Reporting to Investors

The central problem of financial reporting has been stated as resting in the need to define its objectives as a pre-condition to resolving the difficulties which have arisen in the last two decades. It has been noted that the failure of the Accounting Standards Committee lies in its failure to define clearly the objectives of its programme of reform and standardization. It was argued, also, that these objectives should be defined in terms of the information needs of users concerned with making decisions. Therefore, the investigation of this problem ought property to begin with identifying these needs.

Our aim is to consider the problems implied in identifying the information needs of investors.

Problems in identifying investors' needs

At a superficial level, the identification of the information needs of users appears deceptively simple. It seems that it would be sufficient to question users of financial reports and to observe the way in which they make decisions as a means of identifying the decision models used and the information requirement of such models. Accordingly, repeated questionnaires and interviews would isolate the information requirements of users of financial reports. Yet such a method has not proved satisfactory, although it appears ideally suited to the research problem implied.

In effect, the reason why the straightforward questionnaire method has not met with success lies in part in the problems discussed. Evidently, being accustomed to using financial reports containing information specified largely by accounting conventions, users are unable to make a clear distinction between the type of information they are using and the type of information they should be using. For example, if a naive investor were asked for his views on how the information content of these reports might be improved, he may well reply, 'by reporting a bigger and better balance sheet'.

A further difficulty lies in the making of correct observations of the decision models used by investors. Such observations can reveal only the information currently used. Clearly, investors will be obliged to use what information is available, even though it may be deficient in some respects.

For these reasons, it is clear that empirical research into the decision models employed by users cannot produce satisfactory conclusions about investors' information needs. It follows that the rejection of empirical research compels the consideration of alternative methods of constructing a theory about the information needs of investors. It is suggested, therefore, that progress could be made by adopting a normative approach to the construction of such a theory which is based on a formulation of the decision models which investors ought to be using when making decisions.


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Read on: Financial Reporting Summary

The purpose of this section of the website has been to evaluate current financial reporting practice, and the problems associated with the content of these reports. It was seen that the reasons which caused dissatisfaction with the status of financial reporting practice require solutions which are able to stand the test of relevance to users' information needs. The failure of the Accounting Standards Committee's programme of reform was argued to lie in the failure to establish a conceptual framework for financial reports. We examined the work of the FASB in this connection.

An important... see: Financial Reporting Summary