Financial Accounting and Reporting is considered as a major factor for the success of the business organizations. Financial accounting refers to a specialized branch of accounting that helps in keeping the record of all financial transactions (Nobes 2014). At the same time, Financial Reporting refers to the process to produce the necessary financial statements for disclosing an organization’s financial position and performance. Researchers all around the globe have been working on different research topic related to financial accounting and reporting (Nobes 2014). This report aims at the analysis of a specific research area related to financial accounting and reporting; that is ‘The Impact of Financial Reporting on Organizational Performance’.
The above discussion indicates towards the fact that the report aims in analyzing the impact of financial reporting on the organizational performance. The main aim behind the selection of this topic is its importance towards financial reporting and its interest. It needs to be mentioned that financial reporting is a major aspect for the success of the business organizations (Storey et al. 2016). The process of financial reporting involves in disclosing the financial information to different stakeholders so that they can judge the financial performance and position of the business. Due to some of the major factors like market and business globalization, geographical expansion and the demand for transparency and information, the major stakeholders of the organizations largely depend on financial reporting and their main sources of knowledge (Tan 2013). For this reason, different parts of financial reporting include information related to the disclosure of the financial transactions of the businesses, selection as well as application of accounting policies and knowledge of the financial judgments. According to many evidences, business organizations having effective financial reporting tend to provide improved financial performance in the presence of the fact that the presence of effective financial reporting helps in providing good financial information to the shareholders and other stakeholders. It also helps in the reduction of information asymmetries between the market participants. The above discussion shows that effective continuation of financial reporting has positive effect on the financial performance of the companies (Loughran and McDonald 2014). Now, the interesting fact is the ascertainment of the aspects of financial reporting that help the companies in improving their financial performance.
For ever research program, there is a need for the development of one or more than one specific research questions as these research questions provide the researchers with the required direction continue their research; and there is not any exception of this fact in this report. The research question for this report is shown below:
This research question will help the researcher to consider the aspects of financial reporting that need to be considered for the achievement of the objective of the research.
In the article named ‘Consequences of financial reporting quality on corporate performance. Evidence at the international level’, the author has attempted to examine the effects of financial reporting quality on organizational performance with the help of the analysis of quality of earnings, conservatism and accrual quality (Martínez-Ferrero 2014). Thus, the article has clearly related to the research topic. The findings of the article states that financial reporting helps in providing high-quality information to the stakeholders that leads to the reduction of information risk as well as liquidity; it also helps in the prevention of the discretion of power by the managers for their own benefits so that effective investment decisions can be made (Martínez-Ferrero 2014).
The main aim of the article named ‘The spillover effect of fraudulent financial reporting on peer firms’ investments’ is the investigation of high-profile accounting frauds having effect on the investment of the companies (Beatty, Liao and Yu 2013). This article is related to the present study as the researchers have pointed towards the fraudulent activities in financial reporting. The findings of the research states that the companies were able in increasing in investment due to the fraudulent activities in financial reporting. It can also be seen from the findings of the research that there was a positive connection between the investments and the overstatement of earnings in the financial statements due to the fraudulent activities in financial reporting (Beatty, Liao and Yu 2013).
In the article named ‘Business Strategy, Financial Reporting Irregularities, and Audit Effort’, the authors have attempted to examine the fact that whether the business organizations with irregularities in financial reporting is a result of the differences in business strategies; they have also examined whether there is a need for greater audit effort to identify these financial reporting irregularities (Bentley, Omer and Sharp 2013). It is related to this study as it explores the effects on financial reporting irregularities on the financial performance of the companies. As per the findings of the research, companies following prospector strategy are most likely encounter financial reporting irregularities than the companies following the defender strategies; and financial reporting irregularities leads to the unimproved financial performance (Bentley, Omer and Sharp 2013).
In the article named ‘Does Financial Reporting Disclosures Enhance Firm Financial Performance in the Nigerian Manufacturing Companies?’, the authors have taken an honest attempt to analyze the relationship between the disclosures of financial reporting and the financial performance of the manufacturing companies in Nigeria (Ojeka, Mukoro and Kanu 2015). Thus, this study and the current study both have a common aspect that is financial reporting. According to the findings of the research, the financial reporting disclosures related to the explanatory variables have major positive impact on the financial performance of the Nigerian manufacturing companies. It also states that the investors and shareholders are motivated for surrendering the funds for equity finance in the presence of certain disclosures through financial reporting (Ojeka, Mukoro and Kanu 2015).
