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Company's Ownership and Financing Influence the Financial Reporting

Categories: Influence

Explain how international differences in the ownership and financing of companies could lead to differences in financial reporting

There are major international differences in accounting practices whereby different companies in a country may use different accounting systems. This differences between companies mainly influenced by a company’s country, size, sector or number of stock exchange listings. It is very significant that banks are the capital provider for small family-owned business in Germany, France and Italy.

However, in the United States and the United Kingdom there are large numbers of companies that rely on millions of private shareholders for finance.

There are three type of financial system has been formalized by Zysman which are capital market system, credit-based government systems and credit-based financial institution systems. These types could be simplified further to ‘equity’ and ‘credit’. In United States and United Kingdom, companies are finance by investors rather than by individual shareholders.

So, in these countries with a widespread ownership of companies by shareholders who do not have access to internal information, there will be a pressure for disclosure, audit and fair information.

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Thus, this will lead to a different financial reporting. On the other hand, in ‘credit’ countries, few of the listed companies are dominated by bankers, governments or founding families. In Germany, important owners of companies as well as providers of debt finance are the banks. Besides that, listed companies in continental European countries are also dominated by banks, governments or families where the information published is not so detail.

Hence, this can automatically lead to differences in financial reporting.

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In addition to that, most continental European countries and in Japan, the external financial reporting has been created for the purpose of protecting creditors and for governments due to the lack of ‘outsider’ shareholders. So, due to the greater important creditors in these countries, it leads to more conservative accounting. This is because creditors want their money back if companies suffer losses or damages, whereas shareholders may be interested in an unbiased estimate of future prospects. Hence, this could lead to some differences in financial reporting.

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Company's Ownership and Financing Influence the Financial Reporting. (2018, Aug 22). Retrieved from https://studymoose.com/companys-ownership-and-financing-influence-the-financial-reporting-essay

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