Any business entity has financial statements. It contains information on balances and movement, expressed in monetary units. The main indicators are: the turnover of all funds available on the balance sheet, and the results of operations recorded on a specific date.
The main purpose of compiling such documents is to provide information that users of financial statements can familiarize themselves with. The value of the data lies in its accuracy and reliability, and any distortion may indicate fraud attempts.
What is financial reporting?
Documents fixing the final indicators of the economic activity of the enterprise are compiled on the basis of the data of constant accounting. Users of financial statements can see in them full information for a certain period:
- on the amounts of income and expenses;
- on cash flows;
- on payments to owners and their contributions;
- on the state of finance at the end of the reporting date.
In the final documents, everything is stated clearly, fully, reliably and consistently.
The main forms of financial statements are the balance sheet and income statement. These documents have appendices and explanations.
Who are the internal users of financial statements?
Any documents are drawn up to draw information from them. This principle fully applies to financial reporting. Its users are divided into two categories:
- domestic;
- external.
The first group includes a fairly wide range of individuals. Internal users of financial statements are:
- managerial staff (managers and specialists of economic services, financial managers of various levels);
- owners of the enterprise (both current and potential);
- union representatives;
- legal advisers;
- ordinary employees.
For each category of persons potentially interested in obtaining information, only a part of it will be important.
How financial reporting data can be useful for internal users
The aspects that attract attention in the documents are very different. They depend on the place of the person in the company.
- The main internal users of the financial statements are owners. It is these people who risk their investments and reputation in the wrong direction of the enterprise. It is important for them to see what is the return on money and effort spent, how high are the levels of economic risk and the possibility of material losses. Familiarization with financial statements helps owners to evaluate the level of effectiveness of accounting, financial managers and the marketing department.
- Ordinary employees are trying to understand whether the company receives a sufficiently high profit in order to guarantee a competitive and constant income. Whether the necessary volume of activity will be supported. Are there any changes in the staff list in the form of a reduction in the number of employees?
- Top managers and managers of economic services can analyze indicators best of all. It is these users of the financial statements that make up the backbone of the enterprise, which determines the most effective and profitable direction of its activity. They also determine the need for certain resources. It is determined whether investment decisions were made correctly. Based on existing indicators, future indicators are projected.
- Trade unionists are interested in financial reporting in order to obtain information regarding wages and the possibility of raising them.
- Lawyers evaluate data in terms of compliance with applicable law.
Who are external users of financial statements?
However, it is not only people who are related to the subject of economic activity who get acquainted with such information. There are categories of external users who also have access to receive financial reporting information. These include:
- business partners;
- banks;
- investors
- the courts;
- statistical authorities;
- media representatives;
- controlling, verifying and law enforcement agencies.
How external users use information obtained from financial statements
The interest in the documents of the company from third parties is caused not at all by idle curiosity.
- Users of financial statements, consisting of representatives of fiscal services, check to see if the company is evading the payment of taxes and not lowering their amounts.
- Law enforcement agencies are looking for a corruption component in the documents.
- Courts need these reports to make bankruptcy decisions.
- Statistical authorities take figures to compile regional and national reports.
- Business partners are interested in reporting in terms of the feasibility of concluding contracts.
- Potential investors get acquainted with the information to assess the risks and profits associated with the acquisition of shares and investment.
- Journalists need reporting data to prepare materials on the development of various sectors of the economy and assess the level of business activity in the country.
Familiarization of external users with financial performance indicators is beneficial for the enterprise itself. After all, it brings additional financial resources.
How do internal and external users understand that reporting information is intentionally distorted
One of the main requirements for the preparation of final financial documents is their reliability. However, sometimes for the purpose of fraud, employees of the financial services of an enterprise intentionally distort the indicators. Thus, external and internal users of financial reporting information are deliberately misled.
Such veiling can occur by:
- introducing changes in the balance sheet structure regarding obligations;
- untruthful reflection of information about liabilities and assets;
- unauthorized debt cancellation;
- overstatement of the percentage of actually completed work under long-term contracts;
- conclusion of doubtful sale contracts with the condition;
- unlawful capitalization of expenses;
- assignment of expenses to future periods or their concealment in the accounts of controlled companies;
- early recognition of revenue;
- settlements through shell companies;
- substitution of contingent liabilities;
- combining in one article the balance of amounts of heterogeneous nature;
- deliberate arithmetic errors.
In order to avoid such fraud on the part of financial managers, competent managers periodically conduct third-party audits. This method helps to protect the company from employee fraud quite effectively.