Corporate Financial Statements
Uploaded by palmyra68 on Nov 21, 2012
The financial statements for a firm are required as it has a number of stakeholders who depend upon its financial information in order to make economic decisions. However, the major corporate finance scandals often shake the confidence of investors and raise questions about the reliability of financial statements prepared by companies and audited by independent auditors. This essay discusses whether corporate financial statements are management representations of the financial position and the performance of a company. It also analyses whether or not accounting standards and practises contribute to ensuring the confidence of investors in the integrity of financial statements.
A firm has a number of external and internal stakeholders. The investors and creditors need financial information to make investment or lending decisions based on the net worth and profitability of a firm (Benedict and Elliot, 2001). Financial statements are also used by employees and government agencies for monitoring and decision making. Given the importance and usefulness of financial statements, national accounting bodies issue financial reporting guidelines that companies are required to follow when preparing and presenting their financial statements for promoting high quality corporate governance and foster investment (“About the FRC”, 2012).
However, in spite of the widespread knowledge of accounting standards and also the high economic costs associated with the violation of regulations, some companies still tend to commit financial reporting frauds. Large companies like Computer Associates and Tyco International have falsified revenues by manipulating accounting policies in order to show higher than actual earnings (Marshall, 2004). Satyam Computer Limited was one of the largest IT firms in India before it revealed that it had been overstating its earnings for a number of years. This implies that the management of a company can manipulate its corporate financial statements to represent an incorrect view of the financial performance and position of the company.
The possibility of corporate financial statements being management representations of the financial position and performance of a company arises because of subjectivity in the implementation of reporting standards. Revenue recognition is one of the main accounting areas where subjectivity can have a significant impact on the operating results of a company. Issues in revenue recognition arise from the differences in purposes and accounting rules for tax and financial reporting (Stolowy and Lebas, 2006). A company’s interpretation of an accounting policy may not match that of the regulatory authorities and therefore, it could lead to reinstatement of its earnings....