Table of Contents
INTRODUCTION.. 3
MAIN BODY.. 4
CONCLUSION.. 9
REFERENCES.. 10
INTRODUCTION
Financial Reporting Quality (FRQ) refers to the degree of correctness, openness and dependability. In order for investors and other stakeholders to make informed decisions, a business must be able to publish its financial information fairly and completely (Fridson and Alvarez, 2022). The Financial Reporting Council (FRC), which establishes standards for financial reporting to guarantee the openness and integrity of financial accounts, oversees financial reporting in the United Kingdom (Fridson and Alvarez, 2022).
A company's success is significantly impacted by the openness of its financial reporting. A company's reputation is raised and investor confidence is increased through accurate and trustworthy financial reporting, which can boost investment, improve stock performance, and decrease the cost of capital (Fridson and Alvarez, 2022). On the other side, bad financial reporting can lead to financial restatements, legal action, and reputational harm, all of which can have a detrimental impact on a company's success.
In the UK financial reporting quality has a major impact on how well businesses perform (Fridson and Alvarez, 2022). The UK is one of the top financial capitals in the world, and luring and holding on to foreign investors depends heavily on financial reporting. Academics, decision-makers, and investors are all very interested in the relationship between financial reporting quality and corporate success in the UK (Fridson and Alvarez, 2022).
The purpose of this essay is to investigate the connection between UK business performance and the quality of financial reporting (Fridson and Alvarez, 2022). The introduction of the essay will include definitions of financial reporting quality and company performance as well as an analysis of the UK's present financial reporting quality situation. After analysing empirical research in the literature, it will assess the connection between financial reporting quality and business performance (Fridson and Alvarez, 2022).
MAIN BODY
As it affects the accuracy, transparency, and dependability of financial accounts, financial reporting quality is a significant component of financial reporting (Schroeder et al., 2022). The degree to which financial statements are free from mistakes and misrepresentations is referred to as financial reporting quality (Lopes et al., 2012). The Financial Reporting Council (FRC), which establishes standards for financial reporting to guarantee the openness and integrity of financial accounts, oversees financial reporting quality in the UK (Schroeder et al., 2022). The qualitative attributes of financial information are one of the most important factors in financial reporting quality. These traits offer direction on the preferred qualities of financial information, such as its applicability, dependability, comparability, and understandability. The essential and improving qualities of financial information are separated into two groups (Rathnayake et al., 2021).
Fundamental Qualitative Characteristic - Consumers of financial statements need certain basic qualitative characteristics in order to receive information that will aid in their decision-making. Relevance and accuracy in representation are essential qualitative traits. Relevance: The ability of financial information to inform users' economic decisions by assisting with their evaluation of past, current, and future transactions is known as relevance (Lopes et al., 2012). The information must have predictive, confirmatory, or feedback value in order to be relevant. Predictive value - Unlike confirmatory value, which refers to financial information's capacity to support or contradict preexisting hypotheses, predictive value refers to financial information's capacity to assist users in making predictions about the future (Leong and Sung, 2018). The ability of financial information to offer feedback on prior decisions is referred to as financial information's "feedback value." The degree to which financial information faithfully represents the underlying basic economic theories that underpin transactions and events (Leong and Sung, 2018). Financial data must be thorough, impartial, and error-free in order to be accurately reported. Completeness - The degree to which financial information contains all the data required for users to make educated decisions is referred to as completeness. Although freedom from inaccuracy relates to the correctness of financial information, neutrality refers to the lack of prejudice in financial information (Leong and Sung, 2018). Enhancing Qualitative characteristics - Enhancing qualitative characteristics is preferred but not necessary to give financial statement consumers information that will help them make decisions. Comparability, verifiability, timeliness, and understandability are some of them. Comparability - Comparability is the capacity of financial data to be compared across several businesses or time periods. Financial data must be measured and presented consistently in order to be comparable (Leong and Sung, 2018). Verifiability - Verifiability is the capacity of financial information to be independently checked by sources or techniques. Understandability - Although understandability refers to the ability of financial information to be understood by users with an acceptable understanding of business and economic operations, timeliness refers to the timely availability of financial information. The FRC offers advice on how to use the qualitative traits of financial information in addition to the qualitative traits itself (Hussain et al., 2018). While financial reporting necessitates the use of judgment in the application of accounting principles and estimating methodologies, the FRC's guideline emphasises the significance of judgment in financial reporting. To ensure that financial statements correctly depict the underlying economic substance of transactions and occurrences, judgment is crucial. The significance of communication in financial reporting is also emphasised by the FRC (Hussain et al., 2018). Financial statements must be easy for users to understand, clear, and succinct in order to be effectively communicated. Although financial information may be impacted by outside events like the economy or changes in accounting rules, communication is crucial in giving context to financial information. A crucial component of financial reporting in the UK is excellent financial reporting (Hussain et al., 2018). The desirable features of financial information, such as its relevance, dependability, comparability, and understandability, are guided by the qualitative characteristics of financial information (Wahlen et al., 2022). The FRC's guidance places a strong emphasis on the value of judgement and communication in financial reporting because accurate communication is crucial for giving financial information context and because financial reporting requires the use of judgment in the application of accounting policies and estimation techniques (Hussain et al., 2018).
