MANAGERIAL ACCOUNTING AND FINANCIAL REPORTING

Managerial Accounting and Financial Reporting

Managerial Accounting and Financial Reporting

Introduction

The value of the accurate financial statements generated is undisputed. This is as financial statements are like windows into the health of a company. Just by viewing financial statements, adept business owners will be able to determine the strengths and weaknesses at the time that the statement was generated. With this, the owner can then chart the way into the future for the company, by addressing the weaknesses and capitalizing on the strengths that the company has.

Q. The present global banking crisis has demonstrated the degree to which financial statements cannot always be relied upon to reflect accurately the real worth of a company's assets, nor the extent of its liabilities

References to false financial statement (FFS) are increasingly frequent over the last few years. Falsifying financial statements primarily consists of manipulating elements by overstating assets, sales and profit, or understating liabilities, expenses, or losses. When a financial statement contains falsifications so that its elements no longer represent the true picture, we speak of fraud. Management fraud can be defined as “deliberate fraud committed by management that injures investors and creditors through misleading financial statements” (Eliott and Willingham, 1980). For Wallace (1995), fraud is “a scheme designed to deceive; it can be accomplished with fictitious documents and representations that support fraudulent financial statements”.

Financial statements cannot be useful if they are based on unreliable and inaccurate recordings of transactions. There is no greater example of the garbage in, garbage out principle than financial statement preparation. The problem is that financial statement users cannot usually assess the presence of garbage simply by reading the statements. The statements may look fine, but in reality be riddled with inaccuracies.

The two main sources of financial statement inaccuracy are deliberate dishonesty and incompetence. There are two principle ways to combat these problems. The first method is to regularly hire an outside accounting firm to audit the financial statements. In an audit, the outside accountant tests reported account balances for accuracy. As importantly, the auditor tests to see that the accounting principles used in recording transactions are in conformity with GAAP and applied on a consistent basis. Despite some notorious recent audit failures involving large corporations, the auditing process, in most cases, provides a reasonable safeguard against fraudulent and inaccurate financial reporting.

The second method used to prevent fraudulent and inaccurate financial reporting is the adoption of adequate internal controls. Internal controls are the policies and procedures that a business can take to safeguard its assets, insure accuracy of financial reporting, and prevent fraud. These methods are not mutually exclusive. In the best of all worlds, firms would have both good internal controls and regular audits.

Unfortunately, hiring outside auditors and having the very best internal controls can be expensive, especially for small firms. The question of how much money should be spent on auditing and internal controls is a matter of perspective and circumstances. For example, a small business owner who uses the financial statements for internal management ...