Accountability in Government and NPF Sector - Essay Example

General purpose financial reports Table of Contents Introduction 3 Features of GPFR 3 Objectives of GDFR 4 Users of GPFR 4 Accountability in government and NPF sector 4 Government sector 4 Non profit sector 5 GPFR’s of government and non profit organizations 6 Accountability 6 Compliance 7 Financial position 7 Investment and financing decisions 8 Conclusion 8 Reference List 9 Introduction General purpose financial reports (GPFR) are statements that are prepared for meeting the needs of all the users of financial statements. These statements are not prepared for meeting the needs of only particular groups such as investors, creditors, regulatory bodies and the management. These statements are prepared based on the guidelines of the generally accepted accounting principles as laid down by the IFRS. The information from these statements is useful to interest groups such as investors, suppliers and creditors. Accordingly to the information available from the reports interest groups determine whether to provide resource support to an organization. Many investors and suppliers cannot require reporting institutions to provide them with necessary financial information about companies. As a result they rely upon general purpose financial reports and statements for such needs, they are therefore they primary users of the reports. The general purpose financial reports do not provide all the necessary information to the different interest groups (Mack and Ryan, 2006). Investors and lenders therefore are required to obtain additional information from sources. The primary objectives of these reports are to make interest groups aware about the financial condition of the organization. Features of GPFR Some of the aspects considered while preparing general purpose financial reports are discussed as follows. The statements are largely prepared based on the accrual system of accounting which involves recording transactions during the period when they occur, although the resulting payments and receipts occur in a different time period. Such a reporting system is better as it provides greater description of a firms resources rather than just a summary of cash receipts and payments. The financial statements are prepared on the assumption that the organization is a going concern and will continue to operate for a long period of time. The statements are prepared with full disclosure of transactions. It is also ensured that errors are eliminated so that the comparability and verifiability of the financial statements (Barth, Beaver and Landsman, 2001). Objectives of GDFR GDFR act as a reliable means of communication between the users of financial statements and the reporting entity. The users verify these reports and derive necessary conclusions regarding the organizations performance. The reports adequately reveal whether a firm is utilizing its resources efficiently. Investors are generally keen to know how organizations use their scarce resources. When a firm is successful at managing its assets and resources well, it is able to increase productivity, generate greater amount of revenue and increase the level of employment. These reports also help the management to take timely decisions regarding the distribution and allocation of finance to different activities and projects. Such reports give the management a substantial idea regarding the internal financial and operating capability and accordingly different strategic decisions can be taken (Ball, 2001). Users of GPFR The users of the reports are; finance providers such as banks and other financial institutions, suppliers of goods and services, employees of the organization, consumers, government and state authorities. Suppliers of gods and services verify the GPFR in order to determine the credit period to be provided to the entity. Employees make use of such reports to analyse whether the firm is in a proper financial condition so that they can receive salaries and bonuses on time. Consumers analyse these reports for analysing the quality of production and resource utilization of the organization. Government authorities are seen to verify these reports so as to make necessary decisions regarding imposition of taxes, levies, duties and trade related tariffs (Doyle, Ge and McVay, 2007). Accountability in government and NPF sector Government sector Government organizations remain accountable for its operations to the citizens of the nation. Government or state enterprises prepare financial reports and statements in the same manner as general companies. They are required to follow the generally accepted accounting principles for preparing different financial records. Government organizations are not as profit minded as privately owned companies. Government organizations responsibilities are spread widely over a number of stakeholders. Such organizations provide valuable services to the society and hence it is important for them to remain accountable (Orlitzky, Schmidt and Rynes, 2003). The primary financial statements prepared by state owned enterprises are balance sheet, statement of incomes and expenses, cash flow statement and statement of stakeholder’s equity. The purpose of preparing such reports and statements is to provide the government and the public with necessary information regarding the usage of fund and generation of revenue. The revenue earned by government institutions are distributed to its shareholders and are also reinvested in the business. Government organizations play a vital role in the growth of a countries economy. Such