Many studies and researches have been invested into how and why corporate reporting is necessary to potential users. One of the most commonly asked questions in any discussion is about the disclosure involved in the corporate reporting. This paper therefore seeks to examine and answer these questions and at the same time analyze the objectives of corporate reporting. corporate reporting as an essential activity that allow users to keep their operating data records including their income statements, balance sheets, and statements of cash flows at the end of each month or year (Whittington 2008, 49). It is a very effective accounting activity since it enables all potential users to present their accounting statements more accurately and precisely based on the laid down standard procedures. General Accepted Accounting Practice in the UK, or UK GAAP and International Financial reporting Standards (IFRS) lays down the standards (White & Hanson 2009, 59). The IFRS gives room for flexibility as they are based on principles not rules. These principles enable corporations to adopt the standards that best suit their position but with a condition of fair value reporting. For instance, according to corporate report review (2013), it promotes high quality corporate governance and reports to encourage investment. This implies that it helps United Kingdom capital markets, more specifically the markets for risk capital to function properly.
Reasons for Usefulness of Corporate Reports to Users
The Financial Reporting Council issues accounting standards, which apply to all companies in the United Kingdom (UK) and other entities that prepare accounts to provide true and fair view of the companies. According to Marquis (e How contributor), the report gives income statements used by financial analysts, investors, and corporate partners for the purpose of evaluating economic status and progress of the companies. This is confirmed from balance sheets and income statements, which give detailed information on company’s assets, liabilities, expenses and expenditures. Probably, the chief reason why shareholders value corporate reports is that they illustrate financial status of a company including its profit gains and forecasts. In most cases, shareholders concentrate on the profit gains from which they shall be able to determine their share value and dividends. Information concerning prices of share units is clearly outlined here enabling all shareholders to measure what their likely to gain from the shares they own in a given company (Charlotte 2006, 35). Corporate reporting also provides a platform through which a company attracts and retains investors .Many investors are attracted by good performance of various companies as portrayed in their annual corporate reports. Consistent communication with investors on financial performance and company developments helps engage them in the business and boosts their confidence in it. Many investors look for evidences of proper management whenever they review the data from corporate reports. Besides, investors and their employees whose aim is to confirm they are working for a progressive company, which will offer them a secure future and great job opportunities (Zhang 2011, 5).
According to Browlee II and Kenneth (2000), corporate financial reporting is performed to help students understand financial accounting and reporting. This is more appropriate for those undertaking second financial accounting at MBA level. They also ensure that students analyze real financial statements as they work with the actual reports. Governments also use corporate reports to measure the performance of their economy (Bayoud et al. 2012, 98). Money supermarket.com Group PLC is a company based in United Kingdom operating on three major branches that is Money supermarket, Travel supermarket and money saving Experts. The corporate data from money supermarket .com group provide online platform for comparison of products in the market, insurance and home services. It helps users save money on all their household services as it provides a relaxed one to use online service so they can compare a wide range of products that suits their needs (Villiers 2006, 11). Major shareholders such as Simon Nixon, The Capital Group Company Inc., and Aviva plc, closely monitor market trends by visiting money supermarket website where all information including its annual financial reports are found. (Websites: moneysupermarket.com and travelsupermarket.com). The shareholders can also study the yield from this investment by monitoring their shares alongside the current prices.
Reasons against Usefulness of Corporate Reporting to Users
Despite the great achievements of International Accounting Standard Board (IASB) in extending financial reporting standards, it has faced opposition from differences in national accounting cultures, which are concentrated in the market structures. The variation in national accounting cultures slightly affected user’s confidence on the information found in corporate reports. National accounting cultures may vary from one country to another or even from one enterprise to another due to difference in policies and standard rules used. This is common with small or medium sized companies because they tend to go for those policies that best suit their capabilities that are affordable once (Whittington 2008, 76).
Financial reporting fraud, including non-disclosure and deliberate falsification of figures has also contributed to information risk. This is dangerous to shareholders and investors as it portrays the company or business to be economically healthy but in real sense, it is not. Users should, therefore, be keen on figures posted in the reports because some dishonest business people who use false data to attract and retain investors. (Schaltegger, Martin, & Burritt 2006, 9).For example financial fraud committed by Enron Corporation (United States) caused a loss of about 80 billion in the market (Markham, 2006). When financial statement fraud has been, committed companies tend to overstate assets on the balance sheet and net income on the income statement. Fraud can be committed by anyone at any level. From the report by the Congressional Research Service (2002), WorldCom, a long distance telecommunications company in the US, announced that it had overstated earnings in 2001 by more than $3.8 billion. The U.S. Securities and Exchange Commission (SEC) charged the company with accounting fraud. A court order was obtained and to block the company from falsifying financial records. Senior management that is the CEO commits according to (Wells, 2005, 288) seventy-two percent frauds. In addition, some employees commit financial statement fraud (about 43%) to cover their poor performance or to earn bonuses based on good work Results from surveys conducted show that potential users consider annual reports to be the most important source of information.
Multinational companies face challenges when preparing their harmonized financial reports, especially where operations are in the countries with different accounting standards. The variation in exchange rates, transfer rates and international rates pose a great challenge since these aspects are considered differently in different countries (Brownlee, Ferris, & Haskins 2008, 49). During the preparation of corporate reports in accordance with the laid down standards and with the expertise required a company has to engage highly qualified personnel for this task (Whittington 2008, 51). The amount charged for this task can be prohibiting to small entities, which are probably controlled by owner managers. (Brownlee, Ferris, & Haskins 2008, 54).In the comparison of large companies to medium or small; small ones do not poses adequate resources to implement the standard requirements or even to hire professionals. In most cases the small and medium sized companies, are forced to forgo compliance with certain aspects of the IFRS and FRC (Brownlee, Ferris & Haskins 2008, 13).
Despite many criticisms leveled against corporate financial reporting, it is still standing out as a very important activity to all the users. Generally, the various companies, governments and other corporate partners view corporate financial report as a legal requirement. They are presumed to provide a balanced overview of the results and financial position of a given company at the end of the year (White & Hanson 2009, 13). Finally, it is regarded as a mode of communication to stakeholders, investors and shareholders as it raises the key issues of a business and addresses on how management will deal with these issues.
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