The financial performance of an organisation or corporation is a gauge of its capacity to make money and add value for its stakeholders. It includes several financial metrics such as profitability, liquidity, solvency, and efficiency. Investors, creditors, and other stakeholders must go through a company's financial performance in order to assess its financial health and make wise decisions (Rathnayake et al., 2021). Finding a company's profitability in relation to its sales or assets typically involves performing a profitability study. The profitability measures include return on assets (ROA), net profit margin, return on equity (ROE), and gross profit margin (Rathnayake et al., 2021). Operating profit margin measures the amount of revenue that remains after operational costs are subtracted from revenue, as opposed to gross profit margin, which measures the amount of revenue that exceeds the cost of goods sold (Wahlen et al., 2022). The percentage of income that is left over after paying for all costs, including interest and taxes, is known as the net profit margin. In contrast to ROA, which compares a company's potential for profit to its total assets, ROE measures a company's ability to make a profit in relation to shareholders' equity (Martinez-Ferrero, 2014). Another metric of financial performance is liquidity, which measures a company's ability to meet its immediate financial obligations. Liquidity ratios include quick, current, and cash ratios, for instance (Martinez-Ferrero, 2014). The fast ratio looks at a company's ability to meet immediate obligations with its most liquid assets (Martinez-Ferrero, 2014). Solvency indicators include things like the debt-to-asset ratio, the interest coverage ratio and the debt-to-equity ratio (Wahlen et al., 2022). The debt-to-asset ratio displays how much debt and assets the company has used, in contrast to the debt-to-equity ratio, which calculates how much debt and equity financing a corporation has used. The interest coverage ratio measures a company's capacity to cover its interest costs out of operational income (Lopes et al., 2012). Efficiency is a key financial performance metric that evaluates a business's ability to use its resources profitably (Goyal and Kumar, 2021). A few examples of efficiency measurements are accounts receivable, inventory turnover, and asset turnover ratio. While the asset turnover ratio evaluates a company's capacity to produce revenue relative to its total assets, the inventory turnover ratio measures a company's effectiveness in selling its inventory. The accounts receivable turnover ratio evaluates a business's success in collecting its receivables (Goyal and Kumar, 2021). Conclusion: A company's ability to assess its financial status and make informed decisions is substantially influenced by its financial performance. A company's financial performance is impacted by a number of financial indicators, including profitability, liquidity, solvency, and efficiency. In order to assess a debt-paying capacity, a company's profitability, and resource efficiency, creditors, investors, and other stakeholders utilise these indicators (Martinez-Ferrero, 2014).
