Financial reporting is a process of communicating financial information for public or private institution, government and non-profit organizations (Alexander & Britton 2004). Interest groups require financial information when making investment decisions. From the financial information, interest groups compare financial performance of different companies. Therefore, it is importance that standard financial reporting is adopted and used by the private and public companies and not-for profit organizations. Standard financial reporting is essential in providing this information to the interest groups (Alexander & Britton, 2004). The Generally Accepted Accounting Principles (GAAP) is a body that has the responsibility to facilitate the standardization of financial reporting rules. The GAAP provides specific and broad rules that companies should use when reporting financial information to the public in the United States (Kieso, Weygandt & Warfiled, 2012).
Financial reporting environment in the United States of America
The great depression era witnessed the crash of United States market stocks due to inflated prices of stocks (Spiceland, 2009). This increased pressure on the need to establish standard accounting procedures to curb any negative effects to the companies operating within the United States. This led to the formation of Securities and Exchange Commission (SEC), which was mandated to set accounting and reporting standards. All publicly trading companies were expected to comply with the developed by SEC. However, SEC delegated responsibilities to the American Institute of Certified Accountants (AICPA), a private sector entity, but retained its authority in setting the standards (Spiceland, 2009).
AICPA was the first body to set accounting standards in the United States. AICPA formed the Committee on Accounting Procedure (CAP) that facilitated resolution of accounting and reporting problems. The CAP developed no clear financial accounting framework for more than twenty years. Its committee was later disbanded and replaced by Accounting Principles Board (APB) that drew members from AICPA (Spiceland, 2009). The Accounting Principles Board Opinions (APBOs) provided a theoretical framework that solved specific accounting and reporting problems. FASB is the body that currently sets accounting standards in the United States (Spiceland, 2009).
The government and the industry never spared APB’s inability to work on financial accounting and reporting and its inability to solve the accounting issues within the required timeframe. The body was also criticized for not representing all groups, and that all decisions were only made by the accounting professionals. This instigated the formation of the Financial Accounting standards Board (FASB) in the early 1970s. The membership of the FASB is composed of seven permanent members and various interest group members that are professional accountants, accounting educators, companies and the federal government.
FASB established an Emerging Issues Task Force (EIFT) in 1980s to spearhead timely responses to any new financial reporting issue (Gibson, 2012). EIFT has representation from various organisations such as FASB. Other organisations represented in the EIFT include the public accounting organisations among others. FASB does not directly engage in the activities of EIFT, but intervenes only when a common consensus is not reached by EIFT. FASB is mainly concerned with the drafting a conceptual framework that deals with provision of structures that determine current and future financial reporting standards. Additionally, the Government Accounting Standards Board (GASB) was created in 1984 to develop accounting standards for local and state governments (Gibson, 2012).
The general objective of reporting financial statements is to provide information about the financial position of the company to the public. There exist differences in the way the reporting process is done from one country to another. These differences are brought about by the varied national policies of the countries in which the organizations providing the financial report operate. One of the major causes of the differences in culture (Alexander, Britton & Jorissen, 2007). Cultural influence has played a crucial role in shaping the financial reporting policies and rules in the United States for a long time (Sharan, 2006). Culture is an important issue that needs to be considered because of its impact on the functioning of accounting systems. The degree of social conservatism and level of secrecy are among the major influences of culture on accounting practices in the United States. Furthermore, people’s attitude towards the company and the accounting profession has proved to have a profound impact on the formulation of accounting standards in the US (Schiff, 2006).
The attitude that the accounting profession is a high-status job in the United States has increased over the years (Schiff, 2006). People no longer view the accounting profession as a low profession. People respect the accounting profession all over the country in recent days. The increased college enrolment in this profession over the years has contributed positively to the development of accounting theory, procedures, and practices. The level of fraudulency in the accounting industry has significantly reduced over the years. Therefore, society accepts accounting policies and procedures more easily than the case in the past (Schiff, 2006).
Political influence on the process of setting accounting and financial reporting is inevitable (Schroeder, Clark & Cathey 2010). The accounting standards usually have different effects on various groups in society. The development of new or review of accounting standards must consider the economic effect of the change and its impact on the external user. The standards set should have a desirable economic impact on the interest groups in the society, government and investors. Examples of economic consequences that involved a political process to resolve are the proposed changes in accounting for the health care benefits for post-retirement of employees and accounting for employee stock options (Spiceland, 2009). The two economic consequences elicited heated debates from various companies until FASB reacted by making adjustments to the framework.
The FASB conduct the process of constituting accounting standards through a political process to protect the interest of the managers, investors and the general public. According to Ingram and Albright (2007), the accounting standards need to be rationalized so as to be responsive to the interest groups. It is due to these reasons that political influence is inevitable in creating accounting standards within the United States.
FASB is required to follow certain steps when formulating accounting standards. For any existing standards to be reviewed or new standards to be formulated, the bodies must hold a public hearing after an evaluation of the accounting issues that need to be addressed (Ingram & Albright 2007). Responses are collected to determine the view of managers, investors and the public regarding the accounting concepts. The managers usually include government officials and presidents of private corporations that have greater influence on this process. The responses are evaluated by the FASB, which leads to the creation of accounting standards. The board is required to explain how to treat any accounting transaction that can yield any economic consequence. This is a typical political lobbying process. Therefore, it is evident that the political process plays a key role in shaping the accounting standards in the United States (Ingram & Albright 2007).
