From 1900
the financial statements became the basic mechanism by which the activities of
company managers were monitored, and, to some extend, this is still true today.
the financial statements became the basic mechanism by which the activities of
company managers were monitored, and, to some extend, this is still true today.
Once the
directors were required by law to prepare annual financial statements
shareholders then had access to financial information about the company they
owned. However, this access is limited and the shareholders may come to believe
that they are not getting all the information, or the right information to
enable them to make investment decisions/
directors were required by law to prepare annual financial statements
shareholders then had access to financial information about the company they
owned. However, this access is limited and the shareholders may come to believe
that they are not getting all the information, or the right information to
enable them to make investment decisions/
Thus the
role of the auditor as agent for the shareholders becomes crucial and the costs
of the audit are as nothing compared with the comfort and reassurance the audit
affords the shareholders.
role of the auditor as agent for the shareholders becomes crucial and the costs
of the audit are as nothing compared with the comfort and reassurance the audit
affords the shareholders.
Owners
who appoint managers to look after their property will be concerned to know
what has happened to it. Reporting and accounting for their actions is usually
done by means of financial statements which the managers must prepare, and it
is through these that the owners of the business monitor the activities of
their agents. The independent audit is a crucial part this process to ensure
that the financial statements faithfully represent the activities of the
managers during the financial period.
who appoint managers to look after their property will be concerned to know
what has happened to it. Reporting and accounting for their actions is usually
done by means of financial statements which the managers must prepare, and it
is through these that the owners of the business monitor the activities of
their agents. The independent audit is a crucial part this process to ensure
that the financial statements faithfully represent the activities of the
managers during the financial period.
Financial
statements can take many forms. The best known are the profit and loss accounts
and balance sheets of businesses. In the specific case of limited companies,
financial statements are produced annually and take the for, of an ‘annual
report and accounts’ which includes a profit and loss account and balance sheet
and also other statements including the directors’ report and a cash flow
statement.
statements can take many forms. The best known are the profit and loss accounts
and balance sheets of businesses. In the specific case of limited companies,
financial statements are produced annually and take the for, of an ‘annual
report and accounts’ which includes a profit and loss account and balance sheet
and also other statements including the directors’ report and a cash flow
statement.
Parties to financial statements
Historically,
annual reports and accounts of companies are produced by the directors (as
managers) to the shareholders (as owners), and other people were not expected
to be interested in them. However, today, a much wider range of people are
interested in the annual report and accounts of companies and other
organizations.
annual reports and accounts of companies are produced by the directors (as
managers) to the shareholders (as owners), and other people were not expected
to be interested in them. However, today, a much wider range of people are
interested in the annual report and accounts of companies and other
organizations.
The
following people or groups of people are likely to want to see and use
financial statements. These are often described as stakeholders;
following people or groups of people are likely to want to see and use
financial statements. These are often described as stakeholders;
·
Actual or
potential:
Actual or
potential:
o
Owners or
shareholders
Owners or
shareholders
o
Lenders
or debenture holders
Lenders
or debenture holders
o
Employees
Employees
o
Customers
Customers
o
Suppliers
Suppliers
·
People
who advise the above-accountants, stockbrokers, credit rating agencies,
financial journalists, trade unions, financial analysts.
People
who advise the above-accountants, stockbrokers, credit rating agencies,
financial journalists, trade unions, financial analysts.
·
Competitors
and people interested in merges, amalgations and takeovers.
Competitors
and people interested in merges, amalgations and takeovers.
·
The
government, including the tax authorities, and government bodies connected with
consumer protection and the control and regulation of business.
The
government, including the tax authorities, and government bodies connected with
consumer protection and the control and regulation of business.
·
The
public, including those who are interested in consumer protection,
environmental protection, and political and other pressure groups.
The
public, including those who are interested in consumer protection,
environmental protection, and political and other pressure groups.
·
Regulatory
organizations for example those set up under the financial services and markets
act 2000, principally the financial services authority (FSA).
Regulatory
organizations for example those set up under the financial services and markets
act 2000, principally the financial services authority (FSA).
All these people must be sure that the financial
statements can be relied upon.
statements can be relied upon.