Accounting information can also be used for the purposes of control. Business managers need to monitor activities and operations to see whether they are proceeding according to plan. In the example in Section 2.3 of planning to manufacture and sell 120,000 units of a good, a business may have planned to sell the units evenly over a year, that is, 10,000 units per calendar month. Therefore, the business will need accounting information on a monthly basis to see whether this target is being achieved. If it is not, then the business will need to find out why, and take corrective action if possible. The type of corrective action will depend on the problem that has been identified. Different problems can have the same overall effect. For example, if sales were ‘down’ in any given month, it might be the case that trade was more seasonal than anticipated and there might be compensating higher sales in other months. It might also have been the case that a sales representative for a particular area had been away on sick leave, which would also result in lower sales. Equally, a production problem could have prevented sufficient goods being manufactured for sale – perhaps being caused by machines breaking down or suppliers’ inability to deliver raw materials when needed. It is also possible that sales in a given month might be ‘up’ on what was forecast – which could also cause problems if it continued in the longer term, as the business may have resources that are inadequate to meet an unanticipated higher demand. Regular provision of accounting information (in this example, for sales and production) is essential for control purposes.
How do you think a shareholder in a company can be assured that the financial statements give a true and fair view of how the directors have been running the company? Take ten minutes or so to type your answer.
The shareholder would primarily look at the externally audited financial statements for the accounting period ended most recently. You might have been thinking along the lines of the shareholder asking someone to undertake an independent investigation into the financial statements and (by implication) into the directors’ management activities. You would have been right, because this is what external auditing involves. An external auditor is an independent, external person or firm appointed formally by the shareholders to write a report to them on the externally reported financial results of a company (as shown in its financial statements) and on its management.. There are also internal auditors , who might do a similar job, but report to internal committees within a firm.