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A public limited company is a company, which trades its securities on a stock exchange, which can be sold and bought by the public. For this reason, the public companies are regulated strictly. They are obligated by the law to publish a true and complete financial statement for their investors to establish accurately, the worth of its shares (SteIIa Fearnley, Richard Brandt,Vivien Beattie, 2002).
A public limited company is mandated by law to provide a true picture on its performance. They are obligated to be precise in their financial statements. A default to this requirements is viewed as a mislead of the general public and since it is a legal entity, it can face charges.
The financial position of a company is but constant. It keeps varying from time to time. That is why it is necessary for a public limited company to produce a financial statement on a regular basis, preferably, annually. This essay will outline the importance of a financial statement to a public limited company, both externally and internally and the measures taken to ensure an accuracy of its contents.
The importance of financial statements to a public corporate
Financial statements are very vital reports for any company, especially the public unlimited company. They give an idea of how a business is fairing. They give a true picture of a company’s performance. It is important for companies to prepare their financial statement on a regular basis and at periodic intervals. It is also a requirement of the law. Most of the companies prepare theirs at an annual basis. This is because the company’s financial wealth, that is its assets and liabilities vary constantly. It is equally important to prepare statements meant for external use by independent accounting firms in order to maintain transparency.
A public company draws a large amount of its capital from the general public. It is vital for them to maintain a good public image for them to sell capital. They also have to give their competitors an edge. The financial statement of public corporate is visible to the public even their competitors. It is important for them to maintain transparency for their shareholders and creditors. It is equally important for them to be credible to avoid losing business to their competitors.
The importance of a regulatory framework to a public corporate
The public limited company has a huge responsibility to the public because it not only serves them as customers but also as stockholders. They owe it to the general public to uphold integrity. The public limited company has to have well-defined rules that govern the corporate to maintain trustworthiness (Lazarides, 2011).
It is for this reason that a public company should have an effective regulatory system. It regulates the conduct of the corporate. The corporate should instil a compliance culture so that the high standards stipulated by the legal framework are not compromised. Therefore, strict measures should be taken on anyone who breaks the rules and regulations in order to avoid deviations.
The internal and external use of financial reports
As stated earlier, financial reports are meant to give a view of a company’s performance. The stockholders of the company, the board of directors, its various managers, and even some employees, use it internally. In the external side, prospective investors, the government agencies who are responsible for the collection of tax, to the creditors including banks and to stockbrokers and investment analysts, use it.
A financial statement constitutes three main parts. The balance sheet, which is majorly a list of what a company owns and owes at the end of a financial period, the difference between a company’s assets and liabilities. The value gives its net worth. The third component is a company’s profit and loss statement, which gives an idea of the company’s accounting period and the cash flow. It shows how cash was obtained and spent in the course of the accounting period.
The financial statement holds important information that is needed by various people. Its annual preparation ensures accountability for the stockholders. It is used to make financial decisions as well as economic decisions. For example, the shareholders would be informed of when to buy or sell shares. In addition, the annual report creates an opportunity for a public limited company to boost corporate image.
The company benefits from the information given by the balance sheet, as it shows the debts due and what it has on inventory. An analysis of the income statement can help deduce the profit made. An evaluation of the cash flow can help determine how the needs of the company are met, whether it is through generated income or borrowed money.
The companies’ managers benefit the most from financial statements. Managers use this tool to figure out problems and come up with corrective measures at an early stage. They can also use these statements to produce objectives for the following financial year. In addition, they can use them for assessing performance on the set goals.
The financial statement is also crucial for the external communities. The existing and future potential investors together with lenders use the tool to make decisions. That is, whether they should invest or lend respectively. During the meetings of boards and stockholders, participants are given copies of the statements. The rating agencies, analysts, brokers, and money managers assess the statement before they can make recommendations. The statement keeps the major customers and suppliers of a company informed. The other parties, which try to get the information in a company’s financial statement, include competitors, potential competitors, and corporate raiders.
The government of countries take the payment of tax very serious (Bank, 2008). They have a system that ensures that all taxes is collected on due time. The failure of companies to pay taxes is a serious offence that is highly punished. Companies comply with the rules and regulations of its host countries to avoid unnecessary complications (Lethaby, 2013).
The public corporate is not exempted from paying tax. They take the essential steps to ensure that they do not get into trouble with the authorities. The financial statement is used to calculate the tax owed. The tax authorities have become strict on the failure of companies to paying their due tax. Companies that fail to pay their tax on time are heavily fined. The companies, which cheat on their payment, are equally charged. The tax authorities come up with more strict rules that ensure that companies comply (Prasad, 2008).
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A public limited company should ensure that their financial statement have the accurate values. They should prepare them on time to avoid late payment of their taxes. In both cases, a failure to meet both requirements leads to serious fines. The financial statements ought to prevent such expenses. Evading paying taxes and refusing to comply with the legal authorities can create a bad image for the company. That is why it is important for the public limited company to follow the rules of the tax authorities.
The objectives of a regulatory framework
It is important for companies, especially the public limited companies to have a regulatory framework that they comply (Raymond S.Y. Chan, Charles K.S. Lau, Artie W. Ng, 2011). This is mainly so because the public limited companies have a responsibility to their stockholders to maintain credibility and accountability. An effective and efficient financial regulation is multifunctional. It does not only include the rules and regulations that govern the auditing processes, the corporate and financial reports. It also involves ethics and keys players in the capital market. That is, all the parties that add indifferent ways to the success of the markets. For example, the analysts, fund managers, investment banks etc
A regulatory framework that outlines high standards of accounting, auditing, and effective corporate governance is necessary. Such a body will help maintain capital market’s confidence. However, for a regulatory system to be effective, it not only needs to be well defined. A company should also have a compliance culture. Furthermore, it should have a mechanism that oversees enforcement. It should put to stop non-compliance and deal promptly with abuse.
A regulatory system can meet its objective of maintaining public confidence through high standards, an adhering culture, and enforcement. All this can be achieved especially when the regulatory framework is cost effective. That is, compliance cost should not go beyond the general benefits to the society from imposed regulations (Valiante, 2013).
A public limited company is required by law to prepare annual financial statements for its stockholders. In other words, they are required to be more transparent because they have a responsibility to the public. They comply with these requirements because they depend on the general public to obtain their major capital. Therefore, it is important for them to maintain credibility through their annual reports. The accuracy of the reports creates public confidence, which is very important for them not only for capital reasons but also for creating a competitive edge. Lastly, an accurate financial statement prevents them from facing legal charges that can slow the business or bring it to a halt completely.
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