AC 4304Financial Reporting Theory Week 2 Presentation Dennis Ivan Rita
Financial Reporting Theory • Debate I: accountants should focus only on the needs of financial analysts in reporting financial statements. Against side
Definition of Financial Analysts Financial analysts are person who… • passed professional examinations • possess professional qualifications • eligible to study a company • legalize to make investment recommendations • usually employed by bank, brokerage, advisor, or mutual fund
Definition of Financial Analysts(cont’d) Eg. Chartered Financial Analysts (CFA) --- A person who has passed tests in economics, accounting, security analysis, and money management, administered by the Institute of Chartered Financial Analysts.
Define “Focus on their need” • adjust the reporting figures to meet their prediction • adjust the presentation style and scope of reporting
Government Creditors Investors Customers Public Employees Financial Analysts Profitability--- tax Liquidity & solvency Stewardship of MGT Reliability Social concern Company development Forecasting Investment Stakeholders of financial statements & their concerns Qualitative & Quantitative
Drawbacks of focus ONLY on the needs of Financial Analysts • Company may loss the independency, following the nose of Financial Analysts • Reporting style may affect others who access the accounting information • Lead to over reliance on financial analysts
Drawback I. Company lost independency in reporting Phenomenon at Wall Street: Wall Street Analysts give high pressure to company management When financial analysts act as an Investor… • want the companies to perform as they predicted • aim at influence the company performance by forecasting
Reasons that companies “follow” analysts’ prediction • The wall street analysts are influential (to the share price of companies) • To maintain company reputation • Directors want to avoid being laid off • Maximize remuneration (e.g Option, share) from window dressed performance
Consequences of focus on their need and lost Independency • Company too dependent on the result of analysis • Companies being controlled by the analyst • Affect the truth and fairness of F/S • Accountant will generate F/S base on the forecasting of analysts • Affect the integrity of the company/accountant • Affect the long-term development of company
Drawback II. Reporting style affect others users Financial statement becomes too technical • Overlook/ Ignore the needs of other users of F/S --- lack relevant knowledge background Consequence: • Violate the purpose of financial statement --- information for making decisions --- reflect the real situation of company
Drawback III. Lead to Over Reliance on Financial Analysts If… Accountants focus ONLY on the needs of financial analysts Then… Other groups may not be able to seek enough information As a result… All may have to rely on the Financial analysts for information
Risk of over-reliance on Financial Analysts 1. Loss due to the usage of misleading information Management have incentives to window dress the F/S • Auditors have the incentives to cover the mistakes • Garbage in, Garbage out • Incorrect financial statement information mislead the results of analysis
Risk of over-reliance on Financial Analysts In Enron Case, • Directors have intention to mislead investors > Overstate the revenue > hidden debts off-balance its books • This beautified F/S will also mislead the judgment of Financial Analysts >Many Financial Analyst still made a “Strong Buy” recommendation at the day before Enron’s Collapse Risk: Wrong Info Loss on investment
Risk of over-reliance on Financial Analysts (cont’d) 2. solely relying on F/S can’t give the hints to Win • F/S is not update enough • Unexpected instances prevail • Analysis based on historical data is not reliable
Risk of over-reliance on Financial Analysts (cont’d) 3. Financial Analysts may not tell the REAL STORY • Aim of financial analysts • To make profit • To serve their clients • Conflict of interest with other stakeholders • Their information to other stakeholders may not be subjective
Stand point • Accountant should NOT just focus ONLY on the needs of financial analysts in reporting financial statements What should Accountant do???
Whose needs should accountants focus on? Investors? Creditors? Government? …… NO! NO! NO!
What Accountants Should do in Reporting F/S • Follow Accounting principles • Apply professional judgment • Maintain professional ethic • Reflect the REAL situation of the company Not to satisfy specific group
Conclusion • Different stakeholders have different needs • Role of accountant Independently prepare F/S in accordance with a/c principles • Drawbacks of Solely concerning financial analysts being influenced affecting others in accessing accounting information over-reliance on financial analysts
Accountant should NOT just focus ONLY on the needs of financial analysts in reporting financial statements End of presentationThank you!