Financial Assertions: Reliability and Reliability

Introduction

Financial assertions are records of your business' earnings/expenses and property/liabilities. These assertions are being used by stakeholders to get an idea of the performance and state of affairs of an company over a period of time. The stakeholders of a company include its shareholders, taxes authorities, banking institutions, regulators, suppliers, customers and employees can also be considering the financial statements. Quite question is: What do stakeholders expect from financial claims in conditions of qualitative characteristics? An instantaneous answer will depend on the stakeholder and the information he/she is thinking about. For instance, a shareholder would be prepared to know about the near future prospects of the business while a creditor will be interested in the existing solvency of the company.

Despite these variants in goals, two characteristics everyone desires from the information in financial statements are accuracy and reliability. Therefore, all actions need to be taken to ensure that the financial assertions are exact and reliable.

What is Accuracy and Reliability of Financial Statements

'Accuracy' and 'Consistency' may imply various things to differing people. Some seem to equate exactness and reliability with precision while some view it principally in conditions of verifiability. Financial information is exact and reliable when it is free from material mistake and bias and can be depended upon by the users to symbolize faithfully in terms of valid information which it is fairly expected to symbolize. For example, the representation of receivables in a balance sheet at a specified amount, net of any allowance for debt, contends that the stated amount is collectible. However, if the allowance is too small and many more of the receivables are uncollectible, that depiction would not be accurate or reliable since it would not be considered a faithful representation of the amount that is collectible.

Financial claims should faithfully signify real-world economical phenomena and changes in them. A good example may be the concept of good value. Representations of good principles should change when the prices change and the changes should mirror the degree of volatility in these changes.

In addition, information is exact and reliable only if it is complete. An omission can cause information to be false or misleading.

Presentation of Accurate and Reliable Information in Financial Statements

Accurate and reliable information is accounted for and shown in accordance with its chemical and economic simple fact and not merely its legal form. Reliable and correct information is neutral, that is, information is NOT chosen or presented in ways as to affect the making of an decision or judgement in order to achieve a predetermined end result.

Accuracy and consistency is afflicted by uncertainties associated with items recognised and measured in financial claims. These uncertainties are handled, partly, by disclosure and, in part, by training prudence in planning financial assertions. Prudence can only be exercised within the framework of the other qualitative characteristics in the accounting construction, specifically relevance and the faithful representation of transactions in financial claims. Prudence will not justify deliberate overstatement of liabilities or expenditures or deliberate understatement of property or income, because the financial statements wouldn't normally be neutral and, therefore, not need the grade of accuracy or trustworthiness.

In order to ensure that financial claims give appropriate and reliable information, they are governed by polices. Regulations are designed to harmonise financial statement preparation in a way that they give a true and good view of the state of affairs.

How Financial Statements are Regulated to make sure Precision and Reliability

Financial assertions are governed by the requirements of companies' legislation and pronouncements of professional accountancy bodies and local accounting specifications. These directives and pronouncements/benchmarks are meant to ensure precision and dependability of financial assertions. Regulators apply guidelines for managing how an operator reports its financial results. Preparers of accounts have to include disclosures to bring in more clearness. Therefore, rules prevent preparers of accounts from training much discretion in deciding on the accounting treatment of many of the major items in the accounts.

Accounting regulations assure the integrity of financial statements and provide correct data for by figuring out assets and property values, income, benchmarking, monitoring performance on investment and transparency for shareholders.

Company Law Directives

In the European Union (EU), the main company rules directive from an accounting viewpoint that ensures presentation of appropriate and reliable financial claims is the EU Fourth Company Regulation Directives on total annual accounts. Incorporation of the requirements of the Fourth Directive has had a significant effect on the display of the income affirmation and balance sheet in particular by prescribing forms and on the disclosures made therein. Using the set types and disclosures, these directives attempt to ensure accuracy and reliability and reliability. The necessity that accounts provide a true and good view comes from legislation. True and fair view can only just happen when the info in correct and reliable.

Accounting Standards

Compliance with accounting criteria is generally necessary if financial statements are to give a true and fair view. Accounting criteria are authoritative assertions of accounting practice about how particular trades/events should be reflected in financial statements. They try to decrease the variety of tactics in the accounting treatment of the things with that they deal. Execution of requirements has some legal backing in the UK. The specialist of the criteria derives from the actual fact that they represent the views of the accounting job on the correct treatment of particular items if accounts are to provide a genuine and good view.

