I have always just written off financial reports as
exactly that - just a summary of the financial position of a company at the end
of the financial year.
Martin's comments that financial reports are a
marketing tool - I cannot agree more. I posted my introductory blog
before I read chapter 3 and as I went through the learning text I thought to
myself - wow it worked (maybe one of those light bulb moments)........sunny
days, smiling executives/employees and not much more than everything looking
positive and promising. This is basically what I noted in my blog.
I won't go into what each of the financial reports are
and what they do - we are all familiar with this by now. This text is
more along the lines of my views on financial reports and I guess the essence
of what chapter 3 means to me.
From the blogs I have read it appears that all of our
financial reports are set out in much the same manner. To me financial
reports are a standardised way accountants can paint a company's portrait - to
give it's readers a look at it appearance, as such; getting both qualitative
and quantitative info onto a piece of paper.
When I say standardised I just mean basically the same
'paintbrush' or tools are used being the 4 types of reports (which is supposed
to make these reports comparable and reliable). Similarly this is why 2
years are always shown - to compare the progress of a company, or lack thereof.
Each 'portrait' will be unique to others and this is
why readers cannot just whack a standard formula against reports to come up
with a good or bad type conclusion. Understanding the realities that
behind the numbers is paramount when analysis report.
Another point that stuck in my mind was trust.
What does trust have to do with financial reporting.......everything!
I think trust is an essential element of the equity concept and
that a business is separate entity from it's equity owners. Balance sheets
show how much goods/services or money equity owners or creditors have entrusted
into a company – the value of the business to those involved.
Of course there is also the obvious reason, being able
to believe or trust the information. Ethics and trust go hand in hand as
although companies are governed by GAAP rules we as the reader do trust that
those responsible for the information contained in a report compile the
information with a level of integrity and which goes along with my 'painting' a
picture theory and the creative license some companies may use to present
figures.
The GFC comes to mind and I cant help but think - how
did everyone not know!!! The accountants for some of those firms must
have busted out some Mona Lisa portraits of these companies which obviously
shareholders trusted were accurate?!
If you have read this last bit, I am
impressed. It is hard to put my way of looking at this subject onto
a short blog - sorry and thanks so much in advance. :-)
Hi Megan,
ReplyDeleteI'm re-posting my comment since you accidentally deleted all your comments. :-)
You bring up a really interesting topic, "trust". Depending on the type of company, and how long it has been around, the financial statements will need to be audited.
The purpose of an audit of the financial statements, is to verify what is in the financial statements is “fair and true”. The Auditor will be an independent third party and will submit an audit opinion at the end of the audit. The audit opinion will basically provide “reasonable assurance” that the financial statements are accurate and nothing dodgy is going on.
By auditing the financial statements, it increases the value and the credibility of the financial statements and also the trust of the user of the financial statements.
The audit opinion in your annual report is page 50-51. According to Ernst & Young, your company’s financial statements are “fair & true”.
Thanks so much for posting and now reposting your feedback - I actually deleted the WHOLE post :-| but luckily had a word version copy.
ReplyDeleteYes you are absolutely correct! Company financial reports are required to be independently audited however this is not a foolproof way of assuring the validity of the contents - yes, improve the believability and generally keeps reporting honest but definitely not a guarantee.
A good example of the devastating affect of understanding liabilities and overstating profit is a well-known case of Anron Corporation (see link below) and, the auditors were also prosecuted!
Of course, not all misrepresentation of financials is as dramatic as this but misstating financial reports does, and will continue to, happen and unfortunately it is usually the shareholders and employees who wear the brunt. There is a very interesting section in the textbook about this subject.
Yes, ethical behaviour and trust play a big part when using financial reports for decision-making.
http://www.investopedia.com/articles/stocks/09/enron-collapse.asp
Cheers
Megan
Hi Megan,
ReplyDeleteI really enjoyed reading your summary of Chapter 3. Your personal thoughts and insights have helped me considerably to understand some of the key aspects of accounting. The way you summarized financial reports as a standardized way accountants paint a company's portrait is very interesting and clever. Once again, great job :-)
Cheers, Jess.