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Importance of financial statements to managers, investors and creditors
Importance of financial statements to managers, investors and creditors
Importance of financial statements to managers, investors and creditors
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Introduction
It seems to be a cyclical situation regarding transparency and financial quality issues, since after every economic bubble an unusually high number of firms appears to have commit irregularities in the presentation of their financial statements, after that scenario emerges many authorities at different levels of government (and professional bodies) propose new legislations, recommendations and higher standards to help reduce the “fog” in the financial statements and increase their quality and transparency. It´s possible that some of those usually suggested measures (limiting the duration of auditing tenures) is not really helpful, but it could be event harmful for the proposed purposes. In addition to regulations, it´s also helpful to identify the usual situations and conditions where reporting quality diminishes, since in that way auditors (internal and external) can be in an increased alert state, when those conditions arose.
Brief Revision of Literature
According to English (1999) there are two definitions of Information Quality (that can also apply to financial information), they are inherent quality that is the understood as the accuracy of the data, the other definition is the pragmatic quality, in this case, what matters is the usefulness of the data, because if some data is useless, it doesn´t have pragmatic quality, in our case, it would mean that that financial data released by the company would be of no help to an auditor or investor to evaluate the financial situation of a firm.
Transparency in financial information is understood as high precision about reported firm earnings (Sadka, 2011), in the same paper is proposed that information quality could reduce liquidity beta, which in turn will reduce risk...
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...hat the financial statements were not right, it was that sales growth in an astronomical way, but profits remaining at the same low levels as before. That could be a red flag to detect that something is not right about a company reported revenues.
Conclusions:
We have seen that we can only consider that financial reports are of high quality if they help investors to adequately evaluate the risks of an investment, we should also be aware that there are many ways that firms can hide their bad results, so it´s also necessary that investors and auditors check for red flags like over complex structures or deals, and be more aware than normal when we approach an end of business cycle period since lower quality standards are applied there. In addition we can say that there are no easy solutions, since “common sense” measures like mandatory auditor rotation can be harmful.
The Securities and Exchange Commission requires that publicly owned businesses provide annual reports, which are available to the public. Many different people use annual reports, to make informed business decisions. Management from the company uses the information to determine a number of items. Some of these items are the profitability of the company, the inventory turnover rate, and the accounts receivables rate. Creditors use the annual report to determine how well a company can satisfy its current liabilities, as well as, how the company is doing in the aspect of long tem survival. Another group of people who use the annual reports furnished by companies are the investors, who can purchase shares of stock from the publicly company. Annual reports are very important to these people, because they are an over all picture to help them determine the over all stability and reliability of the company’s financial outlook. These annual reports are important because they do not only contain the financial statements of the company, but there is a management ‘s note to discuss reasons for any unexpected numbers, and an auditor’s report, from an independent accounting firm, who either agrees or disagrees with the financial numbers. Market reporter Matt Krant said, “Ignoring these reports is akin to driving down the freeway blindfolded.”
The collection of these three financial statements identifies the financial position of the corporation to help identify the way forward financially for the company. Once all of the data has been collected for the annual reporting the corporation can analyze the data through the different financial ratios including the liquidity ratio, the asset management ratio, and the profitability ratio.
In the year 2002, Adelphia Communications Corporation faced a massive accounting scandal that led to company’s bankruptcy and later reorganization. This paper will attempt to identify, analyze and evaluate the consequences of misrepresentation of financial accounts on a company, industry and economic level. Moreover, it will attempt to examine factors influencing the corporate failure from an auditor’s point of view, and consider the measures that auditor could have taken in order to enable quality and completes of information communicated to external users.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
As technology progresses it can truly change how a business operates in terms of accounting and financial reporting. Online software has become a widely used system by many businesses around the globe. Financial reporting is essential to any business especially when seeking for potential investors or stakeholders. The reason being is because a financial report contains all of the records of how a business is performing financial wise. Likewise there are purposes of securities regulations and the main one is to disclose any schemes.
The Firm’s testing to ensure accurate useful life and disclosure were inaccurate (10). The client did not maintain information on which customers correspond to the intangibles, which raised an existence question regarding the assets. The auditors should have used confirmation with these customers to figure who was listed as an asset. The auditors should have also used more professional skepticism on making sure these customers actually existed. Auditors often rely too much on what management tells them instead of investigating it themselves. The concern with this deficiency was the effectiveness of internal
Investing and lending public: These individuals and entities rely on independent auditors to carry out their “public watchdog” function rigorously, including reporting honestly and candidly on their clients’ financial statements. The integrity and efficiency of our nation’s capital markets are undermined when auditors do not fulfill their professional responsibilities. This will cause these individuals lose faith on the auditing work and might not cooperate with auditors anymore.
Introduction Within the current crisis of confidence in the public accounting profession after the Enron debacle and series of high profile failures of financial services firms, the issue of ‘audit expectation gap’ has never been more important. Though it would take an enormous amount of effort to address these issues, I will argue that tremendous amounts could be done in order to close the gap. In this essay, I will discuss some of these issues and in particular the strategies to reduce the gap. Definitions Various definitions have been proposed for the audit expectation gap.
Schofield (2014) researches the difference between public and private company financial reporting. For instance, a private company has fewer consumers reviewing their financial statements, whereas public companies could have multiple consumers reviewing financial statements. In addition, private companies typically have less specialized accounting personnel, whereas public companies will have several. Lastly, Schofield (2014), reviewed the number of amendments proposed and finalized to help benefit private companies financial reporting.
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
The Purpose of Financial Statements The financial statements of a business are used to provide information about the status of the business, set performance targets and impose restrictions on the managers of the firm as well as provide an easier method for financial planning. The financial statements consist of the Profit and Loss Account, Balance Sheet and the Cash Flow Statement. There are four areas of information, which we can collect from a company's financial statements. They are: Ÿ Profitability - This information comes from the Profit and Loss account. Were we can compare this year's profit with the previous years.
In today’s day and age, there is a lot of news that is related to corporate accounting fraud as companies intentionally manipulate their financial statements to show a better picture of their financial health. The objective of financial reporting is to provide financial information about a company to its various stakeholders such as investors and creditors so that these stakeholders can make decisions accordingly. Companies can show a better image of their financial well being by providing misleading information. This can be done by omitting material information from the books or deceitful appropriation of assets such as inventory theft, payroll fraud, check forgery or embezzlement. Fraudulent financial reporting will have an effect on the
Auditing has been the backbone of the complicated business world and has always changed with the times. As the business world grew strong, auditors’ roles grew more important. The auditors’ job became more difficult as the accounting principles changed. It also became easier with the use of internal controls, which introduced the need for testing, not a complete audit. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. Computers played an important role of changing the way audits were performed and also brought along some difficulties.
In the past, the company performance was measured by asking ‘how much money the company makes?’ To a certain extent, they are right because gross revenue, profitability, return on capital, etc. are the results that companies must bring to survive. Unfortunately, in today business if the management focuses only on the financial health of the company, numerous unwanted consequences may arise.
Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently."