Controversial Issues In Financial Reporting

Financial reporting

What are the most controversial issues on financial reporting faced in the present day and how do you think important authorities and political actors should deal with those issues? 

The Australian accounting standards are vulnerable to several controversial accounting doctrines and have become complex and prone to subjective interpretation due to the lacking in the FASB part as it is very slow in developing standards for new types of financial transactions. With the failure of many reputed and giant companies in the Australian economy, it is construed that companies should highlight their nonfinancial measures as well and not just focus on its financial aspects and measures. This increases the earning capacity of the corporate. Nonfinancial indicators can be best enhanced with the relevant trade association as they are typically industry specific. To enhance various types of nonfinancial indicators of a company’s potential to multiply its earnings which is of utmost utility for the managers and investors comes across as a major challenge for accountants now (Merchant, 2012). There are several changes that might impact the market value of a corporate sometimes up and sometimes down and the market value of a company is always seen to be a multiple of its book value. These are the major issues in Financial Reporting.

The revolutionary business environment of the different industries has been utilizing the accounting data in a very heralding way. This has resulted in the revolution of the accounting field and thus may cause to redefine the function of accountancy. However, it has been seen that many of the business is strangled with the change in the environment and thus questioning the functionality of accountancy. After all the processes of scrutinizing the reporting and accounting function of the firm, the auditors make it essential to check the corporate governance structure also (Geoffrey, 2016). If a person wants to have a clear view of the financial statements of the firm then he should try to appreciate the work and opinion of the auditors and similarly if the person wants to appreciate the work and opinion of the auditor then he needs to analyze the limitations and the scope of the financial statements. The topics of financial reporting and external auditing have been given separate attention by having the analysis which can help to analyze the components even after the strong link present between them. However, it can also be the case that the final result which has been obtained by the result achieved from the dealing between the management and the auditors will be taken into action because the auditors feel that the management have justifiable representations for the actions it has decided to enforce (Geoffrey, 2016). The modern auditing method can be easily be understood as the” audit of motivations” as it mostly has the emphasis on the high-level business risks and thus in order to understand such types of statements it is very important for the firm to have a clear view on the motivations of the management. 

Controversial issues on financial reporting

Globalisation

This has also made the importance of the accounting standards in the international market much more diverse and also the remaining debates that are in need to be adopted. It was also noticed that the European Union traded companies by the year 2005 will have a need to follow the International reporting standards of the international accounting standards board. It was noticed that there has been a very noticeable change in the procedure of the application of the standard setting processes and thus have also resulted in the changes in the economic structure of the standards and the policies of the applications (Matthew, 2015). Thus the accounting standards have been seen to have the political effects of the effect of the accounting ones also. It has been very hard in the recent times to maintain the international accounting standards in the firm. Therefore it has also been mentioned that the main constitution of the advancement in the accounting standards is the major discussion point of any financial reporting debate whether the functions are of statutory or regulatory level or at any levels of the official accounting bodies (Livne, 2015). The cost experiments which were held in the early 1980s were a result of the absence of the help of the financial statement keepers. The present values of the transactions have started to prevail within the financial statements thus concerning the volatility of the reported results which have been stated to be claimed by the standard setters who use the historical cost accounting in order to ascertain the current requirements of the value measurement.

Uncontrollable market pressures 

The force that is exerted by the capital markets over the businesses in order to achieve the earning target. These types of force are varied with the time because of the unstable nature of the equity market because there is the change in the values of the share if the companies fail to meet the market operations. Force exerted by the capital markets is further increased when the management compensation basically constitutes the larger part of the earnings or the other financial targets which are set by the firm (IASB, 2010). The aggressive earning management is one of the consequences that are led by the danger of the force exerted by the market and thus affecting the profitability of the firm to a large extent. Also, the most recent financial scandals have also helped to ascertain the disclosure and the earning management. The information that is provided by the financial statements also helps the user of the stamens to make decisions regarding the assessment of the future cash flows of the reporting entity. It has been realized that from the 1960s the users have started the application of the accounting principles in the recording of the data and thus represent accounting standard setting bodies. It will be interesting for an outsider to use the accounting knowledge to maintain his accounts. It was in 1994 that the AICPA constituted a report which contained the invention of the special committees that were having the aim of improvement of the business reporting methods. The main objective of this committee was to make changes in the future plans of the firm thus letting them give their future a profitable direction (Matthew, 2015). This was also followed by the implementation of the customer focus in the business in which the manufacturers had the main function of producing the commodities according to needs and specifications that were in the best knowledge of the customers. 

Corporate financial reporting

The importance of the users in the decision orientation has not gone to waste and thus have resulted in the assessment of what are the financial statements capable of delivering to the firm. The analyst of the accounts are said to predict the future trends of the firms position while the others try to understand the business structure of the firm by the help of the past experiences of the shareholders, government taxation products and many such policies which may have helped the firm to achieve maximum returns on the basis of their efforts. It has been noticed that the protection of the creditors has been driving the force of the corporate reporting in Germany. Bankers are also required to predict the future trends of the firm as they provide the firms with loans. They do not need to analyze the financial reports of the firm in order to find the trends as they have the direct reach over the budgets that have been made by the firm in order to operate in the particular financial year.  Also, there have been debated regarding the maintenance of the statement of the financial performance because it has been noticed that the customers tend to ignore such documents. Also, there has been the discussion of the fact that wills the analysis of the financial performance of the firm will be enough to decide whether to invest in that particular business or not. The reviews of the financial and the operating statements help to analyze the overall functionality of the firms and thus maintain a balanced scorecard. These issues are now said to be analyzed on the basis of the external reporting systems.

