Financial Reporting and Analysis for Decision Making - Essay Example

? Financial Reporting and Analysis for Decision Making ID Introduction Financial reports integrates the use financial statements, stock exchange documentation to deliver the financial information required. The efficiency and effectiveness of financial reporting under the government of Hong Kong appears governed by; The Companies Ordinance (Chapter 32), the dominant sections appears as Sections 121-145 [Sections 373-446 working under the proposed companies Ordinance 2012]. The other bodies governing the Hong Kong Financial reporting operates as; Hong Kong Financial Reporting Standards (HKFRS), Accounting standards (HKAS) handling the related interpretations;  while the section of stock exchange works under the financial listing rules appendices 14 and 23. There appears no true definition under the ordinance or the HKAS. Most cases require the knowledge of the accountant discretion. When companies comply with the Company’s Ordinance the HKAS depicts the situation as true and fair. The moment there appears a problem; the term comes straight from the legislative or the investment discretion (Oporowski, 2005). Hong Kong citizens tend to analyze the connection found among corporate operation reporting releases. Basing the argument to the results of a, certain company in, Hong Kong years 2011 shows that, Firms experiencing a high earning level, rarely releases the information to the yearly press disclosure. Companies that end up releasing their press disclosures display a heightened impression management. The implication here proves that managers who handle their practices engage in it at varied levels related to the firms’ communications. The ultimate information found in such communications proves that the corporations release information that lures the outsiders to view the firm’s performance in a way that they desire (Chartered Institute of Management Accountants, 2011). Analysis of the Topic Issue Using Financial Theory The issues on manipulation The manipulation of data by the managers creates a wrong impression of the company, which later affects the issuance, and the content of the yearly results press releases. The manipulation of the financial reports leaves the public with numerous questions. The questions range from; whether the firm is trying to run away from legal implications, or it just wants to limit the information about the firm that can be viewed by the members of the public. Managers utilize the secretive nature presented by the members of the press release in facilitating manipulating figure to lure the customers and potential investors of the credibility of their corporate bodies. Another possible reason for the act comes from, or excluding the amount of individuals to reduce impression operations in the Hong Kong Accounting Standard (HKAS) 1 or entirely shun the release practice. Some researchers such as Godfrey et al argue that; earning management directly relates to graphical perception management coupled with explanatory impression management (Agarwal, 2002) Disclosures relating to noteworthy events, balances and transactions The impression can be traced at a glance by critical close look at the earning managements and impression management that are released earlier. Most managers tend to release the organization financial information by the use of the third quarter earnings of the organizational report. The study induces more literature as it constantly deals with the releases of Hong Kong Accounting Standard (HKAS) 1 (Revised). Previous analyses prove the application of manipulation practices in the press release data. The results this ends up affecting the stock markets shares prices (Financial Management Association, 1972) Auditors’ remuneration The disclosure requirement where the issuers are expected by the line 2(h) in the Board’s main rules to give full information on the auditors and non auditors salary included in the corporate government report. The issuers’ failure to disclose the characteristics of non-audit assignments limits the information on the extent of independence of the auditors. When corporate seeks to communicate to the public through press releases the organizations tend to hoard some information to attend to their self-serving management procedures; the information reveals that the corporate report conveys more incomplete issues and appears more preferable than the yearly reports (Agarwal, 2009). Management Discussion and Analysis (MD&A) Paragraph 32(1) through to (12) discusses the requirement for the release of the exact figure of the foreign currencies in borrowing and the equivalent cash held. Full information must be presented to the press release in relation to rates of fluctuation rates, the levels of turnover, operating results, and the total value of asset as at the reporting period. The information presented in the narrative must be presented in narrative form total explanations as to the situation and any added analysis (Agarwal, 2009). Obligatory Revelations under the Hong Kong Companies Ordinance There appears a difference in the issuers reports of separate legal entities, consolidated financial statements, and group existence as distinct in the main board rules 13.46 (2). Occurrences of oversee issuance or PRC issuer requires the cooperation of the related party to comply within 21 days