Accounting and Audit News

published on 30 October 2024 I reading time approx. 2.5 minutes

Good Accounting: The Enemy of Great Accounting

Mr. Jim Collins’ pivotal observation, "Good is the enemy of great," has long resonated in various spheres of life. In the realm of accounting, this wise saying takes on a particularly deeper meaning. While good accounting practices are essential for a company's financial health, they may inadvertently impede the pursuit of accounting excellence. The complacency that often accompanies "good enough" accounting can hinder the adoption of best practices that truly distinguish a company's financial reporting.

The Limitations in Annual Reports- An Investor's Perspective

While annual reports may adhere to legal requirements and disclose facts, they often fall short in providing investors with the clarity and depth needed to make informed decisions. The emphasis on legal compliance can sometimes overshadow the need for substantive, useful disclosures that reveal the true state of the organization. Footnotes, intended to satisfy legal transparency, may not offer the real-world insights that investors seek.

It's essential to remember that an annual report is not primarily a public relations tool designed to sway investor opinion. While it should inform investors, it should not be viewed as a marketing document. The primary goal of an annual report is to provide investors with the information they need to assess the company's financial performance, risk factors, and future prospects.

Great Accounting- Beyond the Basics

While good accounting practice is necessary, it's not sufficient to achieve greatness. Great accounting practice involves going beyond the basics and providing insights, value, and innovation.

This requires:

a deep understanding of the business and its industry, allowing them to provide context and insights into financial performance.
ability to analyze financial data and identify trends, patterns, and anomalies is essential for great accounting.
thinking strategically and help businesses make informed decisions based on financial information.

Example of Good to Great Accounting Practice

Comparison of Profit and Loss (P&L) Statements – Typical Vs Enhanced.

Refer Table below, While the Typical and Enhanced Statement of Profit and Loss (P&L) both aim to present a comprehensive view of a company's financial performance, there are some key differences in their structures and classifications.

Typical P&L focuses on revenue and expenses, while Enhanced P&L emphasizes the operating, investing, and financing activities.
Typical P&L typically follows a linear format, while Enhanced P&L often uses a cash flow statement format to show the impact of operating, investing, and financing activities on cash flow.
Enhanced P&L offers a more meaningful comparison between operating profit and net cash flow from operating activities. This improved alignment makes it easier for users to reconcile the two statements and gain a better understanding of the company's operating performance and cash generation capabilities.
Typical P&L often use the vague label "other" for large amounts, hindering comparability. Enhanced P&L uses more informative labels and aggregate items based on shared characteristics to enhance transparency and comparability

Typical Statement of Profit and Loss		Enhanced Statement of Profit and Loss

Income:		Revenue from operations	x
Revenue from operations	x	Cost of Goods Sold	(x)	Operating
Other Income	x	Gross Profit	x
Total Income	x	Other Operating Income	x
		Selling Expense	(x)
Expenses:		Research and Development expense	(x)
Cost of materials consumed	x	Employee benefits expense	(x)
Purchase of stock -in-trade/ Traded Goods	x	Depreciation and amortization expense	(x)
Changes in inventories of finished goods, work-in-progress and stock-in-trade	x	Other Operating expenses	(x)
Employee benefits expense	x	Operating Profit	x
Finance costs	x	Share of the Profit from associates and Joint Ventures	x	Investing
Depreciation and amortization expense	x	Other Investment Income	x
Other expenses	x	Profit before financing and income taxes	x
Total expenses	x	Interest Expenses on borrowings	(x)	Financing
		Interest Expenses on Pension Liabilities	(x)
Profit before tax	x	Profit before tax	x

Tax expense:		Tax expense:
Current tax	(x)	Current tax	(x)
Deferred tax charge/ (benefit)	x	Deferred tax charge/ (benefit)	x

Profit/(Loss) for the year	x	Profit/(Loss) for the year	x

CONCLUSION

Good accounting practice and great accounting practice are not mutually exclusive.In fact, they are interconnected and interdependent. A strong foundation of good accounting is essential for achieving great accounting results. By combining the rigor of good accounting with the creativity and innovation of great accounting, businesses can achieve both financial accuracy and strategic value.

While good accounting is necessary for financial transparency and accountability, it may not be the ultimate goal. Great accounting is about providing insights, telling stories, and driving value. By challenging the status quo, embracing innovation, and thinking critically, Management can overcome the limitations of rules and regulations to deliver truly exceptional financial reporting be it Internal MIS Reporting or External Reporting to Stakeholders.