Flexibility in UK Accounting Reporting - Literature review Example

Financial Reporting College: Introduction Financial reporting is one of the major elements that are of much concern to the stakeholders any business entity. An essential element is used by the management to communicate to the stakeholders about the performance of the organization, its financial position, as well as the variations in the financial position of the organization (Kline, 2007, p.118). This information is very crucial to the organization’s stakeholders such as the shareholders, investors, financial institutions such as bank, and creditors among others. It enables them make prudent decisions concerning their business relation with that particular business organization (Caprio, 2012, p.81). Therefore, financial reporting is one of the major determinants of the organizations current and future success. Frustrating reports can make the organization loose business as its shares loose demand among other negative impacts (Gibson, 2009, p.52). Financial reporting of business organizations in most countries are regulated by both the government through company’s acts and other accounting regulatory bodies and councils. In UK, this is regulated by Companies Act of 1985 and 2006, and accounting bodies such as the International Financial Reporting Standards (IFRSs) in order to ensure that the reports meet the international financial reporting set as stipulated by (IFRSs) (Emmanuel and Garrod, 2004, p.446). However, accountants in consultation with the organizations’ management are given a room by these bodies to harmonize the reports by making estimations for easy understanding and presentation of the financial reporting. This is undertaken during accounting treatments and there is set rules outlining how the exercise should be carried out (Millichamp, 2002, p.26). However, there are no outlined rules governing judgment hence it depends on the professionalism and experience of the auditor and financial reporting preparer. Nevertheless, some organizations tend to take advantage of this loophole in order to manipulate their reports for their own benefit or that of the organization (Pickett, 2013). Therefore, it is important to focus on the issue of accounting treatment in UK, the rules that control the process and the stipulated implications if incase financial reporting are manipulated by the preparer. The UK government has set numerous rules that are outlined in the Companies Acts of 1985 and 2006 concerning investing and operating a company (Holgate, 2006, p.18; Lee, 2006, p. 42-156). The Acts also describe the acceptable formats that companies must use in presenting their annual reports such as financial reports (profit and loss reports and the balance sheet), all this being one of the measures of monitoring companies activities in the UK ( Birds, 2010, p.71). There exist various boards and councils whose main function is to monitor the founded particularly public companies especially on issues concerning financial reports. The UK law lays special emphasis on the need of companies presenting true and fair outlooks about themselves in the financial statements. This is a matter of much concern to a point that boards such as the Financial Reporting Council (FRC) are formed purposely to promote public’s confidence over the organizations financial reports (Davies, 2009, p.186). This is achieved by ensuring that corporates auditing and accounting reports are of high quality, competence, transparency, and integrity. Other boards like Auditing Practices Board (APB) and Accounting Standards Board (ASB just to mention a few are set primarily to regulate financial reporting in the country. All this is done in order to ensure that stakeholders get quality information about the companies they have invested in or are doing business with (Economic Policy Conference of the Federal Reserve Bank of St. Louis & Stone, 2009, p.88; Jones, 2011, p.50-110). All these boards have set certain conditions that companies financial reports are meant to meet before they are released to the public. A board like IASB insists on annual financial reports that have characteristics that would make the reports useful to the users (Mulford and Comiskey, 2005, p.152). Some of the features that board insists on are the element of understandability, reliability, comparability, and relevance among others. In order for this to be achieved, the reports have to be harmonized in one way or another through accounting treatment, a factor that all accounting regulatory bodies have allowed. UK as a country is highly principle-oriented when it comes to matters concerning financial recordings hence developing such clear policies to govern all the accounting operations (Reddy, 2004, p.16; Wanjialin, 2004, p. 16-52). Giving a room for harmonization of accounting figures or financial reports has a number of advantages as well as disadvantages. First, the provision gives room for the reports to be edited with figures being harmonized in order to ease the reports understandability. This means that users can easily understand the written information (Nanto and Library of Congress, 2009, p.48). Any complex information that nonprofessional persons may find difficult to understand is excluded or presented in a manner that is easy for him or her to understand. Another major benefit of this endowment is the issue of relevance. Such harmonized (treated reports) tend to present the reality of the company in a simple way, a factor that helps the stakeholders a lot in making sound economic decisions by simply looking at the company’s performance in the current, the past and also forecasts its future (Walton and Aerts, 2006, p.11; Rutherford, 2007, p. 136-352). Some of the major disadvantages of this provision are the creation