before the issuers annual general meeting and within four months after the financial year (Agarwal, 2009). Connected and related party disclosures The section, Main Board Rule 14 A.38/ GEM Rule 20.38 requires full information without omission of narrative statement in the yearly reports of the confirmation of the auditors the progression of the connected transactions and the receipt of the certification from the board of directors. The related parties need to confirm the pricing policies of the issuers if the transaction includes the provision of the merchandises or services by the issuer. The transactions must be in line with the agreement controlling the transaction, and ensuring that the transaction had not extended the cap revealed in the preceding announcements (Agarwal, 2009). Corporate Governance Reports The corporate sometimes hoards full information about their corporate government reports as a requirement of the main board rules. The total times meetings were held, and the names of the individuals in attendance, the inventory of the directors meetings of the payments committee or nomination committee. Complete account of the duties undertaken by the remuneration committee or nomination committee and details on the information pertaining to the work done by the remuneration committee. There also appears requirement for emolument policy and the incentive scheme goals in the long-term. There also disclosure required for foundation, how the companies, arrives at the payment structure of the directors (Agarwal, 2009). Financial reports using CASBE The 2011 statement reports its intention to adopt the use of CASBE. The issues pertaining to CASBE are assorted and analyzed under the FRSP. All materials material to the financials statement must be released at the press release. The issuance needs to confirm the essential disclosures appear part of future reports. The reports forge high figures to found fame and change the public perception concerning the company. Financial analysts when evaluating organizations needs to consult with the connection between impressions and earning management. The target press release should be the annual results or earnings of a certain firm always. The tests run at the large samples of the Hong Kong proposed companies between the periods ended 2005 and 2006 (Oporowski, 2005). Related Theories with References to the Current Business and Reporting Situations The focus of Hong Kong appears prompted by the fact that, the use of behavioral answerability theory which implies that; legal and regulatory strategies, improves the level of responsibility. It improves the extent to which a firm releases transparent information pertaining to their real business dealings. The study was conducted to a selected vast if Hong Kong quoted companies for the years 2011. Institutions and markets powers differ as they cut across different countries; this influences the level of information released by different countries; governed by the level of code law countries; such counties tend to have lower investor protection strategies. It also deems crucial that investors find full information pertaining to investors’ protection measures (Oporowski, 2005). Shareholders also need the true results of the corporations report to determine their loyalty to the proposed company. Contrary, the Hong Kong Accounting Standard (HKAS) 1 (Revised) tends to have advanced objectives than the letter issuing sequence to the shareholders because of the litigation costs that come along with the different rates in the diverse countries; such attributions appear prejudiced to corporate reports (Chartered Institute of Management Accountants, 2011). Various studies in charge of undertaking analysis in earning management and impression management press a lot of interest on the USA or UK. There appears proof that Anglo Americans countries legal and corporate management appears different from Europe countries like the Hong Kong and the like. Hong Kong operates on a weak legal environment. It experiences lower litigation expenses hence low investor protection levels. It is fascinating to note that the outward audit tradition in Hong Kong depreciated because of constitutional audits. They did not exist until 1988, when the establishment came into being, coupled with authorization pertaining to audit laws. However, despite the establishment of legislation on audit self-government, the rules appear weak in enforcement. This is proved by the fact that, since the enactment to the year 2004, no laws was enforced to the Hong Kong auditors, and the general results were deprived excellence control frequents the system (Oporowski, 2005). The statistics prove that Hong Kong has the best setting to undertake investigations on impression and earning strategies. The study seeks evidence to the extent where; companies helps with the writing relating to the use of two presentational exercises in the country. The literatures sometimes appears as having two presentational dealings in the country; with smaller litigation risks, low level of public enforcement, and poor public power enforcement, with low powers to creating more rules. Secondly, the need must clearly indicate the use of impressions and earning management collaborates to enhance the positive image of the organization. There appears few study cases that take into account the corporate communication