Financial reporting is an important aspect of accounting. It involves the provision of constructive financial information that is used in making wise economic and business decisions. Such decisions require the involvement of the management and the stakeholders of the business entity. Because of such involvement, the objectives of financial reporting are affected by the internal and external environment of the entity. The most crucial objective of financial reporting borders on its importance in decision making by investors and creditors. This is because investors and creditors require knowing the financial position before providing any finance to the firm. Financial statements inspire confidence since they stipulate the business’ financial performance thus aiding the financiers in determining whether their investments will profit if invested in the firm (Financial Accounting Standards Board, 1978).
The least significant objective of financial reporting regards the provision of financial information regarding the conduct of management in relinquishing its responsibility to stakeholders for the use of resources. This is because the management has adequate knowledge regarding the resources such as the company’s securities. By providing such information to various stakeholders of the organization, the company will not be able to limit the provision of information that is important for the performance of the company to the public. Furthermore, stakeholders are liable to promote other interests for the sake of gaining profits through investing in the firm’s competitors. Therefore, providing such critical information to the stakeholders without recognizing indirect effects can cause the firm to depreciate in financial performance due to the use of business strategies by the competitors availed through scrutiny of financial statements (Porter & Norton, 2010).
Financial Accounting Standards Board. (1978). Statement of Financial Accounting Concepts No. 1: Objectives of Financial Reporting by Business Enterprises. Norwalk, CO: Financial Accounting Foundation.
Porter, G. A., & Norton, C. L. (2010). Financial Accounting: The Impact on Decision Makers. New York, NY: Cengage Learning.
Financial statement fraud refers to the misreporting of financial statements by the business entity to the stakeholders involved. Under the International Accounting Standards, the practice is labeled as a financial crime. Misreporting of financial statements is characterized by scandals that revolve around accounting of economic resources (Tillman & Indergaard, 2007). Such scandals include inflation or deflation of financial figures in the financial statements. Various multinational corporations have been involved in financial statement fraud leading to permanent or temporary bankruptcy. Most of these frauds are attributed to corruption. Additionally, financial statement fraud also includes withholding, erasure or denial of financial statement information to the stakeholders involved. Engineering financial results refers to the manipulation of results obtained from assessing the use of economic and financial resources of the business entity. However, engineering financial results has considerable consequences that can affect both the management and the stakeholders. By employing the example of companies such as Enron that engineered their financial results, disadvantages of the practice can be adequately understood. For instance, investors lose confidence in the firm involved in the frauds and thus decrease the firm’s financial performance and enhance negative public credibility among customers (Carmichael, Whittington, & Graham, 2007). The practice can never be considered ethical because it is the objective of the business entity to disclose financial information regardless of the negative and positive effect on the stakeholders. Despite the different contexts of business enterprises such as family enterprises or global corporations, financial reporting should be free of fraud since both entities have the singular objective creating profit. In order to do so, finances require to be managed and decisions made based on the financial statements.
Financial reporting plays an important role in the business environment. Despite the change in business practices, accounting still functions as a fundamental aspect in business entities. It should also be noted that accounting practices are not limited to businesses only; any object that utilizes resources requires a method of evaluation and analysis to scrutinize its use of the available resources. Additionally, such scrutiny provides for the creation and improvement of strategies to achieve the desired results with the available results.
Carmichael, D. R., Whittington, O. R., & Graham, L. (2007). Accountants’ Handbook, Financial Accounting and General Topics. New York, NY: John Wiley & Sons.
Tillman, R., & Indergaard, M. (2007). Control Overrides in Financial Statement Fraud: A Report to the Institute for Fraud Prevention. New York, NY: St. John’s University.