Escolar Documentos
Profissional Documentos
Cultura Documentos
By
Dr. S.A.S. ARUWA1, CNA
____________________________________________________________________
Being a paper presented at ANAN Practitioners Forum
at Mainland Hotel, Lagos on 3rd August, 2010
____________________________________________________________________
Abstract
Good corporate reporting is generally an indication of competitiveness and superior
corporate governance. Good reports show initiative and effort on the part of the
preparers. Significant changes in the corporate external reporting environment have
led to proposals for fundamental changes in corporate reporting practices. A variety
of new information types are been demanded, in particular forward-looking, nonfinancial and soft information. Openness and transparency in annual reporting on an
unprecedented scale may be inevitable with the adoption of International Financial
Reporting Standards (IFRS) and Nigerias commitment to adopt IFRS; Nigerian
companies will have no alternative but to bring themselves up to speed. One way is
to ensure that companys reports actually reflect good governance.
INTRODUCTION
Good corporate reporting is generally an indication of competitiveness and superior
corporate governance. Good reports show initiative and effort on the part of the
preparers. The better reports always address all the required relevant information
concisely, and disclose thoroughly the measures taken including on activities,
corporate policy, strategic plans, the companys prospects and current initiatives to
protect the environment, (Pushpanathan, 2010:15).
In recent times the demand for financial disclosure of listed companies has
dramatically increased and the failures of large companies listed on the most
important stock exchanges have placed extra pressure on listed companies and
standard setters for the increase in the quality of corporate reporting.
Significant changes in the corporate external reporting environment have led to
proposals for fundamental changes in corporate reporting practices. Recent influential
reports by major organizations have suggested that a variety of new information types
be reported, in particular forward-looking, non-financial and soft information.
1
Dr. Aruwa is a Senior Lecturer and Head of Department of Accounting, Nasarawa State University, Keffi-Nigeria.
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It cannot be stressed enough that companies should be more open if they want to
improve. For example, significant related party disclosures involving holding
companies, subsidiaries, associated companies and joint ventures, as well as other
director-related transactions ought to be disclosed in a transparent manner in the
annual reports. The more relevant information it shares with its stakeholders, the
better a companys corporate governance is likely to be.
Openness and transparency in annual reporting on an unprecedented scale may be
inevitable with the adoption of International Financial Reporting Standards (IFRS) and
Nigerias commitment to adopt IFRS; Nigerian companies will have no alternative but
to bring themselves up to speed. One way, of course, is to ensure that companys
reports actually reflect good governance.
A recent study by the design agency Bostock & Pollitt (2006) found that companies
have two main reasons for producing an annual report. The first is to meet the
governments regulatory requirements. The second is to market the company to key
stakeholders. Corporate reports are viewed as follows:
It provides a balanced overview of our results and financial position at the end of
the year and satisfies all regulatory requirements.
It achieves the primary regulatory requirements. The second is to market the
company to key stakeholders.
It is a legal requirement but it also enables you to get your message out to key
stakeholders It forms a branding exercise also.
It achieves the primary regulatory purpose when signed off by the auditors and
regulators.
It achieves our statutory obligation for filing.
is to give stakeholders a view of business, what drives it, what affects it, how we
measure ourselves going forward.
It is a communications piece to stakeholders raising the key issues for the business
and addressing how management will address these issues going forward.
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Companies want to meet their legal requirements. They also want to communicate
with their key stakeholders. The law provides a framework within which companies
are free to find their own solutions.
When the corporate reporting agency Black Sun (2006) analyzed the FTSE-100 annual
reports published for the year ending December 2005, they found evidence of
significant change:
95% of companies discussed their corporate strategies, up from 75% a year
before
40% provided business objectives or targets, up from 16%
the percentage of firms discussing values and principles rose from 30% to 66%
the proportion disclosing Key Performance Indicators (KPIs) almost doubled
from 19% to 36%.
Many criticisms have been leveled against financial reporting. However, these
criticisms may simply be the symptoms of a financial reporting expectations gap,
comprising of the much discussed audit expectations gap as well as a financial
statements expectations gap. Only once the limitations of the financial statements
are recognized can the real debate regarding the corporate communication of
performance and risk begin.
