Accounting Reliability

//Accounting Reliability
Accounting Reliability 2017-10-11T06:31:52+00:00

Accounting reliability refers to whether financial information can be verified and used consistently by investors and creditors with the same results. Basically, reliability refers to the trustworthiness of the financial statements. Can the end users trust what is on the financial statements?

If decision makers cannot trust what is on the financial statements, financial reporting in general is useless. That is why the FASB is so concerned with the reliability of financial statement information.


Examples

The FASB described three attributes that all reliable financial information has: verifiability, representational faithfulness, and neutrality.

Verifiability

Financial information is verifiable when multiple, independent measures are used to come up with the same result. In other words, auditors and other third parties can measure and evaluate the company’s financial statement accounts and end up with the same result. If the auditors can’t verify financial information, the auditors can’t issue an unqualified opinion.

Representational Faithfulness

Representational faithfulness simply means that the financial statements represent reality or what actually happened during the year. For example, if a company reported cost of goods sold of $100,000 when its cost was actually $159,000, the financial statements wouldn’t accurately reflect reality or what actually happened. In reality, this company incurred $159,000 of costs and must show that on their financial statements.

Neutrality

Finally, in order for financial statements to be reliability, they must be neutral. By definition, financial statements that are prepared by company management are somewhat biased because the management want to see the company improve. This means they are more likely to report increased performance and neglect to report unfavorable events. Neutrality requires that management prepare completely unbiased financial statements.

For example, a company with information about a probable lawsuit must report it on their financial statement notes. Withholding this information would make the financial statements unreliable to outside investors and creditors.