Broader set of Information to be Included in Traditional Financial Reporting
The Main Criticisms of Traditional Financial Reporting
The very first criticism on traditional financial reporting is that the use of diverse accounting policies among different companies jeopardises the performance comparison between financial statements. In other words, traditional financial reporting causes businesses to use multiple accounting policies due to which accurate financial comparison becomes difficult.
Another argument against traditional financial reporting is that despite performing independent examination of financial records and statements through internal and external audit, the financial records and statements may still contain material misstatements . There is a possibility that some material errors may go undetected during financial examination. Because of this, auditors, both internal and external, can only provide reasonable assurance instead of absolute assurance about the fairness of financial statements.
After carefully analysing the traditional financial reporting mechanism, it can be further observed that this reporting mechanism calls for using historical cost method for reporting assets on the balance sheet of the company. This is one of the flawed assumptions of traditional reporting system. This is so because historical cost method fails to account for change in the market price or financial value of an asset over time. Due to this, different internal and external stakeholders are unable to accurately account for a company’s financial performance and make proper investment decision .
In addition to the above criticisms, traditional financial reporting considers only the financial aspects of the business. In other words, this traditional reporting system only takes into account those transactions having financial consequences or that could be measured in monetary terms. The non-financial aspects of the company (such as quality of the human capital and goodwill in the market) are completely disregarded by traditional financial reporting system . In the same manner, traditional financial reporting is greatly criticised because financial statements reported using traditional system could easily be manipulated deliberately for frauds and errors. This reduces the reliability and credibility of financial statements while damaging the corporate image of the company.
Other Types of Information to be included in Annual Report with Costs and Benefits
First of all, as the financial section in an annual report gets started, it should contain financial highlights that should reflect not only the financial information from financial statements but also include calculated financial ratios for the last seven to ten years. By including this financial information on ratios, it will make it easier for different stakeholders to accurately perform financial performance analysis based on accurate financial figures. Moreover, mentioning all ratios and financial figures from statements in financial highlights also helps stakeholders to find financial information on a single page. They can easily consider accurate data because different websites follow separate considerations in calculating ratios .
As stated earlier, traditional financial reporting measures fail to account for the market value of assets when financial statements are reported, it becomes difficult for stakeholders to perform investment analysis properly. Therefore, it is suggested that a separate section should be included in an annual report that reflects market worth of all assets. The benefit of including this section is that stakeholders will be greatly facilitated to access accurate market data instead of wasting time in looking for market figures separately for each asset. Stakeholders can gain insights about actual market worth of all assets, compared to their historical cost, in just a single section.
Should Firms Include More than Financial Information in their Annual Reports?
If annual reports of different companies are analysed thoroughly, one would be easily convinced that the management should not only include financial information but also non-financial aspects having significant impact on the business as well. For instance, the profit and loss statement (income statement) only reflects an increase or decrease in the sales revenue and cost of generating sales. Apart from this financial information, the company’s management should prepare a separate section to determine the prominent reasons for which sales and costs posted an increase or decrease during the financial accounting period.
Large public companies reveal various derivative instruments in their balance sheets reflecting the manner in which risks having financial consequences (such as foreign exchange and commodity price risks) were mitigated. In addition to this, managers should also include a separate section in an annual report that represents different risks faced by the company. Here, the company managers should discuss the manner in which non-financial risks (such as technology, consumer preferences, political and country risks) were dealt with.
Similarly, as companies also indulge in corporate social responsibility activities to be perceived as a socially responsible business in the market, companies should also disclose such non-financial information in another separate section of their annual report. The financial consequences of social activities should be disclosed in different financial statements. This could easily be done by incorporating “social accounting” in reporting the financial statements at end of financial accounting period.
References
Arnold, 2008. Corporate Financial Management. Pearson Education India.
Basu, A.K. & Saha, M., 2013. Studies in Accounting and Finance: Contemporary Issues and Debates. Pearson Education India.
Collings, S., 2011. Interpretation and Application of International Standards on Auditing. John Wiley & Sons.
Simkin, M.G., Norman, C.S. & Rose, J.M., 2014. Core Concepts of Accounting Information Systems. John Wiley & Sons.
