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Materiality Report

Discuss about the External Reporting Issues for Accounting Process.

There are various aspects of the accounting process that need to be taken into consideration while making the balance sheet of a company. Without the presence of these facts, the financial reports of the companies will be affected. These issues should be treated carefully so that the financial statement of a company reflects the true picture. The two most important issues are the application of materiality principles and the high ethical standards which have a great impact on the annual reports of companies[1].

This report is about the examination of the annual report of Blackmores. It is an Australian company which produces health products which help to keep people healthy. The primary aim of the study is to ascertain the role of materiality principles in the financial statement of the company i.e. whether the presence of materiality principles makes the financial report clear to all. At last based on the total report, a conclusion has been drawn.

There are several rules and regulations that govern the annual report of the company. The annual report is formulated based on the appropriate rules and regulation of the companies act. The company has the approval of Audit and Risk Committee to prepare the report. The example of some of the rules is People and Risk Committee Charter, Code of Conduct, Continuous Disclosure Policy, Share Trading Policy, Diversity Policy, Sustainability Policy, Board Charter, etc. The annual report is based on these policies[2].

Materiality refers to the policy of disclosing all the important facts relating to a company’s financial report irrespective of how small the fact is. According to materiality concept, small facts can be ignored if they do not make an impact on the financial report. But if the absence of that small fact affects the net profit of the company, then the fact must be taken into consideration and must be disclosed to the organizational people[3].

Blackmores Ltd. follows the materiality principles as per the Accounting Standard AASB 2015-3. According to this act, companies need to disclose all the small facts about the financial report. Concerning Blackmores, this company has also disclosed all small material facts about the annual report to the shareholders, investors and all the people of the organization. This process works as a motivation to the stakeholders and the investors as it creates clarity in the process and helps to make a strong relationship between the company and the shareholders.

Examination of Accounts

Materiality policy demands to disclose all facts which affect the financial report of companies irrespective of how small the facts are. Application of materiality policy creates clarity in the total process[4]. It is quite natural to make mistakes or make misstatements while preparing an annual report of companies. As no one is perfect in the universe, it is natural that there could be an omission of material facts in the annual report of the company. But the matter of concern is whether the mistake is intentional or unintentional. There are instances where the accountants manipulate the annual statement to create a fake image so that the report can attract the attention of the investors. However, most of the companies in the world prepare the annual reports by true material facts and become successful in attracting the investors[5].

Yes, it is very much possible to meet the twin obligations while preparing the annual report of the company. Ethical standard refers to maintain ethics in the work i.e. principles that help to create trust and fairness in the workplace[6]. On the other hand, materiality obligation means to disclose all qualitative and quantitative facts in the annual report that can affect the annual profit of companies[7]. Referring the annual report of Blackmores, it can be seen that the report is based on ethical standards and has disclosed all necessary material facts. Hence it is concluded that it is possible to maintain ethics and materiality principles in the annual report.

An annual report is prepared for various reasons. The primary reason is that it will create a good image of the company to the investors or stakeholders. They are the users of the annual report and based on that report they will decide whether they will invest in that company or not[8]. On the other hand, the persons or the group of persons who creates the annual report are the accountants and they are the preparers of the report. Both the preparers and the users have their interest in the annual report. As the annual report of Blackmores is a perfect one, it serves the interest of both the users and the preparers. The users get the desired information from the report and the preparers get praises for preparing a fair and perfect annual report[9].

Application of materiality principles makes an annual report more convenience to the users of that report. As the presence of materiality principles demands to disclose all the financial facts to in the report, it becomes a very helpful tool for decision making to the investors and the stakeholders[10]. GPFR stands for General Purpose Financial Report. The annual report of Blackmores is a GPFR which satisfies the needs of the users and it also has the application of the materiality principles[11]. Thus, the annual report of Blackmores is a fair report to the perspective of both users & preparers and it helps to the decision making process of the users.

