Financial Statements for Internal Reporting vs. External Reporting Purposes
Financial Statements for Internal Reporting Purposes vs. Financial Statements for External Reporting Purposes
It is common in most companies to maintain two set of financial statements; one being used/presented for internal reporting purposes and another for reporting externally. Internal reports are used primarily to aid management in the decision making process throughout the course of the business. These are subject to internal audit to make sure that all information reported are fair and correct, safeguard the assets of the company, assure compliance to laws and regulations, etc. The company employs the internal accountants and therefore, unregulated, although there are international standards for internal auditing.
External Reports on the other hand, are to provide information on the financial position, performance and changes in the financial position of the company for a variety of users such as the government, shareholders, financial institutions, employees, vendors, and the public itself. These reports should be very understandable, and are assumed to be read by users who have reasonable knowledge on financials and business, and for those who are willing to study the information diligently. Most of the external users depend completely on these reports for their decision making. The reports are expected to be reliable so the companies should employ external auditors that are independent from the company. This is to avoid conflict of interests and bias towards the information presented by the company.
Ideally, the financial statements that are audited by the internal auditors should be the same as the statements that would be subject to external audit. The problem arises when the company decided to report financial statements that are entirely different from the internally used and that of externally used. But still the intention of the company why it reported two different reports should be considered as well because that is where the ethical issue
It is common in most companies to maintain two set of financial statements; one being used/presented for internal reporting purposes and another for reporting externally. Internal reports are used primarily to aid management in the decision making process throughout the course of the business. These are subject to internal audit to make sure that all information reported are fair and correct, safeguard the assets of the company, assure compliance to laws and regulations, etc. The company employs the internal accountants and therefore, unregulated, although there are international standards for internal auditing.
External Reports on the other hand, are to provide information on the financial position, performance and changes in the financial position of the company for a variety of users such as the government, shareholders, financial institutions, employees, vendors, and the public itself. These reports should be very understandable, and are assumed to be read by users who have reasonable knowledge on financials and business, and for those who are willing to study the information diligently. Most of the external users depend completely on these reports for their decision making. The reports are expected to be reliable so the companies should employ external auditors that are independent from the company. This is to avoid conflict of interests and bias towards the information presented by the company.
Ideally, the financial statements that are audited by the internal auditors should be the same as the statements that would be subject to external audit. The problem arises when the company decided to report financial statements that are entirely different from the internally used and that of externally used. But still the intention of the company why it reported two different reports should be considered as well because that is where the ethical issue