The Regulation of Financial Reporting Essay
The Regulation of Financial Reporting
1.1 Company profile
JD Wetherspoon plc is pub chain based in the UK Which was founded in 1979 by Tim Martin, who established the first Wetherspoon pub.The company’s aim to provides customers with high quality food and drinks at reasonable price, enjoyed the good service by well-trained attendant in a friendly and fun environment. Furthermore, apart from running pub chain, the firm also owns and operates the Lloyds No. 1 chain and Wetherspoon Hotels.
1.2 History and development
With the rapid development and expansion, company have invested plenty of money in new pubs across the country in past few years. As so far, the chain owns 833 pubs in the United Kingdom. However, in the twenty-first century, JD Wetherspoon was facing some problems due to the competition from the development of other pub chain companies and change in people’s drinking habits. These factors lead to a decrease in sales and profit, the number of new pubs is also less than the previous years.
JD Wetherspoon made some change in business strategics to improve the sales and profits. The company acquired Lloyds pub chains which is different from the JD Wetherspoon pub and it has subsequently developed “Lloyds No. 1” brand. Furthermore, JD Wetherspoon also begun developing chain of hotels which is knows as “Wetherloges”. At present, JD Wetherrspoon plc totally owns 16 hotels. There are 11 hotels in England, 3 hotels in Wales and Scotland have 2 hotels.
This report will concentrate on the analysis of financial performance of JD Wetherspoon plc for the year ended 31 July 2011according to the following three aspects.
Operating return on equity
Return on equity (ROE) measures the profitability of company by calculating the amount of profit which company produces with shareholders’ invested money. It is consist of return on capital employed and financial leverage multiplier. Therefore ROE shows how well a company produce earnings by utilizing investment funds.
Return on capital employed（ROCE）is usually used to evaluate the profitability of business, such as management efficiency and plan strategic. It presents how efficient a company gain profit by using its long-term funding. Table 1 shows the profitability ratio of JD Wetherspoon plc for the past five years.
In the five years spanning form 2007 through 2008, there is a slow decrease in ROCE. It decreased by 8.24%(2010) to 7.8%(2011). From the above table, it shows that the ROCE in 2010 has the same net assets turnover as that of in 2011 but has a better ROCE because its better profit margin.
Profit margin for 2010/2011 drop by 6.07% to 5.73%.It shows the figures reached the rock bottom at 4.71% in 2009. The net profit margin ratio indicates the quantity of the net profit per £1 can be recognized as the net income after all the expense are paid. A decrease in the profit margin ratio demonstrates there is a lower interest income resulted in the decline in the company’ profit.
Over the period from 2007 to 2011, the percentage of Net assets turnover stayed the same between 2010 and 2011 which is 1.36. Compare with other four years which the number remained steady. Net assets turnover for 2008/2009 increased 1.25% to 1.60% because this year’s revenue is increasing or the capital assets is decreasing .Through above analysis, it indicates the change in profit margin and net assets turnover resulted in the reduction in ROCE.
Return on Equity (ROE) for 2010/2011 fell by 37.29% to 35.89%. According to the figures for 2009/2010, it shows that the increase in the financial leverage multiplier(3.57% to 4.53%) and an risen in the ROCE can result in the improvement in the ROE. The increase in the ROCE is due to the risen profit margin(4.71% to 6.07%) and an decline in the net assets turnover (1.6% to 1.36%).
As can seen from the table 2, it is obviously that the JD Wetherspoon PLC’s ROCE and ROE are much higher than that of Greene King PLC. It means that JD Wetherspoon PLC is much profitable than Greene King PLC. |Table 2 – Greene King plc |2010/2011 | |Return on Capital Employed (%) |11.91% | |Return on Shareholder’s Funds(%) |4.26% |
4. Cash flow statement
Cash flow statement reveals the company’ s cash receipts and cash payments during the accounting period. It provides more relevant and useful information which can be used to assess liquidity, viability, adaptability and financial flexibility of firm. |Table 3 -JD Wetherspoon plc |31/07/2011 |31/07/2010 | |net cash flows from operating activities(£)
From cash flow statement of JD Wetherspoon in 2010 and 2011, net cash flows from operating activities increased from £147,276 to £172,414. This is because operating profit is £96920 in 2011 which is risen by 8.34% and the receivable was decrease from £5936(2010) to £4429(2011). While net cash outflow for investing activities was reduced sharply by 12.36% from 2010 to 2011. The reason for decline is company spent much money in investing new pubs and pub extensions which is £86,793 in 2011 than that of in 2010. Furthermore, the cost of property, plant and equipment and intangible assets in 2011 is much higher than that of in 2010.