Statement of Accounting Standards (SAS) 1 (Disclosure of Accounting Policies), SAS 2
(information to be disclosed in Financial Statements), SAS 10 and 15 (on Banks and
Non-Bank financial Institutions), and SAS 18 (on Statement of Cash flows) directly
provide guidance on the Information content of corporate reports in Nigeria.
The International Accounting Standards (IAS) 1 prescribes a complete set of financial
statements to include:
a) statement of financial position as at the end of the period;
b) an statement of comprehensive income for the period;
c) a statement of changes in equity for the period:
d) a statement of cash flows for the period;
e) notes, comprising a summary of significant accounting policies and other
explanatory information; and
f) when an entity applies an accounting policy retrospectively or makes a
retrospective restatement of items in its financial statements, or when it
reclassifies items in its financial statements, a statement of financial position as at
the beginning of the earliest comparative period.
SAS 2 prescribes that Financial Statements should include the following:
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a)
b)
c)
d)
e)
f)
g)
This paper provides the knowledge, judgment and perspective necessary to be both
proficient and insightful at understanding, interpreting, and analyzing the information
contained in corporate financial statements and their accompanying nonfinancial
information.
TRANSFORMATIONS IN CORPORATE FINANCIAL REPORTING
Throughout its history, financial reporting has evolved continuously. As a service
activity, the practice of accounting responds to changes in the context in which it
operates. Changes in manufacturing industry brought about by the Industrial
Revolution (especially the rapid increase in the scale of business activity) were
responsible for much of the early development of financial accounting.
Related significant influences include the emergence of the corporate form (and
hence the divorce of ownership from control), the development of active markets for
shares, the formation of Professional Accounting associations, and the regulation of
accounting and auditing practices (Ryan, Scapens and Theobald, 1992). In recent
times, the professional bodies have sought to monitor the environment, identify key
changes, and develop strategies to accommodate these changes. Changes in
accounting practice are highly pragmatic, drawing upon academic research in a
selective manner.
However, the pace of change has not been uniform. It is possible that the
technological revolution may mark a further period of intense change in the course of
development of corporate reporting practices. The rapid developments in information
and communications technology, in particular, have led to the transformation of the
global infrastructure. We now have global capital markets, widespread electronic
commerce, and short-term strategic corporate alliances. Business is increasingly
flexible and consumer-driven, rather than producer-driven.
Allied to this there has, since the late 1980s, been a steep rise in the market value of
companies relative to the book value of their assets (i.e., the valuation ratio) (Higson,
1998). This appears to be due, in large part, to the growing importance of service and
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measurements
that
shareholders,
and
assertion made by another party (SSAE No.1, AICPA, 1993). The level of service in
attestation engagements is currently limited to audit examination, review, and the
application of agreed-upon procedures. Thus, the traditional financial audit is but one
form of attest service which is, in turn, but one form of assurance service. All involve
independent verification.
Three of the six main new service opportunities identified by the committee concern
external corporate reporting. These are risk assessment, business performance
measurement, and information systems reliability. The Elliott Committees view was
that, while external users will eventually demand these new services, demand will
initially stem from the companys management.
The Financial Accounting Standards Board (FASB), the US standard-setting body, has
launched a sample business information reporting package on its website (FASB,
1998). This illustrates how a company might use the Internet to respond to the
information needs of investors and creditors as understood by the AICPA Special
Committee on Financial Reporting (The Jenkins Report). Entitled FauxCom, this fully
integrated web-based package has been specifically designed to exploit the search,
selection and analysis capabilities of modern technology. The package allows drilling
down to the desired level of detail and provides navigation buttons which allow the
user to jump between the financial statements, the related notes, five-year
summaries, and the Management Discussion and Analysis (MDA). Graphs are available
at the press of a button and information can be downloaded directly to Excel files.
The international accountancy firm Price Waterhouse (PW) proposes enhanced,
voluntary disclosure of future-oriented information covering both financial and nonfinancial performance measures. PW calls its proposed reporting model
ValueReporting, and offers an illustrative report (Blueprint Inc.) showing the possible
structure and content of corporate reporting in the future (Wright and Keegan, 1997).
The Chief Executive Officers letter includes an overview of the principal financial and
non-financial value drivers. Following this, there is a detailed quantification of
financial value drivers, customer value drivers, people value drivers, growth and
innovation
drivers,
and
process
value
drivers.
