Deegan (2009) states that financial reports should represent faithfully the underlying transactions and events and should be neutral and complete. However, the question still remains whether we can really accept that accounting can be 'neutral' or objective. Transparency and compliance is the expectation of many in matters of financial reporting. There is a wide gap of communication in annual reports in matters of disclosure and compliance. In various aspects, it is a troubling report since it comprises information on public relations and results of finance (Ball, 2006). Even with the inclusion of sophisticated standards, the financial report still has traces of inconsistencies. The accountants, analysts and regulators with an understanding of finance complexities have taken an advantage of the situation and have compromised with the set standards. Transparency has thus been compromised in financial reports. Therefore, this essay seeks to state that some financial reports can no longer be regarded as neutral and will in most cases be compromised.
Footnotes in financial reports have become too extensive and technically complex for individual investors. The complexity of the documents has made interpretation difficult. Individual investors have been struggling to bring sense out of the high volume of expert information. The footnotes are an inclusion that aims at satisfying the transparency legal form. It has however been used for the wrong reasons. Investors along with their accountants, regulators and analysts seek to use footnotes to provide authentic-world disclosures aimed at establishing direct solutions to simple although very crucial questions to the investor. Such issues include seeking to establish the viability of the investment on long-term basis. Again, it has also been used to establish the capital strength of the investment (Glen, 2005). Such inclusions in the financial report have led to some level of compromise which has interfered with the integrity of the documents (International Accounting Standards Board, 2007).
The main differences in the process of producing financial reports for companies in various countries have led to many problems. These begin right from the process of preparation, consolidation and the interpretation of the published financial reports. The efforts that have been put in place to harmonize the statements of finance in the reports on a global scale have been established by such bodies like IASC, the EU and even the IASB. All the same, they have not produced a significant change in the financial documents. The annual accounts of a company provide information concerning the financial status of the company. Even though the main objective is all the same in different parts of the world, there is a difference in the influences of these financial accounts. Thus, different countries have shown different approaches in coming up with their documents.
One of the causes of major flaws in financial reports is the concern about financial provision. Companies have been increasing in scale. Private capital has thus become insufficient to support the company activities. Based on this fact, companies react differently to the increased need for money to finance these activities (Alexander et al. 2007). Some parts of the world like in America and UK saw shareholders as the source of the needed extra funding. As a result of this, some companies relied more on equity funding. This is where problems begin to emerge. In companies where there is equity funding, the financial statements tend to have an orientation by the investor. The financial statements should make available the relevant information for the investor to come up with the best decision. However, the case is ever different from regions with companies relying on debt funding. The financial statements in this case normally have a creditor orientation. The information is very imperative as it tells whether a company will be in a position to pay debts or not.
Different legal systems are a major cause of the differences realized in accounting practice. These differences account for the many flaws that are evident in financial documents. In such places like USA and England, there is a common law system. The system is established through case law and cannot provide specific regulations which could be applicable universally. Therefore, rules of accounting are set out by established private bodies in the accounting profession. The rules are not a section of the law. However, Spain, Scotland and France apply a Code Law system that offers a large set of rules that attempt to work for any kind of situation (Alexander et al, 2007). The regulations in accounting are in the hands of the federal government and in most cases set in the company law of the country. In such regions, financial reports have sometimes been reduced to a mere compliance to a set of legal requirements by the law.
Well, the authenticity of the financial reports is in a worrying situation. Financial statements have been used in some countries to establish the taxable income of a company. In such a scenario, financial reports can be influenced by tax. This is mainly because a company will seek to cut down the tax imposed on them. This is mostly found in such countries where there is no an explicit approach of the investor in their financial reporting. Norway, Italy and Sweden are such examples where financial reporting relies on taxation (Alexander et al., 2007). Countries like Ireland and the Czech Republic have different accounts for purposes of tax. Therefore, the relationship is not that strong. All these differences highlighted above will have a big effect on accounting and the use of financial reports. Such differences will often lead to confusion in investors and ultimately affect the process of decision making in companies at large. To reduce any suspicion in these documents, harmonization is required so that the authenticity in financial reports can be maintained (Elliot and Elliot, 2004).
Accounting reports reacts to the environment generally. It is thus logical to assert that various environments have different systems of accounting. On the other hand, similar environments have similar systems of accounting. This has led to the emergence of different standards in accounting. Financial reporting has different characteristics. They could either have shareholder or stakeholder orientation. In such places where shareholders tend to be the main users of reports of finance, high quality information is required. Investors do not really have the internal information needed for them to make important decisions. The lack of high quality information at such levels has left a lot of questions amongst investors. The confusion occasioned by the different standards used has compromised the quality of data available in financial reports. The pressure to have a disclosure of the information needed is higher than in such regions where those who offer funding can get access to internal information. The information quality must really be very good regardless the geographical location. A standardization process is required to eliminate these shortcomings (Zingales, 2000).
The representation of the company’s financial situation is also a great concern in maintain transparency in the reports. As provided in the common law nations, financial reports must exhibit a just perception of the situation in a company. In code law nations, the focus is on compliance with the set legal requirements. Therefore, many accountants will manipulate data upon the request by the investor to attain compliance. This is usually done through a well planned collusion. The investor is ever ready to pay off the regulators and the analysts. The accounting handling of lease contracts have drawn a major concern. In the UK for instance, lease contracts can be accounted for in the company balance sheet while companies may not really be in possession of assets legally. All the same, a situation in which legal compliance has a greater influence, the lease contracts are usually kept off the balance sheet. This is because there is normally no legal ownership. This difference can have a very big impact on the equity/debt of a particular company (Alexander et al., 2007).
The need to harmonize financial reports is apparently obvious because it may possibly affect investors. The investors who look in between geographical locations in order to invest will greatly be influenced by the lethargy seen in financial reporting. Transparency has not really been described on an expanded level in financial reports. The kind of definition needed clearly includes the need to have harmony in the standards of financial reporting as well as the format. This will help investors to find similar sections of the financial report in a similar order from time to time. The lack of harmonization creates loop holes for fraudulent activities. The coherence of financial reports can be made possible with the establishment of a standard compliance procedure. Other changes will also be required in the footnotes. The main purpose of these footnotes was initially to provide support for the numerical information summarized in the financial reports. The lack of a standardized sequence in using the footnotes usually tends to be a difficult condition for the investors (Michael, 2006).
Finally, since financial reporting has undergone a variety of changes, the authenticity of the reports needs to be maintained. It is clear that there is a lot of difficult in accepting that accounting can be 'neutral' or objective. There are a number of standards that have been employed in drafting financial reports and have put the entire process in question. It is evident that a standard harmonization procedure is needed to make financial statements easy to analyze. It is no doubt that financial reports have been greatly influence by legal systems of compliance. There is a lot of bias which needs to be addressed.