techniques, and jointly study the influence created by managers. The studies discover that researchers should investigate both actual and accrual based earnings manipulations since they attend to various management reporting methods and act as an upcoming or subordinating practice when they release their financial results to the rest of the world (Agarwal, 2009). Theoretical impression administrations impose lower costs on managers and organizations hence the preference to earning management. The management strategy imposes costs on directors, auditors and managers in the form of litigation and political costs. The organization can also be charged to enhance transparency; especially in cases where the manipulative accumulations overturn, or even when the suboptimal decisions culminates in a reduced competitive advantage. However, if used jointly, they release a powerful blend for managers to influence the organizational stake holders wrongly and have a reasonable level of economic revert. The study enhances the manager’s use of varied techniques present to ensure the information on the opportunistic or informative reasoning (Oporowski, 2005). The measurement of earning management appears prompted by the levels of accumulations and cash flows of real earning management. The two earning management forms serve varied needs in relation to the firm’s competitive edge while meeting the earning targets. The extent of regulation and auditors responsibility alongside accumulations management also affects the deal. Impression management appears founded on the fact that companies shun favoring the accruals based returns management by trying to eliminate voluntary revelation. However, the information condition of the organization is contrary to the notion that the manager should make decisions, on whether to issue or shun an ARPR. Companies that issue an ARPR have the impression management level of the press release They appear linked with the returns management practices exhibit (Agarwal, 2009). There appears to be positive relations between impression management and the operational activity returns, they are more tenuous to detect through auditors or even regulators than accumulations founded earning returns management. Real earning management closely relates to the aggressive forms in impression administration. The proof suggests that evident management compliments the earning management strategy for a valuable part of the analyzed portions. There also appears a division of managers that have a preference in more restrained self-serving characteristics, this lowers the chances of interaction between managers and the public hence other types of revelations like the ARPRs reduces. This proves that there exist various styles of management at operational levels. The notion appears proved by the different genres of earning management, based on accumulations against real earning management, prompted by the difference strategies employed in communication or different follow up strategies (Oporowski, 2005). Companies’ functions more on constitute of ‘nexus of contracts’ individuals; than as separate legal entities. Agency theory supplies the intelligence, and strong framework to enable the understanding of self-serving management behaviors. A situation where the management of the representative lacks motivation and control, the verification of management undertakings, the later tend to act towards their interests. The goal realizing strategies varies, like a case where a manager attributes the faulty results to the environmental causes while they account positive outcomes to their own inputs. Where the outcomes appear intense managers decide to hide the useful information altogether, similarly, the managers may apply the use of thematic manipulation, biasness, highlights, amongst other presentation tools to showcase a positive picture of the organization’s performance (Oporowski, 2005). The ultimatum of manipulative managers comes to play when the theoretical basis sets in explaining or depicting the managers’ character. Analysts must always analyze the ethical views of human characters, which give significant information absent in legalistic and adversarial agency dealings. The information insight proves paramount in the process of analyzing the earning management occurrences. The notion assumes that accounting revelations employs information contents with possessing operational hints and signs to the stakeholders. Contrary, the reliability of the data supplied by companies appears questionable most of the times (Agarwal, 2009). Reliability sets it from the way management processes its operations and works significantly to facilitate its dependability. Situations with low level of critical analysis from outside the organization coupled with a positive relationship towards the management; there appear opportunistic behaviors especially from the managers with the potential to present the organization as having a high rant to the members of the public (Financial Management Association, 1972) Moreover, stake holders’ experiences difficulty while trying to place manipulation in the accounting information because they may lack the skill to detect a deceptive manager, or better still the shareholders may be reluctant to take part in meticulous analysis. Market efficiency point of view considers the failures; if the latter nature