Identify different users of accounting information and discuss the varying information needs of these users.
Users of accounting information are both - internal & external to the company in question. Internal users are the primary users of accounting information. They are company managers, employees and proprietors. Managers make use of the accounting information for analysis purpose regarding the company’s output and ranking so that suitable measures could be taken for bettering company performance. Next-in-line internal stakeholders are company employees. Their information needs are different from that of company managers. They use company information for measuring the earnings made by the company and deriving results thereof for relating with their future income and job safety; whether they should search for greener pastures or remain with the same company for determining their future job satisfaction, security and raise in salaries. Company proprietors are the most leading stakeholders internally, as they own the company. Their primary aim of using the accounting information is to analyse the usability and revenue generation from the investment, to help them take future outcome related decisions. These internal stakeholders are presented all accounting information normally via management accounts, budgets, forecasts and income statements (Accounting Simplified, 2013).
External users are the secondary users of accounting information. They are creditors, taxmen, investors, company customers and regulatory control organisations. Creditors use this information for checking the financial standing of the company for stipulating conditions of offering credit as per their appraisal of the customer company’s monetary worth. These creditors can be suppliers and financial companies like banks for offering loan to the analysed company. Other kind of external users of company information are income tax officials. They use the accounting information for evaluating the truthfulness of income tax returns made by the company management. Next-in-line external users are investors who want to analyse and check the practicality and worth of investing in the company. Their primary concern is to ensure that they are able to earn enough profit on their investment before entering into a deal with the concerned company. Customers, as users want to ensure the product or service supply is uninterrupted, which is guaranteed if the concerned company is financially robust to provide safer supply of the demanded goods in the long run. Thus, the internal users of the accounting information represent the supply side while the external users like customers represent the demand side of accounting information. Last but not the least is regulatory bodies. They ensure that all accounting information adheres to the prescribed norms, fixed by them so that all stakeholders’ interests are not compromised, as they primarily depend on the accounting information in making decisions (Accounting Simplified, 2013).
Unlike internal users, external users of accounting information share it through income statements. The income statements are prepared keeping in view the needs of varied users so that external users can take viable monetary decisions. Thus, there are conflicting stakes of various users’ types for distinct information needs. Income statements are made particularly for external stakeholders to attract soft loans, suppress actual data from tax personnel (in some cases) to maintain reputation with investors and creditors, to ensure loyalty of customers and present information such that it complies with regulatory bodies’ stipulated norms (Accounting Simplified, 2013). For internal users like managers, owners and employees, they themselves are the leading stakeholders who know what is being revealed and what is not. Management accounting is the form of presenting important information to the internal stakeholders. Budgets and forecasts are the tools used to get a transparent view for the internal users. These tools serve the purpose of internal stakeholders only. Thus, the difference between the type of information to different stakeholders can create complications if not segregated, as their needs are also different. For example, for winning customer loyalty some schemes and rebates form part of the accounting information but that may not serve the purpose of external decision makers.
Explain the need for regulation in the context of financial reporting and explain why it is important.
The need for regulation in relation to financial reporting should not be taken for granted. It is very significant from economic perspective to observe regulation in financial reporting, as market is imperfect; benefits and cost of accounting information are not voluntarily revealed. Had the market been perfect, there would have been felt no such need of regulation but as it is not so, importance of regulation remains always. Besides, accounting functions have increasingly become complex, which necessitates setting of standards effectively to bring about greater transparency in financial reporting (Meng, 2009).
Complexities can be better managed if there is increased communication between different stakeholders of a company, including regulating agencies. It is important because regulatory language works equally for all partners. Regulating agencies also need to identify the role of external stakeholders like credit organisations and financial negotiators for systematic functioning of the financial mechanism. Any new standards or a revision in standards should be introduced keeping in view its impact on the stability of the economy. Accounting standards not only help investors in critical decision-making but assist regulators in taking policy decisions. Regulators and financial mechanism, both play a positively acknowledged role, which is the aim of financial reporting (Nouy, 2014). Thus, regulation is very important partner and stakeholder in relation to financial reporting for adding to the transparency in communication to different stakeholder.
Discuss in depth Strengths and Weaknesses of Financial Reporting Framework.
