IN recent weeks, there has been debate on how the country is compliant to international accounting standards.
Most firms have patted themselves on the back for being compliant.
A recent article titled ‘Zim firms comply with global accounting practices’ waxed lyrical about how local companies were fully compliant with global accounting principles in their financial statements, thereby providing opportunities for increased investment in the economy.
The article went on to quote Martin Makaya, president of the Institute of Chartered Accountants, who reiterated that global accounting principles were key in ensuring transparency for the benefit of the economy.
While the article gave a glimmer of hope to the public, given the ailing state of the economy, in the same breath the article failed to explicate unsound financial accounting practices that companies sometimes employ to fool the undiscerning investor.
One aspect that has escaped scrutiny from financial analysts is accounting standards employed by companies in presenting their financial statements in light of the three-tier pricing regime which has seen the majority of private companies charging premiums for cash sales, while overstating the charges for mobile, online and bank transfers.
How are these companies presenting this information in their books?
Given that the multi-tier pricing regime is illegal as it violates banking legislation, it is apparent that most companies have started what is referred to as ‘window dressing’ in accounting parlance, whereby a company’s performance is improved on paper.
While the textbook definition of ‘window dressing’ mostly focuses on overstating a company’s balance sheet, in Zimbabwe, on the contrary, companies have resorted to understating their performance to evade tax obligations as well as keep some transactions off the record as they cream off the profit.
In light of these developments, the Reserve Bank of Zimbabwe (RBZ) Governor Dr John Mangudya has come out guns blazing, invoking the Bank Use and Promotions Act (Chapter 24:24) which states that it is an offence to use different pricing models for different payment systems namely cash, Real Time Gross Settlement (RTGS), internet banking and Point of Sale (POS), or a combination of any two or more of them.
According to the same legislation, hoarding of cash and not banking it is in contravention of the same act.
This presents a problem, especially for listed companies that are mandated to present their financial statements, which ideally should be a mirror image of a company’s performance.
Financial statements such as cash flow statements, profit and loss accounts and balance sheets have often been argued to not provide the most accurate information as companies are mostly inclined to ‘put their best foot forward’, and this voluntary disclosure of information is bent on retaining clientelle and attracting investors.
The purpose of accounting information is to furnish the different users of the information with timely, relevant and reliable information addressing their various needs.
Stakeholders of accounting information include present and potential investors, shareholders, owner-managers, management, suppliers, customers, employees, Government and their agencies, competitors and lenders as well as the public.
Each user has different uses for the information communicated in the financial reports.
Over the years, financial reports have often been touted as giving biased information which mostly satisfies the information needs of shareholders, investors and creditors, while at the same time not giving adequate information to employees, Government and competitors who influence their decision-making.
They use financial statements in order to satisfy some of their different needs for information. These needs include the following:
l Investors: The providers of risk capital and their advisers are concerned with the risk inherent in, and return provided by, their investments. They need information to help them determine whether they should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the enterprise to pay dividends.
l Employees: Employees and their representative groups are interested in information about the stability and profitability of their employers. They are also interested in information which enables them to assess the ability of the enterprise to provide remuneration, retirement benefits and employment opportunities.
l Lenders: Lenders are interested in information that enables them to determine whether their loans, and the interest attaching to them, will be paid when due.
l Suppliers and other trade creditors. Suppliers and other creditors are interested in information that enables them to determine whether amounts owing to them will be paid when due. Trade creditors are likely to be interested in an enterprise over a shorter period than lenders unless they are dependent upon the continuation of the enterprise as a major customer.
l Customers: Customers have an interest in information about the continuance of an enterprise, especially when they have a long-term involvement with, or are dependent on, the enterprise.
l Governments and their agencies: Governments and their agencies are interested in the allocation of resources and, therefore, the activities of enterprises. They also require information in order to regulate the activities of enterprises, determine taxation policies and as the basis for national income and similar statistics.
l Public: Enterprises affect members of the public in a variety of ways. For example, enterprises may make a substantial contribution to the local economy in many ways including the number of people they employ and their patronage of local suppliers.
Thus financial statements assist the public by providing information about the trends and recent developments in the prosperity of the enterprise and the range of its activities.
But it is critical that they provide correct and true information.