The Need for Standardization in Financial Reporting

The topic of one single international set of financial standards has been criticized in recent years. First of all, it is crucial to understand the need for standardization in financial reporting. This is achieved by looking into accounting and its roles in business and other organizations. The primary part of accounting in any organization is to report to communicate the position of the company financially. The report is given to management, investment, banking sector, and the government. There is a need for a system of rules and guidelines for reporting financial information to the relevant people through accounting (Ball, R, 2016, pp. 5-27). The regulation and standards will show guidelines on the format and uses of financial statements. The stakeholders, management, and the government will know the financial position of an organization through assessment of those standardized financial statements.

Over time, nations have been following distinctive accounting standards. When the accounting standards are distinguished for every state, it will become difficult for interested investors to easily understand the financial statements of an organization from another country. There is a need for a single set of international standards and a conceptual framework that will enable the potential investors to compare financial reports and know the best financial position that matches the amount and the type of business they want to invest in. Recently, over one hundred countries have adopted the International Financial Reporting Standards (IFRS). There is also an International Accounting Standards Board (IASB) (Epstein, B, 2010). From a critical perspective, the issue of sustainability in reporting has affected the need for one single financial standard and application of a conceptual framework. This paper gives a critical analysis of the establishment of one single set of economic models. The article will look at the challenges f this move and also at the challenge of sustainability.

Over the past years, the finance sector has seen a wide adaption of International Financial reporting standards. The emergence of capital markets and the process of globalization in economics has led to a need for standardized accounting. The struggle to form a single financial board has resulted in the formation of two bodies. The speed at which accounting is becoming a global process is increasing as time goes. This is because there is a need for international integration of financial reports for countries. This shows that there is a need for a single high-quality standard of accounting. The role of IFRS is to support the economy’s globalization and present a standardized natural outcome of financial reports (Reporting, F, 2010). The set of standards should ensure that the accounting sector in organizations, especially those that are multinationals, have transparent and comparable financial statements that will help in knowing their position in the past, present, and forecast the future of the company. Financial practitioners and investment professionals will find themselves able to analyze and represent investors in the market. The standards have to be considerate to the small companies to ensure that they make equitable and well-informed financial reports. By using the international standards of accounting and financial reporting, the multinational organization will be able to cut costs. The cost challenge is training employees to adapt to the standards. There is much need for those standards, and despite the high lack, not all parties support the novel of adopting one financial standard board. They have pointed out some critical disadvantages of the idea.

The Importance of International Standards

Adopting the International accounting standards means that there will be a considerable cost to transform the financial statements and the whole financial system to reach the standard needed. The price will range from the amount of money required, the amount of time necessary, and the company resources that will be used during the shift in the process of accounting. There may be a need for new employees who know international financial standards. There may also be needed for employee training to adapt to the standards of accounting provided by the single board. There will also need to be reformation of the whole organization to ensure they conform to the engineering of the organization systems to conform with the international board’s standards. The processes come with high risk for loss of data during the transition. Other data may be administered wrongly, and it is a risk posed by the process of growth to the requirements of the novel single international standard. The scale of risk and cost in adopting international standards is high enough to discourage a company from adopting the standards of the one single standards board.  The adoption of the models also brings up concerns about the rules and regulations in the multinational organization (Barton, A, 2019, pp. 22-31). There is a regulation by the governments locally, and that may affect the adoption process if the government’s laws are not considerate of the existence of one single financial standard board. This is because the first world or the highly developed countries dominate the formation of this accounting board. Therefore, the other developing and underdeveloped countries may have a problem in conforming to the international board’s requirements devising the accounting standards. The other threat for the process of formation of one single standard board is the principles that come with it that do not provide room for personal judgment on financial reports. The principles of the standards bring indiscretion, which has inadequate scope for subjective judgments. However, the discretion comes with appreciating the diversity of systems of management for companies. This is because it makes the systems flexible in allowing incoming trends of distinguished company systems. Financial reporting is a significant practice in an institution; therefore, steering the process should be done effectively.

The conceptual framework for general purpose financial reporting shows the concepts for public sectors in financial reporting. The International Public Sector Accounting Standards Board applies these concepts of preparation and presentation of financial reports. The framework is supposed to help the board develop and revise financial reporting standards that are established on consistent ideas. The conceptual framework comes up with policies for the sides of financial reporting that are not covered by the international board of standards. This is a standard for interpretation that applies specifically to transactions and accounting. In making financial decisions, it requires a conceptual framework with guidelines on general-purpose. The framework, however, does not disapprove or go beyond international standards. The conceptual framework addresses the following: The aims of general reporting in accounting, qualities of useful accounting data, financial statements of a reporting firm, measuring, presentation and disclosing the concept of capital, and maintenance.

