The third objective of financial information is to provide information con

The third objective of financial information is to

This preview shows page 33 - 36 out of 70 pages.

make. The third objective of financial information is to provide information con- cerning the company’s economic resources, the claims to the resources (obliga- tions) and the effects of transactions and events that may affect the existence of the resources and claims to them. ±²³´µ³³²¶· ¸µ¹³º²¶·³ DQ 1. What advantages and disadvantages are involved for the management from disclosing financial information? DQ 2. In what sense are the different third parties of a company differently af-fected by the extent and quality of disclosed information (hint: think of the differ-ent amount of resources available and/or access to information etc.
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1. Recognize the different parties demanding auditing 2. Understand the factors affecting the demand for auditing 3. Understand why all interested parties are not capable off or able to do the audit themselves. Contracts between principals and agents will not reduce the costs of conflicts un- less the parties can determine whether the contract has been breached. Therefore there is a natural demand for monitoring (Watts et al. 1986a). The literature sug- gests that accounting plays an important role in contract terms and monitoring these terms. This establishes the demand for accounting. Reporting of accounting figures, i.e. financial reporting, represents an information system to the owner (Ng 1978). It should be noted, however, that financial reporting does not add any (or not much) information to the manager , because management is assumed to have an information advantage over the external third parties, and be able to observe the company’s performance through the internal management accounting information (Ng 1978). Accounting numbers are used e.g. in lending agreements between the companies and their financers. These agreements often include covenants which are tied to financial statement ratios. Also, management compensation and bonus plans are another example where accounting numbers are used to measure man- agement performance. (Watts et al. 1986a) Moreover, it is important to recognize that management produced financial re- ports alone do not solve the agency problems that are due to information asymme- try or conflict of interests. Because management is responsible for reporting on the financial condition of the company, management is also in a position to adjust the figures if the owner is not able to directly observe the actions. Thus there is always an information risk present when financial information is made available
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Proceedings of the University of Vaasa. Teaching Aid Series 29 to the owners. Figure 4 specifies the third parties demanding financial statement information.
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