organizations have huge financial strength that makes them capable of investing in different infrastructural and mass scale manufacturing projects. Such projects require lump sum investment and is low profit yielding. For such reason private enterprises do not invest in such projects. Government institutions are interested in providing welfare services of different types. Although these activities are not intentioned for making high profits, it is important that the organizations earn sufficient profits for meeting operational needs. Government organizations are required to disclose their operations fully and prepare reports that are free from errors and omissions. The public has a high level of expectation from government organization. It is therefore important that government institutions utilize their resources effectively. One of the significant features of such organizations is to provide goods and services to the public at cheaper rates as compared to private sector firms. These institutions are also important for providing necessary support for the growth of small and medium scale firms (Saunders, Cornett and McGraw, 2006). Non profit sector Non-profit organizations do not operate with the objective of making high profits. The primary objective of such organization is to fulfil social needs and deliver society with important functions. This however does not imply that non profit organizations are not required to be accountable. They remain accountable to the society and the government in respect of their operations. They are also accountable towards the different financial institutions which provide such firms with required monetary resources. It is important for non profit organizations to disclose their operational affectivity and performances through the preparation of different reports and statements. These reports reveal where and how finance and other resources have been used by such firms. Non profit organizations are largely engaged in welfare activities. Unless there is adequate public trust, it becomes difficult for such organizations to acquire fund for continuation of their activities. It is therefore important that such entities disclose information regarding their operations by preparing different reports. Government and the public at large verify such reports in order to understand whether non profit organizations are fulfilling their roles (Epstein and Jermakowicz, 2010). One of the primary rules followed by non profit organization is respect of accountability is to completely disclose information relating to acquisition of fund and their usage. Most non profit organizations require tremendous amounts of funds for carrying out there welfare and utility services. Hence it becomes necessary to maintain proper financial records. State authorities verify these documents and accordingly allocate funds. It is also important for such organization to present reports regarding future expenses and fund requirements. Non profit organizations are required to publish their reports on the web and in different journals so as to make the general public aware regarding there services. The primary aim is to make people aware regarding their activities and attract larger amounts of funds (Morsing and Schultz, 2006). GPFR’s of government and non profit organizations Government and profit making organizations are required to abide by the following aspects while preparing the general purpose financial statements Accountability This aspect was critically discussed in the previous segment of this assignment from which it can be clearly noted that one of the prime reasons for preparing general purpose financial reports is to meet the accountability needs of the organization. Accountability means to provide necessary and timely information to various stakeholders. Accountability is necessary for judging an organizations performance. This facilitates decision making in respect of financing and investing. Organizations not only remain accountable to its shareholders and suppliers of funds but also the company’s employees. Employees are an important factor of production. Without their hard work and skill it becomes difficult for firms to generate necessary revenue. A company’s polices such as acquisitions and mergers impact’s its employees and it is therefore required to provide employees with sufficient information regarding its performance and long term objectives. The government is also required to verify accounts and other reports of different organization in order to prevent malpractices and exploitation of scarce resources (Mulford and Comiskey, 2002). Compliance Preparation of different types of general purpose financial statements ensures that organizations comply with certain standards such as complete disclosure of information, prevention of omissions and errors, matching principle, going concern principle, concepts of materiality and conservatism. This ensures that companies follow certain policies and rules while maintain their books of accounts and ensure that business is transacted legally and with full compliance of existing rules and regulations. Regulatory authorities check whether such rules have been followed by companies while preparing reports. Infringement of the policies in respect of preparing reports leads towards serious legal consequences. Rules and regulations ensure adequate levels of transparency and fairness in the preparation of financial statements and reports. This helps the management to take correct decisions regarding resource allocation and future investments. Accounting principles are not significantly different