Service of an Annual Report

Materiality principles and ethical practices are like the two sides of the same coin. At the time of the application of materiality principles, an accountant must be ethical as disclosure of all financial qualitative and quantitative facts needs the fare practice of accountancy. And the fair practice leads to ethical practice. Hence, both materiality and ethics are interconnected as well as interrelated. At the time of preparing an annual report of a company, the accountants face some specific problems. If a company is determined to show the true image of the financial position irrespective of how good or bad the report will be, then the process of making an annual report will not be a tough job to the accountants. In that case, the accountants have every right to be ethical and can apply the materiality principles[12].

 However, sometimes it is not possible for the companies to disclose all material financial facts in the annual report due to many reasons. At that time, it is a very tough job for the accountants as they are not able to maintain the materiality principles in the report. And as a result, the ethics is not maintained by them. Sometimes, due to loss of important data, the materiality principles can’t be applied[13].

Conclusion

From the above study, it can be concluded that in the preparation of an annual report, the presence of materiality principles and ethics must be needed. An annual report containing these two factors is a fair & true one and satisfies the needs of both the users and the preparers of that report. In his report, the annual report of Blackmores has been taken into consideration. After the examination of various accounts of Blackmores, it has been seen that the company has well maintained the materiality principles as well as ethics at the same time while preparing the annual report. It can also be concluded that it is very much possible to maintain the twin obligations of high ethical standards and materiality principles in the annual report, and Blackmores is the perfect example of it.

Carey, Peter and George Tanewski, 'The Provision of Business Advice to SMEs by External Accountants' (2016) 31 Managerial Auditing Journal 290.

Carey, Peter, Brad Potter and George Tanewski, 'Application of the Reporting Entity Concept in Australia' (2014) 50 Abacus 460.

Cherry, Michael, 'Accounting for Trust: A Conceptual Model for the Determinants of Trust in the Australian Public Accountant – SME Client Relationship' (2016) 10 Australasian Accounting, Business and Finance Journal 3.

El-Sayed, Heba and Mayada Abd El-Aziz Youssef, '“Modes of Mediation” for Conceptualizing how Different Roles for Accountants are made Present' (2015) 12 Qualitative Research in Accounting & Management 202.

Griffin Jeremy B., 'The Effects of Uncertainty and Disclosure on Auditors' Fair Value Materiality Decisions' (2014) 52 Journal of Accounting Research 1165.

Himick, Darlene, Marion Brivot and Jean-François Henri, 'An Ethical Perspective on Accounting Standard Setting: Professional and Lay-Experts' Contribution to GASB's Pension Project' (2016) 36 Critical Perspectives on Accounting 22.

Jones, Peter, Daphne Comfort and David Hillier, 'Managing Materiality: A Preliminary Examination of the Adoption of the New GRI G4 Guidelines on Materiality within the Business Community' (2016) 16 Journal of Public Affairs 222.

Karreman, Joyce, Menno de Jong and Stefan Hofmans, 'The Effects of Different Parts of the Annual Report on Potential Investors' Attitudes Towards the Company and on the Corporate Reputation' (2014) 57 IEEE Transactions on Professional Communication 78.

LEE, LIAN FEN and ALVIS K. LO, 'Do Opinions on Financial Misstatement Firms Affect Analysts’ Reputation with Investors? Evidence from Reputational Spillovers' (2016) 54Journal of Accounting Research 1111.

LoGrasso, Marc F., 'Easing the Burden of External Reporting' (2016;2015;) 2015 New Directions for Institutional Research 61.

Maqellari, Majlinda and Ines Dika, 'Materiality and Risk Essential Pillars of the Auditor's Work' (2016) European Scientific Journal.

Someren Greve, van, R, 'The Value of Practical Usefulness' (2014) 168 Philosophical Studies 167.

Wheeler, Stephen and Sandra J. Cereola, 'Auditor Scrutiny of Unaudited Client Disclosure Outlets: Recognized Vs. Disclosed Financial Statement Items also Appearing in the MD&A' (2015) 31 Advances in Accounting 91.

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