The recent global financial crisis in 2008 has not only increased doubts on the functioning of financial systems worldwide, but also have attracted analysts’ attention to the importance of comparable and transparent accounting systems as a whole.
An accounting system is defined as a systematic process of recording financial information of business transactions in order to prepare financial statements, which are the main lingua franca for different organisations in providing information on the resources available to a firm, the results achieved through their use and amount of gained incomes and spent expenses for that period of time (Lasher, 2008). Precisely speaking, accounting systems are concerned with such issues as: what is the financial position of an entity on a specific date; how they have used their resources and performed financially over that period of time.
From the above description it appears that accountant as a profession dynamic phenomenon and is constantly adapting itself to the specific and varying needs of its users. With regards to distinction in accounting information users, accounting are divided into two main groups, namely management accounting and financial accounting. Management accounting solely limited to internal beneficiaries of financial information and this information is always more detailed due to fulfil the strategic aims and objectives of the entity and enable effective organisation control.
This is in contrast with financial accounting, commonly synonymous with financial reporting, where financial statement data is used by external users of financial information. Financial accounting aims to provide financial information about the financial position of the entity to a wide range of external users for their following and rational investment, credit and business decisions (International Financial Standards Board 2003). For the purpose of this essay and due to the fact of insufficient place in the essay of this length, I will work with financial accounting.
The main purpose of this essay is to explore, through theoretical and practical perspectives, who are the beneficiaries of using financial accounting. It will attempt to clarify some concrete examples surrounding the crucial role of financial reporting as an important financial instrument in investors and customers’ policies as well as business approaches. Benefits of Financial Reporting As has been stated before, financial accounting can be beneficial for external users only.
This is in line with Lasher (2008), who indicates different types of beneficiaries of financial accounting ranging from tax and regulatory authorities to overseas investors. Therefore, it seems that there are a significant number of beneficiaries; however, the focus of this section will be on to the two main beneficiaries of financial reporting: investors and customers. The main argument for choosing the latter sectors was the fact that these two groups have gained more benefits of using financial statement data than others.
Although accounting data has been widely used by many companies, Magnan (2010) argues that the information from financial statement data is an unreliable source for investors for their investment projects and business decisions. He also adds that the information of financial accounting has failed its main duties in terms of supervision and control during the recent credit crisis in 2008. This means that financial service agencies and central banks were unable to provide comprehensive monitoring over commercial banks and other companies according their financial statements in order to prevent them from the credit crisis.
Magnan’s claim came as something of a surprise to accountants. According to Shim and Siegel (1999), Lasher (2008) and Arnold (2009), research does not support this claim. As Lasher (2008) states, investors benefit from using financial accounting information by analysing the feasibility of invested money. For them, reasonable return on their investment is only one aim to work with that entity and their financial reporting. Furthermore, Arnold (2009) finds that huge differences between unrealistic prices in financial statements of companies and real market prices of assets have been observed by experts.
However, it seems that a consequence of the crisis and its phenomena such as bubble prices was a reason for creating unrealistic numbers in accounting statements of commercial banks and other big companies. Therefore, from my perspective I would argue that financial reporting is significantly important for investors for their following investment and decisions. In addition, it seems that these investors will continue to gather benefits from this field. With regards to the beneficiaries of financial accounting, not only the investors can be the main users of financial accounting information, but also customers of this entities.
Customers have an interest in terms of continuance of the entity, especially when they have long-term relationships. In particular, they focus on the way how their money work and return with extra interest on a specific date (Sweatt 2002). Although some researchers argue that the language of financial accounting is too specific for general public as well as non-specialists, many other companies such as small entities and exchange bureaus have successfully used financial accounting statements for analysing and choosing their future partners.
Overall, it appears that there are a significant number of beneficiaries of financial accounting, particularly among the investors and customers, which have been mainly described in this essay. The reason for this is the strong reliance of credit, investment and business decisions on information from financial statements. This is the core tool of providing information on the entity financial positions. It has been also suggested that with emergence of new financial ways of investing money as Islamic Finance, the role of financial accounting would be underestimated. Conclusion
This essay has examined the widespread use of financial accounting among external users of financial information. It appears that financial accounting as a subject is a complex phenomenon of applying new concepts and rules of accounting to the financial statement information. The information in financial statement data is the most important source for current and potential investors, lenders and managers of businesses for their following investment strategies and decisions. Despite the fact that there are many users, the main beneficiaries of the subject are investors and customers.
Firstly, investors have benefitted of using financial accounting to decide whether they should invest money to this entity or not. Secondly, customers have widely used financial accounting in analysing financial position of the entity in terms of stability, continuance and long-term relationships. Therefore, the importance of financial accounting has been demonstrated from different angles and it will have been further used according to the development of the financial industries and new ways of investing.