Introduction
Financial reporting is defined as the production of financial statements to reveal the financial status of an organization to relevant users: the government, investors, lenders and the management. For years, organizations have used financial reports to determine their performance in the business field, provide stakeholders and investors credible data, inform decision makers on need for changing certain aspects so as to improve and determine the value of a given entity or organization. Reports are prepared by accountants and verified by auditors who could be internal, external or even both. However, there has been a growing concern about the adequacy of financial auditing given the number of flaws that are seen with the process. Researches have established need for a review into the method used to develop financial reports and associated research so as to clear the doubts and dissatisfaction by people in the business field. This paper will look at the problems related to financial reporting issues and how they can be solved. Some people suggest that a framework with detailed components needs to be developed while others suggest that the sector requires research so as to help improve practice.
Background information
Financial reporting has had its challenges for as long businesses have existed and the problem seems to be growing bigger as years pass by. During this century where business entities are busy with customers and information, there is so much data that it makes it difficult to believe or even understand financial statements especially if they are made manually. Globalization has also led to stiff competition in the market and there are frequent changes in an area or two to which business have to cope. This may consequently lead to errors that are committed knowingly or unknowingly. Due to this, there is need for a way of detecting, preventing and controlling such flaws and financial reporting provides such a viable ground. However, there are difficulties associated with financial reporting necessitating needs for ways to improve the same and provide similar grounds for assessment and reference when reporting. This is compounded by the conflicting theories suggesting ways thorough which reporting flaws can be resolved.
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Research
As Inanga and Schneider (2003) suggest, research in the accounting field has failed to provide useful information to the business fraternity and consumers, especially when it comes to financial reports. For many years, researches have taken the scientific model of data collection, analyses, presentation and discussion of findings and writing reports about the findings. However, there is considerable failure by the researches to add value to the business world as most of the information is just but what is known daily. They identify the main problem with research in the business field as the lack of known theories on which to base studies. Researches heavily depend on theories for formulation of hypotheses and study question and in such a case where there is no known theory, findings that have for long been used raise concerns. Though there are numerous researches conducted using well developed methodologies, the outcome does not add value to the field of accounting since no improvement is experienced in practice.
A report by the Jenkin’s Committee (1994) exhibited evidence showing the inability of financial reporting to meet needs of the users effectively (AICPA, 1994). According to Inanga and Schneider, inadequate investment in appropriate research that focuses on the user needs that are continually changing has largely contributed to the failure of financial reporting related research to bring about desired change in accounting. Financial reports are crucial in businesses and thus need to be developed adequately, on standard basis to enhance its use by relevant people. According to Barth (2014), researchers need to focus on the improving the relevance of financial reports by ensuring that the reports are comparable, verifiable and above all easily understandable; something that is yet to happen.
Over years, there have been mixed developments in the field of research in accounting and mostly, there has been failure. Though in some cases there have been achievements, they did not last for long and after a few years, things went back to “normal” or even worse. For example the Accounting Principle Board once recommended research in the field of accounting to help improve standard setting procedures in the 1960’s and 1970s. It went well for the past few years before crashing totally and nothing has come out since then (Sprouse, 1980). Research should aim at improving practice in the field of accounting and particularly in financial reporting matters. Most researches are aimed at advancement of one’s education and career reputation and thus do not help in improvement of practice, as a result there remain loopholes in the field especially the utilization of research information by practitioners in the financial management field (Inanga and Bruce, 2003).
As noted by Sprouse (1980) Different companies also use different accounting methods and approaches to make financial reports. This leads to difficulties inferring to the reports and therefore a need for harmonization. Consequently, bodies such as Financial Accounting Standards’ Board that are mandated with harmonizing standards within the field and use of common reporting techniques have been created. Standardization of reporting techniques have brought about resistance and controversies as people do not know the implications of such changes in the long run; the associated risks and financial needs. As a result there is resistance by the people in there has been resistance by business organization and other entities. Sprouse continues by indicating that there is need to shift the areas of focus from the just developing standards to a more comprehensive position; establishing concepts and frameworks. Barth (2014) makes the same call; “measurements of concepts in financial reporting” are conspicuously missing and thus have made the area so messy with lack of harmony form company to company or government to government. Such concepts include assets and liabilities and other measurable aspects included in the financial reports.
Measurement in financial reporting also faces a great problem when it comes to understanding the real meaning and use of financial statements. In a field where virtually everything in expressed in monetary values, it becomes tricky to measure aspects of accounting such as income and assets and give their accurate values. Values change and can be used in different terms by different people or organizations. For example a company can value a given asset using historical cost whereas another one will value the same asset using the market value, bringing differences and thus difficulties in determining which one should be used. It is also possible that an organization releases different financial statements in different contexts to meet the expectations of the person who asked for them (ICAEW, 2006). This modification to suit the “context” needs to be resolved so as to ensure transparency and integrity in practice as well as provide investors, lenders and other interested parties the true information of the company’s financial position.
