Have you ever had the need to pick up a company’s financial statements to review? Maybe because you want to open a pension account and need to be sure of the pension fund manager’s performance before deciding if to trust them with your pension? Or you probably want to buy shares in a company and you therefore need to check the company’s historical dividend payment to ascertain the likelihood that you would receive dividends in the future? There are several reasons why a company needs to prepare financial statements. In many cases, it is required by the law for a business to prepare financial statements. In other cases, different stakeholders need the company’s financial statements for other purposes.
For instance, Creditors and Suppliers use financial information to ascertain the liquidity of the businesses that they want to enter into a contract with, including updating their contracts and commitments when financial situations change. They need to be sure that the company would be able to pay them for their services within the required timeframe. Existing and potential Customers use financial information to assess a company’s reliability and ability to provide goods and services. They use such information to benchmark competitors and make decisions on which company to go with. Existing and potential partners use financial information to ascertain potential returns on joint deals.
On the other hand, Employees who require the information to ascertain the health and prospects of their employers. They use such information to negotiate contracts including potential bonuses and share plans. Shareholders and Directors use financial information to assess how profitable and risky a company is. They are able to use such information to estimate the value of a company in order to make buy or sell decisions. They also use such information to assess managerial performance against set metrics in order to pay out incentives as may be required.
Regulators such as the Security and Exchange Commision, Nigeria requires all public listed companies to file annual audited financial statements with the commission. The tax authorities such as the Federal Inland Revenue Service require companies to submit audited financial statements alongside their annual income tax returns in line with the law. In cases where the submission of the audited financial statements to the relevant regulator is mandatory, there may be penalties associated with any late or non submission. Companies therefore need to ensure that such mandatory obligations are met to avoid being penalized. The Government is also interested in the financial statements of companies for labor, taxation and corporate laws. Other users of financial statements include investment analysts and other information intermediaries, such as researchers. They use financial information to predict a company’s future performance including profitability and liquidity and also provide stock recommendations.
In conclusion, there are numerous important reasons why financial statements of businesses are needed. It is therefore critical that companies prepare such statements in an accurate manner free from errors and misrepresentations in order to ensure they are fit for purpose.
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