Regulations in Financial Reporting
Before we get into the needs of regulations in financial reporting, first we have to know: What is financial reporting? , Who uses these reports? , What are the regulatory bodies involved in the regulation of these reports? And finally How this system of regulations and standards works? Financial reports allow the organization to communicate information about their performance to the "outside world". So, financial reports provide summarized information about an organization's transactions for external decision makers. (e.g. Investors). Financial reports can be used by employees and trade unions, government, creditors and lenders, customers, shareholders and investment analysts. All these users may need different statements of financial accounts but the most important statements which they need is the balance sheet, profit and loss account, cash flow account and the income statement. The two main regulatory bodies of financial reporting are the "Law" and the "Accounting Profession" with the Accounting Standards Board usually known as ASB. In UK, most of the legislation related to the publishing of accounts is embodied in the Companies Act 1985 and 1989 which are concerned with the accounts of the limited liabi
It is essential that users of financial reports or investment decision makers be supplied with relevant and standard financial reports which have been regulated and hence standardized. For example, a company which wants to attract investment finance can not make the necessary judgment of how much information is necessary and what form it need take so, it couldn't take the actions necessary to attract investors and may bankrupt. The first one is "Comparability"; financial statements must allow people to compare one company with another one and evaluate the management's performance without spending time and money adjusting them to a common format and common accounting treatments. So , when there is a need for a change in accounting standard the ASB prepare and publish a draft standard called the FRED (Financial Reporting Exposure Draft). Because all this standards and regulations exist accountants have to treat every company in the same way. If the accountancy profession permitted companies experiencing similar events to produce financial reports that disclosed markedly different results simply because of a freedom to select different accounting policies they would lose all of their credibility. After the publishing of these drafts the comments from the public is invited and in the light of these comments the FRED is changed (or unchanged). The last thing that the standards have to supply is "discipline". Standards are for general-purpose and sometimes they fail to respond to user's and the firm's needs. The second and the most important regulatory body is the accounting profession. If all accounting methods were standardized, two organizations which began the year with same balance sheets and which made the same transactions during the year, they would report the same balance sheets and the same profit and loss account at the end of the year.
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Acceptance Essays