Subsequently,
as
PricewaterhouseCoopers (PwC), they published a series of surveys of preparers and
users in Western countries during 1997 and 1998 (Eccles and Kahn, 1998) that confirm
the existence of a wide information reporting gap.
In the UK, the Royal Society for Arts produced a report in 1995, entitled Tomorrows
Company (RSA, 1995), that has received considerable media attention. This inquiry
proposed a more inclusive, non-adversarial approach to both business practices and
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From the above summary, it can be seen that the current re-examination of corporate
reporting embraces five distinct aspects:
i) the parties to whom the company has an obligation (including a reporting
obligation),
ii) the means of disseminating information,
iii) the content of the reporting package,
iv) the need for assurance services in relation to new information types, and
v) the need for regulatory reform.
Each of these aspects is considered, in turn, as follows.
The parties to whom the company has an obligation to report:
In the early 1970s, great attention was given to the objectives of financial
statements. It became generally accepted that the primary objective of financial
accounting should be to aid users in their decisions. In the UK, The Corporate Report
(ASSC, 1975) identified seven legitimate user groups, such as employees, customers
and suppliers. Despite this, investors are currently viewed as the defining class of
user (ASB, 1999, para.1.10).
The debate regarding the participant groups in whose interests a company should be
run is still ongoing. Currently there are two approaches being advocated, the
enlightened shareholder value approach, in which management run the company
with the exclusive objective of maximizing shareholder value, and the pluralist
approach, in which a wider range of interests is valid and has to be balanced. It is
the former approach that is currently enshrined in law and, hence, companies
reporting obligations do not extend to stakeholder groups other than shareholders. In
proposing an inclusive, non-adversarial approach both to business practices and
corporate reporting, the RSA is voicing support for the pluralist approach.
Means of disseminating information:
Wallman (1997), FASB (1998a), ICAEW (1998a,b), ICAS (1999), and the company law
review (DTI, 1999, ch.5.7) all address explicitly the impact of information and
communications technology on corporate reporting. The Internet is generally viewed
as the principal means of information dissemination in the future. This technology
allows anyone with a telephone line and a networked digital terminal to access any
database connected to the network and to download information for their own use.
The use of this technology has been growing exponentially over recent years, a trend
that is expected to continue. Commercial websites are increasingly being used as a
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reporting medium, with financial and other corporate information being included in
addition to promotional and sales material.
A recent study (Hussey and Sowinska, 1999) has shown that, in March 1998, 91 of the
FTSE 100 companies had a website, 63 of which included financial disclosures. Fiftyfour included detailed accounts, 45 included an interim statement, 17 included their
preliminary statement, 12 included a summary statement, and 26 included financial
highlights. Yet the Auditing Practices Board (APB) has confirmed that auditors do not
currently have any responsibility for financial information on the Web. The Board
acknowledges, however, that it would be possible for auditors to offer an opinion on
whether a company has controls in place to ensure reliable online information.
The Internet is also capable of supporting two-way communication, a feature that is
exploited in the ICAS (1999) proposals relating to on-line questioning of management.
This facilitates interaction between management and interested parties, thereby
enhancing corporate governance structures. ICAS (1999, p.74) suggests that the two
principal functions of the Annual General Meeting (the opportunity for questioning of
management by shareholders and voting) could be conducted more effectively via the
Internet.
Content of the business reporting package:
The above summary of key influential reports gives an indication of the broad range
of information types that have been suggested as part of the reporting package. It is
apparent that there is a degree of overlap between the suggestions, but a detailed
comparison is rendered extremely problematic due to terminological differences and
variations in both the scope covered and the level of detail provided. This sub-section
attempts to synthesise this material by providing a tentative framework for classifying
and describing information types.
AICPA (1994), RSA (1995), Wallman (1996), Price Waterhouse (1997), ICAEW (1999),
ICAS (1999), FPM (1999), and DTI (1999) all address explicitly, either in general or
specific terms, the content of the business reporting package. Their suggestions are
based either on a combination of casual observation and logical argument or, in a few
cases, on detailed empirical investigation. This reflects the two approaches that are
used in practice to determine the content and presentation of corporate reporting,
i.e., the normative approach (what users should know) and the empirical approach
(what users want to know).