Advances in technology

This has lead to rising of questions on the importance of the financial statements, the potential investors, creditors, shareholders, etc, basically the stakeholders of the organization demand for more transparent and timely data on the working of the organization. These people would want to invest in the company. the amount of data involved in the decision making is too large, in order to make it of use to the investor, the developments in information technology have added to its possibility. Under the new developments, it is becoming for the investors to have access to the data of the company which they require. The databases which have been created with the help of this advanced technology make it possible to filter the data according to a requirement, minimizing the quantity and saving time (Kaplan, 2011). This also helps the investor have access to both the financial and non-financial data. This data includes both the past and current information on the company. There are some theories that suggest that reporting of more data will lead to lower cost of capital. Accounting reports the main source of flow of transactions if the information in them is ignored it will lead to less flow of transactions. The data reported sometimes compress the relevant data and shoe information which may not even be necessary. It is not possible for the shareholders to understand each and every aspect of the data-informed on the reports. The modern accounting systems also question the requirement of double entry bookkeeping (Kaplan, 2011). This development has raised questions on the survival of real-time accounting practices. There is a higher probability of the financial statements of not having to reflect this development. 

How the authorities should deal with the issues

It is imperative that outcomes of good regulation can be attained when the rules and regulations are properly defined. It needs to be noted that a consistent policy encompassing the role and function of regulatory agencies must be developed so that greater confidence can be attained that pertains to decision making on objective, impartial and consistent basis without any conflict in the interesting process. The regulators are needed strong regulatory practices that are needed to administer, as well a enforce regulations.  The comprehensive regulatory review of the controversial issues in financial reporting states that the governor can be enhanced and can be effective as a broader interest to enhance the outcomes. It is clear from the discussion that the appropriate governance mechanism for the regulators backs up improvement in the practice of regulations and deals with the issue of financial reporting.

When the governance is strengthened the regulators will enable to maintain the confidence and trust. This leads to strong regulation and ensures a strong initiative that leads to facing up of challenges and helps to serve the interest of the citizen. The regulatory bodies must clearly define the objectives that will lead to the development of the legislation. Further, the regulators should not consider conflicting goals and even if such a matter is present it must be ensured that such a framework is backed up by properly linked to necessary bodies.

Moreover, the important authorities must attain proper decision making with the help of integrity. The nature of various regulatory decisions is at times vulnerable to the regulatory process integrity. As a matter of fact, the pressure from the affected interest is sensitive in nature. Greater confidence can be attained with the help of regulatory independence. It needs to be noted that the presence of high level of integrity enhances the regulatory decisions and in this manner, the important authorities deal with such issues. Further, the regulators must insists on high accounting standards that will lead to an effective financial reporting mechanism. Australian accounting standards formulate transparency, consistency, relevance, comparability and financial information that can be relied upon. In the Australian economy, a lot of emphases is given to facilitating investor decisions by providing accurate information (Horngren, 2013).

For a market economy to perform effectively, high-quality accounting standards are required as it allows for the best allocation of capital based on the credibility and quality of financial information. High-quality accounting standards serve as a utility for personnel who make capital allocation decisions, creditors, shareholders, lenders, investors, etc. When more than one set of accounting standards are considered for the preparing financial statements then it becomes tougher for the issuers to tackle a situation where the reports project different cash flow, operating results, and financial positions. It becomes difficult on the part of issuers to explain such contrast in the financial reporting using different standards to the investors (Gay & Simnet, 2015). This will put the genuineness of the organization’s financial reporting into question especially when the difference puts the spotlight on company’s various failures that were primarily concealed.

If there was no requirement for preparation of multiple sets of financial information there would have been an increment in the efficiency of cross-border listings. With the absence of comparable, reliable, comparable and relevant information concerning the company’s financial condition, the effectiveness of working capital will fall. So, it is required for a corporate to encourage legitimate accounting standards in order to eliminate issues in Financial Reporting (FASB versus GAAP, 2010). 

Auditing is performed in order to determine the accuracy of financial statements provided by the company. It is a vital element of financial reporting as the audited financial statements are more reliable and relevant. It is important for every organization to have legitimate auditing standards so as to eradicate issues in Financial Reporting. Recently, in the Australian economy, the importance of legitimate quality standards are projected and also have put present audit process and audit reports into question (FASB versus GAAP, 2010).

It is the responsibility of the audit firms to ensure that there is adherence to the legitimate auditing standards and that the audit is effectively performed and their reports are free from biases or does not carry any irrelevant information. The audit reports should be prepared as per the auditing standards and should always reflect the true and fair view of the company’s performance (Hoffelder, 2012).

Conclusion

The Australian financial reporting framework comprises various independent elements. Such elements are inclusive of active regulatory oversight. Some of them are registrants’ financial reporting, private sector standard-setting processes, and self-regulatory activities under accounting profession. All such components are required for the progress of a high-quality financial reporting structure. This calls for the growth of legitimate accounting standards and auditing standards in the Australian economy. The third-party analysis provided for self-regulatory activities are free from biases. This also encourages a high quality of accounting and auditing standards by the issuers in the Australian economy. 

References

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