Significance Of Financial Reporting

Significance Of Financial Reporting

Length: 1613 words (4.6 double-spaced pages)

Rating: Excellent

Open Document

Essay Preview

More ↓
Significance of Financial Reporting

The Collapse of the Corporate Giants like Enron and WorldCom have raised the imminent question, which always remains in the back of an investor¡'s mind, "Can I trust my hard earned Capital in somebody else's hand?" This is not the first time that investors have lost their trust in companies however the fact does not change that the cost of capital from the market has increased significantly for the companies. Investors have started to invest their capital in risk free securities rather than in company stocks.
Investors have also started to look with contempt and doubt at a company¡¦s financial reports because some of these collapses were preceded by financial frauds cleverly covered by the management of such companies. Investors have arrived to a stage where they no more trust the financial reports provided by the company. However some of the intellectuals believe that financial reporting is of no significance for investment decisions. The reason being the fact that most of the financial reports are historical and they have already been taken into consideration while deciding the price of the stock of the company and it also does not give an idea about the future position of the company.
On the other hand there are also some intellectuals who argue that there are still a lot of investors who still takes their investment decisions on the basis of a company¡¦s financial reports. Ask investors what kind of financial information they want companies to publish and you'll probably hear two words: more and better. But let's face it, the financial statements of some firms are designed to hide rather than reveal information. So what would ensure investor¡¦s trust in companies and its governance? The answer is a good, future oriented and more transparent financial reporting system.
One cannot deny the importance of a good financial reporting system for ensuring sound corporate governance. There is now a clear need to restore confidence in capital markets and elsewhere by enhancing corporate governance in order to provide financial information of the highest quality.
The lifeblood of markets is information and barriers to the flow of relevant information represent imperfections in the market. The need to sift and correct the information put out by companies adds cost and uncertainty to the market¡¦s pricing function. The more the activities of companies are transparent, the more accurately will their securities be valued.
A basic weakness in the current system of financial reporting is the possibility of different accounting treatments being applied to, essentially the same facts.

How to Cite this Page

MLA Citation:
"Significance Of Financial Reporting." 123HelpMe.com. 14 Aug 2018
    <https://www.123helpme.com/view.asp?id=167289>.

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

Lehman Brothers´s Banking Firm and Unethical Financial Reporting Essay

- The Lehman Brothers, an investment banking firm filed for bankruptcy in September of 2008 due to poor financial choices. The company made many bad decisions because of their greed and unethical decision to manipulate the books. The lack of success by the Lehman Brothers shows that it is imperative to be self-evident with financial reporting. The bankruptcy shows that they failed to use factual figures by disguising their actual financial position. The analysis of the Lehman Brothers will show the acts of unethical financial reporting and the effect it had on this financial banking firm....   [tags: Bankrupcy, Manipulation, Greed]

Research Papers
642 words (1.8 pages)

Essay about Users of Financial Instruments and Information

- Financial Instruments is an important topic in accounting and it a controversial topic in many areas. People in the world investor, lender, companies and anyone who uses financial information need reliable and relevant information to make decisions and financial instruments influence significant in their decision especially after financial crises. Financial instruments define as "any contract that gives rise to a financial asset of one entity and a financial liabilities or equity instruments of another entity"....   [tags: investor, lenders, decisions]

Research Papers
821 words (2.3 pages)

Essay about Summaries of Financial Reports

- The objectives of financial report are different from each country, therefore, the worldwide market use the financial report from different countries all over the world following one practice standard. To respond to the need of this worldwide market, the US public companies must do the dual reporting to disclose and to present comprehensible information to the international investors and creditors. Statement of the Problem The dual reporting has been done by US public companies to attract more investors and creditors in the global market....   [tags: study guides,]

Research Papers
781 words (2.2 pages)

Essay about Managing Financial Principles and Tecniques

- UNIT SUMMARY: The assignment describes the significance of the appropriate financial techniques to accelerate the profitability and productivity in the massive and ideal manner. The unit provides the effective principles and formulas to deal with the finances in the balanced and appropriate manner. Every organization desires to have the significant value in the market and most of the decisions which take the companies to another level based on the financial stability of the companies. BACKGROUND OF THE ORGANIZATION: TESCO was founded by Jack Cohen in 1919 and was like a shipment of tea and from tea, the first two alphabets were taken like T.E....   [tags: Business Management ]

Research Papers
1357 words (3.9 pages)