In general terms, there is a call for more information. This is because advances in
information technology (in particular, sophisticated software agents) mean that large
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quantities of data can be searched and analyzed based on the users individual
specifications. More specifically, however, there is a call for information that is
forward-looking and/or non-financial in nature. This information may be quantitative
or qualitative and is intended to augment, and not replace, the existing set of largely
historical, financial information contained in the financial statements.
There are two main reasons for this shift in the nature of the reportable information
set. First, it is recognized that many non-financial performance indicators lead
financial performance indicators, hence providing more up-to-date information about
future prospects. This is important in a world where rapid change means that
companies must be adaptable in order to survive. Second, it can be argued that the
exclusive reliance on financial performance indicators, which appears to privilege the
interests of shareholders, is inconsistent with the pluralist approach to business. Nonfinancial performance indicators, for example employee turnover and average
delivery time, address the specific interests of these stakeholder groups directly.
Several of the reports share the concept of a business having key drivers of success
that must be identified and communicated. Unfortunately, the terms used vary. The
AICPA refers to critical success factors, Price Waterhouse (1997) refers to value
drivers, while ICAS (1999) refers to drivers of company performance. In the general
call for more forward-looking and non-financial information, it is possible to identify
four broad issues about which such information is considered desirable.
First, there is forward-looking information about strategy. Second, there is
information relating to risk. Third, the reports all tend to discuss (although at
different levels of detail) value drivers and related non-financial performance
measures (or performance indicators). The fourth and final area where additional
information is required is background information, principally about the business of
the company and the people who manage it.
The AICPA (1994) discusses risk only generally under the heading forward-looking
information. ICAS (1999) identifies a number of specific sources of risk, ranked in a
user survey in terms of their importance as drivers of company performance. Among
29 drivers, six risk-related drivers ranked highly as follows: vulnerability to
competition ranked second, customer and supplier dependencies ranked tenth, while
flexibility to technological change, vulnerability to exchange rate changes,
vulnerability to interest rate changes, and vulnerability to changes in government
policy all ranked between ten and twenty.
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The most detailed proposals in relation to risk are contained in ICAEW (1997). This
discussion paper proposes a separate statement of business risk that not only brings
together the current piecemeal disclosures required by various accounting standards
and guidelines (e.g., SSAP 18, FRS 13, and the Operating and Financial Review), but
radically augments them. This statement would identify and prioritize key risks,
describe the actions taken to manage each risk, and identify how each risk is
measured. The identification of key risks would be based on their likelihood and
significance, perhaps using a risk mapping technique. Importantly, all types of
business risk, rather than only financial risks, would be included. Thus, the statement
of business risk would encompass external, environmental risks as well as internal
risks, the latter of which could arise from operational, financial or other sources. A
variety of possible measurement methods is considered. In a follow-up report, the
ICAEW (1999b) rebut concerns regarding directors legal liability and commercial
sensitivity, noting that extensive risk disclosures are made in prospectuses. The need
for a separate statement of business risk is, however, played down.
Non-financial performance measures are frequently grouped into themes, with the
themes sometimes linked to the identified value drivers. For example, Price
Waterhouse (1997) identifies four non-financial value drivers, relating to customers,
people, growth and innovation, and process. RSA (1998) identifies three non-financial
themes as the basis for reports to supplement the core document: value chain,
people, and sustainability. FPM (1999) identifies four non-financial themes around
which to group performance measures: activity, development, environment, and
relations.
In each of these three examples, financial was an additional theme. Allowing for
terminological differences, a consensus does seem to emerge from this. Four distinct
themes
appear
to
exist
in
addition
to
the
financial
theme:
customer/relations/people;
growth
and
innovation/development;
sustainability/environment; and process/value chain/activity.
Finally, background about the company and information about management and
shareholders are two of the five broad categories of information proposed by the
AICPA (1994). ICAS (1999) identify, through empirical investigation, quality of
management as the top driver of company performance and, consequently,
recommend that detailed biographical information relating to the top management
team be disclosed (pp.76-77).
It is possible to describe information items based on their character and attributes. In
particular, within the literature it has become common to use the following three
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dichotomous descriptors: forward-looking versus historical; financial versus nonfinancial; and quantitative versus non-quantitative.
