Financial reporting deals with the preparation of financial statements and provides information on financial performance and position of the business. The annual statement of an organisation is also useful to shareholders, employees, lenders and the tax authorities. If the form and content of financial statement are not regulated it would be possible for dishonest or incompetent directors to provide shareholders and other users with misleading financial information (Collins, B. and Mckeith, J., 2010, pp-3). Thus, it is important to introduce regulatory framework to ensure all companies in a country present similar transactions in a consistent fashion. Because of globalisation it has become even more difficult to understand and analyse financial reporting globally. Different nations have distinct system of accountancy. So it is important to introduce legislation and accounting standards. The International Accounting Standards Board (IASB) was formed on 1 April 2001 to tackle these problems. In the US and UK they are called as Financial Accounting Standards Board (FASB) and Accounting Standards Board (ASB) respectively. The emerge of global financial crisis has affected every single country's financial stability. Although, accounting is not considered as a root cause of financial crisis but it has an important role to play in its solution.
Findings
Financial accounting is concerned with the recording, classifying. Summarising and reporting of those transactions undertaken by an entity, which are of a financial nature. It is also concerned with the construction of a theory of accounting, with identification of rules of measurements, and with regulation of the content of financial reports. The pace of internationalisation of trade and investment has accelerated in recent years. This has been accompanied by calls for financial reports to be comparable internationally. The difference in economic and cultural condition of different nations can affect financial reporting. For example, the French business structure indicates the owners are also the managers. Whereas, there is separation of ownership and management in the UK. On the other hand, in France there is far less need for regulations to ensure that financial reports present a true and fair view: the emphasis in not so much on attempting to compensate for potential conflicts of interest between owners and managers a ensuring that the financial reports are accurate ( Elliott, B. and Elliott, J., 2006.pp-4).
IASC/IASB/FASB
The international Accounting Standards Committee (IASC) was established in 1973 by the professional accounting bodies of the UK, Ireland, the US, the Netherlands, Canada, Mexico, Australia, France, Japan and Germany. The main objective of this committee was to establish global accounting standards that require the transparency and integrity in financial statements and other financial reporting to help world's capital markets and other users make precise economic decisions.
The Framework serves as a guide to the IASB in developing accounting standards and in resolving accounting issues that are not addressed directly in an accounting standard. It also defines the basic elements in financial statements like assets, liabilities, equity, income and expenses and discusses the criteria for recognising and measuring them. In recent years, the IASB has undertaken a joint project with the FASB to develop a new conceptual framework. Current indication is that preparers and users of financial statements can expect major changes in the conceptual framework. If these changes are sufficiently substantial it could mean subsequent major changes in many current accounting standards. On the other side, the expansion in the number of multinational enterprise and transnational investments has led to a demand for a greater understanding of financial statements prepared in a range of countries. This had led to pressure for a single set of high-quality International Accounting Standards. IASs are being used increasingly for reporting to capital market. At the same time, national standards are evolving to come into line with IASs (Elliott, B. and Elliott, J., 2006.pp-24).
Financial Reporting Transparency
In financial reporting, the importance of transparency cannot be ignored, because stakeholders of a business make important decisions based on financial reporting. Especially the lenders and investors wish that they should be able to get better, reliable and transparent information of the company before making any investments. Sometimes companies tend to hide the facts and make false statements. The investors are likely to face more risky if they invest with such types of companies. Although, there is no agreed definitions on transparency but Barth, M.E. and Schipper, K. (2008) suggested it as "Financial reporting transparency is the extent to which financial reports revel an entity's underlying economics in a way that is readily understandable by those using the financial reports". Barth, M.E. and Schipper, K. (2008) also suggested on this transparency definition, the IASB and FASB's conceptual frameworks also provided a standard setter perspective. Financial reporting does not exist in a vacuum and it is put under the spotlight when events call its fairness into question. This has been seen in recent times with financial crisis in the global markets. The Asian crisis showed that under the force of financial globalisation it is essential for countries to improve the supervision, regulation and transparency of financial system. It was clear that local accounting standards used to prepare financial statements did not meet international standards. Investors, both domestic and foreign, did not fully understand the weak financial position of the companies in which they were investing (Elliott, B. and Elliott, J., 2006.pp-25)
Global Financial Crisis
Global financial crisis in general means the limitation of cash supply to consumers and business and interest rates are extremely high. It first started from US in 2007 and spread to rest of the world in very short period of time. It led to collision of large financial institutions, huge fall on the world stock markets, created unemployment and unstable economic conditions. The main causes of crisis were rise in hosing price, sub-prime mortgages schemes, low interest rate, loose monetary policy, securitization, large current account surpluses and bubble bursts. The crisis then started spreading form US to the rest of the world because of financial globalisation trend. The immediate effects of the crisis were losses and bankruptcy, unemployment, breaking down of the stock market, instability in prices, poverty and depression. In the course of time, Lehman Brothers the oldest bank in US went on $600 billion debt. Likewise, Citibank the largest bank in US made $20 billion losses. And UBS the largest bank in Switzerland made $17 billion losses.
The Financial Crisis Advisory Group
The Financial Crisis Advisory Group (FCAG) was formed to advise the ISAB and the US FASB on stabling the global financial crisis. It is concerned on possible ways to deal with changes to the global regulatory system on effective financial reporting. The FCAG will emphasis on enhancing investors' confidence in financial market by introducing improvements and possible changes in financial reporting. The group is also responsible in identifying the serious issues that need insistent attention of the boards. In the early stage of the crisis, the fair value accounting principle was highly criticised. The fair value accounting led to significant overstatement of profits and it failed to overstatement losses. On the other hand there financial reporting failed to recognise losses associated with loans, insurance companies, banks and other financial institutions.
Setting of accounting standard is to produce transparent, unbiased and relevant financial information on the condition and performance of business. Prudential regulators can help to reduce the risk of business failure by promoting the safety and soundness of financial institutions. Prudential regulators rely their decision making on financial reporting and are also concerned of economic and market stability. Financial crisis has proved certainty limitations of financial reporting. Financial reports only provide information for a finite period about the situation of a financial institute at a point in time. In turmoil times, financial information may not be useful because it was produced in different period of time in different circumstance. The quality of underlying information used to produce financial reports can only state the transparency and the quality of financial reporting.
Conclusion
Financial reporting plays an important role in financial system by providing transparency information to stakeholders in the business. The regulatory standard varies from country to country with distinct accounting standards. Effective financial reports depend on enforcement of transparency accounting standards. Directors and accountants are constrained by mass of rules and regulations which govern the measurement, presentation and disclosure of financial information. There have been a number of reports relating to financial reporting. The preparation and presentation of financial statements continue to evolve. Steps are being taken to provide a conceptual framework and there is growing international agreement on the setting standards. Strenuous efforts will continue to be needed form the auditors and the IASB to contain the use of unacceptable practices. The essential division between the IASC and its critics is one between those who are more concerned about where they want to be and those who want to be very clear about where they are now. The need for a conceptual framework is being addressed around the world. In both the IASB and the USA, the approach has been the same, i.e. commencing with a consideration of the objectives of financial statements, financial information, and definition of the element and when these are to be recognised in the financial statements. There is a general agreement on these areas. It is also equally important to respect IASC's decisions to make changes on certain style or aspect of accounting standards to bring stability and sound economic growth globally.
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