Accounting pronouncements show a course where creative interpretations or versions in accounting methods could be inconsistent with the harmonisation purpose. You will discover professional accounting requirements in Financial Reporting Criteria (FRSs), Statements of Standard Accounting Practice (SSAPs) and International Accounting Standards (IASs) of the International Accounting Specifications Panel (IASB).

The IASB's Construction for the Preparation and Demonstration of Financial Statements describes the essential concepts by which financial statements are prepared. This framework functions as helpful information to the Panel in expanding accounting standards so that helpful information to resolving accounting issues that are not attended to directly within an IAS or IFRS or interpretation. The IASB and the Financial Accounting Specifications Board (FASB) focus on on qualitative characteristics of accuracy and reliability and reliability as being one of the main element characteristics of financial reporting.

The FASB has Concepts Statement No 2, Qualitative Characteristics of Accounting Information to refer to, while the IASB has a platform to understand the actual components of accuracy and reliability and stability are. The Ideas Statement recognizes as its components representational faithfulness, verifiability, neutrality, completeness and freedom from bias. Likewise, IASB framework recognizes substance over form, neutrality, prudence and completeness as the components. Both Planks assert that correctness/reliability and relevance are the key components in delivering decision-useful information to users of financial claims.

Preparers of accountants are guided by the accounting benchmarks or interpretation statements. In the lack of one, management uses its judgement in producing and applying an accounting insurance policy that results in information that is pertinent, accurate and reliable. In making that judgement, IAS 8. 11 requires management to consider the meanings, recognition standards, and measurement principles for investments, liabilities, income, and expenses in the Accounting Framework.

FRS18 also clarifies the legal disclosure requirements as particulars of any departure, reasons for it and its effect

Sarbanes Oxley Action 2002

US based mostly companies and non-US international companies are at the mercy of Sarbanes Oxley Act. The Work introduces more transparency and accountability into the financial management process and also aims at presenting appropriate and reliable financial assertions. The Function was unveiled in 2002 in the US following accounting and financial scandals in the US. The Act has a explained aim to "protect traders by improving the exactness and trustworthiness of corporate disclosures made. "

Two main requirements of the function that ensure accuracy and consistency of financial information:

Section 302: Certification of Financial Reports

Section 302 requires that financial claims be complete and correct. To ensure this, the Work makes CEOS (CEOs) and Chief Financial Officers (CFOs) accountable for the precision and stability of financial claims. The CEO, CFO and an attesting general public accounting company must certify the accuracy of financial claims and disclosures in the periodic report, and this those statements reasonably within all materials aspects the operations and financial condition of the issuer.

Section 302 prescribes unlawful penalties if CEOs or CFOs knowingly or willfully concern inaccurate assertions. Section 302 also requires that materials information that is used to generate regular reports be maintained and available to the public.

In most enterprises, it systems generate periodic information and control tools for connecting this information internally. Chief Information Officers (CIOs) are being asked to ensure that these systems are secure and reliable. Due to the criminal fines, CIOs also sign an internal attestation on the systems to help expand protect the venture in case there is CIO negligence in keeping these systems.

Section 404 - Management evaluation of internal controls over financial reporting

The Function also requires that companies verify that their financial-reporting systems have the proper handles, such as making certain revenue is regarded correctly. The Work requires all financial studies to include an internal control report. That is designed to show that not only will be the company's financial data correct, but the company has self-assurance in them because enough adjustments are in spot to safeguard financial data.

Ensuring Accuracy and Stability through Financial Audits

Accounting polices require statutory indie financial audits for ensuring conformity to regulatory requirements. A financial audit is an audit of financial statements. It involves an unbiased examination by an authorized of the financial claims of your company or any other legal entity leading to the publication of an unbiased opinion on whether or not the financial assertions are reliable, correct, complete and reasonably presented and relative to accounting requirements. An audit was created to reduce the probability of material misstatement (deliberate or elsewhere)

In the UK, financial audits are conducted by the Registered Auditors including Chartered Skilled Accountant (ACCA) and Chartered Accountant (CA or ACA). They offer reasonable guarantee that the financial claims are clear of material misstatement and give a genuine and fair view of the point out of the company's affairs and its income/loss. It also means that the financial statements have been properly well prepared in accordance with the Companies Act 1985 or other relevant legislation.

