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  Increasing the Scope of Financial Reporting

Introduction to Increasing the Scope of Financial Reporting

THE DEVELOPMENT OF FINANCIAL REPORTING

Financial reporting has been about for many hundreds of years. It appears to have come out like a result of one or more persons having custody and management of assets that belonging to one or more others. Instances might involve a farm manager looking after land owned through another and a merchant captain of ship taking goods, owned through another, overseas and selling them. The owners would generally need that the steward (i.e. the person looking after the assets) report on how the assets were deployed and how successfully.

These reports were frequently expressed in financial terms and provide rise to what is termed as 'stewardship accounting'.

Limited liability companies first came into sight in the middle of the 19th century. Their advent provided added impetus to assets being owned through one group of people (the shareholders) and managed through another group (the directors). The formation of these new legal entities was not accompanied through stringent needs either to publish financial statements or to have them audited. However, many companies did so.

This was mainly in response to pressure from investors that were reluctant to part with their money with no relevant feedback, in the form of periodic financial reports, from the directors.

These financial reports decreased ambiguity in the minds of investors, who then became more willing to give funds and to scale down their expectations of financial returns. There is fairly strong and recent proof that greater disclosure of financial information is apt to lower a cost of capital of company and, additionally, that directors understand this relationship.

Depending on market forces to find out the form and content of financial reports is, though, a risky business. Directors control access to financial information and it is not all the time in their interests to make sure that the truth is revealed in a timely and correct way. In addition, investors are frequently dispersed and find it hard to act collectively. So, they are in a weak position to exert pressure on the directors.

The precedent century and a half has been characterised through a movement away from market-led financial reporting in the direction of a highly elaborate regulatory framework. The UK (United Kingdom) government started the ball rolling with the Companies Act 1862 that suggested the preparation of a rudimentary income statement and statement of financial position every year (and an audit of the latter). This was followed through a succession of Companies Acts along with each needs greater financial disclosure. Because the 1970s accounting standard-setting bodies, and particularly the IASB, have become main forces in financial reporting regulation and have added significantly to the mountain of rules. For instance the IASB has almost forty standards currently in existence.

The relentless raise in reporting requirements has produced some disquiet. Doubts have been come out like to whether the increasing complexity of financial statements has led to an enhancement in their helpfulness. There is a concern that accounting regulators and businesses contain lost a sense of focus and forgotten the aim for which financial statements are get ready. So, a main challenge for the future is to generate better, than simply more, regulation. The quality of financial statements is reliant on regulators making sure that rules are noticeably targeted and are proportionate to the troubles that they address. It is also dependent on businesses that providing as clear, open and understandable financial statements as feasible within the rules that available.

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