of room for manipulation of the reports (Jeffrey, 2010, p.43). Unscrupulous and unethical company’s management can collude with the accountants or the report preparers so as to cook their own figures primarily to create good public image or to influence the economic decisions of the investors. As a result, some companies end up releasing completely corrupt information about their performances, which ends up making the data unreliable (Harris, Emmanuel and Komakech, 2009, p.35). Some of the most common adjustments made include during accounting treatments the accrual adjustments, harmonization of balance sheet fallacies, adjustment of income statement fallacies among many others. Approximations or estimations are also some of the elements that are likely to bring forth some errors hence need for adjustments (Reilly and Williams, 2003, p.92). All public companies are required by law to undergo an audit check after they release their financial reports. Preparers of financial reports together with the auditors are required by law to make professional judgment in harmonizing accounting figures (Humphrey and Lee, 2008, p.13). The law states clearly that if a situation arises whereby the reports need to be adjusted, it should be done in a manner that is professional and not for the interests of the company. Report preparers are required to weigh or try to balance the benefits of making fair presentation against the risks that can be accrued by making fraudulent reports (Lee, 2006, p.145). In most cases, management would prefer to raise the figures especially those concerning the company’s growth and profitability. This can be done primarily to attract more investors especially the shareholders as well as for winning confidence of the creditors (Amor and Warner, 2003, p.22). In addition, common deliberate false presentations that managements are likely to commit is increasing the company’s assets or lowering its liabilities. The company’s management can also collude with the financial report preparers by lowering their figures so that the company can evade taxes (Chalmers and Godfrey, 2007, p.40). In such a situation, managers and the report preparers are charged with misconduct and they can be sentenced to jail or face heavy fines or face both charges. The prepares of the reports who in this case refers to the auditors and accountants, they also face heavy fines, imprisonment or both charges depending on the impact of their misconduct. The law is very clear that incase of litigation, judgment is not defensible. Accountants and auditors are required to possess strong professional ethics such as integrity and transparency in making judgments. Making a professional judgment is a key skill that preparers of financial reports, regulators, and auditors must possess especially in the modern world whereby accounting is principle-oriented (Rajasekaran, and Lalitha, 2011, p.12). At times, making good judgment may be difficult since there seem to be no correct answer; it depends on individual transparency, professionalism, and at times experience. Making good judgments in UK is among the cornerstones of becoming a good accountant in the country (Ashton and Ashton, 2009, p.67). Professional judgment framework help the financial report preparers in making good judgments that are reasonable. It also provides protection the subsequent management and accounting team that would succeed the existing ones. There arises situations whereby accountants or even the general management have to inherit problems from the regime was before them (Stittle, 2003, p.79). Such a framework helps in determining the most suitable accounting treatment for the given transactions especially where there is no particular standard covering the transaction, where standards exist but there is no detailed provision on to deal with the implementation of the subject. The framework also helps in making appropriate accounting treatments where there are various accounting principles on how to deal with implementations (Das, 2007, p.23). In UK, all public companies are required by law to release their financial reports, which are done in different quarters so that investors and creditors can get information about the performance of the company among others (Ahmed, 2007, p.23). Some of the most essential information that investors are interested in includes knowing the risk management strategies being adopted by the company, type of risk the organization is posed to, description of the company’s management and auditors reports among others. Therefore, any public company is obliged to provide its credible financial information to the stakeholders. Provision of inaccurate information or fraudulent accounts in order for the company to deceive the stakeholders about its performance can lead to severe penalties to the company, accountants, and the auditors or generally the report preparers (Penman, 2011, p.12). Auditors and accountants can be charged with perjury, which is taken as a very serious crime in UK. Perjury is a crime that involves a making deliberately making lies of false testimony in a court of law or to people in a public (McMillan, 2004,p.16). Financial reporting in UK is regulated by numerous bodies, with each body having its specific mandate. Financial Reporting Council is one of the major independent bodies that play a major role in in regulating the quality and standards of accounting and financial reporting (Alexander and Britton, 2004, p.10). It has been in charge of preparing rules since its conception in 1990 with its main duty being to enforce financial reporting rules as well as overseeing that the rules the reports are kept and maintained appropriately. Its role is very essential especially in preventing corporates scandals like the one that were happening in the