for non profit and government firms, they are largely similar. It is important that organizations follow similar patterns of report making so that it possible for investors to compare and analyse between different firms operating in the same industry. Investors find greater security in investing in government organizations as they are considered to be financially stronger than private firms. Many firms have been involved in legal disputes for not complying with the rules and regulations of preparing general financial statements (Ball, Robin and Sadka, 2008). Financial position General purpose financial reports include the preparation of balance sheet and income statements that help in understanding the financial position of different government and non profit organizations. Investors generally prefer to invest in business units which have a stable financial position. A suitable financial position signifies that organizations are able to manage their resources efficiently and generate adequate resources. This ensures that investors can obtain timely returns on investment. The strong financial position of the state or government enterprises attracts a large amount of investment from the public. On the other hand investment in non profit organization is not done with the motive of earning high returns. It is done primarily for social benefit. However financial reports of non profit organization help investors to understand whether the company has the capability of utilizing funds effectively. This can be known with the help of the assets position of the firm (DeZoort and Salterio, 2001). Investment and financing decisions Through the preparation of general purpose financial reports and statements, government organizations can effectively take decisions regarding the allocation of funds and resources. The reports help senior management and the administrators to interpret the financial position of the organization and accordingly estimate the retained earnings of the business. Accordingly they determine how the profits of the organization can be used so that there is growth. Government organizations largely invest in projects that require a large amount of finance. Hence it is important for them to critically understand the business position and wisely take financing and investment related decisions. State and the central authorities of the government verify the different operations of the state enterprises and make valuable suggestions regarding investments (Van Horne and Wachowicz, 2008). Conclusion General purpose financial statements are important statements that help in understanding the financial position and the general operating efficiency existing in different organizations. These statements are utilized by different interest groups associated with the business organization. The basic principles based on which the reports are prepared are formulated in a manner such that transparency and full disclosure can be effected. General purpose financial reports provide information regarding a company’s liquidity and asset liability position. Reports regarding firm’s future investment proposals are also analysed and shown. GPFR are not prepared to serve a single interest group. If investors require additional details, they are required to take the assistance of regulatory authorities and other institutions. Proper preparation of such reports is an important aspect of corporate governance. Reference List Ball, R., 2001. Infrastructure requirements for an economically efficient system of public financial reporting and disclosure. Brookings-Wharton papers on financial services, 2001(1), pp. 127-169. Ball, R., Robin, A. and Sadka, G., 2008. Is financial reporting shaped by equity markets or by debt markets? An international study of timeliness and conservatism. Review of Accounting Studies, 13(2-3), pp. 168-205. Barth, M. E., Beaver, W. H. and Landsman, W. R., 2001. The relevance of the value relevance literature for financial accounting standard setting: another view. Journal of accounting and economics, 31(1), pp. 77-104. DeZoort, F. T. and Salterio, S. E., 2001. The effects of corporate governance experience and financial-reporting and audit knowledge on audit committee members judgments. Auditing: A Journal of Practice & Theory, 20(2), pp. 31-47. Doyle, J., Ge, W. and McVay, S., 2007. Determinants of weaknesses in internal control over financial reporting. Journal of Accounting and Economics, 44(1), pp. 193-223. Epstein, B. J. and Jermakowicz, E. K., 2010. WILEY Interpretation and Application of International Financial Reporting Standards 2010. New Jersey: John Wiley & Sons. Mack, J. and Ryan, C., 2006. Reflections on the theoretical underpinnings of the general-purpose financial reports of Australian government departments. Accounting, Auditing & Accountability Journal, 19(4), pp. 592-612. Morsing, M. and Schultz, M., 2006. Corporate social responsibility communication: stakeholder information, response and involvement strategies. Business Ethics: A European Review, 15(4), pp. 323-338. Mulford, C. W. and Comiskey, E. E., 2002. The financial numbers game: detecting creative accounting practices. New Jersey: John Wiley & Sons. Orlitzky, M., Schmidt, F. L. and Rynes, S. L., 2003. Corporate social and financial performance: A meta-analysis. Organization studies, 24(3), pp. 403-441. Saunders, A., Cornett, M. M. and McGraw, P. A., 2006. Financial institutions management: A risk management approach. New York: McGraw-Hill. Van Horne, J. C. and Wachowicz, J. M., 2008. Fundamentals of financial management. New jersey: Pearson Education. Read More