In general, useful information allows the recipient to know the company’s finances enough to provide sufficient grounds for making reasonable decisions regarding the user’s intentions towards the company, which result from its relationship with it.
This somewhat difficult definition made for the use of the article has a very practical dimension. It indicates that utility can only be considered at recipient level and that the same financial information will be more or less useful for different types of recipients.
In order to understand the usefulness of information for a particular type of recipient, it is necessary to know and understand the nature of his relationship with the company and the purpose of the information.
Let us try to transfer the utility to practical ground and track its character for one of the basic types of users as an investor.
The purpose of the investor is to decide whether to invest in the company its financial resources. For the investor, the current question will be whether or not to continue the engagement, or whether to increase it or to withdraw from the investment. For the new, whether to buy shares of the company and how much.
In order to make a rational decision in this respect, any investor, present or new, will want to assess with financial assistance the financial condition of the company.
In this situation, it will consider it useful to have a financial report that will allow it to assess the company's wealth, profitability and liquidity, as well as prospects for the future.
However, in response to market expectations, the latest accounting standards try to respond to the lack of information from external customers and sometimes refer to management accounting.
According to the most common typology used in professional literature, which relatively correctly reflects the practice in this respect we distinguish 2 the main types of recipients of financial statements: internal and external. Internal investors include: boards, managers, supervisory boards and external investors (current and potential, individual and institutional) as well as banks, counterparties or competitors.
In the context of the above types of recipients we can distinguish 2 the main objectives of financial information, i.e. management objective and investor objective. Somewhere in the background of both of these objectives, there is a verification and evaluation target, filled in in different ranges by each group of investors, but most probably by analysts who interpret financial data to provide, mainly external customers, additional, ready-to-use premises and arguments for their decision.
It is worth noting the specificity of individuals, readers of financial information. For some, the most important will be the balance sheet, for others the income statement and for others the cash flow account. More in-depth individuals do not read figures without accounting policy, which, as is known, allows different, often extreme approaches to certain specific transactions and thus can result in significantly different entries and results in the report.
It is often heard that the recipients of financial statements are complaining about incomplete, incomprehensible financial information.
These complaints relate, inter alia, to the failure to adapt financial information to the type of recipient, which is often due to the insufficient adaptation of reporting systems operating in companies to ensure adequate use at the level of the individual recipient.
In particular, internal customers receive financial information very similar to external customers.
This is the result of the “making life easier” by accounting and financial services, which can, in a relatively simple way, draw up information for internal customers using data and financial statements that are mandatory for external customers.
External recipients (in particular institutional investors and analyst groups) would like information as closely as possible to the financial information available to the board. This, in turn, is not allowed by legal systems and regulations which fairly strictly regulate the scope of the information prepared for the company's environment, in order to ensure equal access to information and defence against the privileged use of certain user groups that could use classified information to conduct speculative short-term transactions in the company's shares.
However, in response to market expectations, the latest accounting standards try to respond to the lack of information from external customers and sometimes refer to management accounting. This was the case, for example, with regard to the international segmental reporting standard, which requires that segments be presented from the perspective of the management of the company.
On the other hand, many individuals see the danger of transmitting information outside, even this mandatory and often knowingly breaking the obligation to publish at risk of criminal sanctions. This is the case in the most competitive sectors: marketing, transport, construction, media.
When discussing the usefulness of financial statements, it is not to be overlooked that there are cases, particularly often in crisis situations, where some persons or groups of persons are deliberately influencing the usefulness and understanding of financial information.
The motive for such actions may be to cover up the errors committed by the persons concerned and fraud. In practice, this type of “matacts” that reduce usability and understanding at the same time may include: netting of counterparties' balances, incomplete disclosures or breakdowns resulting in significant figures described as “other”.
Use
financial information from the entity determines the efficiency of financial and accounting services and their reporting systems and internal control systems. However, in many companies they are in short supply.
Then an efficient auditor can and should help improve the usefulness of financial information, who will ensure this both at the level of financial statements prepared for external customers, and advise on how to improve the efficiency of internal reporting systems for the needs of the Management Board and other internal customers.
The statutory auditor's professional diligence in this respect is, in particular, to identify and eliminate the above mentioned "materials" which reduce usability. But it is also to draw attention to the insufficient alignment of the reporting systems in the company to its main groups of recipients of financial statements.
The company's informed management should be given an audit position on the quality of reporting systems for the preparation of useful financial information.