b) Financial statements are the prime measure of management performance by the shareholders. However, as management is responsible for the preparation of financial statements, shareholders have to rely on external verification by auditors in order to gain reasonable assurance that the accounts are free from material misstatements and can therefore be relied upon to give true and fair view of the affairs of the company.
Required:
Identify FIVE limitations which the preparation of financial statements imposes on discharge of accountability to the users of such statements. (5 marks)
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- It fails to account for externalities. Backward looking, (Historic data) therefore information is of limited use. Decision usefulness to who? – Suppliers of capital (effectively shareholders) – limited accountability.
- Estimates and many areas of judgement – do accountants construct their reality of how the world is?
- Conceptual Framework supports the view that information on financial performance and position should be primarily for suppliers of capital.
- Narrow view of accountability/serves capitalist system – what about other key stakeholders?
- Contract an organization should have with society (e.g. Banks). Ethic of accountability.
- Need wider system of reporting (e.g. Environmental/sustainability/integrated reporting).
- Cost of preparing reports (e.g. separate sustainability report) for different users can be prohibitive. (Any 5)
c) It is sometimes argued that companies should be given a choice in matters of financial reporting on the grounds that accounting standards are detrimental to the quality of such reporting.
Required:
Identify FIVE points in favour of the adoption of accounting standards. (5 marks)
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- They reduce or eliminate confusing variations in the methods used to prepare financial statements.
- They provide a focal point for debate and discussions about accounting practice.
- They oblige companies to disclose the accounting policies used in preparation of accounts.
- They are a less rigid alternative to enforcing conformity by means of legislation.
- They have obliged companies to disclose more accounting information than they would otherwise have done if accounting standards did not exist.