Challenges of Adopting a Single Board of Accounting Standards

The conceptual framework enables accounting to have general-purpose reporting. The primary objective of general-purpose reports is to target investors. They target the present and potential investors who are interested in the data. The investors use the data to decide on buying and selling of assets, capital, and debts. They also give the guidelines on how the rights will put in action by the investors. The other uses of the general information are by the management to know the resources of the form and make proper decisions on the allocation of those resources. This will make the control to be efficient in using the company’s help to make a profit. However, international standards des not advise investors to rely too much on general-purpose reporting but to look for other sources as well.  

The framework also addresses the features of crucial financial information. The features include the qualitative features of the economic data being reported (Gibbins,M, 2011, PP535-563). Therefore, the framework identifies the information that will be needed and is very useful to the reader of the financial report. The information is effective when it is faithful to what they represent. It should be on time, updated, easy to understand, and easy to compare with other information. The relevance of the message depends on the capability of it to make a difference during decision making. The information should have related information with consistency that can help to decide the future. The information should also have materiality meaning that they should not be too minute to affect the decision-making process. The information should also be provided in a faithful representation. The economic phenomena being represented by the information should be clearly stated in words. The features of the information can be improved in quality by making the information compared with other information by throwing in a conceptual framework format.

The conceptual framework also has underlying assumptions. The framework of the international standards assumes that a firm continues to operate indefinitely, and if this assumption is not valid, the reporting should be done on a different basis. There are elements that a financial statement should portray. They should show the economic effects of significant business transactions and the other events by categorizing them in broader classes according to their economic features. There are those elements directly related to the firm’s financial position, including assets, liabilities, and capital. Other parts directly relate to the performance of the firm those are: income and expenses.

Role of IFRS in Supporting Globalization

Inappropriate Revenue Recognition Behaviours

This addresses revenue recognition issues that have affected the stock market and the stake holder’s capital. The new revenue recognition regulations by the international standards require firms to disclose details of contract, terms, and conditions of the deal, progressive reports, account judgments that were employed during the recognition of revenues (Choi, F.D, 2018). The reason for the disclosure requirements is to create users’ understanding of the nature of the payment and transactions, the number of contracts, the timing, and uncertainties concerning the revenues and the income to allow for the making of informed decisions. The reliability of this information in the administration of a firm is critical because it is required for decision making; therefore, when recording this information will cause accounting issues and hence may lead to unrealistic decisions. Making the wrong decisions from biased details will lead to corporate failure. The investors will also have uncertainties about the revenue of the firm. The firm’s effectiveness depends on reliable information about the firm, especially in terms of income and expenses. The information should be stated appropriately and should not be cooked inappropriately because it will result in a lot of book omissions and unnecessary recognition of revenue, which will, in turn, allow the management to make misinformed decisions about the firm. When management depends on cooked financial records, then the decisions will mislead the firm, resulting in misallocation of revenue. The allocation of resources depends on accurate financial reporting so that the right amount of payment can be allocated to the right kind of project. The strategic objectives of the firm may also be affected by the inappropriate recognition of revenue. The strategies depend on plans of actions that rely on financial reports of every financial year. When the financial statements are wrong, the managers will make wrong decisions that will affect the strategic plan. The objectives of the firm will not be achieved, therefore leading to corporate failure.

This refers to accounting malpractice that is aimed at the false statement of the firm’s financial performance. It is engineered towards hiking of the financial performance to make the company look like it is making a profit while in the real sense, it is below the stated performance. This type of practice is a creative one that follows the law but does not stick to the accounting code of ethics. The practice aims to project a good view of the company to the management, stakeholders, and investors. The aggressive borrowing can start from overstating to understating costs. There is also aggressive borrowing in revenue, inflating assets, and negating some liabilities. Firms can stretch income by making a report on gross revenue. This is unrealistic because there might be expenses to reduce it. Inflating assets are where a part of the firm’s overhead majorly allocated to inventory because there are indirect costs.

