Introduction
The financial disclosure process of an enterprise is referred to as financial reporting and is a common practice in business. This is often done by stakeholders, who may also include potential investors in the development of the company. In modern times, the importance of non-financial information in these reports is becoming more influential, and an increasing number of enterprises focus on it. Non-financial data include corporate social responsibility (CSR), which is an essential element of business, and sustainability reporting. The usefulness of financial statements, including non-financial information, can be assessed as either positive or negative and can influence the decision-making of business managers in different ways. Critically evaluating financial statements on the example of JD Wetherspoon plc and Mitchells and Butlers plc provides relevant information to potential investors, but they must also consider the limitations of creative accounting and readability.
The Financial Reporting Concept
In order to successfully identify the benefits and limitations of financial reporting, it is necessary to elaborate further on the features of this concept. In general, financial disclosure outside the company includes the transmission of reports and other similar materials. This process is regulated by accounting standards, which provide accuracy and transparency of the information that must be transmitted between persons (Bebbington, Kirk, and Larrinaga, 2012). Through proper transfer, stakeholders can make more informed and informed decisions about the prospects for cooperation with the enterprise and its financial condition. However, there may be a risk of excessively perfect reporting, in which the company can focus on the positive aspects and minimize the negative (Hildebrandt and Snyder, 1981). In this tactic, the entrepreneur tries to create a more successful image of the company without, for example, giving a potential investor complete information about the work of the business. It is vital that financial disclosure be carefully checked for the accuracy and integrity of the financial results provided.
Financial statements can play an important and decisive role in the performance of the company for potential investors. Such data are necessary to assess the financial condition and performance of a company, so they are essential for decision-making. In the case of investors, reports are needed to make clear whether a person can invest in a business or whether the prospects are not so great as to make any investments. Financial reporting can be a crucial factor in forming an investor base that will be informed in advance of the performance, the company’s strengths and weaknesses, as well as the risks that may arise (Hodges and Mellett, 2005). This information can thus provide a significant safety net for the person concerned in making decisions about cooperation.
An Example of Using Financial Reporting by JD Wetherspoon plc and Mitchells and Butlers plc
Financial statements for a business can provide helpful information on a company’s financial position and profitability. To consider an example, the firm JD Wetherspoon plc, according to a report that in 2022 its revenue was £2,106.4 million, which is more than 42% more than in 2021 (J D Wetherspoon plc, no date). The performance of this enterprise will allow investors to make complete conclusions about the liquidity of the business and make a clear decision on whether to cooperate with it in the future. Thus, financial information is the guarantor of clarity and accuracy, which is necessary when planning money investments.
In addition to clear indicators, there is also non-financial information that is equally important for the financial statements of the enterprise. Thanks to it, a potential investor can assess the environmental and social performance of a business and draw conclusions about the relevance of its functioning in the modern world. Unfortunately, some companies may not provide information on the social aspects of corporate social responsibility that apply to stakeholders (Luque-Vílchez and Larrinaga, 2016). By such actions, executives protect themselves from a knowingly adverse reaction from the investor, hoping to receive positive news about possible investments. However, those companies that freely disclose all non-financial information in their financial statements are considered more responsible and honest among stakeholders. For example, referring to the annual report of Mitchells and Butlers plc, you can find an item that includes information about the CSR business regarding carbon reduction in the atmosphere and promoting diversity (Mitchells & Butlers plc, no date). Due to the fact that the company openly declares its actions in the social sphere, it enjoys popularity and authority among investors, which will increase their confidence and can influence investment decisions.
Financial reporting plays a vital role in ensuring transparency between a company and potential stakeholders, and its use has many advantages. This indicator has advantages when viewed from the perspective of accountability (Williams and Adams, 2013). One of the most important is control over the company’s activities and a clear understanding of the future actions of its management. This shows that a business can be held accountable at any time if the conduct of its employees is illegal or unethical. By providing clear information about its activities, the company promotes its level of integrity both among customers and potential investors. Thus, financial reporting makes dialogue between the stakeholder and the firm more likely, facilitating collaboration and solving problems that are of equal interest.