There are various financial reporting frameworks operating at country levels. For example, in America, the globally recognised framework for financial reporting is the American Sarbanes-Oxley Act (SOX). It is a leading framework for reporting specific strengths and weaknesses. Provisions of SOX relating to Sections 302, 404, and 906 needs special mention over financial reporting issue. Section 404 stipulates companies to recognize register and find out solutions to weaknesses of the reporting framework, permitting improvisation before the year-end. Any weakness that does not fulfil the improvisation criteria for material weakness (MWs), needs to be informed about to the financial markets in the 10-K statement, as necessitated under Section 404. Only an analysis of the MWs can help in bettering the reporting procedure (Rubino & Vitolla, 2014).
As stated above, reporting frameworks can be country-specific, we need to select a reporting framework to find out its strengths and weaknesses. One such randomly used framework is the Committee of Sponsoring Organizations (COSO). It is a very abstract framework that does not recognise regulatory control aims at a particular degree, enough to frame comprehensive audit tests. Weakness of COSO is that it does not attain optimal degree of robustness in connection with dependability of financial reporting with regard to the selected MWs. Nevertheless, this weakness of the COSO framework can be controlled by using other kinds of control frameworks, such as information technology based information systems. With their help, information can be availed and managed to fix suitable controls over reporting frameworks, including controls over accounting or management procedures and over IT infrastructures as well (Rubino & Vitolla, 2014).
The SOX internal controls needs straightway incorporation and reveal the significance of information standards on decision making. The financial reporting mechanism making use of management information system creates standard information, which is specifically relevant because it employs central data. Further, it requires sufficient degree of knowledge related to IT audit tactics, as IT systems such as enterprise resource management are quite complicated for measuring the robustness of internal controls. It is this strength of SOX that has heightened the significance of accounting information system linked awareness for outside auditors. Strength lies in the IT controls growth with business procedures’ dependence on information systems. There is an inclination to incorporate them with software based management control systems. Actually, most of the weaknesses occurring for adherence with SOX happen due to various financial reporting mistakes because of weak IT checks. There can be no doubt in saying that IT checks exert and command a huge impact on the dependability of financial reporting. The increasing significance of information systems has spurred the use of many resources to guide management on the functional level over its use as strength of financial reporting framework (Rubino & Vitolla, 2014).
Another worth mentioning robust financial reporting framework is the Control Objectives for Information and Related Technology (COBIT) model, which is specifically significant as a generally agreed upon framework that facilitates the attainment of company administration and management aims. COBIT is a globally followed set up of instructional guides and backed by IT tools, employed to help in corporate governance. Not only external users of accounting information like auditors but leading internal stakeholders like company managers make use of this framework to assimilate technology in enforcing checks and fulfil distinct business aims. Strength of this framework lies in managing and reducing risk to the companies (Rubino & Vitolla, 2014).
Some of the weaknesses of COSO framework are both of account level and company level. Account related weaknesses are linked to particular accounts only but from significance perspective, company level MWs can be attributed to three distinct causes:
Auditors cannot easily find out these MWs, as they belong to routine aspects of the companies’ functions; no particular incident is covered;
They normally create a huge impression on financial reporting because of their vast scope; and
Their negative impacts cannot be fathomed, as the causal relationship is not transparent enough.
The MWs are linked to selected types of issues with parts of the control environment regarding the non-suitability of the behaviour of the senior managers, limited personnel resources with desirable calibre, lacking in relevant accounting training and drawbacks of the policy design. In the area of risk control, weaknesses are related to irregularity of risk appraising procedure and deficiency of sufficient frameworks for approximating and zeroing risks of financial reporting. Weaknesses related to the control functions are in the area of deficiency of policies and processes, division of duties, drawbacks in the reporting at the finish of the period, profit identification and account matching and not conducting internal audit review. In the information and communication division, weaknesses are related to standard in dissemination of information that is not backed by proper paper work, enough IT hardware installation and its management. There are drawbacks in the information systems and incompetency in separation of functions within applications. Lastly, in the area of the monitor functions, these are limited, not capable of amending the overall internal check system well in time (Rubino & Vitolla, 2014).
