"Accountability breeds response-ability".
- Stephen R. Covey (1932 - 2012), Author of "The 7 Habits of Highly Effective People"

Final accounts are the published accounts of an organization, made available to and used by different stakeholders, such as managers, employees, shareholders, sponsors, financiers, and investors. This differs from management accounting (not covered in the IB syllabus), which refers to financial accounts created by and used for internal and confidential purposes. The final accounts of a business consist of two important sets of financial documents:

1. The profit and loss account (also known as the income statement), and

2. The balance sheet (also known as the statement of financial position).

Users of final accounts include both internal and external stakeholder.

Internal stakeholders include managers, employees and shareholders. They can use the final accounts to gauge the performance of the business, in order to negotiate pay deals or to judge the level of job security.

External stakeholders include banks, suppliers, customers and the government. External stakeholder groups are interested in an organization’s final accounts in order to enable them to make sensible and coherent decisions. For example, financiers such as commercial banks and other lenders use the final accounts to evaluate the organization’s ability to afford its debts (or borrowing).

Managers

Reasons why managers are interested in the final accounts include being able to:

• measure the performance of the business against organizational targets.

• benchmark key indicators (such as net profit figures) against those of rival businesses.

• review financial performance against planned or targeted performance.

• help with decision-making, e.g. to assess whether the business has sufficient funds for new investment projects.

• set budgets and targets for the future, e.g. target profit.

• monitor and control business expenditure across the various departments in the organization.

• assist strategic planning, e.g. growth and evolution of the organization.

Final accounts assist managers with strategic planning

Employees

Reasons why employees are interested in the final accounts include:

• Employees can use final accounts to gauge the extent to which their jobs are secure; a profitable business with a healthy balance sheet will create improve job security and promotional opportunities.

• Workers can use final accounts as part of the negotiation process with labour unions to discuss pay rises and conditions of employment; again, a profitable and healthy business helps workers to strengthen their case for job security and pay rises.

Shareholders

Reasons why shareholders are interested in the final accounts include being able to:

• Measure whether the business is more or less profitable, and how this has changed over time.

• Measure the value of the business and judge whether this has increased over time.

• Calculate the return on their investment (refer to profitability ratios).

• Determine how much dividends (share of the organization’s profits) they receive.

• Decide whether the organization has prospects for growth and expansion.

• Compare the financial performance of different businesses in order to make rational investment decisions (whether to buy or sell any shares in the company).

Note: Potential/new shareholders and investors are also interested in the final accounts of a business, as they need access to the financial data to decide whether to invest in the company. This can be done by calculating its profitability ratio (see Unit 3.5), measuring its gearing ratio, and determining the company’s liquidity position (see Unit 3.6).

Financiers

Reasons why financiers (such as commercial banks or microfinance providers) are interested in the final accounts of a business include being able to:

• Decide whether to lend money to the business, and how much to lend, by judging the degree of risk involved.

• Check on the creditworthiness of the organization before overdrafts or loans are given.

• Assess the extent to which the business is able to pay back its borrowing (with interest).

Financiers examine final accounts to judge on the creditworthiness of their clients

Suppliers

Reasons why suppliers will be interested in the final accounts of a business include being able to:

• Assess whether the business has sufficient liquidity to pay its debts (trade credit).

• Determine the creditworthiness of the business in order to gauge the level of risk involved.

• Negotiate improved credit terms, such as deciding whether to extend the trade credit period or to demand immediate cash payment.

Customers

Reasons why customers will be interested in the final accounts of a business include:

• Gauge whether a business is finically secure, especially if there is a long working capital cycle (a lengthy delay between the customers paying and receiving the products).

• Determine whether the business offers security and reliability in its services; otherwise, customers will go elsewhere and purchase by rival suppliers.

• Determine whether there will be future supplies of the product they are purchasing – this is particular important for customers that rely on a particular supplier or business.

The government

Reasons why the government (including tax authorities) will be interested in the final accounts of a business include:

• To calculate and check (verify) the amount of tax that is due to be paid by the business.

• To measure the extent to which the business is able to expand and create jobs in the economy.

• To assess the liquidity position of the business, in case there is a threat of business closure, which could cause serious economic problems (depending on the size of the business and the market in which it operates).

• To ensure the business operates within the law, by adhering to the country’s accounting rules and laws.

Authorities require businesses to pay their taxes

Competitors

As an external stakeholder group, competitors may be interested in the final accounts of a particular business operating in the same industry or market. These reasons include:

• Being able to compare their own financial accounts with the business in question, in order to judge their own financial performances.

• Benchmark best practise by examining what the business does well, and determine how they themselves can improve.

 Key concept - Ethics

Discuss the importance of ethics in the context of accounting practice.

 Teacher only box

Possible areas for discussion could include:

• Integrity - Accountants need to be open and honest in all aspects of their professional conduct, e.g., final accounts should be reported accurately and truthfully with the tax authorities and all other interested stakeholders.

• Objectivity - The reporting of final accounts should not contain bias or undue influence of others parties. Accounting practices should be free of any conflict of interest between the business and its various stakeholder groups.

• Professional competence and due care - This means accountants have a professional duty to continue their professional knowledge and act diligently. They should stay up to date with developments in the industry, including changes in legislation and accounting practices.

• Confidentiality - Accountants must respect the confidentiality of financial data and information acquired as a result of their profession. They must not disclose any of this to third parties unless there is a legal or professional duty to do so. The data must not be used for personal gain of the accountant or third parties. This is both a legal and ethical obligation.

• Professional conduct - Accountants must avoid any action that could bring their profession into disrepute, e.g., they must comply with relevant laws and regulations regarding accounting practices.