In most cases, companies’ financial statements are subject to mandatory audits, but an inspection cannot guarantee that the reporting data is not falsified. As a rule, investors, potential partners, and external users of reporting primarily pay attention to the three leading indicators of the company’s performance in the reports: revenue, net profit, and total assets of the company. To meet investors’ expectations, management might distort data in the income statement, balance sheet, or might not fully disclose it in the notes to the financial statements.
There can be several quality issues related to reporting revenue. First is a lack of information to fill all the gaps to report data on income correctly. Various transactions imply that the revenue can be recorded several times and should not be stated before it is earned (Franklin et al., 2019). Due to this fact, accountants may record revenue untimely or register sales at gross price instead of net worth. Second, the utilization of several technology platforms may lead to additional records or the absence of records because of different revenue data accumulation methods. Finally, the necessity from the accountants’ team to report only figures that must be published according to the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC), and other organizations, may leave blank spaces that professionals can use (Epstein, 2014).
Understanding various inventory valuation methods in determining the quality of reported profits is crucial for different stakeholders. Depending on the system that companies may use, such as first in first ou,t or last in first out, there will be differences in P&L statements (Epstein, 2014). Valuation methods will impact the cost of goods sold, gross profit, and income statement; further, it will influence the total assets figure, working capital, current assets, equity in the balance sheet (Epstein, 2014). The team of accountants who work on developing financial statements should consider inventory valuation methods and communicate their analysis procedures so that other users of statements will understand the data. The incorrect valuation techniques might cause reports to be inaccurate due to the transfer of inventory to subsequent accounting periods.
The accounting rules (GAAP) that exist to guide professionals when presenting their financial statements are still insufficient to avoid conflicts of interest that arise between the management of the company, investors, and other parties. All parties have their specific interests when managing economic transactions, and they hardly align in one direction (Sherman & Young, 2016). Thus, the management of the publicly traded organization may influence financial reporting to present positive information to various stakeholders, speculating facts (Epstein, 2014). However, due to the necessity to comply with GAAP and the SEC rules, it is hard to manipulate data substantially (Oxford Analytica, 2009). At the same time, private companies are not obliged to use specific standards to report financial data. Considering private companies, the conflict of interest may still occur due to the absence of unified reporting rules. Therefore, potential investors and lenders can be tricked by good-looking financial information.
To conclude, one can say that accounting standards are required when it comes to providing clear information on how the company is managing its resources. While there might occur situations when the executives manipulate the financial data, still strict guidelines allow reporting the changes in financial statements openly. It is in all stakeholders’ interest to check the information themselves and ensure that everything is done according to legal requirements.
References
Epstein, L. (2014). Financial decision making: An introduction to financial reports. San Diego, CA: Bridgepoint Education, Inc.
Franklin, M., Graybeal, P., & Cooper, D. (2019). Principles of accounting, volume 1: Financial accounting. Creative Commons.
Oxford Analytica. (2009). Accounting for a difference of opinion. Forbes. Web.
Sherman, H. D., & Young, S. D. (2016). Where financial reporting still falls short. Forbes. Web.