Underlying Principles of Financial Reporting Requirements
26. General purpose financial reports are, in the words of the Institute of Chartered Accountants of New Zealand ("ICANZ"),13 "intended to provide information to meet the needs of external users who are unable to require, or contract for, the preparation of special reports to meet their specific information needs."14
27. These information needs arise for a variety of reasons. It is therefore important to appreciate the underlying rationales behind reporting requirements before considering changing them. Generally, any requirements should advance one or more of the rationales, and keeping these underlying rationales in mind when considering options to resolve any given issue aids the decision making process.
28. The Ministry of Economic Development has identified the following non-exhaustive and inter-related list of rationales that have been used in developing the issues in this discussion document:
- Accountability: The primary reason for imposing external financial reporting requirements is to correct "information asymmetries,"15 ensuring that external users of reports are able to access the information necessary for their purposes. In particular, these reports can be used by the owners, shareholders or stakeholders of an entity (or those acting on their behalf) to assess the performance of the entity's management and hold the managers to account where needed;
- Transparency: In addition to holding management accountable to the owners, shareholders or stakeholders of an entity, financial reports also enable other external parties to assess the continued viability of the entity. This may include debtors and creditors of an entity that are unable to demand special purpose reports (for example, trade creditors) as well as persons considering investments in, mergers with, or takeovers of, a given entity. There are also other parties that may have a legitimate interest in the performance of a given entity, such as prospective and existing employees;
- Monitoring: Financial reports indicate various aspects of an entity's performance. This information is commonly used by academics and analysts to determine such things as business sustainability. The information can also be used to gauge more general matters, such as general economic outlooks. Finally, financial reports are used by various agencies to monitor the activities and compliance of reporting entities;
- Enforcement: Financial reports may be used to enforce other areas of substantive law. For example, the Securities Commission may use financial reports as evidence of the quality and extent of disclosures that are made by issuers to the market in prospectuses for securities offerings, or in their periodic financial reporting. Financial reports may also be used by private individuals in a variety of legal actions; and
- Internal governance: Although general purpose financial reporting requirements are primarily imposed for the benefit of external users, such requirements can also promote good internal financial discipline. Prudent financial management is likely to be beneficial to the entity itself, and thereby, its stakeholders.
29. A further issue to consider is the costs involved in imposing these reporting requirements. The government is committed to ensuring that costs to business are only imposed where they can be justified and there is a net benefit. These costs can take many forms, but in particular (from a business perspective) are the direct costs of regulatory requirements and the compliance costs associated with complying with those regulatory requirements. Also relevant are the costs to the economy generally, where imposing or altering regulatory requirements has some potentially wider side effects, such as reduced incentives for international investment or the misallocation of resources.
30. This discussion document has made an effort to identify potential areas of cost, but it would be helpful if submissions making references to cost issues, both direct costs and compliance costs, were able to provide quantitative or qualitative estimates to support their points of view.
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