Essay on The Need for Regulation in Financial Reporting

- The Need for Regulation in Financial Reporting Discuss: Since 1990 the Accounting Standards Board has produced Financial Reporting Standards (FRSs) It has been performing a very important role in the economics market as the published accounts are the essential sources of information about the organizationsÂ’ performance which is available of the both internal and external user group in large organizations. l Financial Reporting Regulations in UK Regulators that establish requirements for the reporting of financial results have recently issued several new initiatives targeted at the practices of many firms....   [tags: Financial Reportings United Kingdom Essays]

Research Papers
1542 words (4.4 pages)

Qualtiy of Financial Reporting Essay examples

- Introduction Corporations usually communicate with shareholders through making disclosures within and outside the financial reports. The narrative disclosures in financial reports have become longer and more sophisticated in the recent years. With the increasing number of corporate scandals, it has been questioned that whether the financial reporting quality has been undermined by such disclosures. As the statement argued, ‘Disclosure outside the financial statements is only used to manage the impressions of gullible shareholders.’ which generally means that such disclosures mislead the shareholders through manipulating their perceptions....   [tags: Corporations, Shareholders, FInances, Reporting]

Research Papers
1544 words (4.4 pages)

Financial Data Management Essay

- Sahira has received employee complaints about the lengthy time it takes for her team to create financial reports. Her team explains that the computers are the problem and that the software programs are too difficult to use and that many hours of manual manipulation of data are required to complete monthly reports (Colorado State University-Global Campus, 2014, p. 6, ¶3). The management dilemma can be described as: Delays in financial reporting. (Appendix, Worksheet box 1). Upon further examination, the specific management question to be addressed is: Can financial data management be made more efficient....   [tags: financial reporting, transaction cycle]

Research Papers
873 words (2.5 pages)

Essay about International Financial Reporting Standards

- The globalization of the world’s capital markets has created an increasing need for comparable, detailed and transparent system of financial reporting making it imperative to establish one set of high quality global accounting standards (Gornick-Tomaszewski, S., & Showerman, S.2010). Currently, there are two sets of accounting standards that are generally accepted for international financial reporting- The U.S. GAAP ( Generally Accepted accounting Principles ) which have been developed by the Financial Accounting Standards Board (FASB) and the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board(ISAB) (Kieso, D.E., Weygandt, J.J., Warfiel...   [tags: globalization, accounting, IFRS]

Research Papers
1296 words (3.7 pages)

Financial Statements Essay

- In recent history, there have been quite a few memorable cases of corporations manipulating financial reports in order to deceive stakeholders. Deceptive accounting practices are like a disease, and should be rooted out immediately. These practices undermine the stability of U.S. financial markets, and can make people less willing to invest in stocks. Financial reporting is the key to maintaining trust in the financial system and any manipulation should not be tolerated. The purpose of financial statements Financial statements are the primary instruments used in assessing the performance of a business and its managers (Gibson , 2013)....   [tags: financial reporting, accounting, manipulation]

Research Papers
943 words (2.7 pages)

Financial Reporting Essay

- Financial Reporting Generally accepted accounting principles (GAAP) are uniquely different for each country. Although there has been a push for International Financial Reporting Standards (IFRS) to be the new accounting standards for both domestic and foreign financial statements, local GAAP still remains the current standard for participating countries (CFO, 2008). Regulations regarding an organization’s regulatory environment and issues with foreign currency vary within domestic and foreign companies....   [tags: Accounting GAAP IFRS]

Research Papers
1441 words (4.1 pages)