The degree to which financial statements correctly reflect a company's economic performance and financial condition is known as financial reporting quality (FRQ). Investor trust, a company's ability to access capital markets, and the cost of financing are all impacted by the quality of financial reporting. Thus, it is crucial to investigate how FRQ affects UK corporate financial performance (Goyal and Kumar, 2021). There has been a lot of study done on the connection between FRQ and corporate financial success in the UK. According to studies, excellent financial reporting has a favourable impact on a company's financial success. Financing expenses can be reduced and capital markets access can be facilitated by high-quality financial reporting since it increases trust and transparency. Moreover, excellent financial reporting may enhance managerial decision-making, resulting in more effective resource management and increased profitability (Goyal and Kumar, 2021). The financial success of a company, however, might suffer from low-quality financial reporting. Bad financial reporting can reduce investor trust, which can increase borrowing costs and make it more challenging to access the capital markets. Moreover, it may result in improper resource allocation, lower profitability, and lower shareholder value (Beck and Levine, 2018). The UK's legislative framework for financial reporting also has an impact on how FRQ affects a company's financial performance. The Financial Reporting Council (FRC) and the International Accounting Standards Board are two well-known regulatory bodies in the UK that oversee financial reporting (IASB) (Lopes et al., 2012). By ensuring that businesses follow accounting rules and procedures, these regulatory agencies raise the calibre and dependability of financial reporting. By increasing transparency, expanding access to capital markets, and lowering financing costs, compliance with these standards has a beneficial impact on a company's financial performance. In conclusion, a firm's financial success in the UK is significantly impacted by the calibre of financial reporting (Beck and Levine, 2018). Transparency, trustworthiness, and investor confidence are all increased by high-quality financial reporting, which also lowers the cost of borrowing and improves access to capital markets (Papelu et al., 2020). Also, it results in more effective resource management and increased profitability. On the other side, subpar financial reporting can result in lowered investor trust, problems accessing capital markets, improper resource allocation, and diminished profitability (Beck and Levine, 2018). The UK's regulatory system for financial reporting is extremely important for ensuring that accounting rules and norms are followed, for improving the accuracy and dependability of financial reporting, and for improving a company's financial performance (Robinson, 2020).
CONCLUSION
The aforementioned essay discussed the connection between Financial Reporting Quality (FRQ) and corporate financial performance in the UK. The FRQ scale measures how accurately a company's financial situation and economic performance are represented in its financial statements. To determine a company's financial success in the UK, a range of financial data and indicators are utilised, including liquidity, profitability, solvency, and efficiency.
A company’s financial performance is significantly impacted by high-quality financial reporting because it increases the openness, credibility and investor trust which makes it easier to access the capital market and lowers the financing cost. Also, it results in more effective resource management and increased profitability. On the other side, subpar financial reporting can result in lowered investor trust, problems accessing capital markets, improper resource allocation and diminished profitability.
The UK regulatory system for financial reporting is extremely important for ensuring that accounting rules and regulations are followed. For improving the accuracy and dependability of financial reporting and for improving a company’s financial performance. The Financial Reporting Council (FRC) and the International Accounting Standard Board are part of his regulatory structure (IASB).
In conclusion, the financial performance of the organisations in the UK on high-quality financial reporting. To improve the accuracy and dependability of financial reporting, businesses must adhere to accounting rules and principles. By increasing transparency, expanding the reach to capital markets and lowering financial costs, compliance with these standards has a beneficial impact on a company’s financial performance. To secure the best financial performance businesses should emphasise maintaining high-quality financial reporting.
REFERENCES
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Fridson, M.S. and Alvarez, F. (2022) Financial statement analysis: a practitioner's guide. John Wiley & Sons.
Goyal, K. and Kumar, S. (2021) Financial literacy: A systematic review and bibliometric analysis. International Journal of Consumer Studies, 45(1), pp.80-105.
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Leong, K. and Sung, A. (2018) FinTech (Financial Technology): what is it and how to use technologies to create business value in a fintech way?. International Journal of Innovation, Management and Technology, 9(2), pp.74-78.
Lopes, C., Cerqueira, A. and Brandão, E. (2012) The financial reporting quality effect on European firm performance. Available at SSRN 2179994.
Martínez-Ferrero, J. (2014) Consequences of financial reporting quality on corporate performance: Evidence at the international level. Estudios de economía, 41(1), pp.49-88.
Palepu, K.G., Healy, P.M., Wright, S., Bradbury, M. and Coulton, J. (2020) Business analysis and valuation: Using financial statements. Cengage AU.
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Robinson, T.R. (2020) International financial statement analysis. John Wiley & Sons.
Schroeder, R.G., Clark, M.W. and Cathey, J.M. (2022) Financial accounting theory and analysis: text and cases. John Wiley & Sons.
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