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For company, financial statements are the report of their performance on quarterly or annual basis. Financial statements portray performance of enterprises in form of monetary data. They are provided to meet a wide range of users in making various kinds of economic benefit and public policy decisions. Since 2002, Enron scandal and WorldCom scandal had been revealed, public shook their confidence and trust in financial statements especially investors. They are interested in financial statement in order to decide whether to buy, sell or hold the shares. Many problems about the financial reporting are spring up like mushrooms. Hence, these bring the impact for FASB and IASB to reform corporate governance, financial statement, auditor's report and the others.
Use of financial statement to value securities
Over the past two decades, the ideology of shareholder value has become entrenched as a principle of corporate governance among entities in U.S. and U.K (Lazonick and O' Sullivan, 2000). This indicates that maximisation of shareholders' value becomes prominent because the value of company is determinant of shareholders' return. Stock market participants are usually individual investor or institutions investors which expect to receive the return more than the money that they invested. Information in financial statement can help investor to evaluate the securities especially in market efficiency due to the securities prices will be adjusted due to all possible information. Based on Pages and Hines (2007), if is at the level of individual resource allocation, due to market efficiency, investors without market power cannot use the information to earn abnormal profits. This reinforces financial statements to provide faithful and useful information for investors to predict future performance of company. Therefore, investors can analyse the available data and react quickly and accurately to new information.
In addition, they use financial statements to observe the current profitability of company and predict its future profitability, growth of stock prices and ability of distribution of dividends. Investors can know the consistency of company in distributing the dividend. Moreover, they pay attention to the reported earnings of the firms. By viewing financial statements, investors can determine the price-earnings ratio is significant because investors can decide whether the shares are currently under- or overvalued by comparing it with a forecast of entity earnings (Elliott and Elliott, 2006). So that, investor will have an idea of how much the market is willing to pay for the entity's earnings. It can be interpreted as level of confidence of market towards expectation of growth in entity's earning and management in the future. On the other hand, earning per share (EPS) shows the figure that investors will receive for each share when the entity decides to distribute net income as dividend. By comparing EPS form previous and current, it indicates the rate of growth of entity's earning and let investors to determine whether the share of entity is worth for them to invest.
Use of financial statements as a corporate governance mechanism
The level of confidence of investors is the currency of a free market system, but not money (Oxley, 2007). Investors are clear that they are involving investments which fill with risks and rewards, so they will respond according to transparency and credibility information available. If the information is incomplete or wrong and the insider information is leaked, the price of securities will go wrong. Moreover, the gatekeepers of information (directors, managers and accountants) sometimes leak information to others people. These will be harm for investors. After accounting scandal, public lost confidence in financial statement due to the directors and managers manipulated their reported earnings became positive, thus investors might wonder whether the financial statements were reliable to make decision. Indeed, regulations and ethical behaviour of accountants are the ways to rebuild confidence of public or users of financial statements. It then came out Sarbanes-Oxley Act of 2002 (SOX) which enacted by U.S. to restore investor confidence and prevent the accounting scandal. SOX intends to promote corporate responsibility, increase public disclosure, improve the quality and transparency of financial reporting and auditing, and strengthen penalties for securities law and other violations (Alkhafaji, 2007). Under SOX, a good corporate and business ethics are enacted as law.
To prevent managers from doing deceptions, corporate governance need to be strengthened and becomes transparent and accountability. Corporate governance is a mechanism to ensure that the directors will act the interests of investors or shareholders but not pursue their own interests. Because of financial reporting is an essential part of corporate governance, it also describes the duties of board of directors are to review, approve and submit financial statements to shareholders. In other words, corporate governance provides a view about how board of directors monitors the process of producing the financial statements and supports the view of the board is responsible for providing transparency of context in financial statements. Transparency and credibility of information is important for public to understand the company. Thus, financial reporting and related disclosures must be certified by independent auditors as being according to General Accepted Accounting Principles to ensure reliability. When the duties of board of directors in this area are clearly disclosed, shareholders and other stakeholders can find it useful in providing an additional level of comfort regarding the fact that the financial statements accurately represent the situation of the company (UNCTAD, 2006). Definitely, it is reducing the cost of capital of shareholder. If the corporate governance is weak, then the information in the financial statements is fraud and spurious. Then, investors will hard to determine the intrinsic value of the shares and not rely on financial statement because the responses of stock returns to signals are uncertain. Admittedly, corporate governance plays a crucial role in improving the efficiency of the capital market through its impact on corporate operating efficiency and effectiveness, earning growth and employment, and integrity and quality of financial reports (Rezaee, 2002). Hence, Section 302 and 404 of SOX aims to improve corporate governance through assessment of internal control in order to prevent and detect frauds. It requires the management level and independent auditor to provide internal control over financial statement faithfully and transparently. They are not allowed to provide any misunderstanding materials and omit any facts or information. Eventually, information of financial statements are more integrity and reliable.