Assurance services:
Not surprisingly, fundamental changes in the business reporting package necessitate
changes to the way in which that information is audited. AICPA (1996) has a seminal
work relating to this changed set of practices. This report introduces the term
assurance services and provides a detailed examination of the issues. It is argued
that the traditional attest function provides reliability assurance, with direct
assurance on relevance representing a new field for the accountancy profession. Two
forms of reliability assurance are distinguished: data assurance which relates to
specific data items and system assurance which relates to the design and operation
of an information system. If the anticipated move away from point-in-time to realtime corporate reporting occurs, then system assurance will become of increasing
importance to users. Relevance assurances support the various stages of the users
decision-making process, from problem definition, through information search,
selection and analysis stages. Relevance services are more customized, targeted
services compared to the highly structured audit services.
Given the importance to users of information about risk and non-financial
performance measures in business reporting models, assurance service opportunities
relating to risk assessment and performance measures are clearly of direct relevance.
They are types of data assurance. Given the move towards allowing external users
access to large sections of the corporate database, potentially on a real-time basis,
assurances relating to information systems reliability are also of direct relevance.
ICAS (1999) identifies, based on its empirical research, confidence in business
information as one of four important themes relating to the corporate
communications process. It proposes a shift towards the assurance of processes in
addition to outputs and that multiple levels and forms of assurance be developed
(p.79). It suggests that assurance seals could be tagged either to individual
information items or to entire web pages, with electronic warnings at the gateways
between assurance levels (p.82).
It is, however, clear from the available literature that, although the general direction
and nature of future developments in assurance services in relation to business
reporting have been mapped out, detailed methods and procedures have yet to be
determined.
The need for regulatory reform:
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balance sheet (and thus less visible) items. The company would appear from the
balance sheet data alone, to have less debt and more borrowing capacity than is
really the case. Bankers who fail to spot off-balance sheet liabilities of this sort can
underestimate the credit risk lurking in their loan portfolios.
Companies can also smooth reported earnings by strategically timing the recognitions
of revenues and expenses to dampen the normal ups and downs of business activity.
This strategy projects an image of a stable company that can easily service its debt,
even in severe business downturn.
According to SAS 10, Banks recognize their revenues when they are earned or
realized. The timing of classification of loans and advances as non-performing, so as
to put the related interest income in suspense, is a controversial issue. Whilst some
banks take such interest income on non-performing loans into interest suspense
account, others take it into interest income thereby overstating profits.
Managers have reasons to exploit this flexibility. Their interests may conflict with the
interests of shareholders, lenders, and others who rely on financial statement
information. There is therefore, the need to undertake further analysis of the
corporate reports. The Auditors rely on Analytical Review Procedures to assess the
corporate reports.
Analytical Review is the examination of ratios, trends, and changes in balances from
one period to the next, to obtain a broad understanding of the financial statements.
Analysts can broadly be defined as anyone who uses financial statements to make
decisions as part of their job. This includes investors, creditors, financial advisors,
and auditors. To perform good audits, we need more skills than forensic and general
accounting skills, tax planning, risk management, and securities analysis are all vital
competencies for auditors to possess.
Independent auditors carefully examine financial statements prepared by the
company prior to conducting an audit of those statements. An understanding of
managements reporting incentives coupled with detailed knowledge of reporting
rules enables auditors to recognize vulnerable areas where financial abuses are likely
to occur. Astute auditors choose audit procedures designed to ensure that major
improprieties can be detected.
Current Auditing Standards require independent auditors to use Analytical Review
Procedures (ARP) on each engagement. This can help auditors avoid the
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embarrassment and economic loss from accounting surprises, such as the one that
occurred in WorldCom.
Analytical Review Procedures are the tools auditors use to illuminate relationships
among the data. These procedures range from simple ratio and trend analysis to
complex statistical techniques. The auditors goal is to assess the general
reasonableness of the reported financial information in relation to the companys
activities, industry conditions, and business climate. Auditors look behind the numbers
when the reported figures seem unusual.
Three types of financial information are needed (AICPA, 1994):
1. Quarterly and annual financial statements along with nonfinancial operating
and performance data like order backlogs, customer retention rates, etc
2. Managements analysis of financial and nonfinancial data (including reasons for
changes) along with key trends and a discussion of the past effect on those
trends.