There are two ratios linking the cash flow to the financial statement. Cash flow as percentage of sales reflects the company’s ability to change sales into cash by calculating a company’s operating cash flow to its net sales. Operating cash flows ratio compares cash flows from operations to its current liabilities. |Table 4 – Greene King plc |2010/2011 |2009/1010 | |Cash flow as percentage of sales（%
The JD Wetherspoon’ s cash flow as percentage of sales was increased from 14.78% to 16.08% because of the risen in the operating cash flow and net sales. Compare to this ratio of Greene King plc in the table, both the ratios in 2010/2011 and 2009/2010 are higher than that of JD Wetherspoon plc. It reflects Greene King plc generates more cash from its sales.
Operating cash flows ratio of JD Wetherspoon was gone up to 85.20% in 2011 which is 83.26% in 2010. The reason of growth is there was a increase in operating cash flow and current liabilities. In contrast this ratios for Greene King plc, it seems that JD Wetherspoon plc is more likely to face liquidity problem because this ratios for Greene King plc are higher for last two years.
5. Investor ratios
There are three measures of investors to compare the benefit from the investment with the amount of money they paid. Earnings per share, PE ratio and dividend yield.The table 5 outlines these three ratio during the period from 2010 to 2011.
Earnings per share is a measure of company performance and progress. The EPS of JD Wetherspoon decreased to 35.3% in 2011. Company ‘s earnings decrease and the number of share on issues increase may cause a decline in the earning per share. As can be seen in the table 6, the EPS of Greene King plc are higher than JD Wetherspoon, it indicates Greene King plc is more efficient in making earning than that of JD Wetherspoon.
The PE ratio is a measure of forecasting the company earnings and comparing the value of a company’s stock. There was increase in PE ratio from 2010 (89.8%) to 2011 (93.2%). The PE ratios in these two year were very high. It can recognized that JD Wetherspoon pay more in term of earning due to a high expectation for stock.
Dividend yield measures how many a company pays out to the shareholders in the dividends each year according to its current share price. Dividend yield in 2011 was reduced to 36.5% while it was 59.9% in 2010. The increase in share price and decrease in dividend per share lead to the decline in dividend yield.
In this report, through analyzing financial ratio to evaluate the financial performance of JD Wetherspoon plc for the year ended 31 July 2011. It is commendable according to the company’s favorable financial performance and operating condition. This report provide useful information which enable managers and directors to make constructive decisions on corporate and business issues, including operational and financial performance. However, from the report, it also represents the company should continue to make some improvements in the all the areas of the business.
Part 2 Argument for and against regulation of financial reporting
The report will analysis the regulation of financial reporting in the areas of business activity. As the high profile corporate collapse recently. It has stimulated the debate on issues of risk and role played by the regulation of financial reporting in creating and aggravating the corporate collapse.The main objective of this report is to make full use of the existing theory to evaluate whether the regulation of financial reporting is positive or negative for the company. Especially the economic effects of corporate collapses. In the following paragraph, it will represent the arguments for and against the regulation of financial reporting.
1.1 Financial reporting
Financial reporting is a reporting reflects company’s the financial and operating condition. It provides tax returns, documents required by regulatory agencies and the form of standard financial statement, such as balance sheet, income statement and cash flow statement. These valuable source of financial information can help the inventors,creditors and other users to understand the business and economic activities. It is useful to investors to make rational decision. In addition, because company law provides a framework for financial reporting by companies and it requires companies to prepare financial statements and presents them to their shareholders. Therefore, financial reporting is very vital to the economic activities of the organization. It is the final step in the overall accounting process that begins in the transaction cycles.
