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major issue in corporate reporting

major issue in corporate reporting

What is Corporate reporting

To understand the corporate reporting statements, one needs to appreciate the auditors' work and opinion, and, conversely, to understand the auditors' work and opinion, it is necessary to appreciate the scope and limitations of the corporate reporting statements. All too often, corporate reporting and external auditing are treated and discussed in isolation despite being inextricably linked. However, the corporate reporting statements may come about as a result of negotiations between management and their auditor’s ± with the auditors examining the reasonableness of management's justification for their representations. Indeed, the modern audit with its emphasis on high-level business risks could almost be viewed as the `audit of motivations' ± to understand the corporate reporting statements, it is important to understand management's motivations. Financial reporting and auditing are not just technical subjects, but they encompass a multitude of judgments and assumptions

Major issue in corporate reporting 


This has given rise to the push for the international harmonization of accounting standards and the resultant debate about whose standards should be adopted. In the European Union, by 2005 publicly traded EU incorporated companies will have to follow the international corporate reporting standards of the International Accounting Standards Board (IASB) ± formerly the International Accounting Standards Committee (IASC). Therefore, the adoption of international standards needs to be viewed as much in a political context as in an accounting one. However, `[i]international accounting standard-setting is currently in crisis' (Horton and Macve, 2000: 26).

The influence of management

v  This is a critical constituency when it comes to developments in accounting: `Management is central to any discussion of corporate reporting, whether at the statutory or regulatory level, or at the level of official pronouncements of accounting bodies' (Moonitz, 1974: 64).
v  One of the reasons for the failure of the current cost experiment in the early 1980s was the lack of support from corporate statement preparers (they were not convinced of the validity of the exercise).
v  Current values are now starting to creep into the corporate  statements, and  corporate executives concerned about the volatility of reported results have claimed that standard-setters have a hidden agenda to undermine the bedrock of historical cost by introducing piecemeal requirements for current value measurement' (Miller and Loftus, 2000: 5).
v  There is a concern that the standard setters may be requiring data for external reporting that management does not useful for its own internal uses. The debacle regarding current cost accounting in the 1980s should not be forgotten.

Extreme market pressures

v  The pressures from the capital markets are forcing management to achieve earnings targets: These pressures are exacerbated by the unforgiving nature of the equity market as securities valuations are drastically adjusted downward whenever companies fail to meet `street' expectations.
v  Pressures are further magnified because management's compensation often is based in large part on achieving earnings or other corporate goals. (Panel on Audit Effectiveness, 2000: 3) One consequence of these market pressures is the danger of `aggressive earnings management' that `results in stakeholders and the capital markets generally, being misled to some extent about an entity's performance and profitability (Auditing Practices Board, 2001: 3).
v  Recent financial scandals may be viewed as coming about as a result of extreme disclosure and earnings management.

The informational perspective of the ®financial statements

The emphasis is now on the provision of information to enable the users of the financial statements to take decisions and to make assessments of future cash ¯flows of the reporting entity.
Since the 1960s, users have been actively involved in dialogue about accounting principles and are represented on some accounting standard-setting bodies. `An outsider, however, might it remarkable that accounting knowledge should be articulated not only by professional accountants, but also by accounting information users ± much like doctors and patients collaborating on the development of medical knowledge' (Hines, 1989: 80). In 1994, the AICPA issued a report containing the ®endings of a special committee aimed at improving business reporting. The intention was to `influence future agendas of standard setters and regulators and the direction of their projects'

The debate about corporate performance

The `statement of corporate performance' (ASB, 2000) combines the statement of total recognized gains and losses and the profit and loss account, one reason for this being that users seemed to be ignoring the `statement of total recognized gains and losses'. However, there is a question as to what is meant by the word `performance' and whether just focusing on `corporate performance' will really indicate an enterprise's overall performance.
The operating and financial review aims to expand on the contents of the financial  statements, but in the management accounting area, the recognition of the limitations of financial  performance indicators has resulted in the search for complementary indicators, such as the balanced scorecard (Kaplan and Norton, 1996). These issues are now being recognized in relation to external reporting (Upton, 2001).

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This has resulted in a questioning of the relevance of the corporate  statements: `The demand for more timely and broader information comes from decision makers, such as potential investors, creditors, customers and suppliers, who are doing, or may want to do, business with an entity

Audit developments

As a result of the above factors, there has been a perceived change in audit emphasis ± from `audit efficiency' (aiming to reduce audit costs) to `audit effectiveness' (with an emphasis on whether the audit is achieving its objective). This has resulted in a re-engineering of the audit process, which will need to continue (Panel on Audit Effectiveness, 2000), and in the drive to add value to the external audit.
Assurance services

The pressure to `add value' to the external audit has resulted in the consideration of how to extend the audit function. The Elliott Committee (1997a) identified opportunities for assurance services to expand to the new types of information used by decision makers. It denied `assurance services' as `independent professional services that improve the quality of information, or its context, for decision makers'

Fraud `

Accounting history is littered with examples of financial information used as a means of deception' the detection of fraud is an often cited expectation of the external auditors. In Victorian times, the audit did have the detection of fraud as its primary objective (Lee, 1986: 31); however, auditors are now required to plan their work in order to have a reasonable expectation of detecting material misstatements arising from error or fraud (APB, 1995: para. 18). Given the multiplicity and magnitude of the problems relating to the production and utilization of the corporate statements, it is critical that there is a  conceptual basis underpinning corporate  reporting in order to have a foundation.

Note :- This is full fledged topic of major issue of corporate reporting. Just understand the topic and write easy. Chances of this Question comes in Exams is 80%. because it is major aspects of the subjects, 

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