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Limitations of Financial Statement

In: Business and Management

Submitted By sharmaedont
Words 265
Pages 2
The financial statements’ limitations include intentionally manipulating the figures; cross-company or cross-time comparison difficulties in times when different accounting methods are used to prepare the statements and where incomplete records of a firm’s economic prospects exist due to a sole focus on financial measures Financial statements are open to human interpretation and error, worse of all, intentional manipulation of figures. There are instances when high profile management officials have been involved in manipulating figures of the financial statements to indicate inflated economic performance. As such, there are calls focusing on the independence and objectivity of auditing firms. Public companies require an audit of the financial statements useful for investment, tax purposes and financing. Independent accountants and auditing firms usually carry out an audit and their report is included in the annual report. The managing official, for example, the CEO is responsible for attesting that the financial statements are not misleading or untrue. They should also make sure that the financial statements expose those officials involved in any malpractice to face the law. Different ways of accounting across companies and across periods pose another limitation of financial statements since it is difficult comparing a company’s finances across time or comparing finances across companies. In addition, different countries have adopted their own accounting principles thus international comparisons of companies has become difficult. Another limit to financial statements is that they majorly focus on financial measures of health. More than the economic characteristics, an organization requires collecting and presenting information about social, environmental and economic benefits and costs to arrive at an accurate...

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