The Advantages and Disadvantages of Corporate Financial Reports

Corporate financial reports are part of corporate reports consisting of financial statements and accompanying notes that are prepared in accordance with generally accepted accounting principles (GAAP). Financial statements are summaries of business transactions during the corporation’s financial year. The corporate world has many forms of organizations ranging from sole proprietorship for profit, partnerships and limited liability incorporated companies to non-profit organizations whose existence is not primarily driven by financial gain.

Regulations governing the preparation of financial statements apply largely only to incorporated entities. This has given rise to accounting regulatory bodies and legal provisions that form the frameworks used in the preparation of financial statements. The process of preparing reports in accordance with GAAP and legal requirements presents advantages and disadvantages for organizations and other interested groups. International Financial Reporting Standards are increasingly being adopted by many national accounting standard-setting bodies leading the way to a unique set of accounting standards around the world. Therefore, it is worth looking at the pros and cons of financial reporting to raise awareness of the complexities faced by corporations and accounting professionals.

THE ADVANTAGES

A number of advantages of corporate financial reporting can be listed and perhaps one of the most important is that organizations can compare their individual performance with that of others in the same industry or line of business. This is because established principles, standards, and regulations ensure that there is a benchmark to follow when preparing financial reports. The recognition of income, expenses, assets and liabilities is standardized by the existing framework and any deviation can be countered with disciplinary or legal action. Organizations strive to prepare their financial statements to be as consistent as possible with established frameworks. In some countries, for example Kenya, this has resulted in an annual competition (the award on fire) where the performance of companies in this area is evaluated by professional bodies, including the national body of professional accountants, with the objective of rewarding the company with the best prepared financial statements. . This, in turn, promotes professional and staff development, which is a desirable aspect in the growth and wealth creation of corporate organizations.

Investors and business owners in jurisdictions where corporate financial reporting follows clear and robust frameworks can make the right investment decisions. In this case, corporate reporting enhances the development of understanding of companies’ activities and, at the same time, keeps the companies themselves alert, as society in general is well informed of reporting standards. expected. This also acts as an incentive for managers to perform at their best and to institute control measures that help the organization meet the frameworks.

Corporate financial reporting requirements lead to the timely preparation of financial reports. This is desirable for stakeholders who may be more interested in the immediate past of the organization rather than waiting a long time before the outcome of their input is known. When financial reports are prepared and published within the stipulated time, necessary actions may be taken to correct any anomalies that may have led to undesirable results. In a more serious case in which a material error is discovered, it can be corrected and the necessary measures taken to prevent it from recurring.

IFRS allows for flexibility, as it is based on principles rather than rules. Since the principles are based on value, companies can adopt the standards that best suit their circumstances as long as fair value is adequately reported. This also encourages professional development, as the setting of accounting standards requires qualified academics who can develop the required standards after long and rigorous discussions and considerations to reach consensus.

In general, corporate financial reports act as a control measure, as management, owners, employees, customers, creditors, and government depend on the reports in their decision-making. For example, the government in the taxation of companies relies from the beginning on financial reports prepared and reviewed by certified or qualified public professionals. Trends in business growth can also be quickly determined by comparing sets of reports for different periods.

THE DISADVANTAGES

Corporate financial reports don’t just deliver desirable results. There are some undesirable results that need to be mitigated. Consideration of costs guides many companies in their operation. In preparing corporate financial reports in accordance with established norms and standards, experience is required and the company must hire highly qualified professionals for this task. Fee payments to qualified professionals can be prohibitive, especially to small businesses closely controlled by their owners. Compared to larger companies, small entities do not have adequate resources to implement the adoption of the standards or even to train or employ qualified personnel. In many cases, these small and medium-sized enterprises (SMEs) are tempted to forgo compliance with certain aspects of the rules or regulations, leading to problems with regulatory bodies, including the government.

The freedom to adopt standards that are tailored to the particular circumstances of the company leads to manipulation of the reports. Disclosure of important information is in jeopardy as there is no legal enforcement to implement the standards. Even when the government imposes legal obligations on the financial reports that must be prepared, there are still loopholes that can arise, especially when accounting standards and legal stipulations are not in compliance in some areas.

For multinational companies, there are challenges in preparing their consolidated financial reports, especially when operations are located in countries with different accounting standards and legal regimes. There are also other challenges in dealing with, for example, exchange rates, interest rates, and transfer prices, where the treatment of such aspects may be considered differently in different countries. Taxation and the existence or non-existence of double tax treaties also pose another challenge.

CONCLUSION

It can be concluded that corporate financial reporting is essential and the benefits of following principles-based accounting standards far outweigh the disadvantages, as the freedom to prepare reports in whatever way organizations deem appropriate can lead to chaos. financial.

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