A1 Importance of Accurate Records
Audits are examinations of financial statements, usually conducted annually. This will usually include the statement of comprehensive income, statement of financial position and cash flow statement. Transactions included in these documents will be reviewed against evidence should as invoices and sales receipts. Businesses can choose to have an internal audit (done by a member of staff) or an external audit (by an external accountant). Audits add credibility to financial statements, ensuring stakeholders that they are true records of the financial performance of the business. For example, shareholders are more likely to invest when they believe a firm is transparent about its finances.
Accounting concepts are the accepted norms and expectations in accounting. These may include the point at which a business can record revenue, the separation of accounts of a business and owner and the expectation that once a style of laying out financial statements is chosen, it will be consistently used. Accurate financial record keeping requires businesses to comply with these concepts in order to provide consistency and transparency in their accounts which allows for comparisons to be made.
Managers can use documents to measure performance. They can identify areas where the business is doing well as well as areas that are in need of improvements. They can review financial documents to assess increases and decreases in profitability, liquidity and efficiency. For example, a decrease in profitability may be as a result of an increase in operating costs which can be identified through an analysis of the statement of comprehensive income. The impact of an investment of an asset can be established by conducting an investment appraisal using financial records of project costs and cash flows.
Companies are legally obliged to provide evidence to prove their financial position. This may include proving their income through sales receipts, proving their expenditure through invoices from suppliers, bank statements, the value of inventory and sales of shares. In the UK, companies are required to keep this evidence for 6 years.
Financial fraud is when somebody steals or manipulates you into giving money or financial assets. Examples of financial fraud include identity theft, embezzlement and misrepresentation of a financial position. Keeping accurate financial records can help managers to detect fraud as any anomalies in the figures will stand out.
It is the professional responsibility of the managers of a business to ensure financial records are accurate. When a company employs an accountant to prepare its accounts, the accountant will adhere to a code of conduct. The code of conduct requires all accountants to act with integrity and objectivity. If an accountant detects fraud or misrepresentation of accounts, it is their professional duty to report it.
Security of accounting information is the responsibility of every business. When dealing with financial transactions, sensitive data is shared. Physical information must be stored appropriately and securely such as in a locked filing cabinet. Increasingly, financial records are kept electronically. This means that businesses need to have appropriate password protection and firewalls to ensure that non authorised personnel can access sensitive data.
The reputation of a business is at stake if they do not keep accurate financial records. Whether an inaccuracy in financial accounts is a mistake or a more conscious manipulation, exposure of financial inaccuracies can lead to a negative reputation. If a business is exposed as reporting inaccurate accounts, investors may not trust them. This may lead to reduced future investment sell-off of shares which reduces their value. Customers may also not want to buy products from a company that they feel is committing financial fraud.
Accurate financial records support the calculation of tax liability. All businesses have to pay tax on their profits. The more profit a business makes, the more tax it will pay. When businesses get a large tax bill at the end of the year, it can have a negative impact on their cash flow if they are not prepared for it. It is therefore important that accurate financial records are kept so that a business pays the correct amount of tax and they are prepared to make the payment.
Accurate financial records can improve stakeholder confidence. Transparency in financial reporting can have an impact on a range of stakeholders. Employees, whose key objective is job security, may feel that the future of the company is uncertain which can have a negative impact on morale. Investors may feel that they are being misled about the return on their investments and prefer to invest in firms that are more transparent in their finances. Customers may not want to support companies that they feel are being dishonest and shop elsewhere.
