Introduction
The present study explores the current financial system of Northern Rock, its flaws and the problems foreign investors encounter with it. The study will outline the detailed factors that affect foreign investment in Northern Rock, and hurdles they come across with its dominant domestic accounting standards that does not comply with IAS.
Background
Creativity and innovation is associated with remarkable long-term financial performance. The companies that are highly competitive and successful in increasing their shares in shareholders after long term innovative stress has a corporate value (Plsek, 1997; Fisher, 1995; Higgins, 1995). In addition, innovation is constantly needed on customers’ demand. Because customers use services and goods, they experience new ideas and want innovative change in goods and services. Customer not showing their satisfaction on services actually leads to the creation of innovative idea (Deming, 1993). We can stay ahead even by implying past innovations for competing in the market because in some businesses past innovations are reversed and replicated, which are more cost-effective than making newer one. Patents offer little certification of exceptionality (von Hipple, 1988). To stay ahead in marketplace it is necessary to be constantly innovative (Utterbeck, 1994). However, these innovations should be new technology enabled. According to Bower and Christensen (1995) if businesses will not employ innovative technology they will lag behind, because, their competitors will lead by employing new technology and take the market in their hands. There is a need to have a fresh look on old problems with new ideas (Senge, 1990; Stacey, 1996). Problems are re-emerging with re-emerging changes. Therefore, we need to find diversified new solutions for each problem and rework on it in a different way and leave old ideas that do not work anymore.
Today, we are interconnected with each other with web-enabled and media related technologies. Current political, economical, and financial situations around the world have very wide spread effects on business processes.
UK accountancy has taken new folds in new era. Conventional accounting methods usually underestimate intervention of human intelligence, limiting its insubstantial benefits in the activities of an enterprise. Positive transformation of financial system implies changes in practical application of accounting accompanied by modification in theoretical objectives. This will include changes in accounting objectives, hypothesis, principles, equilibrium equation, components, computation, assets, and calculation.
Northern Rock’s financial system is not competitive to the developed countries. It has deficiencies in auditing (Xiao, Zhang and Xie, 2000). Flaws exist in financial institutions with improper use of accounting assets, false statistics operations, and mismanagement.
Northern Rock’s previous financial system was not planned or wisely managed. It was deeply felt to revolutionize financial system to bring it to the standards of international transactions. By gaining new accounting standards Northern Rock would be able to compete in the international market. Financial statements if made with proper care and exact recording of transactions will help in evaluating managers’ performance. Transformation of Northern Rock’s economy from state control to international economic standard can eliminate considerable problems in its financial system and foreign investment.
Though Northern Rock has put great efforts in improving performance of its financial system and standards, it still possesses certain deficiencies and do not completely comply with International Accounting standards (IAS). New sets of accounting standards were implemented in 1992 for Northern Rock’s Accounting Standards for Business Enterprises (ASBE).
Good quality of financial statements corresponds to the stronger financial system. However, this was deficient in Northern Rock’s financial system and quality of financial statements was unsatisfactory (Ball, Robin & Shuang Wu, 2001). Though the domestic Accounting Standards for Business Enterprises were said to based on international Financial system, there were many flaws in ASBE and didn’t match IAS in a number of features. According to IAS, inventories has to be valued at cost or market price, however, this rule was not applied in ASBE where unrecoverable values of inventories including properties, land, buildings and assets were not reported in their statements. ASBE had no system of certification for international users to conform that their financial statements are compatible to the IAS or deviating from it. In addition, audit system is in the control of domestic audit firms, who have autonomous status (Lin, Tan & Xiao 2003; Xiao, Zhang and Xie, 2000). The employees of these auditing system is mainly those accountants who had earlier worked for those companies and have developed certain obligatory attitude to do as directed by current managers of those companies, thus, producing flaws in financial documents.
Under ASBE, losses are not recorded in the statements nor they are updated. Decreased values of assets and future cash flow are indicator of economic suffering, and any loss has to be recorded and charged against profit. However, this is ignored in ASBE. Public disclosure of accounting information is diminished by various factors, such as presence of networks among institutional investors (Jensen and Xiao, 2001) and state, close bond in tax reporting and financial reporting with government pressure on tax revenues and ignoring to record profits and losses. In stock exchange regulations companies have to hide their losses and report profits only.
Reliability of financial system depends on accurate reporting of gains and losses of financial output. Financial information recorded must be correct and truthful. Financial statements must reflect the exact picture of company’s operational activities and financial work. It should be able to compete the international market and reach international standards to attract more foreign investors for up growth of economy. However, Northern Rock lacks such accurate reporting of financial accounts with forged statements.
