AC 4304Financial Reporting

Theory

Week 2 PresentationDennisIvan

Rita

Financial Reporting Theory

Debate I: accountants should focus only on the needs of financial analysts in reporting financial statements.

Against side

Definition of Financial Analysts

Financial analysts are person who… passed professional examinations possess professional qualifications eligible to study a company legalize to make investment

recommendations usually employed by bank,

brokerage, advisor, or mutual fund

Definition of Financial Analysts(cont’d)

Eg. Chartered Financial Analysts (CFA)

--- A person who has passed tests in economics, accounting, security analysis, and money management, administered by the Institute of Chartered Financial Analysts.

Define “Focus on their need”

adjust the reporting figures to meet their prediction

adjust the presentation style and scope of reporting

Stakeholders of financial statements & their concerns Government Creditors Investors Customers Public Employees Financial Analysts

Profitability--- tax Liquidity & solvency Stewardship of MGT Reliability Social concern Company

development Forecasting

InvestmentQualitative & Quantitative

Drawbacks of focus ONLY on the needs of Financial Analysts

I. Company may loss the independency, following the nose of Financial Analysts

II. Reporting style may affect others who access the accounting information

III. Lead to over reliance on financial analysts

Phenomenon at Wall Street:Wall Street Analysts give high pressure to company management

When financial analysts act as an Investor…

want the companies to perform as they predicted

aim at influence the company performance by forecasting

Drawback I. Company lost independency in reporting

Reasons that companies “follow” analysts’ prediction

• The wall street analysts are influential (to the share price of companies)

• To maintain company reputation• Directors want to avoid being laid off • Maximize remuneration (e.g Option,

share) from window dressed performance

Company too dependent on the result of analysis

Companies being controlled by the analyst

Affect the truth and fairness of F/S Accountant will generate F/S base on

the forecasting of analysts Affect the integrity of the

company/accountant Affect the long-term development of

company

Consequences of focus on their need and lost Independency

Drawback II. Reporting style affect others users

Financial statement becomes too technical Overlook/ Ignore the needs of other users

of F/S--- lack relevant knowledge background

Consequence: Violate the purpose of financial statement

--- information for making decisions--- reflect the real situation of company

Drawback III. Lead to Over Reliance on Financial Analysts

If…Accountants focus ONLY on the needs of

financial analystsThen…Other groups may not be able to seek enough

informationAs a result…All may have to rely on the Financial analysts

for information

Risk of over-reliance on Financial Analysts

1. Loss due to the usage of misleading informationManagement have incentives to window dress the F/S

Auditors have the incentives to cover the mistakes

Garbage in, Garbage out Incorrect financial statement

information mislead the results of analysis

Risk of over-reliance on Financial Analysts

In Enron Case, Directors have intention to mislead investors

> Overstate the revenue> hidden debts off-balance its books

This beautified F/S will also mislead the judgment of Financial Analysts

>Many Financial Analyst still made a “Strong Buy” recommendation at the day before Enron’s Collapse

Risk: Wrong Info Loss on investment

Risk of over-reliance on Financial Analysts (cont’d)

2. solely relying on F/S can’t give the hints to Win

F/S is not update enough Unexpected instances prevail Analysis based on historical data is

not reliable

Risk of over-reliance on Financial Analysts (cont’d)3. Financial Analysts may not tell the

REAL STORY

Aim of financial analysts To make profit To serve their clients Conflict of interest with other stakeholders Their information to other stakeholders

may not be subjective

Stand point Accountant should NOT just focus

ONLY on the needs of financial analysts in reporting financial statements

What should Accountant do???

Whose needs should accountants focus on?

Investors?Creditors?

Government? ……

NO! NO! NO! NO! NO!NO!

What Accountants Should do in Reporting F/S

Follow Accounting principlesApply professional judgmentMaintain professional ethicReflect the REAL situation of the

companyNot to satisfy specific group

Conclusion

Different stakeholders have different needs Role of accountant

Independently prepare F/S in accordance with a/c principles

Drawbacks of Solely concerning financial analysts being influenced affecting others in accessing accounting information over-reliance on financial analysts

End of presentationThank you!

Accountant should NOT just focus ONLY on the needs of financial analysts in reporting financial

statements