Accounting isone of the most important parts of any successful business. As there iscurrently much doubt in the economy, the use of this information is becomingincreasingly important for businesses if they want to survive and thrive.Without this information, businesses would be unable to predict future inflowsand outflows through the firm which would mean they cannot plan appropriately, potentiallyleading to business failure. The information obtained from these financial reportscan aid the users in making more informed business-related decisions.
Also, theavailability of this information will allow the financial position andperformance of the business to be easily observed, which reduces theuncertainty in the business for stakeholders as they are aware of the precisebusiness details. For this information to be useful to its users, it mustpossess the two important qualities of “relevance” and being “faithfullyrepresented”. For the information to be relevant, it should impact the decision-making of someone pursuingthe information. Therefore, it should be able to aid in the prediction offuture events and in confirming past events, which will influence the decisionof the user. Accounting information that is faithfully represented should be;complete and no information should be left out, error free to avoid anycomplications and unbiased to present an honest view of the business. Havingboth qualities is the only way for this information to be useful. The International Accounting Standards Board (IASB) isan independent body dedicated to developing a single set of globally acceptedaccounting rules.
Accounting standards reduce the variations in accountingpractices, as having a set of rules that are globally followed will allow theusers of financial statements to compare the financial position of companies indifferent countries. Therefore, there will be no complications whilstinterpreting financial statements internationally as they would all be similar.Also, firms located in countries where there is arelack of accounting standards may be incorrectly recording their accountinginformation to make their businesses look more appealing to potential investorseven though the business may not actually be as successful as the financialstatements make it seem.
This would lead to an increase in future net cash flowfor the firm, however poor economic decision making may arise as theseinvestors may potentially lose large amounts of money. In 2009, the founder ofSatyam, an Indian IT services and back-office accounting firm, falsely boostedrevenue by $1.5 billion. He did this by falsifying revenues, margins and cashbalances, making himself 50 billion rupees in process. Therefore, havingstandards in place will ensure that all information is in the financial reportsand that it is relevant and faithfully represented so that the users of thisinformation can make informed decisions.
IAS 1 states that the main objective of financialstatements is “to provide information about the financial position, financialperformance and cash flows of an entity that is useful to a wide range of usersin making economic decisions”. It also provides information used in assessinghow well the business is being managed, how well resources are being allocatedand how business operations are running. Without financial statements, manybusinesses would be unable to predict the future of the business. Therefore, theywouldn’t be able to consider expanding as they would not be sure on the futurecash inflow, which may lead to the firm falling behind its competitors andstruggling.However, implementing these standards may hinder thedevelopment of new and improved procedures.
A business may find a way ofreporting its finances in a more efficient way due to innovation oradvancements in technology. Yet, if they must follow a standard they would notbe allowed to implement this into their business as it would go against therules. This could be detrimental to a firm in the long term, as if they unableto implement ways to increase efficiency and accuracy of their financialreports then accounting standards may become irrelevant and outdated.As accounting standards are becoming increasinglyimportant, many businesses are heavily invested in complying with them. Thiscan be very costly for the business as if the costs to the business were toincrease, this reduces the profit which will lead to lower dividends forshareholders. If shareholders are incurring the cost of these standards, thenthey will look to invest elsewhere to earn a greater return on theirinvestments, which would have a negative on future net cash flow into thebusiness.
Therefore, the implementation of generalised accounting standards maynot be beneficial for all businesses.No two businesses are the same, so having a commonstandard may lead to important aspects of a business being overlooked and nottaken into consideration. So therefore, the standards may benefit one firm, butto another they could be problematic to another.
The costs and benefits ofimplementing these standards should be considered as it is hard for them to begeneralised to work for every business.