The Conceptual Framework for General Purpose Financial Reporting

The aggressive borrowing will occur where the employees of the company are not audited to make sure that they are following the correct procedures of accounting set by the standards board, either international or national. It is essential to develop a checklist to ensure all entries have been made, and all documents have been signed to complete a transaction. Even the smallest transactions have to be recognized because they will contribute to aggressive accounting. The small errors might lead to the making of wrong entries in the accounting system and can lead to a differentiated financial report during General purpose financial reporting. The most important thing is to adopt a standardized accounting system that ensures all entries and transactions are recorded. It is also important because the organization will be running in the course of the budget as set out. When there is no framework, then the employee may fail to differentiate between an income and an expense accurately. When aggressive records dominate accounting, it may lead to false information about the firm’s income and expenses. Revenue and costs are the elements of financial reporting that help in calculating a firm’s net profit. The wrong net profit will lead to the calculation of the assets and liabilities and, hence, a false statement of the firm’s financial position. General-purpose financial reporting is crucial in making financial decisions and other related decisions for the firm. When all this information relies on the aggressive borrowing of financial records, it means the firm’s management decisions will be affected negatively. If the financial position is overstated, the firm will make the allocation of revenue that is unrealistic in its budgeting for the next financial year. If the firm’s financial situation is understated, the budget will be effective, but the objective will be to target lower profits and investment, which the firm’s financial ability surpasses.

Ineffective governance is one of the most critical factors in business today. This is because the governance of a firm determines how it is ruled, gives procedure to be followed, and manages the company’s customers, suppliers, employees, and the customers. Governance of a company is a board of directors that is put in place following the law with a legal obligation to serve as per how the interest of a company directs (Soltani, B, 2014, 251-274). The governance of a company, however, should not be done according to their wish, either that of the management of the company. A company needs to put into consideration the connection between corporate governance and the performance of the corporate. However, only a few companies have considered studying corporate governance and corporate failure, and this has led to neglecting the role that corporate governance has.

Qualitative Features of Financial Information

Outside directors are one of the elements that influence corporate failure. According to research, having more outside directors in the management of a company will reduce the probability of a corporate failure as compared to having many fewer outside directors. This is because inside directors are known to have less objective and have less freedom from the board of management. This lack of freedom is crucial for the board of directors because it means securing the shareholders from managerial self-interest. This is also true since the bankruptcy of the failed companies increase yearly in the companies that are known to have fewer outside directors as compared to those that have more of the same. This is because the companies that have less inside directors advocate for the interest of the members of the management and not from the manager’s point of view. Therefore the inside directors have fewer ideas and also have fewer entrepreneurs since they do not advocate for the company to get involved in large risk businesses to achieve better gains. This, therefore, leads to corporate failure.

The presence of an audit committee is also another factor that impacts the success of the corporate. This is because the presence of an audit committee that is sufficient in a company makes the company have a low probability of corporate failure compared to the company that has an inadequate audit committee or does not have it entirely. As per research, a company that has an audit committee is least expected to have any severe accounting problems. This means that the presence of the audit committee lowers the risks of corporate failure. In contrast, the absence of the audit committee makes a firm more vulnerable to corporate failure. This is because there are no monitoring mechanisms that are meant to oversee the company’s financial reporting progress and also the integrity of the audited financial statements. This means that it will also give a window of opportunity for misappropriation of the funds that belong to the company. Additionally, in the presence of the audit committee, the company may not be able to account for funds in case there is embezzlement in the firm. This will not only allow the loss or misappropriation of the firm’s fund but also make the company vulnerable to corporate failures.

Another factor that may lead to corporate failure is the size of the board of a firm. Even though the element cannot be different from the failed companies from the non-failed companies, it influences the corporate success of a company. This is because the companies that have large boards have a low probability of having a corporate failure. In contrast, the companies with a small board are known to have a high chance of corporate failure. Additionally, the audit opinion contributes to the firm’s corporate failure. This is because the idea of the audit is outside information to the firm’s governance but helps in the decision making of the company. This is because having a good audit opinion and carefully following it will make the management make good management decisions, which will reduce the probability of a company having a corporate failure.

Ball, R., 2016. International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and business research, 36(sup1), pp.5-27.

Barton, A., 2019. Public and Private Sector Accounting?The Non?identical Twins. Australian Accounting Review, 9(18), pp.22-31.

Choi, F.D. and Meek, G.K., 2018. International accounting. Pearson Education.

Epstein, B.J., and Jermakowicz, E.K., 2010. WILEY Interpretation and Application of International Financial Reporting Standards 2010. John Wiley & Sons.

Gibbins, M., Salterio, S. and Webb, A., 2011. Evidence about auditor–client management negotiation concerning client’s financial reporting. Journal of Accounting Research, 39(3), pp.535-563.

Reporting, F., 2010. The Conceptual Framework for Financial Reporting.

Soltani, B., 2014. The anatomy of corporate fraud: A comparative analysis of high profile American and European corporate scandals. Journal of business ethics, 120(2), pp.251-274.