Importance of Financial Reporting in Australian Private Firms
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This literature review explores the relevance and significance of financial reporting in Australian private firms. It discusses the understanding of financial reporting, its importance, theories, and managerial roles. The review also highlights the limitations and gaps in previous research on the topic.
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Running Head:APPLIED BUSINESS RESEARCH APPLIED BUSINESS RESEARCH Name of the Student: Name of University: Author Note:
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1APPLIED BUSINESS RESEARCH Table of Contents Introduction......................................................................................................................................2 Discussion........................................................................................................................................2 Understanding the financial reporting.........................................................................................2 Importance of the financial reporting..........................................................................................3 Theories of financial reporting....................................................................................................4 Managerial roles in financial reporting........................................................................................5 Limitation and gaps.........................................................................................................................6 Conclusion.......................................................................................................................................7 Referencing......................................................................................................................................8
2APPLIED BUSINESS RESEARCH Introduction Financial reporting is considered to be one of the most important aspect for a private business firm that contributes to the financial stability and transparency of the organisation along with providing better understanding of the financial condition of that private firm. Based on this understanding, the purpose of this literature review is to evaluate the relevance and significance of financial reporting. As a matter of fact, identifying different financial reporting practice and models is also considered to be a major aspect of this discussion. Moreover, the literature review also tries to find out the role of the managers in order to make an effective financial reporting. Finally, the literature comes up with the literature gaps and the limitations of this literature review that pushed the researcher to prepare further researches on the same topic. Discussion Understanding the financial reporting According toLeuz and Wysocki(2016) it is important a business firm to develop its financial condition and understanding on the basis of the financial reporting. It requires in-depth knowledge regarding various elements of the financial reporting and the key purposes that can enhance the efficiency within the organisation. From that point of view,Franciset al. (2015) arguedthatthefinancialreportingisareportthatincludesthedisclosureoffinancial performance of an organisation and links with the views of different stakeholders about the financial performance and the financial position of that organisation. In this context,Council (2014) mentionedthatthefinancialreportconnotestheinvestors,creditors,public,debt providers and different government agencies. Therefore, it can be asserted that the financial
3APPLIED BUSINESS RESEARCH report encompasses all the required and important financial data and information that are important for the organisation and help the private firm to develop its understanding regarding the financial condition of that company. In this context,Davidson, Dey and Smith(2015) showed that the financial reporting generates its data from different financial statement like balance sheet, cash flow statement, profit and loss account and stock holder’s equity. In addition to this, the quarterly and annual reports of the company are also contributed a lot in preparing the financial report effectively. For the private firms the management discussion and analysis are identified as important facets that helps to prepare proper financial report. In this regard, the management decision will encircled the business related financial statements and decision and in the financial report this decision making and strategy will also get an important place in order to understand the motive behind the change and transformation in the financial figures and matters. Importance of the financial reporting As far as the importance of the financial reporting is considered it can be argued that the objectiveandpurposeofthefinancialreportingcreatesfinancialplanning,analysis, benchmarking and decision making in order to make the flow of organisational finance a continuous process. According toAbbottet al. (2016) the financial reporting helps to comply with various statues and regulatory requirements that can build up strong and transparent operational framework for the business firm. As a result of that the future sustainability of the organisation becomes secured enough to cope with the obstacles and mitigate the issues effectively. Moreover, it is also essential for the organisation to evaluate the annual results of the company in order to publish the stock exchange strength of that company. In case of the Australian private firmsFrias‐Aceituno, Rodríguez‐Ariza and Garcia‐ Sánchez(2014) opined that the financial report is the backbone for financial planning, analysis
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4APPLIED BUSINESS RESEARCH and decision making process which is lack in case of the Australian financial organisations. Due to lack of understanding regarding the importance of the financial report it becomes a problem for the Australian private firms to ensure their financial stability in a firm and solid basis. Putting limited emphasis on the stakeholders’ opinion caused a discrepancy in the financial details that the stakeholders could not enjoy. Therefore, miscommunication and indecisions caused serious problem for the organisation. Moreover, it can also be stated that due to get clear insights of the financial report the organisation can evaluate its strengths and weaknesses in a pro-active manner. As a result of that the decision based on the evaluation will be effective enough to deliver better decision making. In response to this,Gigleret al. (2014) asserted that the role of the financial reporting is to guide the organisation financially so that the private firm is able to capitalise in the market both domestic and internationally. Due to the advent of the globalisation the high competitiveness in the market makes it becomes difficult for the Australian private firms to outreach the overseas theoverseasmarket.Asaresultofthatfinancialreportingcreatesabusinessfriendly environment for the organisation to compete and sustain in the intense competitive market of Australia (Francis et al. 2015). Theories of financial reporting In this context, there are several theories that are responsible to make financial reporting effective. In this regard, the materiality and matching principles of accountancy are highly important. According toZimmerman and Bloom(2016) the matching principles of accounting reports the expenses of a company on its income statement in a certain period of time. In this context, the matching principles makes it more effective for the organisations to measure its expenses and also keep the income and revenue matters under consideration. Moreover, it can be