USA in the 2002 because of lack of such regulatory bodies (Delaney and Whittington, 2009, p.44). The UK government has extended its power to FRC in the all matters concerning promotion of transparency while preparing accounts/reports, ensuring good corporate governance and most importantly winning the public’s confidence over corporates financial reporting (Miller, 2008, p.84). The body comprises of seven departments which are Accounting Standards Board (ASB), Board for Actuarial Standards, Professional Oversight Board, Auditing Practices Board, Financial Reporting Review Panel (FRRP), Accountancy, Urgent Issues Task Force and Actuarial Discipline Board (Ridley, 2008, p.100). From these departments, ASB is the one in charge of accounting standards and statement of standard accounting practices like the financial reporting standards that are mandatory for all public companies (Subramani, 2009, p.4). Another key regulatory organization in UK is the Financial Service Authority (FSA), which is a non-governmental corporation (Epstein, 2005, p.126). The body is also accountable before UK parliament on issues concerning corporate governance and release of financial reports. The UK laws also elaborate on the issue of provision of high quality financial reports for all listed companies. These basic rules are set in the Companies Acts of 1985 and 2006. Provision of quality and accurate financial reports is also a requirement by the London Stock Exchange (Ittelson, 2009, p.35). All listed public companies have release their financial reporting on quarter basis (after three months) throughout the year. However, ASB and London Stock Exchange are the main regulators who give public companies all the conditions and basic principles that the prepared financial reports have to meet (Greuning and Koen, 2001, p.17). There have been several cases in UK of companies and report preparers giving out misleading financial reporting (Beattie, Fearnley and Hines, 2011, p.84). Among the cases that attracted much public attention, include that of Equitable Life, RBS, and that of EY. Equitable Life is a leading insurance company in UK and was once charged with releasing misleading information. The financial preparers particularly the auditors Ernst and Young (EY) were also both reprimanded and fined £500,000 on top of paying a cost of £2.4m. In 2010, the government also heavily penalized Equitable Life Company by making it compensate the investors with of £1.5bn. RBS, a leading bank in UK was also involved in a scandal relating to giving untrue and misleading financial information about rights issue back in 2008. The company was sue by 21 investors for the loss of over £12bn they had lost by investing in the company’s rights issue only for the company to collapse after six months because the management had overvalued the company’s during the rights issue. HMRC, the body that is in charge of collecting taxes in UK has also pursued many companies and individual who fail to pay taxes. By December 2013, the body had made 2,345 prosecutions relating to tax evasion. Many businesses evade paying tax by giving out lower turnover figures than they actually made. UK laws are also very clear on matters concerning litigation reserve (the amounts that banks and other financial institutions are required to keep as security). Failure to comply with this regulation is a serious crime according to UK laws and that particular organization can be held liable in a court of law and forced to pay heavy fines. In conclusion, preparation of financial reports is one of the major requirements that all public companies are supposed to meet. The released annual financial reports acts as one of the few modes though which company’s management can communicate with their stakeholders about the performance of the company. Financial reports show the position of the particular organization in terms of their past, their current position, and the company’s future prospects. These reports are usually released on quarterly basis and there exist set standards that they are supposed to meet. However, in countries such as UK, the regulatory bodies that are in charge of overseeing the operations of listed public companies such as the London Stock Exchange, ASB and the government law through companies act 2006 and 1985 gives room for accounting treatment. This is done primarily to improve the understandability of the accounts or reports to the stakeholders most importantly the investors and creditors. These parties are entitled to getting credible financial reports from the company, a factor that highly influences their business relations with that particular company. However, some unethical management can take advantage of this provision to manipulate the company’s financial reports in their favor. Such an action is taken as a serious crime and the report preparers are held liable and are subjected to serious punishment such as cancellation of their accounting or auditing licenses. The action is termed as highly unprofessional and a person can be charged with perjury, which is a very serious crime in UK. The company that has also engaged in such fraudulent reports faces serious penalties among them being imprisonment for the auditors and accountants and any other person who might be found guilty. Bibliography Ahmed, N. 2007. Corporate accounting: A simplified approach : for B.Com. (Hons.) and other professional courses. Atlantic. India. Alexander, D. and Britton, A. 2004. Financial reporting. Thomson. London. Amor, K. and Warner, A. 2003. Uncovering creative accounting. Financial Times Prentice Hall. London. Ashton, A. H., and Ashton, R. H. 2009. Judgment and decision-making research in accounting and auditing. .Cambridge Univ. Press. Cambridge. 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