The link between financial reporting and capital markets: Evaluating the extent of development and use of International Accounting Standards

Résumé du document

"As capital markets play an increasingly central role in today's modern economies, policy-makers are confronted with the question of how to assure the continued effective functioning of these markets and, in particular, how to develop a sound financial reporting infrastructure." (Sir David Tweedie, 2005)

"Explain the link between financial reporting and capital markets, and critically evaluate to what extent the development and use of International Accounting Standards, effective corporate governance practices and strong internal controls may contribute to meeting the challenges outlined above"

Over the last 50 years, globalization has been more potent than ever and now plays an essential role in modern economies and the rest of the world. As a result of this process, the boundaries between different countries tend to blur. Modern economies are barely the ones present in the triad (name given by Kenichi Ohmae for the three developed markets of Japan, North America and Western Europe) and a handful of other developed countries.

The capital market is the product of the increasing number of transactions among these economies. It plays a major role in the global economy. According to the business dictionary, capital markets are defined as "financial market that works as a conduit for demand and supply of long-term debt and equity capital.

A capital market is not a compact unit, but a highly decentralized system made up of three major parts: stock market, bond market, and money market." The global economic crisis that began in 2008 is partly due to the capital markets in which main decisions are made by the market. That's why they are dependent on stock exchange markets and why they are so important. It is therefore essential that capital markets become increasingly globalized.

A market can be efficient depending on the following components: "audit, corporate governance, accounting standards, enforcement and internal controls" (Tweedie, 2005). The perfect efficiency is hard to reach as different countries have different histories, laws and regulations. Investors could reduce the risks taken and have much more opportunities if the market could "fully and quickly process the information" (Bromwich, 1992). The problem with information is that it's not the same everywhere; financial reports utilized by investor to assess investments depend on the various accounting standards.

The first part of this report will present and highlight the existing link between financial reporting and the capital markets. It will turn the limelight on the relation of finance with accounting. Then it will discuss the role played by the International Accounting Standards. Finally, it will shed light on the situation of corporate governance with the issue of internal controls.

Tags: Corporate governance, International Accounting Standards,modern economies,accounting standards