appears trivial. Earning management before equity issues tends to impact on the share prices. This means that investors rarely see through the earnings management. Naive investors’ theory falsely believes that financials hoards useful information, and secondly, the misrepresentations in the financial reports may not be readily exposed to the shareholders (Oporowski, 2005). Improving the Situation in both Theoretical and Practical Prospects Earning management (Creative accounting) comes in play in eras when the managers judge financial reports and while arranging transactions to change the change financial reports to either misinform stakeholders of the prevailing economic performance of the organization, or manipulate contractual relations depending on the results presented as the accounting data. The cases of earning management usually take place in three critical areas of; the regulatory flexibility, inadequate regulation strategy, and management secrecy nature in reference to future predictions. However, earning management results can never give clears data on the information in question. This comes from the fact that companies can easily implement diverse earning management strategies. Permissive accounting standards create room for managers to exploit the possible earning management (Financial Management Association, 1972). Affiliated to the meaning of earning management motivation to earning management, is the quest for a reason which can be, undertaken to misinform users or falsely warrant for contractual outcomes. Motivation for earning management appears from the availability a difference, in data, between the actual performance of the organization and the analysts’ expectations. The bench marks or targets made appear far from the link intended to compare income measurements with executive compensation. There appears a need to minimize on the notion on inconsistency experienced in the organization; reduction of taxes also proves worthwhile. Agreements with debt holders also supplies breeding grounds for the managing earnings to shun unfavorable debts covenants so as to attain an attractive credit rating. Regulations related motivations also influences companies to undertake earning managements to attain the regulation’s earning entrance level and shun regulations deletion from the list (Agarwal, 2009). Accumulation Based Earnings Management against Actual Activities Earning Management The traditional focus analyzed trends that accrue to management earning through total accounts decisions. This was done through manipulation of accounting accumulations and employment of accounting based strategies, including classification of the expenses, which proved extra ordinary and ended up being the basis. Managers usually raise extraordinary items, which later increase the income statement and sometimes add up extraordinary losses on the statement of the earnings retained. This influence purely results from the accounting system and believed to act as a less expensive source of earning management; this attests to the fact that most managers go for the practice (Financial Management Association, 1972). Another manipulation strategy comes from real earning management which originates from cash flows; it takes into account real decisions like decreasing expenditure on research and development, advertising, employees training, timing the sale of assets to inflate sales by providing lenient credit terms. This method of real earning is termed as the most expensive form of earning management (Peterson et al, 2004). Over the years, most studies have based their arguments towards accrual manipulations, and only recently have there been plans to appreciate that earnings management sometimes takes the form of real activities influence. Despite the costs incurred, the system practicing this method appears the best as auditors and regulators cannot the earning management in use. This fact appears prompted by the uncertainties crumble in the business environment (Peterson et al, 2004). Fresh research scrutinizes the interrelations and pecking system amid accruals and operational activities in earnings management opinions that organizational options; these takes place amid the earning management practices. It is a responsibility to the firm’s reasoning to apply the use of accrual management and expenses related to it. There is an investigation meant to ascertain the validity of cash related sales so as to keep track of earnings. This is used as a strategy for dropping accruals that can attract auditors’ attention (Financial Management Association International, 2000). The researchers feel that the feeble controlling role employed by the Hong Kong results into the fragile legal setting in the country, which prompts the conducive setting for the analysis. Hong Kong’s firms appear as a group of typical firms that can increase cash sales to an associated firm. The studies discover that research should investigate both actual as well as, the accrual based earnings manipulations; since they attend to various management reporting methods. They also tend to act as an upcoming or subordinating practice (Chartered Institute of Management Accountants, 2011). The above discussion prompts the manager’s verdict to provide a press release that will support the genre of earnings management undertaken. Individuals prefer accrual earning management