The Information Needs of Shareholders and Investors

The information needs of shareholders and investors

Historically, business accounting developed to supply information to those who had invested their wealth in business ventures. Financial accounting, as it is now known, emerged in the 19th century as a result of the need to protect investors in Joint Stock Companies trading under limited liability. It has been evident for a long time that the information needs of investors are not adequately met by published balance sheets and income statements. In Part 2, we shall examine the nature of the information disclosed to shareholders and investors, and in Part 4, we shall subject traditional financial accounting practice considered in Part 2 to a critical analysis based on the question 'what information should be provided to investors'? To answer this question, we begin our discussion in Part 4 with an inquiry into the objectives of shareholders in business corporations. By stating that they are concerned with the value of their investment and the income which they expect to derive from their shareholding we are able to enquire into the nature of the information which they need in order to make rational decisions.

The information needs of management

Organizations may be considered as falling into two broad classes: those having profit or business objectives, and those having welfare objectives. In this book, we are concerned mainly with business organizations, but it should be remembered that many of the accounting methods employed in business organizations are equally employed by welfare or non-profit organizations. As regards the management of organizations, little difference exists between the information needs of managers of business organizations and those of welfare organizations.

The management process may be analysed into three major functions-planning, organizing and controlling the activities of the organization. Planning involves setting objectives for the organization, and devising strategies to attain those objectives. Organizing means establishing the administrative structure for implementing plans. Controlling is the process of observing and measuring actual performance so that it conforms with the planned and required performance. Thus, controlling means identifying deviations from planned performance, and taking such corrective action as may be necessary.

These various management functions have one thing in common: they are all concerned with making decisions, which have their own specific information requirements. Planning decisions, for example, are directed towards realizing broad goals which, in addition to the organization's survival and its profitability, usually include the intention to grow and to capture a large share of the market for its products. Other goals often include product leadership, increased productivity and improved industrial relations. There is an element of conflict between various organizational objectives, and it is the function of management to reconcile them through the planning process.

We devote Part 5 of this book to the examination of the accounting information needs of management, and the manner in which these needs are met. The scientific management of organizations has considerably extended the demand for accounting information, and the nature of the accounting problem. As we shall see, the influence of the behavioural sciences and the need for more information generally has created measurement problems as well.


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Read on: The Output of An Information System

The output of an information system

The foregoing discussion has served to indicate how important are the needs of users of accounting information, for they determine the objectives of an accounting information system.

There are several groups of people who have vested interests in a business organization-managers, shareholders, employees, customers and creditors. Additionally, the community at large has economic and social interests in the activities of business organizations. This interest is expressed at national level by the concern of government in various aspects of firms'... see: The Output of An Information System