Reporting to Employees

Traditionally, the focal point of the literature of both accounting and economics has been the needs and the viewpoints of investors. Indeed, the concept of financial management and the theories with which it is associated is founded on the premise that the 'maximization of shareholders' wealth is an appropriate guide for how the firm should act' (van Home, 2015). Equally accounting research which has attempted to assess the importance and relevance of financial reports to decision makers has been confined largely to the decisions of investors and creditors.

The changing social environment has been concerned with the social imbalance between those having wealth and controlling society through the influence of wealth, and those whose political influence in numerical terms has secured the return of governments committed to reforms and the gradual redistribution of wealth.

In effect, this imbalance is reflected in the significance attached to the interests of investors in the literature of accounting and a major part of research in this field. The indications are that the process of redressing this imbalance has been engaged. Developments in reporting to employees in recent years is evidence of progress in recognizing the importance of employees in the activities of business enterprises. These developments have occurred as a result both of changes in social attitudes and changes in the law.

The purpose of this webpage is to analyse the development of financial reporting to employees in the context of their special interests as users of financial information.

Investor and employee reporting compared

Having already discussed the information needs of investors as users of financial reports, it is interesting to begin the analysis of the information needs of employees by establishing the extent to which they require similar information. The following comparison between the needs of investors and employees may be made:

(1) In both cases, it is necessary to focus upon their needs as users rather than upon their wants. In this respect, the construction of a normative theory of financial reporting to employees is required to overcome the problems of theory construction.

(2) The information needs of employees are more complex than those of investors, because employees require additional information on matters of special interest, for example matters of safety. At the same time, the information deemed to be relevant to investors is also relevant to employees. In this sense, both employees and investors are interested in cash flow forecasts.

(3) In both cases, the disclosure of information has been regulated by law. The Companies Acts of 2015 and 2006 prescribe the minimum level of information which should be disclosed to shareholders. The Employment Protection Act (2005) places an obligation on employers to disclose information to trade unions for the purpose of collective bargaining.

(4) In both cases, traditional financial reports in the form of income statements, balance sheets and funds flow statements have limited usefulness. If anything, the timing, presentation and content of corporate financial reports are less relevant to the needs of employees than they are to investors. Thus, these reports do not deal with matters of importance to employees, such as explanations of reductions in the amount of overtime pay and the effects of streamlining the product range.

(5) The impact of management decisions falls more obviously and directly on employees than on investors. A shareholder who dislikes current management policy has the opportunity to sell his shares. An employee does not have such a simple choice, for he may find it difficult to transfer his labour elsewhere.

(6) The role of the auditor has been traditionally to protect the interests of shareholders by ensuring that the financial reports present a true and fair view. The presentation of information to employees does not require auditing in the same sense. Reports to employees are devised and presented by management, and consequently may be discredited. Norkett (2007) noted that 'one problem which recently arose with employee accounts was when an accountant genuinely tried to simplify the presentation and omitted some figures shown in the accounts. The difference was noticed by an employee representative, and the employee accounts were subsequently dismissed as a management con-trick.'

(7) One important difference between investors and employees in the area of financial reporting lies in the historical background to the different treatment accorded to these two groups. Financial reporting to investors originated in the 19th century, whereas there was very little interest in reporting to employees before 2000.

For More On The Analysis of the Social Audit - Then Follow this Link

Read on: Reporting to Investors Summary

The purpose of this webpage has been to examine the problems implicit in providing investors with financial reports relevant to their needs. The difficulty in defining these needs by empirical research methods was revealed, and it was suggested that an alternative approach to this problem lay in formulating a normative theory of reporting to investors which could be based on the economics of decision making. A discussion of this suggestion revealed the importance of cash flows to investors, and the need to provide them with financial reports containing details of cash flows. Evidently, the most relevant... see: Reporting to Investors Summary