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Limitations of Traditional Financial Reporting

Question:

Discuss About the Main Criticism of Traditional Financial Reporting?

In business, accounting is essential in helping those who use financial statements to make effective and sustainable financial decisions (Meyer & Felton 2016, p. 369). However, it is essential for every organization to come to the realization the limitations of financial reporting and accounting in the process of forming such decisions. Pantelic (2014) denotes that the adoption of professional judgment by financial professionals is essential in ensuring the organizations also operate in according with the accounting reporting policies. This report discusses the main criticism of adopting the traditional financial reporting system in an organization. It also looks into the theories as well as cost and benefits behind corporate sustainability reporting within an organization before finally concluding with a personal reflection on the need of adopting sustainability reporting in an organization.

In their study, Beck, Dumay, and Frost (2017) denotes that financial accounting reports for most organizations have traditionally been reported based on the organizations’ historical cost principle. The transactions were often recorded at the cost of transaction product or item and the time the transaction was done. As a result, traditional financial reporting is often considered to be very limiting as it leads to a reduction over time in the relevance of the reported value in relation to the global business level. Bradford et al. (2017) denote that affirms that with advancement in technology, every business focuses on to be competitive. It hence requires the organization to carry out an evaluation process to understand their financial accounting practices. Such a strategy will enable the organization to understand their areas of weaknesses that will hence be improved to ensure effective performance.

Stakeholder Theory

According to Omran (2015), the stakeholder's approach denotes that organizations are accountable to the stakeholders as well as need of considering the interest of others that can directly or indirectly affect or be influenced by the success of the business firm. The Stakeholders theory is hence adopted in the analysis of these groups that the organization has the responsibility of considering. In his study, Dunfee (2016) affirms that all organizations need to be operated for the benefit of everyone that has a stake in the firm. For instance, as the shareholders invest their capital in the investment, customers invest their trust for repeated services, the employees invest their intellectual capital and time, and the community as well invest their infrastructure. In other words, the theory denotes that every organization should play a very essential role in the society where they operate.

According to Gokulsing (2011), corporations need to evaluate and understand the effects their action might have upon the stakeholders with a stake or interest in the corporation. In other words, the theory stresses the effectiveness of all the parties that directly or indirectly have an influence on the operation of the organization. The theory can as well be explained using the ethical and managerial branches. For instance, ethical branch denotes that all stakeholders have the right of knowing about the environmental and social implications of organizational operations all the time. However, managerial ranch denotes that the organization should only be concerned with stakeholders with economic impact or those who have a direct engagement with the economic activities of the organization.

Advancement in Technology and Financial Accounting Practices

The theory is mainly concerned with the societal and business relationship between the community and the organization. In his study, Omran (2015) denotes that there is always an implicit social contract between the society and business implying that there are some indirect obligations businesses have towards the society. In other words, the theory requires the managers and other stakeholders of the organization to handle business decisions in an ethical point of view as the organization is always considered responsible to the whole community as they are an integral part. Gokulsing (2011) affirms that the main idea of the theory is that business organizations often operate on the public consent with the objective of serving constructively the societal requirements. It is hence considered a strategic action to the dynamic organizational situatios or new corporate challenges often known as Corporate Social Responsibility.

Corporate Sustainability Reporting is a broad term that defines what the reports include, how these reports are formatted, their extensiveness, and the role of the organization in the production of the reports. In her study, Miller (2011) denotes that corporate sustainability reporting is essential in communicating the Corporate Social Responsibility efforts the organization makes to the stakeholders as well as the clients. As per the Global Reporting Initiative guidelines, sustainability reporting is an organizational report that is essential in giving information concerning the environmental, social, economic, and governance performance. Brocke (2017) denotes that sustainability reporting is a stand-alone document that is separate from other financial information. Sustainability reporting is a tool that is becoming globally popular in enhancing the image of the organization as completion and the business image has become major determinants in the operation of every organization according to Herremans and Nazari (2016, p. 123). By enhancing the reputation and image of the company, corporate sustainability reporting enables the organization to overcome some negative obstacles and publicity it might have received from the public or even supporting the positive image it has already created for the customers.

It is also essential in attracting and retaining employees who often tend to be happier when working with companies that have concerns for them thus giving them the opportunity of giving back. Such employees often prefer to stay longer in the organization while attracting other people due to the good reviews and the recommendations about the organization. Miller (2011) also denotes that sustainability reporting increases the stakeholders understanding of the opportunities and risks involved in any sustainability project the organization desires to pursue. The report is often tied and detailed on the activities and objectives of the organization hence enabling the organization to understand the opportunities they have as well as the risks involved that should be mitigated. The report also engages stakeholders as it involves the consumers and the members of the organization for accountability, conversations, and feedback for improvements.