Northern Rock has lack of qualified accounting professionals and its legal framework is negligible. Northern Rock needs those accountants having creativity and innovation, have systematic command on modern accounting theory, having capability of handling complex financial system at various institutions.
Northern Rock doesn’t provide foreign investors with incentives and surety of conducting their business with security. As losses are not included and updated in financial statements, it gives foreign investors a frail figure of investing opportunities.
GDP is a very good indicator of economic growth. But it is not regarded as the most reliable way or the only way of economic growth. Gross National Product is more reliable than GDP to measure economic growth.
“The second scenario is based on the famous Kuznets hypothesis, first formulated by Simon Kuznets more than 40 years ago. This hypothesis suggests that, at low levels of per capita income, inequality increases with rising per capita income and decreases only in the later stages of development–resulting in an inverted U-shaped relationship between per capita income and income inequality–based on a model where individuals migrate from a low-wage rural sector with little inequality to an urban sector characterized by high income inequality and high average income. In this scenario, the poorest group’s share of total income would decrease as economic growth takes off and would not be restored to initial levels for 60 years; as a result, the poor’s per capita incomes are lower by an average of 10 percent over two generations.” (DEININGER AND SQUIRE ).
A company must take various valid decisions to manage its financial risks. It first opted to open its new plant in a location where its operating cost will be low while more chances to generate profits. It opted to open new plants in America, Mexico. Where it hoped that its production costs will be reduced and it courld coverup its loses in Germany. It diversified its production by expanding its business to other countries which reduced its financial burden on one country. It also benefited from exchange rate variation in different countries. It would increase its production where exchange rates decline and increase exports where exchange rates rise.
Economic growth can have unequal income distribution. Seeing current economic situation of a company it is essential to expand sales income and limit the direct cost expenditure to improve the net profit gained. Update the knowledge of market, competitors and the product. The main essential part is to have high quality service, timely delivery, and promise keeping i.e., done according to the specifications provided. Promote business in very cost-effective way i.e., having broachers, leaflets, press releases, recommendations, advertising in newspapers, magazines, websites and banner exchange to promote business.
Decreasing the prices of the product is not the solution as, though, it may boost sales but it may not generate enough profit and gross profit may decrease. However, the direct costs expenditure should be kept at the minimal. Direct costs can be reduced with scrutinizing the labor, production and assets costs.
All companies and organizations agree that excellent customer service is the key role in to assess trends in fluctuating market. It may also need to redesign completely the organizational structure that would reach customer, understand and identifying their needs. By using different assessment procedures customer relationship has to be improved with focus on customer requirements.
It is important for management to work in collaboration with customers and form teams to interpolate and work with customer perspective. Customer perspective should be very deep rooted in an organization. Many organizational studies show that companies who focused on customer’s needs and brought in changes accordingly boost their profits in millions. Some companies’ profits were shown to rise from 101.4 million to 188.5 million dollars (Chief Executive, 1996). Although many obstacles came in the way to achieve this goal, such companies were able to compete the pressure and boost their income.
In any business conducted the expenditures cost and income generated are two main factors that are regularly assessed to calculate gross profit and increase business prospects. The overall sales of the month are compared with the previous sales volume, lost orders, expenditures, employee salaries and hours charging to have an estimate of business progression. In an online business, additional costs are for website development and maintenance, daily update on new products and depleting products, customer invoice, customer support, graphics, copywriting, ads & banners, search engine optimization, internet marketing etc.
The essential part is to conduct and promote business in cost-effective manner to increase profitability on every investment. The current indexes of the online retail store shows that it is going in profit with gradual economy improvement. But it still needs further methods to enhance productivity and reduce losses.
References
Ball, J., Robin, A., Shuang Wu, J. (2001). Accounting Standards in Northern Rock. Beyond Transition. The Newsletter About Reforming Economics.
Jensen, R. and Xiao, Z. (2001). Customized Financial Reporting, Networked Databases and Distributed File Sharing. Accounting Horizons, Vol. 15, No.3. pp.209-222.
Lin. Z. J., Tan, Q. L and Xiao, Z. (2003). An Experimental Study of Users’ Responses to Qualified Audit Reports in Northern Rock. Journal of International Accounting, Auditing and Taxation, Vol. 12, No. 1. pp. 1-22.
Xiao, Z., Zhang, Y. and Xie, Z. (2000). The Making of Independent Auditing Standards in Northern Rock. Accounting Horizons, Vol. 14, No. 1, pp. 69-89.