1.2 Definition of regulation
Regulation is provided by the discipline of market principles which are laws, rules and standards,etc. These regulations plays an important role in the company. Financial reporting standard, legislation and company law are the main regulatory reference to examines financial reporting. In the United Kingdom, the financial reporting is regulated by Company Acts and International Financial Reporting Standard(IFRS). The Company Acts requires the financial statements must give a true and fair view. The requirement of IFRS is compulsory for consolidated financial statements of all listed companies.
1.3 Theories of regulation
There are three types of theories of regulation: public interest theory, capture theory and economic interest group theory.
1.3.1 Public interest theories
Public interest theories indicate that regulation is needed to correct market failure since the market is widespread in the market and it is harmful to market. Thus, government would intervene in the market due to public interest theory. Public interest is the allocation of scarce resources for individual and collective goods. According to public interest theory, regulation can improve the problems existing in the market such as allocation, organization and transaction. They also can prevent or correct the unfavorable market result. For the public interest theories, it can not predict the test which is amenable by empirical economic science and can not well accounted the facts are observed in social reality.
1.3.2 Capture theory
Capture theory means that a firm can captures the advantages because regulatory body have imposed regulations. Because of capture theory, regulatory agency can avoid the conflict with regulated company. Furthermore, it can provide the career opportunity. However, the weakness of the capture theory is inadequate by comparing to the public interest theory because it does not explain the reasons for the branch can take over the regulatory agency.
1.3.3 Economic interest group theory
Economic interest group theory means that the main purpose of groups are acquiring their economic interests. It is primarily aimed at the economic regulation. The function of regulation is effectively organizing the political group and serving the individual interest. The lake of the economic interest group theory is incomplete which ignored some elements. Furthermore, it can not foretell which groups will be the most effective. Consequently, according to the economic interest group, regulation can not be produced to serve the public interest.
1.4 Outline of report
The remainder of report is organized as follows. Section 2 gives a discussion of the arguments in favor of financial reporting regulation with the relevant example and academic literature. Section 3 presents the arguments against the regulation of financial reporting. Section 4 offers concluding remark.
Argument for regulation of financial reporting
The regulation of financial reporting is effective way to verify the accuracy of financial reporting that can certify the quality of firm. Therefore, to the extent, regulation can depend on the regulatory standards to ensure the financial stability of company.
2.1 Reasons for regulation
First at all, the market needs regulation since market is not perfect which has some potential problems, in particular, the existence of market failure which is due to the inefficiency in the market, such as insufficient information and monopoly. These problems would result in a loss of company. The reason for need regulation is that firm may unwilling to publish the financial information voluntarily because competitors can gain benefit from the information provided. Furthermore, regulation can prevent the redundancy in the company and reduce enforcement costs, or can relieve the adverse effects caused by the market failure. Hence the regulation enhance the efficiency in allocation and production.
Secondly, there are the potential risks to the financial reporting. Financial reporting risk is extend all over the firm or organization. It includes errors in the ledger accounts because of incorrect or unauthorized account, a defective audit trail or wrong decisions made by the company . If not controlled, these risks may result in mistaken financial statement or other reports and misleading people who need view and check the financial reporting. These consequences would cause a financial loss for company.
Thirdly, there is a requirement for government intervene in the productivity and propaganda of financial information. The main functions of mandatory disclosure are as followings. Mandatory disclosure can solve the problems of unequal access to information, enhance confidence in its financial statements generated by firm. Diminish the expenditure when collecting information and data about company and enhance the comparability of accounting information.
Finally, the law of market need regulation. For instance, when the customers’ interest harmed, customer can safeguard their right by using law. It is the same to sellers. Thus the regulation of market law would protect consumers and sellers. Moreover, deregulation may result in a confusion in the market and as the excessive deregulation in the past ten years, sometimes it would leads to the deepening crisis. Therefore, in order to a raise the quality of financial reporting, it is essential to control and regulate the financial reporting of company。
2.2 Financial crisis and regulation
Due to the Financial Crisis, many financial institution have collapsed which results in the economic recession. This crisis has made people aware of the importance of regulation of financial reporting. For example, Lloyd’s of London’s collapse in the early 1980s. Lloyd’s is a British insurance and reinsurance market. The way to regulate the company is just supervising firm under the Lloyd’s Acts.
