Individuals who are charged with the responsibility of keeping and inspecting financial accounts are called accountants. An accountant has many roles. In a financial institution, they are entrusted with the role of collecting data, entry, and recording of data, generating reports, offering advice based on the analysis of the data and also presenting the financial operations of the company hence the need for documents such as financial statements. In writing financial statements, there should be accuracy and clarity. This means the information presented on the documents should be based on truth and facts and as such should not be having errors or erasures. In addition to the accuracy and clarity of financial statements, GAAP rules that are applied in accounting should be followed, and it is important to note that problems do occur if these requirements are not fulfilled.
Business dictionaries often define financial statements as summary reports that are prepared by the company to be accountable for provided funds and to state the current financial institution. Income statements, balance sheets, and cash flow statements are the basic components of financial statements. The users of financial statements require them to be free of errors and also to be an accurate representation of the financial situation in the company or in the organization. This is commonly referred to as the true and fair view of the financial statement. This means that it should be a faithful replica of the financial performance and position of an institution and also should be lacking in misstatements. Clarity means it should be free from error. Free from error translates into the process of producing and documenting the information being well selected and applied without mistakes in the process (IFRS Foundation, n.d). This is usually counter checked by the auditors of the institution hence the accountants are required to meet the set standards. Among the users of financial statements, there are stakeholders and lenders to the company. There are various reasons why the users of these documents demand a high standard of clarity and accuracy from the company.
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One of the major reasons why the users of financial statements require them to be accurate is because these are necessary for better decision making. These documents are important for critical decision making because they reflect the strengths (assets) and weaknesses (liabilities) of the organization hence the management can decide whether to acquire more assets and what to do with liabilities. Also, financial statements show the income and expenditure of the organization thus explaining the profits and losses that have been made then the investors can know whether to venture into new avenues of the company. When the financial statements are true and fair, informed decisions can be made with regard to corporate measures and equity investments can be decided upon
Another reason is for the lenders and shareholders to be able to catch the costly mistakes made by the company or on their part. Financial statements can detect and reveal theft, fraud and other illegal activities within the scope of operations of the enterprise. The auditors affirm the validity of the financial statements hence the conclusions drawn from the validated statements is a true representation of the organization. When financial statements are a faithful representation of the company’s representation, the stakeholders can validate their investments and know whether it is beneficial so as to continue in business or to withdraw. The stakeholders and leaders, therefore, need the financial statements to be accurate and very clear so that the right conclusions can be made.
In the event of financial statements being inaccurate, some problems may occur. Auditing is done in attempts to look into the errors that may have made in the financial reporting of the organization. This is done even if the institution is going to apply for a loan or when other investors are being brought into business with the company. Among the consequences of relying on inaccurate information, the company may lead to bad decision making and cost the company. For example, in the event of reporting profits, the numbers may be too high or too low both of which have consequences. If the profits are estimated to be too low, the company shall depreciate. If a company depreciates, it is hard to retain the customer base and the investors too since people look for value at all avenues. If the profits are also found to be too high, the company is liable to be taxed highly. This may affect the company since it might be hard to channel designated for other needs towards fulfilling tax burdens.
The stakeholders are also affected when inaccuracies in the reports are uncovered. First of all, the bond of trust between the investors and company is destroyed. The directors and investors may discredit the company and as such the company loses its credibility which most of the time affects its operations. For instance, if a buyer discovers the fault in the financial statements, the company may be on the losing end of the deal. If the buyer discovers the discrepancies in the reports offered after sealing the deal, the company may be sued and lose a lot more.
Irregularities within financial statements are sometimes considered fraud and are punishable by law. This occurs when the institution maliciously alters the information in the financial statement so as to remain attractive to investors. This is done by hiding negative information such as huge losses or underplaying the negative aspects and inflating the positive ones. If a company is found to engage in such, the law recommends that they are punished, and penalties may range from heavy fines to total closure of the company.
There are standards set aside to monitor accounting practices, and these are majorly International Foreign Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) (Sherman & Young, 2016). There lies significance in adhering to the rules set by GAAP as it is the most common set of rules used. GAAP includes rules on recognition, measurement, presentation and disclosure. It sets a standard for the information that is supposed to be reported. Without GAAP, companies would have the liberty to include or remove important information financial statements so that even stakeholders would not have a stake in the company. It is important for the users of financial statements to understand GAAP because its commonality makes it a preferred language among professionals in finance and accounting (Arline, 2015). As such information from different corporations and across vast time spans can be easily understood. If a company is making transitions in management or relocating to new venues, the information presented to the auditors, lenders and even the government is usually the same and easily understood. Managers can be able to make realistic conclusions on the performance of different branches. GAAP also has checks and safeguards that help reduce errors in the documenting of information hence the users ought to understand these principles to avoid these errors.
When a transaction occurs, the key details are usually recorded in a source document. These often come in handy during accounting. They are used for accountability in that they record information about all the money movements in the company and as such can be used to generate financial statements and also can be used as evidence in support of information recorded in the accounting file. It is also a legal requirement to possess source documents hence they are important in keeping the business legally running.
In conclusion, the accounting function of an organization sees to it that there is the preparation of financial statements which should be accurate and free of material errors and also follow the regulations set by GAAP. They can use source documents to get accurate details.
References
Arline, K. (2015, April 2). GAAP: Standards and Rules for Accountants . Business News Daily . Retrieved from http://www.businessnewsdaily.com/5486-generally-accepted-accounting-principles-gaap.html
IFRS Foundation. (n.d). Chapter 1: the objective purpose of general purpose financial reporting . Retrieved from http://www.frascanada.ca/international-financial-reporting-standards/resources/unaccompanied-ifrss/item71833.pdf
Sherman, D.H. & Young, S.D. (2016). Where Financial Reporting Still Falls Short. Harvard Business Review. Retrieved from https://hbr.org/2016/07/where-financial-reporting-still-falls-short