Generally Accepted Accounting Practices (GAAP) and International Financial Reporting Standards (IFRS)
Under GAAP there is a strong recommendation that companies and organizations disclose all the information honestly. In reporting, companies are required to include note (including footnotes) so that they provide adequate information on things that may not be included in the main body of the report. Such aspects include: information on inventories, company debts, securities held and pension plans among others. This provides for a detailed disclosure of the company’s position which may be useful in making decisions such as investments and acquisition of the companies. On the other hand, the International Financial Reporting Standards (IFRS) are considerably gaining popularity in the business world. They are standards mostly principle based offering a broader and general approach to reporting as compared to the rules based system which has strict specificity and structure (Schneider, 2016).
Different people, organizations and even countries prefer different approaches as some will go with IFRS as others choose GAAP but in most cases both approaches are used. However, some people and governments argue that the lack of specific prescriptions by IFRS provides a ground for managers and business people to manipulate figures to their favor. The GAAP on the other hand seems to be more complex tiresome and difficult to use, yet it does not guarantee 100% accuracy as there are still scandal cases about financial reporting (Schneider, 2016). GAAP in its complexity is seen as time wasting as people have to follow step by step and fill in information concerning every detail. This is seen by some people as “trivial” as it demands so much. On the other hand, the IFRS system is seen as not representative of the truth as people are allowed to do whatever they want without as long as they play within the “standards.” Another disadvantage of IFR standards is the edition, addition and subtraction of certain aspects that they feel will not impact them or are not applicable in the given countries and thus there is chance uniformity is just on paper, not in reality (Ball, 2006).
In my opinion there needs to be a harmonization of the ways in which financial reporting are conducted all over the world so that so that the controversial issues will be solved and catered for. A detailed framework that encompasses defined approaches and concepts in financial reporting could go a long way in bringing harmony in an area that has for long witnessed stagnation due to lack of common ground on how to operate. Business people, company representatives and governments around the world need to come together and structure a new framework that will put in consideration every aspect of financial reporting so as to clear all the controversies. It is evident that attaining uniformity when it comes to financial reporting standard is a difficult thing to achieve despite great success with IFRS. Therefore, there needs to be a system that provides guidelines for major concepts and guidelines within a framework. Countries will then have to enforce the requirements through education and research.
First, there is need for all countries to adopt a single framework and redefining concepts and contents so as to enable comparison of companies form different countries. This will help in determining a similar ground and thus easy comparability, say between companies in the United States and Japan that offer similar services or products. With this, it will be easier to know the scope of the company’s performance as opposed to the case today where comparing companies in different countries does not give the actual values as there are different ways in which financial statements have been made. Redefining the concepts and contents that make up the framework and their valuation will go a long way in solving the issue. For example establishing when historical value, market value, etc. should be used on assets could be crucial in clearing the problems that are experienced today. Alternatively, the frameworks could do away with multiple definitions of valuation so that there remains just one that will be universal. An example is considering use of market values for assets in financial reporting so as to avoid having a single item attributed market value by one company and historical value by another one. Business, just as any other field needs harmonized terminologies and what they exactly mean.
Technology has for years been in use and has improved the performance of many professional fields in the world including the business field. Such innovations should also be advanced in financial reporting especially in capturing, storage and analyses of data. Systems can be made in that once saved, the data cannot be changed whatsoever; read only. This will not totally solve problems but will reduce incidences of manipulation of information by the management so as to suit their course. A special tool, probably software, should be developed to take care of business aspects that require finances yet cannot be reported in the balance sheets, income statements and other documents used in financial reporting.
Research is one field through which any developmental orientated organization and individuals should consider if they are to realize there goals and remain relevant in the field. Financial statements should not be left out in this sector. There is an urgent need for the business fraternity to determine theories and concepts upon which one can use when it comes in researching about financial reporting. Research helps provide information for the whole business profession; information which can be useful in such a way that it helps improve the financial statements. The research should be well organized and objectively approached so as to provide only relevant data to help improve the field that seems to be taking a step forward and two behind. A specialized methodology should be created instead of following the conventional scientific formats.
References ;
American Institute of Certified Public Accountants, (1994). Improving business reporting—a customer focus. The Jenkins’ Committee Report . New York.
Ball, R. (2006). International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and business research , 36 (sup1), 5-27.
Barth, M. E. (2013). Measurement in financial reporting: The need for concepts. Accounting Horizons , 28 (2), 331-352.
Inanga, E. L., & Schneider, W. B. (2005). The failure of accounting research to improve accounting practice: a problem of theory and lack of communication. Critical Perspectives on Accounting , 16 (3), 227-248.
Institute of Chartered Accountants in England and Wales (ICAEW). 2011. Measurement in Financial Reporting: Information for Better Markets Initiative. Finance Reporting Faculty
Sprouse, T. R. (1980) Financial Accounting Standards: Controversy, Concepts, and Consensus. Retrieved November 23, 2016 at: http://www. rackcdn.com/collection/papers/1980/1980_1009_SprouseControversyT.pdf