3. Information that makes it possible both to identify the future opportunities and
risks confronting each of the companys businesses and to evaluate
managements plans for the future.
The auditor should consider analytical review information that has already been
prepared by management. Examples include exhibits, charts, graphs and similar
analyses included in the companys internal management reports, board reports,
divisions or line of business statistics, and similar documents. The key is not to
calculate all the ratios possible, but to identify those few key relationships that best
satisfy the auditors objective of substantiating or corroborating the account balance.
When deciding whether to incorporate analytical review procedures into the audit
programme as substantive tests of balances, the auditor should consider the extent to
which the underlying data should be tested.
Analytical procedures means the analysis of significant relationships, ratios and
trends, including the resulting investigation of fluctuations or relationships that are
inconsistent with other relevant information or which deviate from predicted
amounts. Analytical procedures include the consideration of comparisons of the
entitys financial or non-financial information with, for example comparable
information for prior periods.;
Analytical procedures also include consideration of relationships among elements of
information that would be expected to conform to a predictable pattern based on the
entitys experience. Various methods may be used in performing the above
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procedures. These range from simple comparisons to complex analyses using advanced
statistical techniques. Analytical procedures may be applied to consolidated financial
reports, financial information of components (such as subsidiaries, divisions or
segments), individual elements of financial information and individual elements of
non-financial information. The auditors choice of procedures, methods and the level
of application is a matter of professional judgement.
Analytical procedures are used for the following purposes:
a) to assist the auditor in planning the nature, timing and extent of other audit
procedures;
b) as a substantive procedure when the use of analytical procedures can be more
effective or efficient than tests of detailed transactions or items in reducing
detection risk; and
c) as an overall review in the final stage of the audit.
Analytical procedures have become increasingly important to audit firms and are now
considered to be an integral part of the audit process. The importance of analytical
procedures is demonstrated by the fact that the Auditing Standards Board, the board
that establishes the standards for conducting financial statement audits, has required
that analytical procedures be performed during all audits of financial statements. The
Auditing Standards Board did so through the issuance of Statement on Auditing
Standards (SAS) No. 56 in 1988, which requires that analytical procedures be used by
auditors as they plan the audit and also in the final review of the financial
statements. In addition, SAS No. 56 encourages auditors to use analytical procedures
as one of the procedures they use to gather evidence related to account balances
(referred to in auditing as a substantive test).
SAS No. 56 describes analytical procedures as the "evaluation of financial information
made by a study of plausible relationships among both financial and nonfinancial
data" (AICPA, 1998, 56 p. 1). Accounting researchers have helped to clarify the
process that auditors use to perform analytical procedures by developing models that
describe the various stages of the process. One such model developed by Hirst and
Koonce (1996) describes the performance of analytical procedures as consisting of five
components:
a)
b)
c)
d)
e)
expectation development,
explanation generation,
information search and explanation evaluation,
decision making, and
documentation.
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(e.g., internal control and inherent) associated with the account balance(s) affected.
As any of these factors increase, the reliability of the information obtained in support
of the explanation should also increase. SAS No. 56 provides guidance for auditors in
the evaluation of the reliability of data. Some of the factors to be considered by the
auditors include the following:
Data obtained from independent sources outside the entity are more reliable
than data obtained from sources within the entity.
ii) If data are obtained from within the entity, data obtained from sources
independent from the amount being audited are more reliable.
iii) Data developed under a system with adequate controls are more reliable than
data from a system with poor controls.
i)
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Horizontal and Vertical analysis can also be conducted to elicit information on trend.
The ratios commonly used for comparative analysis are presented below:
Ratio
Elements compared
accounts
receivable
to
current
Equity ratio
Debt ratio
Stock turnover
CASE STUDY
ANALYSIS OF BANK USING PUBLISHED FINANCIAL STATEMENTS
1. Capital adequacy variables
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A bank should have adequate amount of capital to support the stability and
sustainability of its operations. There are three variables which describe what is
called a capital adequacy:
i)
Equity over Assets (E/A),
ii)
Equity over Earning Assets (E/EA), and
iii)
Equity over Loans (E/L).
It is preferable for a bank to have high amount of Equity, as a bank expands its
earning assets, it has to maintain Capital Adequacy Ratio ruled out by the Central
Bank.
