Accounting Information Quality
Accounting information is very important for the investor, creditor to access company performance in order to make proper decisions. This information will tell the outsider about the company’s situation. However, if the accounting does not have quality, it will not tell us the truth. Without any benefit, poor quality information may lead us to make the wrong decision. So before placing any reliance on that information, we should know the level of trust we can put on them. How do we know that?
Accounting information quality consists of 5 factors which include:
The information should be related to the user, it can impact the user decision making. The information has a significant influence on the stakeholder and may impact their economic benefit. The present and absence of such kind of information will show the different results in their decision.
The relevant information can show the entity’s past performance or predict the possible future. The relevance information may be irrelevant when it is not timely. For example,
The accounting information must be faithful present to the reader and reflect the real condition of the company. The transaction should be based on the economic form rather than the legal form. This is the concept of substance over form when the real intention and the form are far different.
It prevents the company from using the legal form to cover the actual business transaction behind. It will lead to a misunderstanding of the reader and outsider.
The format of financial statements should be comparable from one accounting period to another, it means that report from year to year must be in the same accounting framework which is comparable. Moreover, the same report should be able to compare with other companies in order to benchmark. The investor needs to compare company performance within the same industry and make a decision regarding their investment.
However, it is only applicable when these companies use the same accounting policy which falls under the same framework such as IFRS or GAAP. When the company uses a different framework, it will be hard to compare its financial statement.
Verifiability means that the information can be verified by a third party such as an external auditor. In order words, the third can produce the same financial statement by using the same data and assumption. The auditors are able to recalculate and access the assumption made by the company. For example, auditors can calculate the depreciation expense by using fixed asset cost and useful life. And the result is the same for the company.
Besides recalculating, auditors also access the reasonableness of company assumption if it is appropriate or not. For example, during depreciation recalculation, auditors must access the fixed asset useful life if it is too long or too short compare to actual usage.
It can provide a higher level of confidence from the user of financial statements by ensuring that the information in financial statements is present true and fair.
Timeliness refers to the accounting information qualification which is able to provide the information as quickly as possible to take action. The user needs the recent accurate information, the data may become useless when over time, so it is important to provide them on time. The older information gets, the less relevant they are.
If the information is not updated, it means that we make a decision base on the outdate data which can lead to an unexpected situation.
Understandability is the principle concept that the transaction show in the financial statement is easy to understand by the users who have different levels of knowledge. It helps to ensure that users understand the business transaction with reasonable diligence.
This principle prevents the company from using a complex and complicated transaction to cover up its real intention. The normal users are not able to understand and access the risk which the company is facing.