For those in a hurry

• Reporting includes all matters that are aimed at improving the level of information.
• It should capture all relevant information deemed necessary for planning, management and control.
• In formally designed information systems, little consideration is given to the actual information needs of managers.
• It can really only be about increasing transparency, with a focus on identifying the causes of structural changes.
• Accounting is generally considered to be the most important source of figures in a company.
• However, the accounting data is usually not available at the necessary time or is available very late.

Improving the level of information

As already mentioned in the first part, the enterprise is composed of three subsystems: the target system, the social system and the information system. We will now take a closer look at the information system, i.e. we will show the importance of information supply for corporate management. But what is behind this unwieldy term? 

"The information supply system includes all matters that are aimed at improving the level of information". This definition describes an operational reporting system in the broadest sense.

As such a system, the supply of information is understood as a preliminary stage to the actual planning and control. A planning and control system should support decisions based on a given level of information. This means that the quality of the information system has a significant influence on the actual management of the company. 

The desired and desirable target state of an information system is thus the collection of the relevant information deemed necessary for planning, management and control. 

However, the relevance of information cannot always be clearly determined. Especially since the question of whether information is to be considered relevant or not is strongly

• from the person of the decision-maker, 
• the person transmitting the information and 
• depends on the decision-making situation in question. 

A friend of COMMITLY, the management expert Georg Jocham, devotes himself to this exciting aspect in decision-maker communication under the title "The Decision-Maker Code". But that is another topic.

Consequently, information must be based on the employee's position in the organisation as well as on his or her intellectual abilities. An additional problem is the factual, organisational and temporal discrepancy between the creation and acquisition of information. Welters must be asked for whom the information is intended and for which decisions it is to be used to support.

An attempt to clarify the question of the relevance of a piece of information has been made by a not unknown commentator named DELANEY: 

"Information is decision-relevant if it makes a difference to the decision-maker's ability to predict events or confirm or correct expectations. 

Relevant information reduces the decision-maker's assessment of the uncertainty of the outcome of a decision, even though it may not change the decision itself. 

Information is relevant if it provides insight into past events (feedback value) or future events (forecast value) and if it is timely."

The following problems arise in the design of the information system:

• The quantity problem - typical of this problem is the "lack of information in the abundance of information". Meaningful information must therefore be created by filtering, condensing and channelling. 
• The time problem - environmental dynamics require shorter planning and control cycles.
• The quality problem - here the already known decision relevance of information is addressed.
• The communication problem - poses the question of how information should be communicated. This problem arises because information is usually not generated where it is needed.

The fundamental problem here is that in formally designed information systems, little consideration is given to the actual need for information by managers. 

Who doesn't know them, the overloaded dashboards with countless graphics and numbers? 

Due to the multitude of these problems, as well as the interdependence between the information system and planning and control, the development of such a system is an extremely complex and thus time-consuming task. 

For these reasons, various requirements must be placed on an information supply system:

• The criterion of relevance has already been addressed above.
• In addition, there is the demand for temporal, linguistic and personal correspondence.
• Furthermore, such a system must be flexible to unpredictable information needs.
• Cost-efficiency must also be taken into account, i.e. an information supply system must be designed according to economic aspects. The economic value of information is determined by its benefit for business decision-making processes and the costs of obtaining the information. However, this fails due to the lack of quantifiability of costs and benefits.

The report, which is the output of the information system, so to speak, forms the information basis for the decisions to be made in a company. In this context it should be noted: 

No excessive demands are to be made on an information system, since the complexity of the real world cannot be compensated by methods. Rather, it can only be a matter of increasing transparency, with the focus on recognising the causes of structural changes.

But where does the information come from now?

Accounting is generally regarded as the most important source of figures in a company. Above all, the annual financial statement, i.e. balance sheet, profit and loss statement and notes (if required), serves as an important instrument for interested parties. A wide variety of tasks can be identified in this regard: Information' These functions are derived directly from legal regulations. 

In this context, the information function specifically regulated in the Austrian UGB in § 190 and in the German HGB § 238 should be addressed in more detail. Both laws specify the applicable accounting principles:

The bookkeeping must be such that it can provide an expert third party with an overview of the business transactions and the situation of the enterprise within a reasonable period of time. 

§ Section 195 UGB follows on from this regulation and states with regard to the content of the annual financial statements:

It shall give the entrepreneur as true and fair a view as possible of the assets and earnings of the enterprise.

In addition to the regulations listed above, the UGB provides special regulations for corporations:

§ 222 (2) The annual financial statements shall give as true and fair a view as possible of the assets, liabilities, financial position and profit or loss of the enterprise. If this is not possible due to special circumstances, the necessary additional information shall be given in the notes. 

The Annex is dealt with in detail in § 236:

In the notes to the financial statements, the balance sheet and the profit and loss account as well as the accounting and valuation methods applied to them shall be explained in such a way that a true and fair view of the assets, financial position and earnings of the company is conveyed. 

Information from accounting only for external parties?

Of importance is the more detailed execution of the tasks of the information function: 

• Protection of creditors, 
• Protection of shareholders, 
• Protection of employees participating in the profits, 
• Protection of the financial authorities, 
• Protection of the public interested in the operation and the 
• Protection of the farm through self-information.

