How To Refute The Following Statement To Be Evaluated:
Financial statements are useless because they are incomplete. Not all assets or liabilities are in included.
The question should not be whether financial statements are useful or are not, but rather, the degree of usefulness. Financial Statements are useful and progressive tools in our economy, providing financial markets transparency and efficiency. This is done by helping investors make educated investment decisions by providing them information on a company’s performance and financial position. Through my experience, I have been taught that the general purpose of financial reporting is to provide financial information about the reporting entity to all potential stakeholders in making decisions, which involves buying, selling, and/or holding equity and/or debt.
The degree of usefulness does vary, dependent on the company’s operations. If the operations and profits are more closely tied to the tangible assets and liability obligations (i.e. manufacturing companies), then financial statements will be more useful then companies with more intangible or human capital assets.
The more trustworthy the source, the more useful financial statements are. What is axiomatic is the scrutiny that goes with Financial Reporting. And the heightened focus on ethics, character flaws, and potential subjectivity that comes with financial reporting. If a company is perceived to be ethical and trustworthy, then Financial Statements are a market efficient tool that can be “trusted”. However, the “Accounting Today” journal talks about the potential “evil roots” in financial reporting talking about two shortcomings. It states, “Shortcomings in financial reporting can be traced to two-character flaws. The first is unbounded ignorance and the second is shameless arrogance. In a sense, these problems are also ethical failings, because experts should be both well informed and diligent” (Miller 2013). This means that those who research and use financial statements just needs to be aware of the threat.
The more transparent in changes in accounting policies, the more useful and reliable the financial statements are. For instance, FASB’s and the Auditing Standards helps discuss how Financial Reporting is more transparent, by helping auditors analyze changes. To discuss the background briefly, the CPA Journal addresses this by stating, “The effect of any change is dependent on how current and prior year financial statements are affected. While the general solution for reporting changes in accounting principles is the non-restatement of prior years' financial statements, there are many exceptions that can result in restatement” (Bailey 1988). The principle we can consider here is the Retrospective Approach, which implies:
Conclusion. Financial statements are useful. The better question to ask is to what degree are they useful? The more we can tie the operations to the accounts, if we can ensure ethical and trustworthy behavior (that may sometimes mean “in accordance to GAAP”), and changes are transparent and communicated, then effectively, they have a higher degree of usefulness.