Effectiveness of Polices in Ensuring Reliability and Reliability

Despite the exhaustive accounting laws and requirements of enhanced disclosures common concerns continue to be about the precision and stability of financial statements. Some regulations such Section 404 of Sarbanes Oxley Take action help in improving internal controls and for that reason help sounder financial reporting by confirming more correct and reliable information. The limitations and penalties for misstatement of financial information, the Sarbanes Oxley legislation has made the communication of financial information by companies a lot more translucent. However, many stakeholders are doubtful about the result Sarbanes-Oxley has had on communication transparency, recommending that many might not exactly know this legislation and its impact on businesses today.

Regulations can be effective in ensuring correctness and stability of financial assertions only if regulatory conformity can be assured. Regulatory compliance can only just be confirmed through financial audits but can't be guaranteed as financial audits have their own constraints.

The auditors follow the guidelines, but those guidelines are not always able to uncovering information that is purposely disguised by a dishonest employee. Furthermore, auditors utilize sampling ways to test certain ventures during the performance of your audit or review, since it would be practically impossible and too expensive to test each and every transaction. The sampling may be aimed at the largest items or the items on the financial statements that pose the most threat of misstatement. If materials problems in the financial assertions are found out, the auditors will point management to correct them.

Misstatements can be brought on by either mistake or fraud. Auditors involve some responsibility for the diagnosis of both problems and frauds that are material, but this responsibility is not total. Auditors give realistic assurance that materials misstatements have been uncovered, but not total assurance.

Errors are much more likely to be found out during an audit than are fraud. Fraud schemes change the accounting system and controls, and therefore it is more difficult for an auditor to find them. Actually, auditors may never discover immaterial frauds. When a scams is not large enough to produce a difference in the financial statements, then it stands to reason it most likely will not be detected. This will lead to inaccurate and unreliable financial information in the financial assertions.

Besides restrictions of financial audits, sometimes accounting benchmarks themselves may present limitations. Accounting expectations are too slow in addressing a number of controversial and sometimes are too complicated. So too will be the financial deals and set ups to that they apply. Actually the existing accounting theory shows lot of level of resistance to change. Also, it is impossible to effectively describe the financial position of a commercial enterprise using traditional financial assertions. The prevailing accounting criteria offer likelihood of manipulation and screen dressing of financial statements. This implies that the financial assertions aren't completely exact and reliable.

Also, there may be a need for a trade-off between qualitative characteristics approved by accounting benchmarks. For example, FASB Concept affirmation 2 says that, to be useful, financial information must be relevant as well as appropriate / reliable and acknowledges that information may possess both characteristics to differing certifications. However, the accounting framework claims constraints on information being both relevant and reliable in terms of timeliness. For being relevant information must be reported without undue wait. This will likely impair consistency. Conversely, if reporting is postponed until all aspects are known, the information may be highly reliable but of little relevance to users. Likewise, the balance between advantage and cost of reporting financial statement information is also one constraint on relevant and reliable information.

Conclusion

In conclusion, financial statements might not exactly be completely reliable and accurate and even the most meticulously prepared statement may well not provide a true, fair view of any business's financial health. Though accounting laws are important for financial claims to be appropriate and reliable, it is similarly important to ensure conformity to restrictions. Accounting regulations have not been able to totally ensure correctness and stability of financial assertions as there is still range of some subjectivity in interpretation of regulations. Financial audits too do not give total assurance. One must also be mindful of the trade-offs and the unintended effects.

References:

  • International Accounting Expectations Committee, International Accounting Criteria Explained, Wiley
  • Henning Kirkegaard, Improving Accounting Trustworthiness- Solvency, Insolvency and Future Cash Moves, Greenwood Publishing
  • Wikipedia, Financial Audit, Available from http://en. wikipedia. org/wiki/Financial_audit [Accessed 3 December, 2006]
  • Internal Control: The Coso Construction www. jeffersonwells. ca/Media/COSO_May9_Presentation. ppt#13 [Utilized 2 December, 2006]
  • Out-law. com, U. K Version of Sarbanes Oxley in Force Today Available from: www. out-law. com/web page-5505 [Accessed 2 December, 2006]

Dr. Archana Raheja

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