Logically it seems more correct for us to consider E/EA instead of E/A because in fact
only earning assets, which directly generate earning, contains risks to be covered.
2. Growth and Aggressiveness variables
i)
Loans Growth Rate (LGR).
ii)
Loans Market Share Increment (LMSI).
iii)
Deposits Growth Rate (DGR).
iv)
Deposits Market Share Increment (DMSI).
The higher these four variables are the more aggressive the policy of a bank is.
However, it is not clear whether to be aggressive all the time is necessarily a good
strategy. We would rather share a point of view that this should remain a matter of
specific policy within specific circumstances of a bank.
3. Cost of fund as a credibility measurement of a bank
It is commonly accepted that one can use cost of fund to measure credibility of a
bank. If a bank pays relatively lower interest to funds received than other banks, it
means that the bank is perceived as a more secure and trustworthy than other banks.
4. Sources of income and funds diversification variables
Dependence on single type of income source and on single type of fund source may be
considered as not a good practice as this practice is relatively more viable to change
in market conditions. It should be considered good for a bank to be able to generate
fee-based income from activities like arranging syndicated loans, credit card
administration, trade finance administration, payment agent, or collection agent, as
they are relatively risk-less activities. Also, it should be considered good if a bank
does not depend solely on deposits and can diversify its source of funds, for instance,
by issuing marketable securities or receiving low-interest off-shore loans.
The two ratios are:
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analytical procedures. Some of the major issues that companies will need to deal with
over the next few years include:
Electronic/Internet reporting: From early 2007, this is likely to cause issues during
the transition phase; companies will also need to develop new processes to handle the
online materials, whilst maintaining the old-style paper reports for those who want
them. As firms need to provide more information to more people in more forms than
ever before, it is likely that there will be a shift to new models for gathering and
managing parcels of information, and disseminating them in different ways to
different audiences. The corporate report, as the key strategic and operational
summary of the business, is likely to remain central to those developments.
Global developments: The current trend is towards more international harmonization
of Accounting Standards. The International Accounting Standards Board (IASB) has set
out a roadmap for the convergence of the International Financial Reporting Standards
(IFRS) and Nigeria is at advanced stage of pronouncing its roadmap towards full
adoption of IFRS, and has committed not to expose existing standards as part of the
transition.
For multinational companies no longer having to prepare accounts to meet multiple
different standards, the cost savings could be considerable. So could the benefits for
analysts wishing to compare performance. But as well as the obvious surface
differences between accounting standards, there are also differences in the
underlying philosophical approaches followed in different regions of the world,
especially the conflict between a rules-driven and a principles-driven approach.
Auditors and other stakeholders must brace up to these challenges.
Changes from the major accounting firms: The recent call by the major accounting
firms for a radical change to the current financial reporting model would have an
even more significant impact on corporate reporting than the changes we have just
seen. The firms have called for quarterly financial reporting statements (with a
historic perspective on performance) to be replaced by real-time, internet-based
reporting that would encompass a wide range of financial and non-financial
performance measures. This, they suggest, would provide a more valuable indication
of company value and its future prospects than current reporting. It seems unlikely
that these changes would happen quickly. But the shift from providing historic to realtime information, and the associated shifts in systems, processes and relationships
with external auditors, would be so fundamental that this is an issue no Accountant or
Finance Director can afford to ignore.
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References
American Institute of Certified Public Accountants (1988). Statement on Auditing
Standards No. 56: Analytical Procedures. New York
ASB (1999). Statement of Principles for Financial Reporting, Revised Exposure Draft,
London: Accounting Standards Board.
ASSC (1975). The Corporate Report, London: Accounting Standards Steering
Committee.
Beattie, V. (2000) The future of corporate reporting: a review article. Irish Accounting
Review 7(1):1-36
Beretta, S. and Bozzolan, S (2004). Discussions of A framework for the analysis of
firm risk communication, The International Journal of Accounting, Vol. 39,
No. 3, pp. 303-305.
Black Sun (2006). Whats happening in Corporate Reporting? May
Bostock & Pollitt (2006). Corporate Reporting: Seeing the Bigger Picture, November
DTI (1998). Modern Company Law for a Competitive Economy, Consultation Paper,
March, London: Department of Trade and Industry.
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