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Financial reporting is used by owners, managers, employees, investors, institutions, government, and others to make important decisions about a business.
Give examples of who uses financials statements and why
Owners and managers require financial statements to make important business decisions that affect its continued operations.
Employees also need these reports in making collective bargaining agreements with the management, in the case of labor unions or for individuals in discussing their compensation, promotion, and rankings.
Although laws differ from country to country, an audit of the financial statements of a public company is usually required for investment, financing, and tax purposes.
Financial statements may be used by different stakeholders for a multitude of purposes
Owners and managers require financial statements to make important business decisions affecting its continued operations. Financial analysis is then performed on these statements, providing management with a more detailed understanding of the figures. These statements also are used as part of management's annual report to the stockholders.
Employees need these reports in making collective bargaining agreements with the management, in the case of labor unions or for individuals in discussing their compensation, promotion, and rankings.
Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are used by investors and prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions.
Financial institutions (banks and other lending companies) use them to decide whether to grant a company working capital or extend debt securities (such as long-term bank loans or debentures) to finance expansion and other significant expenditures.
Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company.
Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business.
Media and the general public are interested in financial statements for a variety of reasons.
Government also produces financial reports to stay accountable to the public and people. The rules for recording, measurement and presentation of government financial statements may be different from those required for business and even for non-profit organizations.
The requirements for non-profit financial statements differ from those of a for profit institution and therefore, will not be discussed.
Personal financial statements may be required from persons applying for a personal loan or financial aid. Typically, a personal financial statement consists of a single form for reporting personally held assets and liabilities (debts) or personal sources of income and expenses, or both. The form to be filled out is determined by the organization supplying the loan or aid.
Audit and Legal
Although laws differ from country to country, an audit of financial statements of a public company is usually required for investment, financing, and tax purposes. These are usually performed by independent accountants or auditing firms. Results are summarized in an audit report that either provides an unqualified opinion on the financial statements or qualifications as to its fairness and accuracy. The audit opinion on the financial statements is usually included in the annual report. There has been legal debate over who an auditor is liable to. Since audit reports tend to be addressed to the currentshareholders, it is commonly thought that they owe a legal duty of care to them. This may not be the case, as determined by common law precedent. In Canada, auditors are liable only to investors using a prospectus to buy shares in the primary market. In the United Kingdom, they have been held liable to potential investors when the auditor was aware of the potential investor and how they would use the information in the financial statements. Nowadays, auditors tend to include in their report liability restricting language, discouraging anyone, other than the addressees of their report, from relying on it. Liability is an important issue: In the UK, for example, auditors have unlimited liability. In the United States, especially in the post-Enron era, there has been concern about the accuracy of financial statements. Corporate officers (the chief executive officer (CEO) and chief financial officer (CFO)) are personally liable for attesting that financial statements "do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report. " Making or certifying misleading financial statements exposes the people involved to civil and criminal liability. For example Bernie Ebbers (former CEO of WorldCom) was sentenced to 25 years in federal prison for allowing WorldCom's revenues to be overstated by billions over five years.