The use of off balance sheet accounting continues to undermine the financial transparency of company financial statements

analytical Essay
1499 words
1499 words

In this assignment I shall examine whether off balance sheet information can be the main cause of undermining the financial transparency of company financial statements. More specifically, I will start analysing the general objective of financial statements linking it to transparency of financial statements. Furthermore, I will discuss critically about off balance sheet information giving a definition and examples of which items can be considered as “off balance sheet”. Moreover, I will discuss the benefits and the disadvantages of using “off balance sheet” information in the financial statements by referring to a UK case. In the concluding paragraph my personal view will be given, based on the above research giving the reasons why I agree and in what extend with the particular comment. Traditionally, accountants have followed an objective of Financial statements. According to Alexander and Britton(1993): “The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions”.Moreover, Financial statements of a corporation should give a positive impact to whoever is interested recording every entry clearly. As a consequence, investors or other users who are interested in making economic decisions are also interested in transparency of financial statements. Financial transparency can be described as a high quality and clear financial statement. Moreover, for corporations, transparency is including visible information which is understandable for investors and everyone else who is interested in making economic decisions. Furthermore, transparency is playing a substantial role in... ... middle of paper ... ...of the companies are using off-balance sheet information in their financial statements nowadays. This is a result of the many benefits that the off-balance sheet information can offer to financial statements. On the one hand, using off-balance sheet information has its disadvantages. Through Enron and Lehman brother’s scandals, it can be concluded that off-balance sheet information can only be “benefit” for company executives. On the other hand, it can be the cause of many disadvantages for everyone even to company executives. As a consequence even if off-balance sheet offering many advantages we cannot ignore the negative effects. It undermines the financial transparency of company financial statements. Therefore, financial transparency should prevail over the off balance sheet in every corporation in order to have “healthy” and high quality financial statements.

In this essay, the author

  • Explains that financial transparency is a high quality and clear financial statement. companies should make more transparent financial statements to make investors feel more safe and trustworthy.
  • Explains that lehman's brothers were one of the largest investment banks in america. the main causes of bankruptcy were leverage, liquidity, and losses.
  • Explains the advantages of using off balance sheet finance, such as improving the appearance of financial statements and financial ratios, and avoiding taxation.
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