As per the article named ‘How Frequent Financial Reporting Can Cause Managerial Short-Termism: An Analysis of the Costs and Benefits of Increasing Reporting Frequency’, the authors of the article have applied a cost-benefit tradeoff in order to develop insight on the aspects that the companies are needed to consider in the process of their financial reporting (Gigler et al. 2014). For this reason, this article is related to the present study. The findings of the research state that the effective financial reporting helps in the reduction of the risk premium related to their financial performance. At the same time, it can also be seen that effective financial reporting has major positive impact on the financial performance of the companies (Gigler et al. 2014).
In the article named ‘Financial Reporting Quality of U.S. Private and Public Firms’, the authors have taken an honest attempt for investigating the quality of financial reporting of the private and public companies of United States with the help of a new database (Hope, Thomas and Vyas 2013). For this reason, this article and the current study are interrelated. For the purpose of this research, the researchers have compared the quality of financial reporting of the public and private companies. It can be seen from the findings of the research that the public companies have been able in maintaining higher quality of financial reporting as compared to the private companies; and thus the financial performance of the public companies have been better than the private companies (Hope, Thomas and Vyas 2013).
In the article named ‘Internal control over financial reporting and managerial rent extraction: Evidence from the profitability of insider trading’, the authors have tried to examine the relation between ineffective internal control on financial reporting along with the profitability of insider trading (Skaife, Veenman and Wangerin 2013). This article is related to the current study as it focuses on financial reporting for financial performance of the companies. It can be seen from the findings of the research that the profitability of the insider trading is high when there is the presence of ineffective financial reporting related to the disclosure of material financial information; and high profitability of insider trading leads to the ineffective financial performance of the companies (Skaife, Veenman and Wangerin 2013).
In the article named ‘The Impact of the Quality of Financial Reporting on Non-Financial Business Performance and the Role of Organizations Demographic’ Attributes (Types, Size and Experience)’, the researchers have taken an honest attempt for examining the relationship between financial reporting quality and non-financial business performance of the public listed companies in Jordan (Al-Dmour, Abbod and Al-Balqa 2018). This research deals with different aspects of financial reporting and thus, it is related to the current study. According to the findings of the research, financial reporting of the companies needs to possess certain aspects in order to positively influence the financial performance of the companies; and they are understandability, relevance, comparability and faithful representation. The findings of the research also states that these qualitative characteristics of financial reporting helps in improving the non-financial performance of the business organizations (Al-Dmour, Abbod and Al-Balqa 2018).
It can be observed from the above discussion that there is a positive relation between financial reporting and the performance of the business organizations as the presence of effective financial reporting ensures the improved performance of the organizations. The absence of effective financial reporting leads to financial fraudulent activities, insider trading and others; and all these aspects create hindrance towards the improvement in the financial performance of the companies. It can be seen from the above discussion that the public companies have the tendency to comply with all the requirements of financial reporting with the aim to provide the shareholders and investors with the required financial information for the purpose of financial decisions-making. At the same time, it can also be observed from the above discussion that the financial reports of the companies must contain four qualitative characteristics in order to positively influence the financial performance of the companies; they are faithful representation, comparability, understandability and relevance. On the basis of the analysis of all these eight articles, it can be said that the financial performance of the business organizations largely depends on the manner in which they are continuing their financial reporting. Hence, there is a positive relationship between financial reporting and financial performance of the companies.
The current research question can be addressed with the assistance of certain accounting theories and they are discussed below:
Positive Accounting Theory: Positive Accounting Theory can be regarded as an important accounting theory that has relevance in the preset study. According to the positive accounting theory, the business organizations will select the accounting policies that take into consideration the minimization of the costs of the business (Ball 2013). It needs to be mentioned that the minimization of cost in the business leads to the improved profitability of the companies. At the same time, this theory states that financial reporting requires the flexibility of management for the selection of accounting policies. It needs to be mentioned that all these aspects of financial reporting leads to the improvement of the financial performance of the companies (Khan 2015).