The legal provisions of the UGB make it clear that the legislator is primarily aiming to protect those outside the company. 

It is only through the interpretation or extension of the balance sheet theorist that secondary balance sheet purposes are established, i.e. the task of accounting to produce planning-relevant numerical documents for the company management. 

This also highlights the essential weakness of the accounting principles for internal reporting. This means nothing other than that accounting is actually primarily there to paint as true a picture of the company as possible for external parties.

U.S. regulations similar but more pragmatic

Although U.S. financial statements convey almost the same information as their European counterparts, different objectives can be discerned in the regulations, which are otherwise consistent in fundamental respects.

"In recent years, the SEC has worked with the Financial Accounting Standards Board (FASB). Because it is confronted daily with the accounting and reporting practices of US companies, the SEC often refers emerging issues to the FASB to address. In turn, the SEC provides advice to the Financial Accounting Standards Board (FASB) upon request."

The FASB also plays an important role in setting reporting objectives by publishing Statements of Financial Accounting Concepts (SFAC), which, unlike the Statements of Financial Accounting Standards (SFAS), do not constitute GAAP. SFAC 1 regulates the "Objectives of Financial Reporting by Business Enterprises". This regulation basically defines three objectives.

"The first objective of corporate reporting is to provide information that is useful in making business and economic decisions."

"The second goal of reporting is to provide understandable information that helps investors and creditors predict a company's future cash flows."

"The third objective of reporting is to provide information about an entity's economic resources (obligations) and the effects of transactions, events and circumstances that change resources and claims on resources."

Info Box:

This development can be explained by the different economic philosophies of Europe and the United States. Due to the great stock market crash in 1929, the Securities and Exchange Commission (S.E.C.) was founded in the USA in 1934, a federal authority that bindingly determined the form and content of annual financial statements. Subsequently, however, further government intervention was abandoned and the problem of regulation and interpretation was passed on to private organisations. Today in America, there is a complicated system of private organisations working with the SEC. For example, the Financial Accounting Foundation (FAF) consists of the Financial Accounting Standards Advisory Council (FASAC) and the Financial Accounting Standards Board (FASB). The FASB is responsible for the establishment of Generally Accepted Accounting Principles (GAAP), the American counterpart of Generally Accepted Accounting Principles (GAAP). 

The objectives refer to internal and external addressees, but also state that the management of a company has an information advantage over outsiders.

Information on economic resources is understood as indicators of the strengths, weaknesses and Cash position of a company.

Other components of the third objective are information on economic developments and earnings, solvency and cash flows, management performance (in the sense of generating profits) as well as information on corporate governance and its effects on future corporate development (in the sense of assuming management responsibility).

Thus, while SFAC 1 focuses particularly on the information to be provided, SFAC 2 attempts to identificate those characteristics that qualify information for the decision-making process sought by management.

Figure: Management of the decision-making process based on SFAC 2 (Hierarchy of Accounting Qualities)

Information must therefore fulfil the following criteria:

• Qualities for the user: the information must be useful & understandable and subsequently comparable and consistent
• Qualities of the information: Information must be relevant and reliable
• Information is considered relevant if it is available in a timely manner and has feedback and predictive value.
• Information is considered reliable if it is verifiable, representative of the facts and equally neutral.

Accordingly, only material facts should be assessed. The cost-benefit ratio must be taken into account in the assessment. At the end of the day, it is in the entrepreneur's own interest to prepare only those facts that are worthwhile. From these explanations it is clear that in the American accounting system the primary focus is on the adequate acquisition of information to support decision-making, especially for the company management but also for external parties.

It is also important here that the concept of Cash position is addressed much more closely.

However, the fundamental shortcomings of accounting should not be overlooked. The limitations of "classical" accounting are 

• the sole mapping of the effects and not the causes, 
• the reduction of n-dimensional events in the enterprise to the dimension of values, and
• the delayed provision of evaluations from accounting due to the necessary compliance with legal requirements and the associated necessary diligence.

Nevertheless, according to the doctrine, internal reporting should be based on accounting data:

• Budgeting, balance sheet and income statement provide an excellent and proven model for classifying information through the principle of double-entry accounting.
• The most important formal objectives of planning are formulated in the language of "classical" income and expenditure accounting (turnover, profit, assets).
• The information already recorded and classified by the accounting department should, if possible, also be used as a data basis for internally oriented evaluations, if only for reasons of economy (one-time recording and multiple evaluation).
• The information provided by the balance sheet leads to financial consequences (profit distribution, tax payments), which are of fundamental importance for planning and control.
• The information provided by the balance sheet influences the decisions of external decision-makers, which in turn can be of great importance for corporate planning.

Again, the most important point of criticism is ignored: the accounting data is usually not available at the necessary time or very late.

Topics covered as part of the theory:

Part 1: Company, objectives and Cash position

Part 2: Corporate governance and liquidity management

Part 3: Decisions and liquidity management

Part 4: Reporting in the company

Credits: Photo by Patryk Grądys on Unsplash