Corporate financial reports are part of corporate reports consisting of financial statements and accompanying notes that are prepared in accordance with Generally Accepted Accounting Principles (GAAP). Financial statements are summaries of business transactions during the corporation’s financial year. The business world has many forms of organizations ranging from for-profit sole proprietorships, partnerships, and incorporated companies with limited liability to non-profit organizations whose existence is not primarily driven by financial gain.
The standards governing the preparation of financial statements largely apply only to incorporated entities. This has given rise to accounting standards issuing bodies and legal provisions that form the frameworks used in the preparation of financial statements. Reporting in accordance with GAAP and legal requirements presents advantages and disadvantages for organizations and other stakeholders. International Financial Reporting Standards are increasingly being adopted by many national accounting standard setting bodies leading the way towards a single set of accounting standards worldwide. Therefore, it is worth discussing the pros and cons of financial reporting to raise awareness of the complexities faced by corporations and accounting professionals.
THE ADVANTAGES
A number of benefits of corporate financial reporting can be listed, and perhaps among the most important is that organizations can compare their individual performance with others in the same industry or line of business. This is because established principles, standards and regulations ensure that there is a benchmark to follow in the preparation of financial reports. The recognition of income, expenses, assets and liabilities is standardized by the existing framework and any deviation can be counteracted with disciplinary or legal actions. Organizations strive to prepare their financial statements to match established frameworks as closely as possible. In some countries, for example Kenya, this has taken the form of an annual competition (the fire award) where the performance of companies in this area is assessed by professional bodies, including the national body of professional accountants, with the aim to reward the company with the best prepared financial statements. . This, in turn, promotes personal and professional development, which is a desirable aspect in the growth and wealth creation of corporate organizations.
Investors and business owners in jurisdictions where corporate financial reporting follows robust and clear frameworks can make the right investment decisions. Corporate reporting in this case enhances the development of understanding of the activities of companies and, at the same time, keeps the companies themselves on their toes, as society at large is well informed about expected reporting standards. . This also acts as an incentive for managers to perform at their best and institute control measures that help the organization meet the frameworks.
Corporate financial reporting requirements drive the timely preparation of financial reports. This is desirable for stakeholders who may be more interested in the immediate past of the organizations rather than waiting a long time before the outcome of their input is known. When financial reports are prepared and published within the stipulated time, necessary actions may be taken to correct any anomalies that may have led to undesired results. In a more serious case where a material error is discovered, it can be corrected and the necessary measures taken to prevent its recurrence.
IFRS allow for flexibility as they are based on principles rather than rules. Because the principles are based on value, corporations can adopt the standards that best suit their circumstances as long as fair value is properly reported. This also fosters professional development, as setting accounting standards requires qualified academics who can develop the required standards after long and rigorous discussion and consideration to reach a consensus.
In general, corporate financial reporting acts as a measure of control, as management, owners, employees, customers, creditors, and the government rely on the reports for decision making. For example, the government’s corporate taxation relies from the outset on financial reports prepared and vetted by qualified public or certified professionals. Trends in company growth can also be quickly determined by comparing sets of reports for different periods.
THE DISADVANTAGES
Corporate financial reports don’t just deliver desirable results. There are some undesirable results that need to be mitigated. Consideration of cost guides many companies in their operation. In the preparation of corporate financial reports in accordance with the established norms and rules, experience is required and the company must hire highly qualified professionals for this task. Paying fees to qualified professionals can be prohibitive especially for small businesses closely controlled by their managing owners. Compared to larger companies, small entities do not have adequate resources to implement the adoption of the standards or even to train or employ qualified personnel. In many cases, these small and medium-sized enterprises (SMEs) are tempted to forego compliance with certain aspects of standards or rules, leading to problems with regulatory bodies, including the government.
The freedom to adopt standards that follow the particular circumstances of the company leads to the manipulation of reports. Disclosure of important information is in jeopardy as there is no legal enforcement to implement the standards. Even when the government imposes legal obligations on the financial reports that must be prepared, there are still gaps that can arise, especially when accounting standards and legal provisions are not in compliance in some areas.
For multinational companies, there are challenges in preparing their consolidated financial reports, especially when operations take place in countries with different accounting standards and legal regimes. There are also other challenges in dealing with, for example, exchange rates, interest rates and transfer pricing, where the treatment of such aspects may be seen as different in different countries. Taxation and the existence or non-existence of double tax treaties also pose another challenge.
CONCLUSION
It can be concluded that corporate financial reporting is essential and that the advantages of following principles-based accounting standards far outweigh the disadvantages, as the freedom to prepare reports in whatever way organizations see fit can lead to financial chaos.