"As capital markets play an increasingly central role in today's modern economies, policy-makers are confronted with the question of how to assure the continued effective functioning of these markets and, in particular, how to develop a sound financial reporting infrastructure." (Sir David Tweedie, 2005)
"Explain the link between financial reporting and capital markets, and critically evaluate to what extent the development and use of International Accounting Standards, effective corporate governance practices and strong internal controls may contribute to meeting the challenges outlined above"
Over the last 50 years, globalization has been more potent than ever and now plays an essential role in modern economies and the rest of the world. As a result of this process, the boundaries between different countries tend to blur. Modern economies are barely the ones present in the triad (name given by Kenichi Ohmae for the three developed markets of Japan, North America and Western Europe) and a handful of other developed countries.
The capital market is the product of the increasing number of transactions among these economies. It plays a major role in the global economy. According to the business dictionary, capital markets are defined as "financial market that works as a conduit for demand and supply of long-term debt and equity capital.
A capital market is not a compact unit, but a highly decentralized system made up of three major parts: stock market, bond market, and money market." The global economic crisis that began in 2008 is partly due to the capital markets in which main decisions are made by the market. That's why they are dependent on stock exchange markets and why they are so important. It is therefore essential that capital markets become increasingly globalized.
A market can be efficient depending on the following components: "audit, corporate governance, accounting standards, enforcement and internal controls" (Tweedie, 2005). The perfect efficiency is hard to reach as different countries have different histories, laws and regulations. Investors could reduce the risks taken and have much more opportunities if the market could "fully and quickly process the information" (Bromwich, 1992). The problem with information is that it's not the same everywhere; financial reports utilized by investor to assess investments depend on the various accounting standards.
The first part of this report will present and highlight the existing link between financial reporting and the capital markets. It will turn the limelight on the relation of finance with accounting. Then it will discuss the role played by the International Accounting Standards. Finally, it will shed light on the situation of corporate governance with the issue of internal controls.
Tags: Corporate governance, International Accounting Standards,modern economies,accounting standards
[...] This act introduced foremost changes in the control of corporate governance and financial practices and is only applicable to public firms and public accounting companies. A company has the choice between different accounting standards in the event of a public offering. IFRS (International Financial Reporting Standards previously known as IAS) methods are more commonly applied in European countries while American companies prefer the national GAAP system. Due to the influence of the U.S. stock exchange market that is well recognized around the world and the weight of European companies; the two boards - IASB (International Accounting Standard Board from the UK) and FASB (Financial Accounting Standards Board from the United States) - agreed in October 2002 to a memorandum of understanding called “Network Agreement”. [...]
[...] The first part of this report will present and highlight the existing link between financial reporting and the capital markets. It will turn the limelight on the relation of finance with accounting. Then it will discuss the role played by the International Accounting Standards. Finally, it will shed light on the situation of corporate governance with the issue of internal controls. With the view of investing in capital markets, potential investors need a financial report of companies to determine if it is worthwhile to invest or not. [...]
[...] A common system based on the International Accounting Standards could massively enhance the capital market by getting rid of trade obstacles, thanks to similar standards in financial reports from companies. Even if GAAP standards are considered to be obsolete by many people, there are some others who are against the adoption of IFRS. The first counter argument pertains to accounting matters. The difference usually pointed out is that GAAP is rule-based while IFRS is principle- based. So, some people draw attention to IFRS and how will be more difficult for a preparer to defend its position in case of litigation and the difficulty to structure a transaction just to meet a certain accounting objective” (Forgeas, 2010). [...]
[...] The main achievement of using corporate governance and IAS would be to move toward a lessening of limits for capital and improve the reliability of the group's information. That would allow investors to have opportunities on a global scale and obtain better market efficiency. The focus should be on the enforcement methods and on the implementation opportunities that differ according to the level of the country development. For the European market, there isn't a scheme of a “common enforcement authority” (Ugeux G. [...]
[...] (16 September 2007) International Financial Reporting Standards and the IASB, International Accounting Standards Board - Durisin, B., Puzone, F. (2009) Maturation of Corporate Governance Research, 1993–2007: An Assessment, Corporate Governance: An International Review, pp 266–291 - Fearnley, S., Hines, T. (2007) How IFRS has destabilized financial reporting for UK non-listed entities, Journal of Financial Regulation and Compliance, Vol No pp. 394-408 - Gregory H. J. Simms. Marsha.E. (1999) Corporate governance: what it is and why it matters, 9th international anti corruption conference 10-15 October 1999 Durban South Africa - Forgeas, R. [...]
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