Limitations of Published Accounts – A Level Business CAIE Revision

Understanding Limitations of Published Accounts

Published accounts are required by law to provide an overview of a company’s financial health and performance.
While they provide valuable insights, they are not without limitations and must be used cautiously.

Published accounts are prepared by a company’s own management, introducing the possibility of bias or selective reporting.
Management may present the accounts favourably or creatively manipulate figures to present a rosier picture of the financial health of the company. This is referred to as ‘window dressing’.
There are rules and standards to comply with, but the preparation of accounts does involve a degree of judgement. For example, the selection of accounting methods and policies used.

Published accounts provide a summary of financial information, which might not include detailed data.
Details such as individual product profitability, detailed costs, or specific market segments cannot often be gleaned from published accounts.
Financial statements primarily show monetary transactions and financial changes, so they don’t capture non-monetary information such as the quality of management or nature of internal controls.

Published accounts often represent the historical perspective due to the time taken to prepare, audit and publish them and so the data may be outdated when they become available.
Economic events, market changes and company circumstances happening after balance sheet date could significantly change the situation of a company, which is not reflected in the published accounts.

Published accounts can be difficult to interpret for those lacking expertise in accounting or finance. They can contain industry-specific jargon or complex information.
Accounting policies and standards can vary across companies and countries, which can complicate accurate comparisons. For example, different methods of depreciation or inventory valuation can make comparing two firms tricky.

Reliable, transparent and ethical financial reporting are crucial to build trust and confidence amongst shareholders, investors and other stakeholders.
Companies who violate these standards may face reputational damage, regulatory fines, investor mistrust or even legal action.
Complying with ethical standards and having a robust audit system provides stakeholders with confidence in the published accounts.