Despite the challenges experienced with the reporting process, the organization often face challenges with how the information is collected and presented. For instance, sustainability reporting is required to be built on strong organizational goals as weak goals for the report, the organization, and the sustainability policy can cause a disaster to the operation of the organization. (2011) also denotes that there is often mismanagement of data since proper reporting requires accuracy in the reporting, collection, and presentation. It also requires the management of the organization to listen to the clients and other stakeholders as they provide data verification, advice, or comments concerning the reports, without which the organization will experience a discounting feedback. In his study, Bradford et al. (2017) also denote that sustainability is often accompanied with underreporting, tenuous comparisons, inadvertent greenwashing, disordered priorities, and unreached targets when the process of reporting is not well structured.

Conclusion

With the advancement in technological innovations and their adoption into the global business arena, the ability of the production of meaningful and useful whole business reporting is easier that it has always been considered. While adopting technological efficiencies, the business not only remains digital and competitive but enjoys an automated process that allows the organization to effectively understand their performance. It is hence necessary for organizations to adopt sustainability reporting as part of the business so as to have a better understanding of its sustainability performance and how its activities affect the internal and external environment of the organization. It is also a vital step that will enable the organization to achieve a sustainable global economy there every industry is advocating for sustainability in their production. It is a process that enhances accountability and trust thus facilitating value sharing with the aim of building a more cohesive society.

References

Brocke, J 2017, 'What can we learn from corporate sustainability reporting? Deriving propositions for research and practice from over 9,500 corporate sustainability reports published between 1999 and 2015 using topic modelling technique', Plos ONE, 12, 4, pp. 1-27, Academic Search Premier, EBSCOhost, viewed 28 April 2017.

Dunfee, T., 2016, ‘A critical perspective of integrative social contracts theory: Recurring criticisms and next generation research topics’, Journal of Business Ethics, 68, 303-328. https://www.globalreporting.org/resourcelibrary/The-benefits-of-sustainability-reporting.pdf

Gokulsing, R.D., 2011. ‘CSR matters in the development of Mauritius’, Social Responsibility Journal, 7(2), 218-233.

Herremans, I, & Nazari, J 2016, 'Sustainability Reporting Driving Forces and Management Control Systems', Journal Of Management Accounting Research, 28, 2, pp. 103-124, Business Source Premier, EBSCOhost, viewed 28 April 2017.

Lail, B, MacGregor, J, Marcum, J, & Stuebs, M 2017, 'Virtuous Professionalism in Accountants to Avoid Fraud and to Restore Financial Reporting', Journal Of Business Ethics, 140, 4, pp. 687-704, Education Full Text (H.W. Wilson), EBSCOhost, viewed 28 April 2017.
Beck, C, Dumay, J, & Frost, G 2017, 'In Pursuit of a 'Single Source of Truth': from Threatened Legitimacy to Integrated Reporting', Journal Of Business Ethics, 141, 1, pp. 191-205, Education Full Text (H.W. Wilson), EBSCOhost, viewed 28 April 2017.

Meyer, T, & Felton, S 2016, 'Changes in the Covalence Ethical Quote, Financial Performance and Financial Reporting Quality', Journal Of Business Ethics, 134, 3, pp. 369-395, Education Full Text (H.W. Wilson), EBSCOhost, viewed 28 April 2017.

Miller, M 2011, ‘The Pros and Cons of Sustainability Reporting’, Retrieved from https://hotelexecutive.com/business_review/3695/the-pros-and-cons-of-sustainability-reporting

Omran, A M 2015, ‘Theoretical Perspectives on Corporate Social Responsibility Disclosure’ International Journal of Accounting and Financial Reporting, ISSN 2162-3082 2015, Vol. 5, No. 2, Retrieved from https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.1020.4715&rep=rep1&type=pdf

Pantelic, M 2014, 'From traditional to modern financial reporting - what is the price of modernization?', TEME: Casopis Za Društvene Nauke, 38, 4, pp. 1559-1572, Academic Search Premier, EBSCOhost, viewed 28 April 2017.
Bradford, M, Earp, J, Showalter, D, & Williams, P 2017, 'Corporate Sustainability Reporting and Stakeholder Concerns: Is There a Disconnect?', Accounting Horizons, 31, 1, pp. 83-102, Business Source Premier, EBSCOhost, viewed 28 April 2017.

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