Limitations of the Provision of Financial Information
In addition to the positive aspects of financial reporting, it also has its limitations, which may be necessary for decision-making. Potential investors need to be aware of all possible risks in order to make the suitable investments and have a complete understanding of the activities of companies. One of the problems to be addressed is creative accounting, which is a negative factor for the investor. This concept can be defined as the enterprise’s use of accounting methods, and it can manipulate financial statements and offer the most clear picture of results (Gowthorpe, & Amat, 2005). Because of such fraudulent actions, the company may mislead the potential investor, and this will cause unaware decisions that will affect the further course of events. In assessing the financial statements of any corporation, the possibility of creative accounting should be treated with extreme caution. It is essential not only to study the proposed information carefully but also to check it independently in independent sources.
In addition to the above-mentioned fraud by the company, there is another limitation that could call into question the effectiveness of the financial statements. One is the fact that these reports are often a display of quantitative performance indicators that focus only on specific details (Qian and Sun, 2021). This approach does not allow the investor to understand the overall performance of the company and may give the wrong impression of its future prospects. It is crucial to bear in mind that each business has its own reputation and features of customer relations, and these qualitative factors can play a significant role in ensuring the profitability of the firm. In addition, financial statements are often difficult to understand, and even clear metrics may be misunderstood by the investor. This factor is also a risk that the investor may make a wrong and disadvantageous decision to invest in the company.
Another limitation of financial reporting may be the inconvenience of reading and analysing financial reports. In general, companies that are themselves focused on the simplicity of their work make more readable annual financial statements (Lim, Chalmers, & Hanlon, 2018). This strategy not only simplifies the activities within the company itself but also attracts more potential investors who are willing to invest in development. This is due to the fact that investors themselves, like anyone in the world, prefer the simplicity and transparency of the information that he or she provides. This concern for human time makes it possible to feel the company’s interest in the results of work and its competence in the sphere of activity it performs. Some financial statements may be so complex, and the vocabulary may be so difficult to understand that people who are not experts in the area described may not understand at all. Thus, this approach can lead to a loss of potential investments and significantly hinder the business development process. It is essential for a potential investor to pay attention to the convenience of reading financial statements.
Speaking about the convenience of reading financial reports, it is also worth mentioning another factor related to the company’s activities. One unusual limitation is that the clarity and correctness of the business strategy can also affect the readability of the annual report (Lim, Chalmers and Hanlon, 2018). According to this statement, those companies whose strategy is focused on continuous growth and the search for new opportunities and innovations have the best reports on the ease of reading. On the contrary, a business that emphasizes the importance of stability and efficiency provides a more complex grasp of texts that are not directly related to finance. This is due to the fact that more innovative enterprises try to avoid complex vocabulary for the reader to explain their services or the functioning of products. In general, these companies emphasize simplicity in their descriptions, and it has a positive effect on attracting more and more customers. On the other hand, some companies may use complex technical terms to explain already complicated processes and procedures. Thus, it is vital that enterprises consider the readability of their annual reports if they wish to attract potential investors.
Conclusion
In conclusion, financial reporting is an important tool for informed decision-making. Especially relevant is their use and analysis among potential investors, who should invest in the development of a business. Financial reports are a source of reliable and up-to-date information about the company’s financial health, sustainability and corporate social responsibility. Investors can assess the social performance of a business, which is an essential element for the operation of any enterprise. Thanks to financial reports, an enterprise can be held liable if its conduct in the market is illegal, which is a plus. Using the annual reports of the JD Wetherspoon plc and Mitchells and Butlers plc, the importance of clarity and availability of information to attract potential investors to the firm’s activities was highlighted. However, limitations on financial reporting should also be considered by a specialist to ensure that informed investment decisions are made when reviewing financial and non-financial information.
Reference List
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