Accounting in Society - Report Example

Accounting in Society work - Essay Introduction: Corporate financial reporting is a very important branch of study because the present business environment is dynamic and, therefore, lacks of adequate reporting, which affects the business negatively. Financial reporting task has been under scrutiny for a number of reasons. There has been a controversy over the topic of financial reporting because there are both pros and cons to the concept of financial reporting. Traditional financial reporting is merely about revealing the financial statements of a firm. However, one needs to consider the fact that financial reporting is also important in order to meet the needs of multiple stakeholders and this is very important in making all economic decisions. The important question is whether financial reporting standards meet the needs of stakeholders or do they need reformations. There has been a demand for reformations of financial reporting and research has been conducted by ICAEW in order to understand as to why there is a demand for reformations of financial reporting. This essay focuses on whether present corporate financial reporting is adequate and why there is a demand for reforms in financial reporting. It will also focus on the importance of financial reporting to meet the economic needs of stakeholders. The present scenario of financial reporting and the need for reforms: Financial reporting is reporting about the finances of the firm. “Financial reporting and auditing are not just technical subjects, but they encompass a multitude of judgements and assumption.” (Higson 2003, p.1). The main need of financial reporting is that it is through financial reporting that new investors are drawn towards a firm and the firm can increase its investment opportunities. Major companies like the PricewaterhouseCoopers have demonstrated the benefits of financial reporting because financial reporting is of huge interest to investors. “According to the Financial Accounting Standards Board, financial reporting includes not only financial statements but also other means of communicating financial information about an enterprise to its external users. Financial statements provide information useful in investment and credit decisions and in assessing cash flow prospects. They provide information about an enterprises resources, claims to those resources, and changes in the resources.” (Financial statements, 2010). There are many critiques of financial reporting who label this reporting as misleading and unproductive statements to business. The main problem identified in corporate financial reporting is that there is a tendency among the users of financial reporting to look directly into the profit statements while ignoring the totals of the balance sheet. Another major drawback according to an article regarding financial reporting is that financial reporting does not reflect the main component of the business, that is the supply chain of the business. The other major drawback recognized in financial reporting is that in financial statements like balance sheets intangible accounts like the customer relationships do not occupy a place. However, customer relationship is very important to business and should be accurately measured for the development of the firm. Another reason for considering financial reporting as futile is due to the fact that financial reporting provides only the quantitative data of the firm while qualitative data is essential for the development of a firm. Qualitative data is also needed for better analysis of the firm and also for improving investor relations. “The objective of corporate financial reporting is to provide information that is relevant for valuation of the company. Financial statements are at the centre of the corporate financial report.” (Bhattacharyya 2006, p.9). The Stakeholder and the Shareholder needs for financial reporting: According to the Financial Accounting Standards Board, financial reporting should be fair and true. “Fair value is the price that would be received for an asset, or paid to transfer a liability, in a current transaction between market place participants in the reference market for the asset or liability.” (King 2006, p.29). Financial reporting should also be of good quality. A financial statement is mainly identified by its characteristic qualities like the understandability in the financial statements, the relevance of financial statements to the investors, the market and the nation. Financial statements should be very reliable and authentic. The financial report should also be revealing that it can be compared with company accounts of the previous years. “A recent report by the U.S. CFA Centre for Financial Market Integrity comments that financial reporting and disclosure must provide all of the information that investors need to evaluate their investments. The financial reporting methods chosen by a company should not be influenced by the effects of the method (for example, whether it causes net income to rise or fall).” (Financial reporting-are investors needs being met? n.d). Previously shareholders and stakeholders mainly used to rely on the financial reports published by firms and the disclosure of financial reports like the profit and loss statement, the balance sheet, the cash and fund flow statement which are essential for inviting new investors. But this situation has changed considerably in the present times. “Disclosure on corporate profitability was regarded by shareholders, directors, and senior managers alike as an unnecessary way of revealing secrets to business competitors.” (Lee 2007, p.78). When seen from the perspective of investors, financial