7.2 Perceptions of key actors on the use of financial reporting information and the impact
7.2.4 Perspectives on the uses of financial reporting information and the impact of
7.2.4.1 Internal users and preparers
Accounting is perceived of as a central part of the mechanism, whereby, company performance and operations are turned into financial information. Accounting numbers
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provide the information framework that companies use to make economic decisions and to take action. The role and use of annual and quarterly financial reports, as formal sources of accounting information, varies according to the size of the company and the information requirements of the different user groups that in turn analyse and employ these accounting datasets. Larger companies tend to have more advanced and computerised accounting information systems that they use either to report and extract information for internal use (management accounting) or for external use in the form of annual or quarterly reporting to interested parties and for tax purposes (financial accounting).
According to the interviewees’ views, private and public companies that apply IFRSs (either on a mandatory or voluntary basis) are considered to be large companies; nonetheless, defining companies according to their size has proved problematic. Categorising these companies based on official quantitative criteria, such as turnover and number of employees, means that most listed companies will fall under the category conventionally described in the literature as SMEs51. This categorisation holds true even if qualitative criteria are used, such as the ownership structure or legal form, as they are predominantly family-owned with a single basic shareholder. Listed companies usually operate locally, with some exceptions in the form of companies that have expanded into the Balkan countries or that conduct transactions with a limited number of countries internationally (Hyz et al., 2011).
An auditor comments:
‘When using the European criteria to categorise Greek companies, they are considered small, and when using the American ones, then they are considered very, very small.’
[AUD9]
It is assumed, however, that companies that use the IFRSs are large or medium-sized according to market standards in Greece. The larger the company, the more complex their transactions, the more they pay attention to detailed accounting information, ‘the more
51 According to the European Commission, SMEs are defined as all enterprises employing less than 250 employees. Within SMEs, the following size-classes are distinguished: Micro enterprises, having a headcount of less than 10, and a turnover or balance sheet total of not more than €2 million. These are enterprises without any employees, which provide an income for the self-employed and constitute a special category within this size- class. Small enterprises having a headcount of less than 50, and a turnover or balance sheet total of not more than €10 million. And finally, medium-sized enterprises having less than 250 employees, and a turnover of not more than €50 million or a balance sheet total of not more than €43 million (EU recommendation, 2003/361).
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organised the accounting reporting procedures they develop are, and the more ‘seriously’
they take accounting information’ [AUD5].
The companies’ managers primarily use management accounting information, which is more detailed and timely; extracted from trial balances and cash flows budgets, in order to make decisions on the operation of their businesses. Managers, for instance, will collect information (on a regular basis) covering their monthly sales; their expenses, such as payroll, cost of raw materials and operational expenses, suppliers and debtor balances. Based on this kind of accounting information managers determine their plans for a company, its pricing or discount strategy, predictable risks and budget according to expected sales and expenses and cash flow forecasts, in general; these are then compared with the actual results as reported in the annual/quarterly financial reports.
Annual or quarterly financial reports serve as a ‘confirmation’ of actual results, which will determine the forecasts of the company in the future, and will consequently, influence the economic decisions of managers. Owners and CFOs examine balance sheet items, such as loans (liabilities), customers, inventory and cash accounts, but tend to focus more on net profit and turnover and (future) cash flows as this will facilitate high borrowings.
‘All the essence is on the bottom line, the final results - it is important not only to analyse them in a static way, but to see how they develop over a period of time.’ [MA1]
Although the owners and the managers of companies base their economic decisions mainly on management accounting information, financial statements play an important role in determining the image of the company and in contributing to attracting and finding sources of funding from investors and other financial institutions. Financial statements serve the important role of representing an official financial image of companies towards banks and to some degree the investors become an essential component of decision-making.
‘Maintaining a good image for the banks, which are considered as strategic partners, is a main concern and a significant purpose that financial statements serve.’ [ACT1]
‘We are concerned about showing a good image to the banks and financial statements help us to achieve this.’ [MA5]
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‘Reporting high turnover is the most important aim for companies as this will determine whether they will get the support in the form of bank capital. This has seemed to work, at least until now.’ [AUD4]
The last quote shows the importance of the income statement in financial reporting and analysis even though IFRS standard-setters have adopted a balance sheet-based model of financial reporting. The companies’ representation of the business community through financial reports is, hence, a crucial factor of a company’s viability and development. In this sense, the qualitative information and disclosures provided in the annual reports is equally important as quantitative data and figures. The position of a company in the market, its future prospects, innovations in new products and services, its ‘value’ and ‘history’ are features that entail understanding of subjective elements that can partially be achieved from examining financial statements. In the case of a potential take-over, for instance, financial information is important, but the evaluation of qualitative information determines the actual outcome of any decision.