It is obviously that the degree of oversight is inadequate. However, in the early 1980s, because of the economic crisis, the lack of regulation was exposed gradually. As a result, it made Lloyd’s collapsed. Thus, Lloyd’s has gradually improved its regulatory standards and has also looked for better regulatory standards in the past few years. At present, Lloyd’s fared a great deal of self-regulating better than many companies. Because the company was regulated by Lloyd’s Acts, Regulatory Board and the Corporation’s Regulatory Division.
3. Argument against the regulation of financial reporting
Deregulation is elimination or simplification of rules and reduce the control of business. Whereas, deregulation just on the particular rules and regulations. However, he deregulation of financial reporting does not mean enable to ignore completely the laws direct at fraud or property.
3.1 Reasons for deregulation
In the first place, each country is different in these areas including political system, economic pattern, institution development, legal regime and national culture. It can be realized that one system is impossible to suitable for all the countries. Consequently, there is a distinction of the regulations of financial reporting among the each country. This problem may lead to a doubt about the truth and unity of financial reporting across the world. Especially the multinational corporation.
In the second place, the cost of regulate the financial reporting is expensive. The costs would be produced in two aspects. Legislation and regulatory charge. The regulation and law are diverse and complex. It needs much time and a lot of money to legislate and liable to have different views in the legislative process. Moreover, based on the principles of financial reporting regulation, there is a conflict between the owner and manager in the company. Owners want to maximum the benefits like return on investment.
While managers are interest in maximum the total remuneration. Due to this conflict, owner should undertake the regulation cost, these cost decrease the remuneration of managers. Therefore, the deregulation of financial reporting can mitigate the conflict, because in the absence of regulation, publishing accounting information can make company reduce the regulatory cost, company can spend less money on the regulation so as to improve the remuneration of managers.
In the third place, company would initiatively represent financial information to public. It makes investors and lenders know more about the company’s financial status. ultimately this condition would result in a decrease the expense of company. In addition, if someone wants to obtain and know the relevant information of a company, they can consult with the firm’s owners or information intermediaries. If the desired information beyond range which is publicly available and free of charge, they need buy the information. Therefore, company can use this method to optimize the allocation of resource information.
In the fourth place, the deregulation of financial reporting can improve the competition which will lead to more efficiency, higher productivity and lower price. It also can create a more freedom market which is a market unregulated by any parties or government. except for the unfair and fraud behavior that take place in the markets. The principle of free market is the prices are just determined by the supply and demand. In addition, when the company have less restrictions, it facilitates progress and innovation which enable to promote the economic growth and development while regulation stifles innovation.
Lastly, capital market would have problem in organization structure without regulation. For the reason of bad news which firm hided. Therefore, it is difficult to regulate due to the insider trading and bad information which the firm are hiding. Some firms may not be willing to disclose the relevant information because they do not want present information to their competitors and make competitors gain benefits.(Verrecchia, 1983). For example, bad news which are not conducive to the firm and key dates like price and productivity. Thus, Regulator is unable to overseeing accurately the firm. In addition, regulation always result in the politicization of accounting and information overload because some of beneficiaries who requires more information but do not pay for the costs of the information they need.
3.2 Weakness of Market Intermediaries regulation
It has been acknowledged(Carvajal and Eoliiott, 2007) that there are three main objective of the regulation of market intermediaries: ensure the intermediaries are fair and servicing the customers wholeheartedly; guard against the breach of contract and market disruption; protect the customers’ assets from the bankruptcy of company. Thus regulation enacts licensing standards, prudential standards, internal controls and risk management standards, and business conduct rules. However, there still exists a weakness of regulation of intermediaries in the market. This is because many regulators lack the experiences and skills to regulate the market intermediaries efficiently. This prevent regulators from examining effectively and detecting the potential risk. Hence, these weaknesses are not beneficial to regulate the market intermediaries.
This report provides the insight about the regulation of financial reporting. It succinctly presents regulation and how the financial reporting regulated in United Kingdom. Then the report gives detailed discussion of various theories of regulation. This report primarily focus on the basic arguments for and against the regulation of financial reporting and applied these arguments to analysis with the relevant case and academic literature respectively. From this report, it can be recognized that whether the regulation of financial reporting or deregulation of financial reporting, both of them have own advantages and disadvantages. Therefore, the effects of regulation of financial reporting were laid out in the paper.
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Subject: Balance sheet,
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 5 January 2017
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