THE IMPORTANCE OF FINANCIAL STATEMENTS

Financial statements are utilized by different users to make an informed decision about the financial performance, position as well as the cash flows of an assessed individual, or business. In different business sectors (CIDB in Construction)

Financial statements can also be used to determine the future performance of a company by analyzing trends of past performance.

Different users, use financial statements to determine, whether, they can invest in the financial performance of a company.

These users can be, investors, funders, employees, shareholders, the tax man as well any other person interested in the financial affairs of the company.

Due to the fact that the financial information is critical, the preparation of these financial statements becomes very critical.

Financial statements must be prepared and signed off by a competent person, that is regulated by a professional body.

They can be signed off by either, a fully registered accountant, or a qualified auditor.

A number of regulatory bodies exist in each and every country, to regulate the professionals tasked with this functionality.

The main reason as to why the profession is regularized, is to prevent scrupulous individuals from publishing financial statements that would otherwise be mis leading to the users of these financial statements.

For this reason, financial statements must be prepared and issued by an independent accountant or auditor, who will issue financial statements that are not materially misstated, as to influence or mislead the users of these financial statements.

An accountant or auditor who signs off financial statements, must issue a statement or what is referred to as an independent accountant’s or auditor’s report, which states whether the financial statements present fairly in all material aspects, the financial position and performance of the company.

The preparer of financial statements must put into consideration, the qualitative & quantitative aspects of the financial statements.

The qualitative characteristics of the financial statements include those aspects which make the financial statements useful to the users of the financial statements.

In terms of the accounting framework for the preparation and presentation of financial statements, these are classified as

• Understandability
• Relevance
• Reliability
• Comparability.

I will be discussing each of these attributes in the paragraphs that follow below.

Understandability

The attribute of understandability dictates that the financial statements should be prepared for an audience, that already has the reasonable knowledge of the economic activities of the entity as well as the willingness to study the financial information with due diligence.

Relevance

In terms of the generally accepted accounting standards, information is considered relevant, when it will influence the economic decision of the users. The relevance of financial information is influenced by its nature as well as materiality. Information is considered material if its omission or misstatement could materially influence the economic decision of the user.

Reliability

Financial information must be presented reliably to the users of the financial statements. In other words, it must be free of material errors as well as biasness as to present faithfully the information for which it purports for.

In terms of the accounting standards, reliability is influenced by the following factors

• Faithful representation
• Substance over form
• Neutrality
• Prudence
• Completeness

Comparability

In terms of the accounting standards, it is expected that accountants and auditors should sign off financial statements that enable its users to be able to compare and analyze information over time as well as across the different industries.

Factors that enhance comparability include

• The consistent reporting of the accounting treatment of similar transactions and other business events
• The disclosures of accounting policies adopted by the entity as well as its effects thereof
• The disclosure in changes of the accounting policies adopted
• The presentation of corresponding information for the prior year periods.

For as much as it is important to prepare financial statements that are fair & represent the financial performance and position of the entity or individual, the accounting standards also do recognize that there are shortcomings that could affect this objective.

These short comings include

The timeliness of information.

Time affects the effectiveness of financial information reported. For example, financial statements could be prepared that indicates a healthy dose of fixed movable assets, only to be signed off and those movable assets go missing after the financial statements have been already authorized for issue.

The balance between benefit as well as the cost of information.

In certain institutions or businesses, certain information could be crucial in reporting, however, some times the cost to benefit cannot be justified.

For example, assessing the valuation of a minor high volume of assets, might not warrant that particular valuation for those class of assets.

So, at the end of the day, a trade off has to be established between the qualitative characteristics of the financial information. Financial statements should therefore, generally be prepared for the users to show a true and fair presentation of the financial performance, position as well as the results of the entity or individual cash flows for the reporting period.

Financial statements therefore play a crucial role by providing the financial information needed by its users for the economic decisions to be made.