Financial Reporting Systems and Economic Development Essay

Financial Reporting Systems and Economic Development - Essay Example The role of the financial reporting system, as supported by accounting standards, the law and the ethics, in economic development is reviewed and analyzed in this paper. Particular emphasis is given on faithful representation, as an indicator of the reliability of financial statements. Also, the circumstances under which true and fair override apply are identified and explained. It is proved that faithful representation, in its current form, is something more than simple a compliance with accounting standards. One of the most critical issues when having to evaluate the quality of financial statements is that these statements should achieve faithful representation. In order to understand the role of ‘faithful representation’, as an element of the financial reporting systems, it would be necessary to refer to these systems, as the basis on which a firm’s financial practices are usually based. In accordance with Uddin et al., two major financial reporting systems are considered as the most credible for businesses in all sectors: the US Generally Accepted Accounting Principles (US GAAP) and the IFRS.1 The use of one of these systems, which have been appropriately tested as of the effectiveness in financial reporting, results to the increase of credibility of the local economy. From this point of view, it has been proved that the use of these systems within a particular country leads to the increase of the foreign direct investment (FDI) to the above country. Thus, accounting standards and financial reporting are closely related to the performance of the local economy, of course under the terms that global financial markets are stabilized, i.e. that these markets do not suffer from delays in the implementation of financial and other projects. In the literature the term ‘faithful representation’ has been given various explanations, which are all similar. For example, in the study of Hussey reference is made to the use of the term fait hful representation in order to show the reliability of the financial statements involved.2 In other words, the specific term is used in order to indicate the fact that the information included in the financial statements is accurate and responds to the actual financial status of the organization. Apart from reliability, the term ‘faithful representation’ also reflects the completeness of information included in the financial statements.3 The financial statements are considered as complete when they include all necessary information.4 A similar approach in the description of faithful representation is included in the study of Needles et al. In accordance with the above researcher, the term ‘faithful representation’ means that the financial statement involved is ‘complete, neutral and free from error’.5 It is further explained that the phrase ‘free from error’ does not imply the full accuracy of the particular financial statement, a s such requirement is quite difficult, almost impossible, to be achieved since financial statements are highly based on estimations.6 At this point, the following problem appears: how the reliability of financial statements is proved? The fact that there are some transactions that cannot be measured, at least not precisely, is highlighted in the study of Hussey.7 On the other hand, the availability of the data involved is an issue that needs to be carefully considered when having to