A stakeholder refers to an entity or a person who has an interest towards the failure or success of a particular business project. Stakeholders have a significant influence on decisions regarding the finances and operations of company or organization. The stakeholders of financial accounts can be external or internal. The internal stakeholders of a business refer to groups of people or an individual who has a direct financial transaction with the organization or business. The stakeholders of financial accounts include the directors, suppliers, creditors, owners, employees, government, the community, and customers.
The employees act as stakeholders of financial accounts since they receive a financial gain from the company. The company or an organization should pay their employees their wages. The employees may be interested in knowing the level of financial stability of an organization and also to know the level of risk of their jobs. The employees may also be interested in knowing the profitability level of the organization that they are working for with the aim of paying expectations. Through the financial accounts the employees are in a position of evaluating as to whether their bonuses or pay is likely to be affected by any financial activity that the organization undertakes.
The customers are considered to be financial stakeholders since they may want to access the profitability of the organization to be in a position of evaluating if there is a possible movement of prices on the products and services offered by that particular organization. The customers are in a position to judge the reliability of future supply of products through assessing the organization's financial stability. The creditors are also interested in the financial accounts of a company to determine the receivable days.
Suppliers are financial stakeholders to determine the creditworthiness of the organization and their ability to pay the goods they are supplied with regularly. The suppliers will be interested in the financial statement of the company such as the balance sheet and income statement. Being the stakeholders of financial accounts, the suppliers can assess if an organization can pay their debts that fall due and whether they will have a lasting relationship with the organization. The suppliers are also interested in any items within the financial accounts of a company which may have a possibility of affecting the company's liquidation such as loans and bank overdrafts as that could act as an indication the company is facing financial crises which may help the suppliers to consider the company as a buyer who is insecure in the future. The creditors are further interested in the financial accounts of a company to be in a position of calculating the creditor days.
The directors of the company are required to use the financial accounts to review its overall performance. The financial accounts guide the directors and owners of an organization during the decision-making process concerning the business so as not to overestimate or underestimate the potential of the business. The directors are also interested in the financial accounts to assess their remuneration (Richardson, 2013).
One of the external stakeholders of the financial accounts is the company's competitors. The competitors are usually interested in the company's financial position to compare its performance with their performance and to see whether if their results are worse or better than theirs and whether they have new products they are offering in the market. The government is also an external stakeholder of the financial accounts to tax the company.
The shareholders of a company are financial stakeholders who have the right of receiving the company's financial statements annually. The accounts help the shareholders to know what activities the company has involved itself in with the money of the shareholders and whether such investments are profitable or not. If the investments prove to the shareholders to be profitable, the company is required to pay the shareholders their dividends. When a company uses the money to invest using the shareholder's money to a business which results to a loss the shareholders may opt to sell their shares and cease to the company's shareholders and invest in a better business that will give them better profits. The financial accounts assist the shareholders in determining whether the financial goals of the organization have been met and whether the current directors should be still be elected again at the next annual meeting (Allen, Demirguc-Kunt, Klapper and Martinez , 2012 ).
Window Dressing of Accounts
Window dressing refers to actions that are undertaken to improve how the financial statements of a company appear. This is mostly practiced by companies which have several shareholders to assist the management to be in a position of giving a statement that makes the company have an appearance of being run properly to the potential investors. Window dressing is also an accounting tool that can be used by the company to give a lender or a supplier a good impression. Window dressing is an attention getter maneuver that can result in a company venturing into a territory that is illegal and unethical. Mutual funds can also engage themselves in window dressing activities.
A company may be influenced by several factors to window dress their accounts. A company may be influenced to window dress their accounts so that they can reduce the amount of tax they pay. This result in misleading the government and taxing agencies since the information that is reflected in the accounts is not correct. To obtain funds from lenders, the company may be influenced to window dress their accounts. This makes the financial institutions and banks to have a wrong perception regarding the financial position of the company.
To hide some of the financial problems that the company is facing the management of the company may be required to window dress their accounts. Some of the financial problem s that may influence the company to window dress the accounts include poor management, profitability, and liquidity. The financial accounts may also be window dressed to smoothen the company's financial data such as the accounts receivable, sales and expenses. Such window dressing of the accounts ends up misleading the owners of the company. Window dressing of accounts may also be influenced by the fact that the company wants to increase their portfolio value and also to improve the structure of their fund portfolio. This results in the existing and potential investors receiving misleading information about the financial position of the company (Dechow and Shakespear, 2009).
Window dressing is possible by the company recording their accounts receivable like low bad debt expense which are unusual so that the account receivable appears to be better. This impacts the current ratio directly whereby it looks more appealing than it is supposed to be. Window dressing is also possible by the company using the straight-line method of calculating depreciation on their assets instead of using the accelerated depreciation, and this helps the company to reduce the amount of depreciation that is calculated as an expense in the current financial period. Window dressing is also possible by postponing to pay the company's suppliers and other expenses such as withholding the invoices of the supplier. Through this, the company's balance sheet and income statement reflect cash that is higher than it is supposed to be during that particular period. It is also possible for a company to window dress their accounts by selling their fixed assets whereby the accumulated depreciation consist of large amounts. Through this, the remaining assets tend to have a net book value that shows a cluster of assets that is relatively new. It is also to window dress the financial accounts of the company by offering the customers with shipment discount in advance. This increases the revenues of the company which were supposed to be recorded in the future so that they are recorded in the current period, and through this, the company's revenue appears to be more than required.
It is possible for fund managers to window dress their accounts by buying stocks that are performing well and then sell the stocks which are non-performing. It is also possible to window dress the accounts through buying additional stocks that are performing well at a price that is higher (Agarwal, Gay and Ling, 2014).
The stakeholders of the financial accounts are the people who can be affected or can affect the achievements of a company or a business. The financial stakeholders include the customers, employees, suppliers, directors, and shareholders. Window dressing is an act that is misleading and therefore it is unethical for a company to window dress their accounts. Window dressing is an act that helps improve the performance or liquidity of a company.
Agarwal, V., Gay, G.D. and Ling, L., 2014. Window dressing in mutual funds. The Review of Financial Studies, 27(11), pp.3133-3170.
Allen, F., Demirguc-Kunt, A., Klapper, L. and Martinez Peria, M., 2012. The foundations of financial inclusion: Understanding ownership and use of formal accounts.
Bodington, S., Visa USA Inc, 2010. Incentives associated with linked financial accounts. U.S. Patent Application 12/688,653.
Richardson, J., 2013. Accounting for Sustainability: Measuring quantities or enhancing qualities?. In The Triple Bottom Line (pp. 56-66). Routledge.
Dechow, P.M. and Shakespear, C., 2009. Do managers time securitization transactions to obtain accounting benefits?. The Accounting Review, 84(1), pp.99-132.
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