that is cheap yet easily detected to counteract the decisions of the press release. The decisions to term a manager as conducting the business badly proved nil as the managers appears protected by the business idea of good judgment. Secondly, there appear no bench marks set to guide the managers’ activities. However, the preceding types of earning manipulation like, accrual management comes with accounting standards, as a benchmark, and subject to inspection by auditors and, or by potential forensic accountants and courts (Financial Management Association, 1972). Impression management writing originates from the social psychology and is affiliated to the way individuals presents package themselves in the society. Corporate reporting systems view impression management as the process of controlling and influencing the impression expressed to users of accounting information. The explanation proves that the managers apply impression management. The manager targets corporate reports as the wheels to influence the perceptions, and ultimately the decisions of the shareholders strategically. A paramount section of the literature investigating strategic message of the information, amid firms and shareholders steps in during manipulation of graphs (Shim & Siegel, 2000). There also appears a well formulated stand focusing on literature and narratives. This increases the chances of misinforming the revelations practices. The information provided in the form of narratives has been subject to investigations mostly in yearly reports, yet also the press releases sometimes give the information. Press releases allow a significant level of management secrets. They capture the information absent in the face of the financial statements; providing room for qualitative and quantitative formats, ensuring strategic revelation practices. Corporate narratives use different strategies, which could ultimately cause misleading information. The former literatures discuss the positive and negative diction in annual reports narratives (Elliott & Elliott, 2008). The analysis comprises of classifying words into positive and negative to assess the existence of thematic influence. Another potential misinformation revelation comes from the repeating information of coming from a certain part, to make it so clear to the readers. Another dissimilar thread of literature examines the format of disclosure proving to be qualitative versus quantitative analysis as a strategic revelation practice. Gibbins, a researcher reveals that most firms’ reveals good news using qualitative format and unfavorable news by use of quantitative format (Oporowski, 2005). Later analysts produced proof of companies employing qualitative data to put information across unfavorable news while they use the quantitative data to present the favorable news. Clatworthy, a researcher, also found out that profitable companies are involved in excessive use of quantitative data; they use percentages more when referring to performance than quantitative data. Benchmarking allows organizations to strive towards increasing performance, and it proves a good source of strategic disclosure. Use of specific units as a benchmark material drastically increases the earnings; an apparent attempt to influence the readers’ notions (Chartered Institute of Management Accountants, & Proquest Direct, 2000). Conclusion The fair and view in the HKAS presents the reports with some elements of transparency. The cash flows from operating activities allow reconfirmation on operational result. The cash flows investment activities ensure the reflection of the company’s financial activities. It appears note worthy for the financial reporting to take care of the funding reserves to enable sound financial reports. The constant review of the accounting standards requires undivided commitment for accountants and directors of accounting reports to stay updated. There appears an urge to the issuers to take part in the development and formulation of the standards requirement in accounting and comment, in the discussion papers. Issuer’s regular review and update to their financial reports proves paramount. Bibliography Agarwal, O. P., 2009. International financial management. Mumbai: Himalaya Pub. House. Association of Chartered Certified Accountants (Great Britain). 2007. Financial reporting. Workingha. Berkshire: Kaplan Pub. Chartered Institute Of Management Accountants. 2011. Financial management. London, BPP Learning Media. Chartered Institute Of Management Accountants, and Proquest Direct. 2000. Financial Management. London, CIMA. Elliott, B., and Elliott, J., 2008. Financial accounting and reporting. Upper Saddle River: Prentice Hall. Financial Management Association. 1972. Financial management. Tampa: Financial Management Association. Financial Management Association International. 2000. Financial management. Tampa: Financial Management Association International. Oporowski, J., 2005. Theories of financial disturbance an examination of critical theories of Finance from Adam Smith to the present day. Cheltenham: Edward Elgar. Peterson, P. P., Fabozzi, F. J., and Habegger, W. D., 2004. Financial management and analysis Workbook step-by-step exercises and tests to help you master financial management and Analysis. New York: Wiley. Shim, J. K., and Siegel, J. G., 2000. Financial management. Hauppauge, N.Y: Barron's. Read More