Harmonization of accounting standards is inevitable and there is a need to establish accounting principles that can be accepted across the world. According to Fischer, Taylor, and Cheng (2012), harmonization of accounting standards across the world is essential in improving the comparability of financial information among various multinational corporations in the world. Harmonizing accounting standards allows multinational corporations to check the efficiency of their subsidiaries in different parts of the world. Furthermore, it helps in the efficient allocation and regulation of capital by the international capital markets. The harmonization of the accounting principle is also critical in providing valuable financial information to customers and supplier or investors about business opportunities available on an international scale (Fischer, Taylor & Cheng, 2012).
With the world achieving economic integration, many companies operate in different countries across the world. Therefore, companies should comprehend the regulations on customs laws from various nations. There exist differences in the way accounting and reporting of financial information among the countries is handled. In some countries, the accounting standards are undertaken by private bodies whereas the government exclusively determines the process in other nations. These differences have profound effects on companies operating in different countries. This is because they have to comply with the accounting standards of foreign countries in which they operate (Spiceland, 2009).
The International Accounting Standards Committee (IASC) was established to come up with accounting principles that could be acceptable around the world. The IASC was then reorganized to international Accounting Standards Board (IASB). The structure of accounting standards should be in line with the FASB vision of providing optimal, standard setting environment (Camfferman & Zeff 2007). The IASB strives to align the United States accounting principles with the established global values. The body has so far endorsed and revised forty-one international accounting standards, known as the International Financial Reporting Standards (IFRSs) (Spiceland, 2009).
FASB and IASC ratified the Norwalk Agreement depicting the body’s commitment to streamlining US GAAP and IFRIS. Through this agreement, the boards agreed to eliminate differences in accounting and financial reporting in view of developing the future standard setting of accounting and reporting between countries across the world. These bodies work towards narrowing the differences and setting international standards to be used in the future (Camfferman & Zeff, 2007).
The outcomes of the convergence of the accounting standards may present advantages or disadvantages to the companies. The U.S. corporations are likely to benefit by raising capital from foreign subsidiaries. The move is also likely to stimulate investment by local and foreign investors because there is the comparability of financial reporting standardized across the globe. The negative outcomes could result from resistance of companies that do not have subsidiaries in foreign countries due to significant costs that are likely to be associated with the convergence and adoption of international financial accounting and reporting (Spiceland, 2009).
Description of financial and non-financial reporting of Covidien Company
Covidien is a medical company incorporated in the United States of America that is engaged in the development, manufacture and sale of healthcare products. The company manufactures products that are used in hospitals, ambulatory centers, and alternate healthcare providers. Intensive research is carried out by the company to ensure the production of effective and safe pharmaceutical products. The company owns various manufacturing centers around the world. The majority of these manufacturing centers are located in the United States and Europe plus others in Asia Latin America (United States Securities and Exchange Commission, 2011).
Under the Securities and Exchange Commission regulations, the company provides quarterly, annual, and special reports, proxy statements, and other relevant information to the public and investors. The investors and another interest group can access the company’s financial information through SEC special office or through the SEC or Company official websites. Upon request by the shareholders, the company issues the financial documents. The information provided by the company also includes audit reports and reports and incorporation documents.
Various factors present risks to the Covidien Company in its business environment. Technological changes present a substantial risk to the operation of the company in the future. These changes may create hinder the company from introducing and selling new healthcare products. The government reforms in the taxation systems of medical manufactures may also have a profound effect on the profitability of the company in the future. The uncertainty regarding the availability of raw material for the manufacture of the pharmaceutical company poses a greater challenge for the entire business in the future. The fluctuation of foreign exchange rates coupled with worsening economic conditions in the United States is also a point of concern for the company (United States Securities and Exchange Commission 2011).
The company has a sustainability roadmap that ensures the company operations are maintained to avert the risks. The company has been engaged in strategic acquisition of other companies to consolidate its business base. Furthermore, the company has encouraged divestiture of non-performing business units with a view of reducing the cost incurred by the company (United States Securities and Exchange Commission 2011).
The FASB and GAAP regulations require that financial reporting should disclose the operation of the business to the general public and investors. Covidien Company has adequately complied with the requirements by disclosing information relating profitability of the company. The company has also disclosed share earnings, balance sheets, and cash flow statements to the shareholders and another interest group. The company has adequately met the GAAP regulation on financial reporting by presenting the end year annual reports and other information to SEC.
Financial reporting is highly essential in providing financial information regarding the performance of companies and organization to groups with a vested interest. Therefore, the information provided should be consistent across different sectors and countries. This is essential in providing reliable information on the viability of the company, which is an attracting feature for investors and creditors. Developing standardized accounting and financial reporting procedures will be important to create unity in the application of the accounting standards. Covidien Company operates on a global platform, and has developed strategies to follow the provisions of the international accounting and reporting standards. There is a need to continue amending the accounting and reporting standards so that all organizations can apply harmonized standards. This will reduce conflicts in the application of the accounting standards globally. Therefore, companies operating in the global market will have favourable environment to conduct business.
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