Qualitative Characteristics and Professional Judgement in Financial Reporting

This report discusses the qualitative characteristics of financial reporting and limitations on judgement of professionals on these reports in order to understand the financial reporting structure. It also explores the importance of professional judgement in financial reporting and steps to enhance its quality.

ACCOUNTANCY
1

Contents
Introduction................................................................................................................................3
Qualitative characteristics of financial reporting.......................................................................3
Professional Judgement – Financial Reporting..........................................................................4
Conclusion..................................................................................................................................5
References..................................................................................................................................6
2

Introduction
The primary objective of the financial statements is to provide the users of the financial
statements with the true and fair view of the financial status and performance of the economic
entity. It is important the quality of this reporting is high, as the financial reports influence the
decisions of the capital investors (Girard, 2014). The major value of the economic entity is
dependent on the financial reports. It is the duty of the professionals to provide the genuine
report on the condition of the entity. But there are limitations on financial reporting.
Involvement of personal judgement of these professionals many times makes it unreliable for
the investors to rely on the report. In the following report we have discussed the qualitative
characteristics of the financial report and limitations on judgement of professionals on these
reports in order to understand the financial reporting structure. (Ittelson, 2009)
Qualitative characteristics of financial reporting
The financial reports influence the decisions of the financial investors. The investors rely on
these reports to judge the viability of the company (Lerner, 2009). Therefore a good financial
report should contain the few qualitative characteristics in order to constitute a proper report.
- Relevance: it is important that the financial report contain all relevant information in
respect to the entity. Be it financial or non-financial, any information which might affect
the decision of the user should be included in the financial report.
- Reliability: it is one the major characteristics. The financial statements should be made in
such a manner that that the investors can rely on the report for their judgement.
- Understandably: the financial reports will be of no use if the users cannot understand the
data in them. Therefore it is important that the financial statements present the
information in a manner which can be understood by the investors.
- Comparability: the financial statements made should follow all the accounting standards
in the preparation, so that they can be compared with other entities. This helps the
investors understand the performance of the entity with respect to another entity.
The other qualitative characteristics of financial statements are consistency, freedom form
bias, materiality, accrual and conservatism (Loughran, 2010). It is important that the
professionals express an opinion on the statements that are free from personal judgment and
present the actual financial position of the entity.
3

Professional Judgement – Financial Reporting
With the growing complexity of the financial transactions, it is important that the financial
information derived is reliable. Accountants are the professional which help us establish the
authenticity of these financial statements. A judgement form a professional refers to the
conclusion that one draws after taking into consideration all the relevant information. This
judgement should be unbiased and should be made with professional scepticism.
The relationship between the auditors and the investors play a very important role for a
company’s financial performance (McLaney & Adril, 2016). It is important that there exists
trust between them. But considering the recent events, we have seen that the trust of the
stakeholders have declined due to major frauds taking place because of false reporting. It is
the duty of the auditors to perform their duties professionally so that public trust is
maintained. Since the professionals have failed to report the financial problems ongoing in
the entities, it has majorly effected the decisions of the investors. This has taken away the
trust of the investors and there reliability on the financial statements. Taking these frauds into
consideration the Sarbanes Oxley Act and the Public Company Accounting Oversight Board
was bought into action. This does not solve all the issues related to professional judgement
(Piper, 2015).
In order to bring back the trust lost, it is important that the auditors are made responsible for
their judgement. Also, there should be guidelines which help the professional make the
judgment. The judgement of the professional is a key skill, which helps him making an
opinion on the financial statements (Sargeant, 2010). Apart from this, the professionals
should also be made aware of importance of ethic in their professional work. Lack of ethics is
the major reason for biasness in the professional reporting.
Also to improve the reliability, the power of the professional should be reduced and there
responsibilities along with liability should be increased. The main work of the professional is
to express an opinion n the reports which are already prepared by the management. It is
important that the preparers of the financial statement be also educated on the importance of
the financial reports. It is then the auditors who should follow the principle and using their
knowledge make correct opinion on the statements of the company (Siciliano, 2015). After
the professionals are done making an opinion, the regulators should take some responsibility
4

and assess the judgment made any the professionals. This will ensure the viability and
authenticity of the financial statements.
Many countries have set up a professional judgement framework in order to assist the
professionals. This framework on judgement will help the preparers and the professionals to
form a judgment without bias with the help of their knowledge, skill and experience. The
principles laid down helps in setting a path for the professional make a judgement on the
reports. It is important the auditors challenge the judgement of the preparers of the financial
judgment and not blindly rely on them. They should also document the basis of such
judgement (Strathern, 2010). They should check the source of information and should also
double check the information from external sources.
Financial reports are very important to ascertain the position and performance of the entity.
The people, who do not take part in the day to day activities of the business, rely on these
statements in order to evaluate the position of the entity. Therefore it is important that the
financial statements represent true and fair view of the financial status of the company
(Taillard, 2013). This can only be verified by a professional, who has extensive knowledge in
the field of accounting and finance. The professionals have the knowledge and experience in
order to make a proper judgement on the reports. It is just that, they need to understand the
importance of their work and include the ethical norms while performing their duties.
Conclusion
Therefore considering all the discussion above we can say that though the stakeholders and
other people have lost the trust on the professional judgement on the financial reports, still,
the importance of the same cannot be denied. The opinion of the professionals will always be
important in taking the financial decisions. But in order to enhance the quality of judgement
and get back the faith lost, it is important to take certain steps. Establishment of framework,
increasing responsibility and liability along with ethical education will help us improve the
quality of judgement and reduce biasness. The use of financial judgement in financial
reporting should not be reduced; it should be made better and reliable.
5

References
Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.
Ittelson, T. (2009). Financial Statements: A Step-by-Step Guide to Understanding and
Creating Financial Reports. Franklin Lakes, N.J.: Career Press.
Lerner, J. J. (2009). Schaum's outline of principles of accounting. New York: Schaum.
Loughran, M. (2010). Auditing For Dummies? Hoboken, NJ: John Wiley & Sons.
McLaney, E., & Adril, D. P. (2016). Accounting and Finance: An Introduction. United
Kingdom: Pearson.
Piper, M. (2015). Accounting made simple. United States: CreateSpace Pub.
Sargeant, A. (2010). Fundraising principles and practice. San Francisco, Calif.: Jossey-
Bass.
Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.
Strathern, M. (2010). Audit cultures: anthropological studies in accountability, ethics and
the academy. London: Routledge.
Taillard, M. (2013). Corporate finance for dummies. Hoboken, N.J.: Wiley.
6