reports should show the value of the current assets and liabilities that the firm has and the net assets that are available to shareholders. For the benefit of stakeholders, footnotes should be incorporated in the balance sheet such as the company’s social activities, which are beneficial to the society. “A stakeholder- oriented financial reporting aims at maintaining a strong financial position and avoiding excessive payouts to any of the firm’s stakeholders. Stakeholder oriented reporting incentives mitigate the effect of shareholder- oriented accounting regulation accounting practices.” (Gossy, G., 2008. p.66). Significant changes or reforms are taking place in financial reporting to improve the quality of information to shareholders and stakeholders to make the appropriate decisions on investment and economic decisions. Additional volume of disclosures and additional descriptive information disclosures made by firms that are reliable and accurate will be of immense help to shareholders and stakeholders. “The primary ethical challenge relating to finance is making sure that businesses internal financial reporting is honest and fair and reliable.” (Sternberg, E., 2000, p.165). Only if financial reporting is reliable, market ethics can be maintained. “Effective oversight of the financial reporting process is fundamental to preserving the integrity of our markets.” (Young, M. R., 2003, p.205). Conclusion: There is a controversy on the topic of financial reporting because financial reporting has some major deficiencies which affect businesses negatively. The major reform which can be brought in financial reporting is that the financial reports of firms should not be the only basis for judging the affairs of the firm. “Users of financial reporting also need to obtain information from other sources.” (Information for better markets: Development in new reporting models, 2009). The stakeholders and shareholders should not simply rely on the financial reporting of the firm but should also be careful to gather information from other sources in order to make an analysis about the firm. Qualitative aspects of a company shoud also find place in financial reports so that the stakeholders are better informed of the actual status of the company. Reference List Bhattacharyya, A. K., 2006. Financial accounting for business manager 3Rd Rd. [Online] PHI Learning Pvt. Ltd, p.9. Available at: http://books.google.co.in/books?id=m0r4LN4lsWMC&pg=PA9&dq=corporate+financial+reporting&hl=en&ei=QmvvTPHzOI7Zcc3RoYYK&sa=X&oi=book_result&ct=result&resnum=6&ved=0CFEQ6AEwBQ#v=onepage&q=corporate%20financial%20reporting&f=false [Accessed 26 November 2010]. Financial reporting-are investors needs being met? n.d. [Online] Deloitte. Available at: http://www.deloitte.com/view/en_IE/ie/services/audit/63bd9387372fb110VgnVCM100000ba42f00aRCRD.htm [Accessed 26 November 2010]. Financial statements, 2010. [Online] Reference for Business. Available at: http://www.referenceforbusiness.com/small/Eq-Inc/Financial-Statements.html [Accessed 26 November 2010]. Gossy, G., 2008. A stakeholder rationale for risk management: implications for corporate finance decisions. [Online] Gabler Verlag, p.66. Available at: http://books.google.co.in/books?id=GgIR4Nxc-F8C&pg=PA66&dq=the+importance+of+financial+reporting+to+multiple+stakeholders&hl=en&ei=AXXvTNjuFsW5cbz2iKQK&sa=X&oi=book_result&ct=result&resnum=2&ved=0CDUQ6AEwAQ#v=onepage&q&f=false [Accessed 26 November 2010]. Higson, A., 2003. Corporate financial reporting: Theory and practice. [Online] SAGE, p.1. Available at: http://books.google.co.in/books?id=yG_kvK1smTkC&printsec=frontcover&dq=corporate+financial+reporting&source=bl&ots=pie-O37xEa&sig=QcEJFEjXTrtfhBK91uGxnSl-dQA&hl=en&ei=YE7vTILBA4WycNHmtKsK&sa=X&oi=book_result&ct=result&resnum=1&sqi=2&ved=0CCQQ6AEwAA#v=onepage&q&f=false [Accessed 26 November 2010]. Information for better markets: Development in new reporting models, 2009. [Online] Financial Reporting Faculty, p.13. Available at: http://www.icaew.com/index.cfm/route/169544/icaew_ga/Faculties/Financial_Reporting/Information_for_better_markets/IFBM_reports/Developments_in_new_reporting_models/pdf [Accessed 26 November 2010]. King, A. M., 2006. Fair value for financial reporting: Meeting the new FASB requirements. [Online] John Wiley and Sons, p.29. Available at: http://books.google.co.in/books?id=pwZbZG2RDoMC&printsec=frontcover&dq=corporate+financial+reporting&hl=en&ei=QmvvTPHzOI7Zcc3RoYYK&sa=X&oi=book_result&ct=result&resnum=5&ved=0CEwQ6AEwBA#v=onepage&q=corporate%20financial%20reporting&f=false [Accessed 26 November 2010]. Lee, T. M., 2007. Financial reporting and corporate governance. [Online] John Wiley and Sons, p.78. Available at: http://books.google.co.in/books?id=OJDe8U3slekC&pg=PA78&dq=importance+of+financial+reporting&hl=en&ei=CV7vTLOkCpSiuQOsybmeDg&sa=X&oi=book_result&ct=result&resnum=4&ved=0CEMQ6AEwAw#v=onepage&q=importance%20of%20financial%20reporting&f=false [Accessed 26 November 2010]. Sternberg, E., 2000. Just business: Business ethics in action. [Online] Oxford University Press, p.165. Available at: http://books.google.co.in/books?id=dQu7yXJcJ0EC&pg=PA165&dq=importance+of+financial+reporting&hl=en&ei=CV7vTLOkCpSiuQOsybmeDg&sa=X&oi=book_result&ct=result&resnum=7&ved=0CFIQ6AEwBg#v=onepage&q=importance%20of%20financial%20reporting&f=false [Accessed 26 November 2010]. Young, M. R., 2003. Financial reporting hand book. [Online] Aspen Publisher, p.205. Available at: http://books.google.co.in/books?id=g5yJH-WF4vQC&pg=SL3-PA205&dq=corporate+financial+reporting&hl=en&ei=QmvvTPHzOI7Zcc3RoYYK&sa=X&oi=book_result&ct=result&resnum=10&ved=0CGsQ6AEwCQ#v=onepage&q=corporate%20financial%20reporting&f=false [Accessed 26 November 2010]. Read More