Evaluation of Current Financial Reporting Practice

Evaluation of current financial reporting practice

We have examined the nature of current financial reporting practice and the efforts which have been made in recent years towards its improvement. We noted that financial reporting practice was made the subject of much criticism during the 2000s on the following grounds:

the lack of uniformity in accounting practice made difficult the comparison of the financial reports of different companies;

the multiplicity of accounting practices made it possible for management to select alternative presentations of the financial results which allowed earnings to be manipulated and made it possible to conceal economic realities;

changes in the value of money added to the difficulty of comparing the financial statements of different companies in a meaningful manner, and added a new dimension to the problem of financial reporting.

The accountancy profession responded to public criticism by establishing the Accounting Standards Committee, charged with the task of producing standards of accounting practice aimed at remedying the problems of financial reporting. However, since accounting is a social science which is rooted in the value system of the society in which it operates, it was to be expected that the programme of the Accounting Standards Committee (ASC) should itself have been the subject of criticism.

In 2018 the ASC published the Watts Report (ASC, 2018) 'to review the process of setting accounting standards in the light of experience gained since the formation of the ASC in 2009 and to consider what improvements in that process could be effected'. This report highlighted the criticisms which the standard setting process had attracted. For example, the degree of uniformity which should be created by accounting standards has been the subject of controversy. Some believe that standards should seek uniformity, others that they should be more flexible and specify alternatives. Conflicting criticism of this type is a product of the inherent nature of accounting practice, much of which is so firmly rooted in matters of experience, individual circumstances and subjective judgement that it becomes extremely difficult to advocate a blanket standardization of all problem areas. Consequently a certain amount of flexibility in accounting practice is inevitable. This was acknowledged in SSAP 2, which requires, the disclosure of the accounting policies followed in preparing financial statements. However, it should be noted that the financial effects which result from the use of alternative accounting bases need not be disclosed, although such effects are of considerable importance to external users.

An essential feature of any standards system ought to be enforcement. In the U.K. the principal sanction against business enterprises which break SSAPs has been a qualified audit report. Experience suggests that this has not been a successful deterrent. Following the Watts Report, the ASC has been trying to secure the assistance of the Stock Exchange and the Council for the Securities Industry in enforcing standards.

Another controversial area has been the failure of the standard-setting process to recognize user needs. The membership of the ASC, which is composed essentially of accountants, has attracted criticism. Since, as we saw in the Introduction, management exerts considerable influence within the accounting profession, the ASC is open to the charge of having a bias towards industry. It has been argued that a greater recognition of user needs could be achieved by giving equal representation on the ASC to users.

Interested in Financial Reporting

Read on: Financial Reporting-extending the Disclosure of Information

The scope of accounting was defined as being 'to provide information which is potentially useful for making economic decisions and which, if provided, will enhance social welfare'. This definition of the scope of accounting was followed by a discussion of the development of accounting theory, where several approaches to accounting theory were discussed. It was seen, in particular, that the current state of accounting knowledge depended substantially on a descriptive approach to accounting theory. This emphasized observations of the practices of accountants as a major source of accounting knowledge.... see: Financial Reporting-extending the Disclosure of Information