The Focus of Financial Accounting: External Users

The most common external user of financial information is the investor, be it institutional or individual. If you are saving for retirement and your money is invested in mutual funds via a 401(k), you may in fact own a tiny fraction of FaceBook, or Home Depot, or any number of publicly traded companies. Or, you may have your own investment account on the side, picking your own stocks. However, most of the investors in the stock market are retirement funds and mutual funds, and those funds are run by people, like you, who need reliable financial information in order to make an informed decision.

The SEC requires public traded companies to undergo, at their own cost, an annual financial audit by independent Certified Public Accountant. A financial statement audit is the examination of an entity’s financial statements and accompanying disclosures. The result of this examination is a report by the auditor, attesting to the fairness of presentation of the financial statements and related disclosures. The audit report is included in the annual filing of form 10-K with the SEC and in the company’s annual report that includes the financial statements.

Similarly, lenders typically require financial statements for any entity to which they lend funds. Suppliers may also require financial statements before they will be willing to extend trade credit. For non-publicly traded companies, CPAs will often prepare statements under a standard of review that is less stringent than an audit, but that still gives the external user some level of confidence that the statements are prepared in compliance with GAAP.

Internal Users of Accounting Information

While external users are waiting for historical data to be presented in the form of financial statements and all the related disclosures, internal users, mainly management of the company, are dipping in to the accounting data in real time. Production managers want to know what the product costs to build right now, and how much and how many to build to meet future demands and sales goals. Sales managers want to know both historical sales by quarter and by region, and what the predicted demand will be. Upper management wants to know profit margins, overhead costs by division and by function, and how the company is progressing against the plan (budget.)

Finally, the budget office often spans the gap between external and internal users by creating prospective financial reports (budget) and comparing those budgeted reports against actual results (the financial statements, audited or unaudited.)

All of these users, internal and external, have something in common: they are decision-makers seeking accurate, reliable, relevant information.