Accounting reports are the financial records compiled, mainly for meeting the decision making needs of the top management. It consists of the income statement (the profit/ loss statements), position statement (balance sheet), cash flow (statutorily applicable foe companies) statement of equity and much more.
There are many kinds of custom made reports such as the monthly or quarterly turnover reports and profitability reports which are more specific and enables the management to judge, comment and take the most accurate decisions based on the conclusions reached by them.
Reports are used to analyze the risk involved in the business, where business risk refers to the chance of loss which may be caused due to the wrong decisions taken as a result of inaccurate and untimely accounting reports generated by the system.
Business Risk
Business risk may arise due to the heavy competition from the business within the entity, for that the accounting reports by incorporating sensitivity analysis summary is generated from the data available from the competitors. Such reports are thus helpful in comparing the performance of our business with the competitors and hence, the management takes decisions to reduce the business risk caused from the competition faced by the entity.
Business risk also comprises of the interference of government in the business. Proper accounting reports generated on the income tax liabilities and other compliance requirements will be very helpful for the management to take stance on the tax saving investments and to reduce late fee and interest which are considered as additional cash outflow which would have been reduced if properly complied with.
The stake holders, especially the creditors are capable of building business risk. The accounting reports may show false details of creditors, deliberately or otherwise, in order to build reputation to show that the business is running on their own and not with the help of outsiders. The creditors, on viewing the financial reports registered with the statutory authorities, may find out such misstatements and may approach the tribunals with the suits and proceedings. This creates business risk and forces the company to create provisions and spend time and effort on dealing with the suit filed against the business. There is a business risk of losing the falsely created reputation and fame and develops defamatory picture in the investor and other stakeholders. Hence, such circumstances show the need for true and fair accounting reports.
Accounting Reports
The accounting reports generated shall disclose the non-cash items such as the provisions and depreciation accurately with proper valuation results from the experts. The misleading figures regarding the depreciation may over value or under value the assets in the business. The overvalued assets indirectly results on higher corporate tax payable, as lesser the depreciation claimed as per section 32 of the income tax act 1961, the higher the value of assets, lower the deduction claimed as per the said statute and higher the tax liability. If the assets are undervalued, there comes the obligation of the entity to scrap the asset and arrange for the replacement or acquisition of asset. Such under valuation also results in future interest burden on tax paid at relevant rates. Such irregularities create risk on the part of the top management.
For a business to function smoothly and without interruption, the business risk must be minimized, even though the risk factor cannot be eliminated wholly from business. The accounting reports shall be able to generate analytical data or a comparative study of the fluctuation in demand for the products offered by the business. Such data must be useful for the management to take decisions as to why there is change in taste ad preference of the customers, or is from the changes brought in the quality or quantity of product or is the price factor affecting the market, whether the change is favorable or not. If the change is favorable, the management could focus on the demand creating factor more and get a competitive advantage on the product. If the change is unfavorable, the management shall be able to find out the root cause and rectify such unfavorable factors and shall strive to bring about positive demand making conditions in the market. However, the business risk creating factor like strike or political controversy or frequent change in the ruling party have nothing to do with the accounting reports.
The accounting reports created by the accountant shall show case prudence. In other words, the accountant shall anticipate loss and after required deliberation shall create appropriate amount of provisions, so as to mitigate the abnormal situations which may arise in the economy or the market. Such an action will merit the business as the business will be least affected, if such a circumstance occur. Creating provisions cause lessened profits, enabling the management to focus on more profit capitalization techniques.
It is always better to delegate the risk management functions to a separate wing in the business and entrust the accountant with the function of compiling data from such department and pass relevant entries, rather than over burdening the accountant with the functions on which he is not so well equipped with. Such an action also reduces risk internally and results in better and accurate reports to be presented in front of the management.
Another matter of concern is the definition of business process in the business. The management shall take initiatives to redefine and give the business process an organized structure, which enables the business to move in the fixed direction and never gets deviated from the path. For instable, inventory management in huge organizations are done using the total automation of the inventory control system. The purchase department gets warning signals from the stores department when the raw materials are deficient to meet the output level. Such a defined system generates less risky results and the accounting reports created after such defining process seems to make the management able to predict the future revenue generation level and concentrate on the higher areas of business growth.
Therefore accounting reports is essential tools for the risk management of an entity.
For a professional accounting report preparation consultancy and taxation consultancy, contact Lima Tax Consultant at info@limagcc.com or visit limagcc.com