Users of Accounting Information

Introduction:

This note will discuss the various classes of persons that use accounting information. By accounting information, we mainly refer to the financial statements prepared by accountants. Two broad classes of users will, internal users and external users, will be discussed.

Classes of Persons that Use Accounting Information:

1. Internal users: These are individuals within an organization who use accounting information to make informed decisions related to the organization's operations and strategy. They have direct access to detailed financial data.

2. External users: These are individuals or entities outside the organization who rely on accounting information to make decisions related to their relationship with the organization. They usually have access only to publicly available financial statements.

The different classes of persons that form part of these two classes are now explained.

Internal Users of Accounting Information:

1. Owners:

A. Who are they?

Owners are the individuals or groups who have invested capital in the business and are entitled to its profits. In smaller businesses, they may also be actively involved in day-to-day operations.

B. Why do they need accounting information?

1. To assess the profitability and financial health of their business.
2. To evaluate the return on their investment (ROI) and decide whether to reinvest profits or withdraw funds.
3. To make strategic decisions about expanding, downsizing, or diversifying the business.
4. To ensure efficient use of resources and prevent financial mismanagement.

C. Example: An owner of a retail store might use profit and loss statements to decide whether to open a new branch.

2. Management and Directors:

A. Who are they?

Management includes executives, managers, and department heads responsible for planning, organizing, directing, and controlling the organization’s resources.

In a company, a group of persons known as directors are responsible for the management of the company. In Section 170 of the Companies Act, 2019 (Act 992), directors are defined as:

Those persons, by whatever name called, who are appointed to direct and administer the business of the company.

B. Why do they need accounting information?

1. To prepare budgets and allocate resources effectively.
2. To analyse costs and revenues to improve operational efficiency.
3. To set financial goals and track progress toward achieving them.
4. To make informed strategic decisions, such as launching new products, entering new markets, or reducing expenses.
5. To identify and address financial risks.

C. Example: The directors may use the income statement to identity high expenses and devise ways to minimize such expenses.

3. Employees:

A. Who are they?

Employees include staff members at all levels, from frontline workers to middle managers, who contribute to the day-to-day functioning of the organization.

B. Why do they need accounting information?

1. To understand job security by assessing the financial stability of the company.
2. To negotiate wages, bonuses, and other benefits based on company performance.
3. To evaluate opportunities for career growth and promotions.
4. To ensure transparency and trust between the employer and employees regarding financial performance.

C. Example: Employees in a company may use annual financial statements to understand if the business is performing well enough to offer annual bonuses or salary increments.

External Users of Accounting Information:

1. Lenders:

A. Who are they?

Banks, financial institutions, and individuals who provide loans or credit to the business.

B. Why do they need accounting information?

1. To assess the organisation’s ability to repay loans and interest on time.
2. To evaluate financial stability and creditworthiness.

C. Example: A bank is likely to review an organisation’s balance sheet and income statement before approving a loan. This review is to satisfy itself that the organization would be in a position to repay the loan.

2. Customers:

A. Who are they?

Individuals or businesses that purchase goods or services from the company.

B. Why do they need accounting information?

1. To ensure the company can meet future supply obligations.
2. To evaluate long-term reliability and product quality.

C. Example: A retailer checks a supplier’s financial health before committing to a long-term purchase contract.

Also, the customers of a bank are especially concerned with the bank’s ability to meet withdrawal requests promptly.

3. Suppliers:

A. Who are they?

Businesses or individuals providing raw materials, goods, or services on credit.