Information provided to meet users and purposes
The framework lists users and their needs under seven categories (Alfredson et al., 2009). There are present and potential investors, lenders, suppliers and other creditors, employees, customers, governments and their agencies, and public. They use financial statements to made decision. For example, investors need to decide whether to buy, sell or hold shares and reappointed management; lenders need to decide whether to lend and at what price; suppliers and other creditors need to decide whether to extend credit; employees need to make rational career decisions; customers concern whether the company able to provide goods or services for them in the future; government and their agencies interested in activities of the entity as well as its ability to pay taxes; and the public interested in effect on the local economy for the company activities. Thus, information in financial statements should be useful to make such decisions.
Typically, financial statements are provided by the directors or managers. Managers' legitimate interest are best served by information that is highly informative about their performance in running the company, since this enables efficient compensation contracts and better working of managerial labour markets (Scott, 2009). They need to work for best interest of investors because they are appointed by them. Consequently, management's performance in discharging its stewardship responsibilities is important to existing investors when making decision whether to reappoint or remunerate management and the others. A lot of information in financial statement for investors to access stewardship in order to make decision such as buy, sell or hold the investment. For example, it provides information about the entity's resources, claims on those resource and changes in resources and claims. Hence, financial statement served as one kind of dialogue between investors and managements. Therefore, stewardship can solve the agency problem and it becomes a role objective of financial statements.
Stewardship relates to behaviour of management and generally on past event. When the Enron scandal had been revealed, investors lost confidence in accessing stewardship. They found that directors might cheat them, particular in providing fake information. Thus, they move towards to "decision usefulness". They expect that the information can be useful when making decision rather than just focus on stewardship part. Also, stewardship is insufficient for users to predict the future prospects because it provides less information of future events and transactions.
Information should be "decision usefulness" to users
Moreover, stewardship focuses narrowly on the existing investor and ignores others. It is conflict with the objective of financial reporting which "to provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions" (Alfredson et al., 2009). This lead to problem of identifying the users and the information they needed. Eventually, the Board identifies the present and potential investors, lenders and other creditors as primary users as well as capital providers because they have direct and immediate needs rather than other users' needs. This makes other users such as suppliers and employees grumble for unfair and biasness of financial reporting. They complaint the objectives of financial reporting should not limited in satisfying the needs of investors, thus they ask for information in "decision usefulness" rather than stewardship". Since stewardship arise disputes, "decision usefulness" come out to overcome the problems. Without doubt, financial statements, at least, should be made more useful for users because it is impossible to provide theoretically correct financial statement (Scott, 2009).
To respond to the objectives of financial reporting, "decisions usefulness" is needed in order for users to make decisions. Thus, financial reporting should focus on "decision usefulness" rather than "stewardship". If financial reporting is not useful in influence decision, these resources would be wasted and it would seem that it would serve no purpose (Lennard, 2007). Also, decision usefulness is related to prediction of future cash flow of a company. Hence, decision usefulness is more relevant to meet the objectives of financial reporting. Although the concept of decision usefulness will encompass provide information useful in accessing management's stewardship, stewardship should be retained to ensure there is appropriate emphasis on company performance as a whole and not just on potential future cash flow because it is inherently linked to agency theory and is a broader notion than resource allocation as it focuses on both past performance and how the entity is positioned for the future (Anon., 2007). Thus, there are no conflicts between decision usefulness and stewardship. Finally, the Board conclude that stewardship decision useful are parallel objectives with different emphases, thus defines as separate objectives.
