The advantages and disadvantages of corporate financial reports

Corporate financial reports are part of corporate reporting 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 limited liability incorporated companies to nonprofit organizations whose existence is not primarily driven by financial gain.

The rules 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. The reporting process in accordance with GAAP and legal requirements presents advantages and disadvantages for organizations and other interested groups. International Financial Reporting Standards are being increasingly adopted by many national accounting standard setting bodies leading the way towards a single set of accounting standards around the world. Therefore, it is worth discussing the advantages and disadvantages of financial reporting to raise awareness of the complexities faced by corporations and accounting professionals.

THE ADVANTAGES

A number of advantages of corporate financial reporting can be enumerated, 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 preparing 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 resulted in an annual competition (the fire prize) where the performance of companies in this area is assessed by professional bodies, including the national body for professional accountants, with the aim to reward the company with the best prepared financial statements. . This, in turn, promotes professional and personal 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 companies’ activities 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 to comply with the frameworks.

Corporate financial reporting requirements lead to 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 undesirable results. In a more serious case where a material error is discovered, it can be corrected and steps can be taken to prevent a recurrence.

IFRS allows for flexibility as it is 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 adequately reported. This also encourages professional development, as accounting standard setting requires qualified academics who can develop the required standards after long and rigorous discussions and considerations to reach a consensus.

In general, corporate financial reports act as a control measure, as management, owners, employees, customers, creditors, and the government depend on the reports for decision making. For example, governance in corporate taxation relies from the outset on financial reports prepared and reviewed by certified professionals or qualified public officials. 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. Cost consideration 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 owner-managers. Compared to larger companies, small entities do not have adequate resources to implement standards adoption or even to train or employ qualified personnel. In many cases, these small and medium-sized enterprises (SMEs) are tempted to forgo 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 jeopardized 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 loopholes 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 are conducted 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 considered different in different countries. Taxation and the existence or non-existence of double taxation treaties also pose another challenge.

CONCLUSION

It can be concluded that corporate financial reporting is essential and that the advantages of following principled accounting standards far outweigh the disadvantages, as the freedom to report in any way organizations see fit can lead to financial chaos.