5APPLIED BUSINESS RESEARCH asserted that due to the miscalculations and misjudgements most of times companies calculates the expenses at the period when it is paid rather than the time when the expenses and liability incur. As a result of that it causes problems to measure the expenses for both quarterly and annual financial report. On the other hand,Kulikovaet al. (2015) advocated that the matching principle keeps an eye on the systematic allocation of the cost to a certain accounting period in which the cost is used up. It becomes also a strategic measure to keep the track of both the expenses and the income at the same time through using the matching principle. The materiality principle, on the other hand puts emphasis on the relationship between accounting standard and net impact on the financial statements. In other words,Edgley(2014) opined that the role of the materiality principles is to identify almost all the materials that cause heavy impact on the financial statements. In most of the cases small materials are neglected due to its volume and values. However, having high impact on the financial statement, the materiality principles helps to make it a valuable element. Therefore,Libby(2017) stated that the materiality principles are considered to have effective advantages in order to make a clear and proper financial reporting. Managerial roles in financial reporting In this context, the role of the managers are pivotal in order to prepare a conclusive and transparent financial report for the company both in quarterly and annually. The role of the Chief Financial Officer of a private organisation I not only preparing the financial statements, income statementsandbalancesheets.Thestandardofthereportsisalsoasubjectoffurther investigation and it is the responsibility of the CFO to consult with the chief consultant about this matter. As per the research ofGomariz and Ballesta(2014) it can be argued that the financial matters of a private firm changes its process in accordance with the situation and the financial
6APPLIED BUSINESS RESEARCH statement. There is no hard and fast regulation or process to follow. It has to be the role of the financial teams and the auditors to implement such a plan that can generate accurate financial report and check the reliability of the report. Authenticity of the report is the prime concern in thiscontext.Fullcompliancewith theexistingaccountingstandard isalsoa subjectof investigation for the finance team of a private company. In this context, the notion of due diligence is highly relevant that connotes the reliability of the financial information provided by the financial statements and balance sheets (Badolato, Donelson and Ege 2014). In this context, the CFO and the organisational management should have a clear conversation regarding the objective of the company. There are both short term and long term objectives that the company sets in order to make profitability and smoothen the business performance. However, the efficiency and success of the organisation depends on the objectivity of the organisation. In this regard, the managers and executives of that particular organisation held responsible. Based on their decision making the CFO sets the financial targets (Garrett, Hoitash and Prawitt 2014). Therefore, it can be argued that the entire process of financial reporting is a collaborative process that encapsulate all the decision makers and stakeholders in order to execute adequate decision making that subsequently delivers better exposure for the development of the financial reporting. Limitation and gaps The above discussion is not free from any limitation. There are number of gaps that the previous researches have done in terms of understanding the role of financial reporting in developing the organisational profitability. Firstly, there are little empirical evidences about the problem of financial reporting in Australian private firms. Moreover, it can also be stated that there are lack of articles that can contribute to increase the efficacy of financial reporting.
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7APPLIED BUSINESS RESEARCH Conclusion Therefore, it can be argued that the literature review on the theme of importance of financial reporting on maximising performance of the Australian private firms is rightly pointed out the efficacy of the financial reporting on organisational efficiency. In this regard, the discussion also identifies relevant accountancy theories that can help to develop a better financial reporting. Henceforth, it can be stated that the literature review is clear and relevant to understanding the mentioned theme of the research.
8APPLIED BUSINESS RESEARCH Referencing Abbott, L.J., Daugherty, B., Parker, S. and Peters, G.F., 2016. Internal audit quality and financial reporting quality: The joint importance of independence and competence.Journal of Accounting Research,54(1), pp.3-40. Badolato, P.G., Donelson, D.C. and Ege, M., 2014. Audit committee financial expertise and earningsmanagement:The roleof status.Journal of Accountingand Economics,58(2-3), pp.208-230. Council, F.R., 2014. Guidance on risk management, internal control and related financial and business reporting.London: Financial Reporting Council. Davidson, R., Dey, A. and Smith, A., 2015. Executives'“off-the-job” behavior, corporate culture, and financial reporting risk.Journal of Financial Economics,117(1), pp.5-28. Edgley,C.,2014.Agenealogyofaccountingmateriality.CriticalPerspectiveson Accounting,25(3), pp.255-271. Francis, B., Hasan, I., Park, J.C. and Wu, Q., 2015. Gender differences in financial reporting decisionmaking:Evidencefromaccountingconservatism.ContemporaryAccounting Research,32(3), pp.1285-1318. Francis, B., Hasan, I., Park, J.C. and Wu, Q., 2015. Gender differences in financial reporting decisionmaking:Evidencefromaccountingconservatism.ContemporaryAccounting Research,32(3), pp.1285-1318.
9APPLIED BUSINESS RESEARCH Frias‐Aceituno, J.V., Rodríguez‐Ariza, L. and Garcia‐Sánchez, I.M., 2014. Explanatory factors of integrated sustainability and financial reporting.Business strategy and the environment,23(1), pp.56-72. Garrett, J., Hoitash, R. and Prawitt, D.F., 2014. Trust and financial reporting quality.Journal of Accounting Research,52(5), pp.1087-1125. Gigler, F., Kanodia, C., Sapra, H. and Venugopalan, R., 2014. How frequent financial reporting can cause managerial short‐termism: An analysis of the costs and benefits of increasing reporting frequency.Journal of Accounting Research,52(2), pp.357-387. Gomariz, M.F.C. and Ballesta, J.P.S., 2014. Financial reporting quality, debt maturity and investment efficiency.Journal of Banking & Finance,40, pp.494-506. Kulikova, L.I., Sokolov, A.Y., Ivanovskaya, A.V. and Akhmedzyanova, F.N., 2015. Lowest valueprincipleimplementationininventorymeasurementoffinancialstatementsofthe enterprises.Mediterranean Journal of Social Sciences,6(1 S3), p.406. Leuz, C. and Wysocki, P.D., 2016. The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research.Journal of Accounting Research,54(2), pp.525-622. Libby, R., 2017. Accounting and human information processing. InThe Routledge Companion to Behavioural Accounting Research(pp. 42-54). Routledge. Zimmerman, A.B. and Bloom, R., 2016. The matching principle revisited.Accounting Historians Journal,43(1), pp.79-119.