The consequence of that would be different results or financial positions each of which would apparently comply with the overriding requirement to show a true and fair view. However the investors might not get the real picture behind the numbers which put them to a disadvantage and they would not be in a position to see through the techniques used by the management to show the results of the company in the most favorable and flattering way.
That¡¦s why a stricter and more elaborative financial reporting is very much essential because it discourages managements intentions and besides that there are a lot many advantages to the investors, analysts and other accounts users and ultimately it also benefits the company itself because it limits the scope of uncertainty and manipulation. In addition to that the wider the scope for alternative treatments the less useful financial reports become in terms of comparability thus a uniform set of generally accepted accounting principles and practices is necessary.
What investors look for in an accounting report is a coherent narrative (supported by the figures) of a company¡¦s performance and prospects. In order to ensure that the responsibility should be placed on the Board of the Directors and they should pay particular attention towards presenting a balance and understandable assessment of their company¡¦s position.
Furthermore the fundamental principle of financial reporting is that the view presented by the reports should be true and fair. And further principles suggest that board of directors should aim for the highest level of disclosure of the facts which are understandable by avoiding damage to their competitive position. They should also aim to ensure the integrity and consistency of their reports and they should also meet the letter of the reporting standards such as GAAP.
Here the Investors should seek disclosure and simplicity. The more companies say about where they are making money and how they are spending their resources, the more confident investors can be about the companies' fundamentals. It's even better when financial reports provide a line-of-sight view into the company's growth drivers. Transparency makes analysis easier and thus lowers an investor's risk when investing in stocks. That way you, the investor, are less likely to face unpleasant surprises.
As per the views of George Bennet Stewart III of Stern Stewart & Co. the current Accounting Practices are of no use in determining a company¡¦s current position. In the United States of America, President George Bush has created a new oversight board to regulated accounting standards. But according to Bennet these reforms just solves some of the problems but they do not provide a full fledge solution.
Here the main problem is not with companies like Enron and World Com who broke certain rules the root of the problem is that every company is working on the boundary lines set by the government. The idea is to bend the rules to the maximum and finding a way around the legal requirements. Bennet suggests some extreme measures to reform the accounting practices but that certainly would not cost beneficial to the companies.
On the contrary George J. Benston of Emory University suggests that accounting is not in need of fixing it is just needed to be reinterpreted. Benston agrees with some of the suggestion by Bennet but he totally denies the motion of altering the GAAP from the root. In support to his arguments he describes the importance of traditional accounting system. He explains that the traditional accounting practices did not put an emphasis on measuring and reporting the current market values of balance sheet accounts or changes in these values over the period. Instead the primary aims of the financial reports the audits were firstly to detect theft or gross misuse of the resources and secondly to ensure that the earnings generated by those resources were measured and reported fairly and consistently over time in accordance with GAAP.
Financial reporting is not just important for investors. One should always know the importance of financial reporting to the capital markets because investors, creditors, regulators and other market participants rely on getting accurate, timely and comparable financial information from public companies. The efficient allocation of capital depends on financial reports that provide a realistic picture of company¡¦s past performance and future prospects. When the information provided draws a misleading picture than the results could be disastrous as seen in the failures of Enron and World Com.
Why there is a need of accounting reform whereas the system has been successfully operated over a period of time? The answer to that is the slow rate at which accounting standards evolve. The Economy had and is evolving at a rapid pace while reporting standards have changed to a very little extent. In fact they never changed they were just modified so to avoid the imminent problem for the time being.
One should know that developments in accounting historically have been slower than business developments and the task of setting standards is not an easy one. To ensure that accounting standards keep pace with business developments, the government must continually reassess the answer to the ultimate question, "What do investors really need to know?" Obviously, investors need accurate and relevant historical information, but it would also be helpful to know the key drivers of the business and the risks the company faces.
GAAP cannot ensure the providing of the most relevant information to investors for making decisions about the true value of the company. For example, many companies now derive much of their value from intangible assets. GAAP ¡X which does a relatively good job of reporting the cost of tangible assets, such as a company's equipment ¡X is less effective in providing relevant information on intangible assets, such as technology rights, human capital, and innovation. As a result, the value of huge sectors of the economy may not be accurately reflected by financial reports.
As GAAP is not designed to provide some of the information that today's investors might find most relevant, the investors need to focus on improvements in business processes and business reporting that make the desired information available. This additional information could, for example:
ľ The information provided by GAAP should be enriched further by giving additional financial information like performance metrics, operational data, macroeconomic or industry-specific data or other information;
ľ The companies should also provide the context for the analysis of GAAP financial statements;
ľ The Risks and drives that allow better evaluation of the quality of earnings and cash flows should be identified and explained to the investors.
All these motions and arguments for reformation or reinterpretation of the financial reporting one thing that remains unquestionable is the significance of financial reporting in order to secure investors¡¦ trust and for that matter to ensure good corporate governance. However as we discussed earlier that there is still a need for some reforms and reinterpretation needed while preparing the financial reports.


References:
ľ George J. Benston, Corporate Governance at the Crossroads: A Book of Readings, McGraw Hill Irwin, 2003.
ľ George Bennet Stewart III, Corporate Governance at the Crossroads: A Book of Readings, McGraw Hill Irwin, 2003.
ľ Christine A. Botosan, Corporate Governance at the Crossroads: A Book of Readings, McGraw Hill Irwin, 2003.
ľ www.eskom.co.za
ľ www.oecd.org
ľ www.austrac.gov.au
ľ www.eei.org
ľ www.ccdg.gov.sg
ľ www.ecgi.org
ľ www.corp-gov.org
ľ www.icgn.org
Return to 123HelpMe.com