Financial Statements vs Investment Decision Making: The role of Financial Statements on Investment Decision Making - getviewupdates

Financial statement is a formal and comprehensive statement describing financial activities of a business organization such as the financial institutions.

Financial Reporting Standards and Practices have in  the recent past come under great criticisms, demanding that accountants take further steps in  ensuring that the true and fair view of the actual worth of business are also incorporated in  the financial statements published by them.

Corporate organizations owe a duty to fully disclose matters concerning their operations so as to aid investors in making investment decisions.

Both large and small organizations in addition to satisfying the legislating requirement tend to retain existing investors and to attract potential ones through the publication of their financial statements where the capital stock of a corporation is widely held and its affairs are of interest to general public relations.

Financial statement provides important information for a wide variety of decision, investors draw information from the statement of the firm in whose security they contemplate investing.

Decision makers who contemplate acquiring total or partial ownership of an enterprise expect to secure returns on their investment such as dividends and increase in the value of their investment [capital gain].

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Both dividends and increase in the value of shares of company depends on the future profitability of the enterprise. So investors are interested in future profitability. Past income dividend data are used to forecast returns from dividend and increase in share prices.

The financial statement comprises of balance  sheet (for determining financial position), profit and  loss statement (describes statement of  comprehensive income), statement of equity  changes (explain the changes of the company’s  equity), and cash flow statements (reports on a  company’s cash flow activities, particularly its  operating, investing and financing activities).

The perceived relevance of the financial statement are, to provide information about the financial position, performance and changes in financial position of a firm that is useful to a wide range of users in making management and investment decisions.

These users include managers, directors, employees, prospective investors, financial institutions, government regulatory agencies, media, vendors and general public.

Though, these financial statement are often prepared according to national standards, corporate governance, professional ethics, and code of ethics. This to avoid financial reporting fraud and scandals that might hinders effective decision making process by management and other users of reports.

The purpose of ethics in financial accounting reporting with expected standards is to re-orientate corporate organization on the need to abide by a code of conduct that facilitates public confidence in their services. 

In Nigeria, it has become common practice by financial institutions to adopt creative accounting in anticipation of sourcing for equity capital from the capital firms.

A perceived problem of financial statement disclosure is the non-compliance to industry corporate governance, ethics, and regulatory standards which is prevalent in the financial institutions of Nigeria.

In 2009, during CBN commercial banks test, huge financial fraud and scandal occurred in commercial banks and other financial institutions in Nigeria that led to service disengagement of its Managing Director and Executive Director.

This was on the account  of  manipulating  the  company's  financial  records,  book  padding  scandal  and corruption. This warranted CBN to review and investigate all the financial institutions accounting records.

The investigation confirmed a deliberate overstatement of the company’s financial position over a number of years to the tune of billions of naira. The over-statements are directly traceable to those systems abuses, violation of regulatory standards, in particular, deliberate breaches of our accounting systems and controls.

It was observed that the roles of financial statement on investment decision making of financial institutions in Nigeria has some problems to both investors and managers of business organizations who are either not aware of the importance of interdependence relationship that exist between investors and financial organizations.

Publication of financial statement provides a way for a firm to present its financial health or otherwise to shareholders, creditors and the general public and to potential investors, to enable them make rational investment decision.

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The role of financial statement analysis in making investment decisions should not be overlooked as it helps investors to establish the fiscal strength and weakness of a firm. Financial statement analysis can reveal the red flags of an investment opportunity.

On the other hand, they can also reveal the strength of a company as well as the potential profit of investing with a particular company. By their nature, financial statements are retrospective, which means an investor should never look at a single statistic or metric in making investment decisions.

Every financial institution should ensure that all material facts as regard the assets and equity of the organization should be reflected in their yearly financial statement. As such, the financial institutions should adhere to the demand of subjecting their financial statement to statutory audit as a way of authenticating their contents.

The financial statement should be prepared using such a language and terms a layman can understand because the technical terms do not mean much to the investors. These should be prompt provision of the financial statement at the end of each financial year and the profit after tax should be reported precisely and correctly with actual figures and avoid use of percentage to enable any layman make good investment decision.

Adequate care and due diligence should be maintained in preparation of financial statements to avoid faulty investment decisions which could lead to loss of funds and possible litigations.