B. Why do they need accounting information?

1. To assess the company’s ability to pay its debts on time.
2. To decide credit terms and limits.

C. Example: A raw material supplier checks the company's financial statements before extending credit.

The above is particularly important if the organization is a company. This is because companies have a separate legal entity and the debts of the company are not the debts of the owners or managers. In the case of Morkor v. Kuma [1999-2000] 1 GLR 721 the respondent had supplied fish to East Coast Fisheries Ltd. (the first defendant) on credit. The execution of the contract for sale was witnessed by the appellant, a director of the company and the majority shareholder, and another director. When East Coast Fisheries Ltd. failed to pay the full amount for the fish, the respondent instituted an action against the company and the appellant for recovery of the debt. an attempt to recover a debt from a director of the company failed on this ground. The appellant contended that she is not a property party to the suit. The Supreme Court of Ghana, in upholding the appeal, said that she negotiated the contract as an officer of the company, and

When an officer of a company, in the normal course of her duties, so negotiates or signs an agreement entered into by the company, no personal liability is thereby created, in the absence of other clear indications to the contrary.

It is therefore important for a supplier to satisfy itself that the entity that has the liability, has the ability to discharge its liability.

4. The Government:

A. Who are they:

The body of persons that constitutes the governing authority of a political unit or organization. However, when we speak of government here, more emphasis is on governmental organisations and agencies such as the Ghana Revenue Authority.

B. Why do they need accounting information?

Per the Course Manual, government needs accounting information because:

Financial statements provide data from which taxes (e.g. VAT, PAYE, Income Tax, and Corporation Tax) can be assessed and collected, security for individuals and businesses, new job creation, introduction and adoption of new technologies

5. Investors:

Who are they?

These are current and potential shareholders or individuals considering investing in the company. They are persons or entities that put money into or an interested in putting money into something with the expectation of earning a financial return.

Why do they need accounting information?

1. To evaluate profitability and growth potential.
2. To assess risk and return on investment.

In the Caparo Industries Plc v. Dickman [1990] UKHL 2 , Caparo wanted to make a takeover bid for a Firm known as Fidelity. In doing so, they relied on financial reports prepared by Dickman for Fidelity’s annual audit. The reports showed that Fidelity was profitable, and based on this information, the claimant proceeded with the takeover. Although the reports in this case misrepresented Fidelity’s profitability, what is essential is that the decision to make the takeover bid was based on accounting information.

6. Competitors:

A. Who are they?
Other businesses that offer similar services or goods to the same competitors. For example, MTN is a competitor to AirtelTigo.

B. Why do they need accounting information?

1. Benchmarking: Accounting data allows competitors to compare their own financial performance (profitability, efficiency, liquidity) against rivals. This helps identify areas where they are stronger or weaker, informing strategic decisions.
2. Predicting competitor behaviour: The financial records of a competitor may reveal their investments, ability to hire more employees and expand production, among others.
3. To identify strengths and weaknesses. A competitor's weaknesses, such as high debt or declining market share, can present opportunities for a rival to gain market share or exploit vulnerabilities.

7. Regulators:

A. Who are they?

These are entities empowered to ensure compliance with rules.

B. Why do they need accounting information?

Among others, regulators use accounting information to “find out whether the company is complying with its rules, achieving the regulatory aims and being managed by fit and proper persons.” (Course Manual).

8. Financial Analysts:

Who are they?
Professionals who evaluate financial data to provide insights and recommendations.

Why do they need accounting information?

1. To analyse company performance.
2. To advise investors and stakeholders.

9. General Public:

A. Who are they?
Individuals or groups interested in the company’s activities, such as local communities or activists.

B. Why do they need accounting information?

1. To know whether the organization provides value for money
2. To understand the company's contribution to the economy.
3. To evaluate whether the organization fulfils its legal and corporate social responsibility.

C. Example: A community group examines financial reports to check environmental responsibility initiatives.

Conclusion:

In conclusion, accounting information serves as a vital tool for both internal and external users by providing insights into an organization’s financial health, performance, and future prospects. Internal users, such as owners, management, and employees, rely on detailed financial data to make strategic, operational, and personnel-related decisions. On the other hand, external users, including lenders, customers, suppliers, government agencies, investors, competitors, regulators, financial analysts, and the general public, use publicly available financial statements to assess financial stability, compliance, and growth potential.