Financial Reporting in the Face of Accounting Scandals Essay

Financial Reporting in the Face of Accounting Scandals - Essay Example The job of financial reporting is to give an overview of the short and long term financial position of a company. This is done by producing the Balance sheet, which provides a picture of the company at a point in time, the Income Statement which gives an account of the business's performance during the year in terms of revenues and expenses, the Cash flow Statement which presents the cash inflows and outflows fro the company divided into operating, investing and financing activities and finally the statement of changes in equity which basically explains the change in a retained earnings of the company during the financial year (Graham 2005). These four statements are aided in understanding by notes to the financial statements which provide additional and in depth information about specific items mentioned in the four statements. Accurate and transparent financial reporting of a company's accounts is significantly important in this age of massive investments. The four statements listed above provide information to the investors in making important investment decisions and to lenders regarding credit decisions (Piotroski 2000). This is done based on the position of the company presented in the financial statements which allows investors to judge whether the company is profitable and whether they would be able to get a significant return on their investments with this company. Creditors similarly can judge the ability of the company to pay off its debt in the future and whether they will be able to receive their money back with the interest payments. These statements are also utilized for assessing the cash flow prospects of the company as well with the same purpose in mind, to benefit investors and creditors. Cash flow projections are very important for decision making as cash inflows and outflows are ultimat ely the most important things in terms of a company's ability to payoff investors and creditors. Without this liquidity, there would be little to payoff with (Kaplan 1995). Furthermore, financial reporting gives information about the ownership of assets of the company and its related liabilities which allows users of the statements to assess what the company holds and how it is performing in general. It is also an indicator of the management's performance during a fiscal year, allowing shareholders to judge whether the current crop of management and the Board of Directors is doing a good job handling their investment (Kaplan 1995). As such, the existing shareholders of the company need financial reporting to assess whether their investments are worthwhile. Prospective investors can utilize them to judge whether the company presents a better investment option compared to others in the industry and in general. The all important tax collections that government authorities perform are b ased on the financial statements of the companies which make them important for the Government (Watts 2003). Even the employees of the company, who are organized in the form of labor unions in many countries, use the financial statements to assess the company's performance and negotiate for compensation and promotion with the management. Financial analysts and those on the