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Financial Reporting
Financial reporting refers to means through which financial information is presented. The information could be statistical figures, financial agreements, or monetary transaction by an organisation. Financial reporting is presented in the form of reports that are referred to as financial reports. A financial report is, therefore, a record of an institution’s financial position and monetary activities. The report has to be formal. Moreover, a financial report does not necessarily have to be for a company or an organisation. It can be for an individual, entity, or even from the government. Relevant financial information is usually presented in the report in a structured manner. There are widely accepted ways in which financial information is presented (Lev, & Zarowin, 2013). However, there are various factors that may affect the way financial reporting is carried out. These factors primarily influence the spending or flow of finances in and out of the organisation whose financial data is being reported. This paper analyses the effect of economic, political, and cultural variables on financial reporting.
A financial report is not complete without management discussion, analysis, and financial statements. Certain financial tools are used for financial reporting; these include; statement of financial position or a balance sheet, a statement of comprehensive income also called an income statement, a statement of retained earnings also known as the equity statement and lastly a cash flow statement. The primary goal of financial reports is to provide details of a firm regarding its financial position, variations in the financial situation, and the entity’s financial performance. As a result, the statements presented in financial reports should be relevant, reliable, comparable, and understandable (Lev, & Zarowin, 2013). Items covered in financial reports comprise of assets, equity, income, expenses, and liabilities.
Through extensive research, Accounting researchers have managed to understand some extent to which politics affects the practice of accounting, especially in standard-setting. The effect is made evident by the casual observation of the process of standard-setting which suggests that indeed politics has the potential of causing first order effects on the procedure of setting accounting standards.
Political influence on economic factors is defined as a purposeful intervention. The intervention is intended to cause variations in the outcome. Typically, the effect is carried out either to increase an entity’s economic wealth, value or achieve a particular self-interest purpose that is inconsistent with Financial Accounting Standards Board (FASB) mission. In FASB’s regard, political influence is mainly felt if there is a need to vary the standard-setters’ position. The movement is primarily from the perceived right answer position which is also the point upon which accounting reports that the entity is achieving its objectives (Lev, & Zarowin, 2013).
To better understand the political effect on accounting reporting. A pragmatic approach has can be used. This approach is inconsistent with FASB’s mission. Moreover, it explains the fundamental effects of politics on the accounting rules. For instance, the effect moves accounting from a neutral position which is highly consistent with the typically accepted descriptions of financial statement items. These definitions are majorly based on economics, improvement in transparency, and elimination of accounting alternatives which provide additional flexibility to managers, especially in reporting.
Moreover, reporting in accounting could be influenced by in various means by the Congress. This is mostly through Congressional lawmaker’s intervention. However, Congress cannot intervene on their own save for situations where there are some political influences. This influence could also impact the financial accounting standards board rules (Strouhal, et.al, 2009). Other interference through the Congress could come as a result of companies and managers direct lobbies. These lobbying groups are usually motivated by particular self-interests.
Moreover, effects on accounting could also be as a result of lobbying by firms involved in accounting. This is generally done if the business feels that there is need to improve the quality of financial reporting. For instance, they may be lobbying so as to do away with the ambiguity that may characterise financial reporting. Besides, accounting firms may also lobby on behalf of their individual partners.
As opposed to the government influence on financial reporting, Effect by cultural variables is difficult to characterise. In some dimension, the effect is also a form of political lobbying. However, cultural variables work on financial reporting to achieve objectives which are in accordance with the requirements of FASB. However, cultural variables sometimes appear to be forcing FASB’s action. These imposed or rather forced actions are not always political even though they take a political dimension. Their difference with political effect is that cultural variables only cater for interests of individuals while political influences advance the agendas of a party (Strouhal, et.al, 2009).
In assessing the effects on financial reporting from a perception of political environment becoming a regulatory mechanism, there is some external pressure that affects the SEC. This pressure forces this body to take sides regarding the rules of the FASB. However, the SEC views on the standard setting in financial reporting are mostly consistent as time goes by, making them a representation of the commissioner’s views. This is because both the commissioners and the SEC are all political appointments.