However, the financial reporting cannot provide all the information for these users to make decisions. This does not imply that other users are to be ignored: the information that provided to investors is useful as a frame of reference for other users, against which they can evaluate more specific information they may obtain in their dealings with the company (Dodge, 1997). No matter other users have direct and indirect interests in assessing company's ability to generate cash and cash equivalents and of the timing and certainty of those future cash flows, these are same with capital providers' interests. The Board also concluded that, to extent to the needs of other users do not overlap with common needs of capital providers, those needs are beyond the scope of general purpose financial reporting (IASB, 2008). Thus, the information meets the capital providers' needs will automatically satisfy other users' needs regardless how much additional financial data are available for users.
Besides this, financial reporting will be useful at least, possessing two fundamental qualitative characteristics namely relevance and faithful representation. Information is relevant if it is capable of making a different in the decisions made by users in their capacity (IASB, 2008), whereas information should be faithful presentation to ensure that the depiction of an economic phenomenon is complete, neutral, and free from material error (IASB, 2008). These qualitative characteristics will together contribute to decision usefulness of financial reporting. Also, comparability, verifying, timeliness and understandibility used as enhancing the qualitative characteristics in order to provide more decision useful of financial reporting information.
Revised conceptual framework: Objectives of financial statement
To response these, FASB and IASB have just begun a new joint agenda project, to revisit their conceptual frameworks for financial accounting and reporting (Bullen 2005). Conceptual framework is needed to provide structure and consistency of accounting standards because there are many arguments about the accounting standards since the standards are developed by each member of standard-setting body based on their individual concepts. When new theory and idea came out, some people might not accept them. However, the framework needed to be updated and refined to reflect about the current issues or problems. Some standards are not longer to be consistent should be eliminated. Moreover, some of the framework is needed to be mended in order to be completed. If not, some directors of companies will accidentally to do loopholes. They will assume that some issues are not mention in framework will be permitted. Therefore, it should revise the conceptual framework to ensure the framework can be useful as guidelines to the Accounting Board for making standard-setting decisions.
In the past, SOX required the Securities and Exchange Commission (SEC) to examine the feasibility of a principles-based accounting system since the U.S. accounting scandal revealed that the accounting standards have become "rules-based," filled with specific details in an attempt to address as many potential contingencies as possible (Shortridge and Myring, 2004). Rules-based is lack of flexibility in adjusting to conditions and new products, thus it always requires for maintenances. Also, it is easier for companies to look for loopholes in order to create their favourable reporting. Awareness of disadvantages of rules-based, the FASB decided to revisit the framework and move toward making accounting standards to be "principles-based". Such standards, by their very nature, must be soundly grounded in a coherent and cohesive set of concepts that is up to date, internally consistent and comprehensive (Johnson, 2004). In this way, FASB can achieve the goal. Unlike rules-based, principles-based is a standard rely on judgment and interpretation of the financial statement preparers before they can be implemented. It is more flexible and less maintenance if compare with rules-based. In order to implement principles-based, those documents of FASB Concepts Statements and IASB Framework need to be refined, updated, completed and converged. Indeed, standards need to change to reflect the current issues.
During 2008, two accounting Boards, IASB and FASB jointly proposed discussion paper that sets out the preliminary views on the reporting entity concept and related issues. The purpose of open discussion to public is to converge together all the ideas and suggestion from them, and then come out better standards. For instances, some may suggest that the Boards need to clearly identify the "wide range of users" and defined the "reporting equity". Also, some will suggest the Board to improve conceptual framework. By improving the standards, the users will be more secure about using the financial reporting.
In summary, investors rely on information of financial statements to make decision. Thus, information should be reliable and relevant for them. Also, the Boards need to clearly and specific identify the objectives of financial reporting and set out some policies and standards to enhance the qualitative of financial reporting and constraints some company from doing fraud or loophole. Financial reporting are "decision useful" when they can satisfy the needs of the users. Furthermore, conceptual framework need to refine and updated in order to be consistent with principles-based that promote decision useful financial reporting and reflect changes in business practices, economic environments and markets.
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