Stakeholder Theory: Stakeholder Theory is considered as a major accounting theory that can be connected with the present situation of financial reporting. According to the stakeholder theory, the main purpose of the business organizations is the creation of value for their all stakeholders, not only shareholders (Jensen 2017). It implies that it is the responsibility of the companies to provide the stakeholders with the financial and accounting information so that they can make effective decisions. In order to accomplish this objective, there is a greater need for financial reporting as it ensures the delivery of financial information. Thus, this whole aspect of financial reports helps the companies in improving their financial performance as the stakeholders will be motivated to invest their money in the companies when they can get the required financial information (Jones, Wicks and Freeman 2017).
Conclusion
The above discussion states that the aspects of financial reports and the financial performance of the business organizations are positively connected as effective financial reporting helps the companies in improving their organizational performance. In this process, the companies are needed to consider certain aspects like qualitative characteristics of financial reporting and others in order to ensure improved financial performance of the companies. The above discussion also shows that the research question of the report can be addressed two major accounting theories; they are positive accounting theory and stakeholder theory.
References
Al-Dmour, A., Abbod, M. and Al-Balqa, N., 2018. The Impact of the Quality of Financial Reporting on Non-Financial Business Performance and the Role of Organizations Demographic’Attributes (Type, Size and Experience).
Ball, R., 2013. Accounting informs investors and earnings management is rife: Two questionable beliefs. Accounting Horizons, 27(4), pp.847-853.
Beatty, A., Liao, S. and Yu, J.J., 2013. The spillover effect of fraudulent financial reporting on peer firms’ investments. Journal of Accounting and Economics, 55(2-3), pp.183-205.
Bentley, K.A., Omer, T.C. and Sharp, N.Y., 2013. Business strategy, financial reporting irregularities, and audit effort. Contemporary Accounting Research, 30(2), pp.780-817.
Gigler, F., Kanodia, C., Sapra, H. and Venugopalan, R., 2014. How frequent financial reporting can cause managerial short?termism: An analysis of the costs and benefits of increasing reporting frequency. Journal of Accounting Research, 52(2), pp.357-387.
Hope, O.K., Thomas, W.B. and Vyas, D., 2013. Financial reporting quality of US private and public firms. The Accounting Review, 88(5), pp.1715-1742.
Jensen, M.C., 2017. Value maximisation, stakeholder theory and the corporate objective function. In Unfolding stakeholder thinking (pp. 65-84). Routledge.
Jones, T.M., Wicks, A.C. and Freeman, R.E., 2017. Stakeholder theory: The state of the art. The Blackwell guide to business ethics, pp.17-37.
Khan, M., 2015. Accounting: Financial. In Encyclopedia of Public Administration and Public Policy, Third Edition-5 Volume Set (pp. 1-6). Routledge.
Loughran, T. and McDonald, B., 2014. Measuring readability in financial disclosures. The Journal of Finance, 69(4), pp.1643-1671.
Martínez-Ferrero, J., 2014. Consequences of financial reporting quality on corporate performance: Evidence at the international level. Estudios de Economía, 41(1), pp.49-88.
Nobes, C., 2014. International classification of financial reporting. Routledge.
Ojeka, S.A., Mukoro, D.O. and Kanu, C., 2015. Does Financial Reporting Disclosures Enhance Firm Financial Performance in the Nigerian Manufacturing Companies?. Mediterranean Journal of Social Sciences, 6(6), p.332.
Skaife, H.A., Veenman, D. and Wangerin, D., 2013. Internal control over financial reporting and managerial rent extraction: Evidence from the profitability of insider trading. Journal of Accounting and Economics, 55(1), pp.91-110.
Storey, D.J., Keasey, K., Watson, R. and Wynarczyk, P., 2016. The performance of small firms: Profits, jobs and failures. Routledge.
Tan, L., 2013. Creditor control rights, state of nature verification, and financial reporting conservatism. Journal of Accounting and Economics, 55(1), pp.1-22.
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