The strength of COSO framework lies in controlling the leading weaknesses of the internal check system linked to the dependability of financial reporting. It is a robust framework as most of the companies use it as a standard for measuring their ICFR. It is an effective framework for piloting the notion of internal checks and guiding companies to find out and hold the release of wrong statements because of quantitative and qualitative impacts occurred due to mistake or cheating (Rubino & Vitolla, 2014).
International Financial Reporting Standards (IFRS) for SMEs is the new standard introduced in July 2009 by the International Accounting Standards Board (IASB). It is an additional framework that can replace the complete set of IFRS for SMEs. It is a self-sufficient standard, including accounting principles based on concurrent IFRSs, modified to befit the businesses that come in its range (ACCA Global, 2015).
The standard for SMEs includes only selected classifications of IAS 39, for measuring financial tools at amortised value, employing robust interest method, testing them for impairment. Standard for SMEs modifies the hedge accounting and unacknowledged needs. Thus, importance lies in simplification of IFRS for SMEs. There are many other simplifications that make it worthwhile for the SMEs, just as the section on transition that permits all exemptions in IFRS1 besides including ‘impracticability’ exemptions for relative information. Further, the financial placing as shown in the opening statement can be shown in the restatement (ACCA Global, 2015).
The outcome of the new standard has been very positive for SMEs, as they need not adhere to more than 10% of the accounting needs of the listed firms adhering to complete set of IFRSs. Some other examples of modification in the IFRS standards include:
Reputation and other temporary intangibles are liquidated slowly across their life span. In the case of not able to measure usefulness, it is allowed a period of ten years;
A modified computation is permitted if approximation of set benefit pension plan stipulation requires additional cost through the unit credit method;
The cost model is allowed for putting money in linked companies and for entering into joint collaborations.
It needs to be acknowledged that irrespective of the exemptions permitted to SMEs, they cannot adopt frameworks unique to their specific needs; they have to adhere to the selected standard completely, as they don’t have the choice of adopting the most preferable accounting policy from IFRS complete (ACCA Global, 2015).
Standard for SMEs is very flexible also for such SMEs that want a shift to complete IFRS, if opting for a publicly listed firm. Many criteria for SMEs have been relaxed by the IFRS, which include some measurement and identification parameters that help the SMEs in cost-cutting and reducing burden. They are exempted from making future forecasts, as the users of SMEs accounting information don’t make such disclosures. The relaxation in IFRS norms can also help SMEs in getting funds as well. Language used in writing the standards for SMEs is quite simple for explanation purpose (ACCA Global, 2015).
This transition initiated by the IFRS has been the result of efforts made by advanced and emerging countries for a stringent accounting standard for the SMEs. The new standard offers better relativity for accounting information users and at the same time boost the morale of SMEs, as they need not invest funds in ensuring compliance to complete set of IFRS standards at the national level, adding huge costs of maintaining the IFRS criteria of compliance (ACCA Global, 2015).
References
ACCA Global, 2015. IFRS for SMEs. Accaglobal.com. Available from: http://www.accaglobal.com/za/en/student/exam-support-resources/professional-exams-study-resources/p2/technical-articles/ifrs-for-smes.html# [Accessed 1 April 2016].
Accounting Simplified, 2013. Accounting-simplified.com. Available from: http://accounting-simplified.com/financial/users-of-accounting-information.html#sthash.OqlmYny4.dpuf [Accessed 1 April 2016].
Meng, X., 2009. Why there is a need for regulation of financial reporting? Financial Press News and Opinion. Available from: http://www.fasri.net/index.php/2009/06/why-there-is-a-need-for-regulation-of-financial-reporting/ [Accessed 1 April 2016].
Nuoy, D., 2014. Regulatory and financial reporting essential for effective banking supervision and financial stability. European Central Bank. Available from: https://www.bankingsupervision.europa.eu/press/speeches/date/2014/html/se140603.en.html [Accessed 1 April 2016].
Rubino, M., & Vitolla, F., 2014. Internal control over financial reporting: opportunities using the COBIT framework. Managerial Auditing Journal, 29 (8), pp. 736-771. Available from: http://www.emeraldinsight.com [Accessed 1 April 2016].
