Financial reporting is a communication tool between the management of an entity and the external stakeholders. The objective of financial reporting is to reduce information asymmetry between the management of an entity and the other stakeholders. Financial reporting regulations are applied in almost all jurisdictions in the world. There various financial regulations that aim at creating harmony in financial reporting including the US generally accepted accounting principles (GAAP), International Financial reporting standards (IFRS) and Islamic Finance Regulations (IFSB). The regulators employ systems of rules to control the way in which entities reports their financial results. Specifically, the system of rules regulates the manner in which an entity is supposed to keep and report financial records. The topic of the financial reporting has elicited a heated debate with one side arguing for the continued implementation of the strict financial reporting rules while the other school of thought argues against this regulations. The ensuing segments critically analyse the two sides of the argument and presents a coherent report on the various scholar views addressing the same issue.
Arguments for the Regulation of Financial Reporting
The financial report is supposed to truthfully, and fairly reflect all the transactions of an entity for a given period. One aim of the financial reporting regulation is to ensure that the information provide the needs of all the stakeholders, and is presented in a way that the stakeholders can be able to understand (Hendler and Zülch, 2014). The regulations ensure financial reports are understandable and decision useful. The absence of financial regulations would mean that each organization adopts its unique way of preparing and reporting its financial transactions. For an investor or stakeholders who has an interest in more than an entity, will be subjected to a lot of difficulty in understanding and making an informed decision based on information presented in different way (Hussey, 2011). As such, financial reporting regulations helps to create transparency without which the organization would not provide correct insight into the financial performance and position, and it would be impossible to know the risks facing this organization.
The performance of the organization is compared with that of its peer to know how well it is utilizing the resources invested in it by the stakeholders. Financial reporting regulations set a common language through which all the organizations communicate their performance and activities. Effective communication, which is the central factor in financial reporting, is facilitated significantly by adopting a particular global language. When it comes to financial reporting, there is no doubt that this can only be attained by adopting a single set of reporting standards (Davies and Green, 2013). Application of the same language around the world lowers the risk of misunderstanding and boosts the consistency of the financial report provided. As acknowledged by various accounting standard-setting bodies such as IASB, financial reporting regulating enhances comparability which is instrumental in making informed investment and other kinds of financial decisions (Lawrence, 2007).
Following the 2011 collapse of American energy, services, and commodities company (Enron Corporation), the essence of having strict and mandatory financial reporting regulations was more accredited by investors and other organization stakeholders alike. The company sustained its reported financial condition by an institutionalized creatively planned, and systematic accounting fraud. The collapse of this company led to the loss of jobs by more than 2000 employees, and loss to the various creditors (Mourik and Walton, 2014). This case underpins the imperativeness of having strict financial reporting regulations that ensure that top management of the organization is held responsible for all the reporting made and that it is obligated to give a true reflection of what is happening in the organization. The role of ensuring this is attained well under the auspice of a financial reporting body such as IASB. As such financial reporting regulations play an important role in ensuring that accounting frauds in organizations are detected by the auditors or other stakeholders before it deteriorates leading to a huge negative impact on the entity’s sustainability and continuity (Pratt, 2011).
Regulations in any area help to create discipline. Discipline is very important especially in the areas of financial reporting. Financial discipline on the side of the management means that they will be able to use and invest the resources trusted to them by the shareholders in the most rationally appropriate ways. If there no financial reporting regulations the management would only by disclosing the information that in their……………………………………….