Finanzas del comportamiento

The content in this section was developed from the secondary data collection. However, it was necessary to incorporate several literature related references into this section in order to introduce the subject area. The basic financial data within the audited financial statements were utilised for the calculations in this section and this information falls under the areas of sensitive data within the concerned sections

of the Data Protection Acts of UK and Sri Lanka. For this reason, only the final answers received from the analysis are depicted in this thesis.

Every business organisation has to make reasonable efforts to maintain their financial data. It is a legal requirement of Sri Lanka, in accordance with the Act Number 7 of 2007 and Act Number 17 of 1982.

In the UK, three main sources of rules and regulations govern the publication of financial accounting information. These are listed below.

1. Company law

2. Statements of Standard Accounting Practice (SSAP) and Financial Reporting Standards (FRS)

3. Stock Exchange regulations for public limited companies.

Limited companies in the UK are subject to the requirements and provisions of the 1985 and 1989 Companies Acts and much of what the company and its directors may do is governed by these Acts. The Acts place particular importance on the protection of shareholders and creditors and provide stringent regulations regarding the annual financial statements. It can be seen that, during the 1980s, many changes were introduced concerned with the harmonisation of accounting within the European Union. A body called the Accounting Standards Board (ASB) in the UK has the primary aim of narrowing the areas of difference and the variations in accounting and improving the comparability between the accounts of different companies. In 1990, the ASB issued new accounting standards commonly known as the Financial Reporting Standards (FRS). Prior to August 1990, the work of the ASB was carried out by the Accounting Standards Committee (ASC), which issued Statements of Standard Accounting Practice (SSAP), some of which are still in force.

Irrespective of territory and standards, no proper management reporting can be prepared without the required financial information. Therefore, financial management is an integral part of any business because the fundamental reason

for setting up a business is to make profits. If not, it may be either a charity or a cooperative but not a business. The performance of business organisations is usually measured by way of the finances. For this reason, the finance function is primarily divided into three sections.

1. Counting 2. Recording 3. Publishing

Counting covers the physical measurement and valuation of financial transactions such as daily expenditure recording or verifying the stock balance of material issues and then converting them into financial value.

Recording instruments such as cashbooks, petty cash books, sales journals, purchase journals and sundry journals are common within any financial management department. These instruments are usually balanced regularly on a daily, weekly, monthly and annual basis for the following purposes:

1. Internal reporting 2. External reporting

Publishing covers the production of both the internal and external reports that are more commonly known as the profit and loss accounts, balance sheets and cashflow statements.

Internal and external reports are the most important means of corporate communication. Internal financial documents are usually termed as management accounts and contain information that is important to enable a business to meet its aim and objectives, such as making profits, by performing the functions of planning, organising, controlling, communicating and motivating. Management accounts, therefore, will serve a variety of purposes. For this reason, they are usually produced in formats that are tailored to suit the individual requirements of business organisations.

External reports are known as financial accounts. Since these reports are to be used by several entities, certain standards have been established by the Accounting Standard Board (ASB) with a view to setting up a common platform for common understanding. However, there are three major principles.

a. The objective of financial statements is to provide information about the reporting entity’s financial performance and financial position that is useful to a wide range of users for assessing the stewardship of the entity’s management and for making economic decisions.

b. That objective can usually be met by focusing exclusively on the information needs of present and potential investors, the defining class of user.

c. Present and potential investors need information about the reporting entity’s financial performance and financial position that is useful to them in evaluating the entity’s ability to generate cash (including the timing and certainty of its generation) and in assessing the entity’s financial adaptability.

(Accounting Standards Board, 1999, p. 1) Companies can be owned by their shareholders and it is compulsory to use the term ‘Limited’ or ‘PLC’ in such cases after the name of the artificial person or the given name of the company for ease of recognition by the public. Furthermore, ‘PLC’ indicates that the company is a public limited company and is able to have its shares held by the investing public and traded in the market (although these days the vast majority of shares are quoted on the Stock Exchange and are owned by institutional investors such as pension companies or life assurance companies). In either public or private limited companies, the liability of the owners is limited to the amount that they have invested into the business.

Companies can have various forms of share capital, but normally it is the ordinary shareholders who have the power to vote at general meetings and control the company. Ordinary shareholders are entitled to receive accounts. As a rough rule, companies are required by law to produce a set of accounts each year. These

accounts provide the shareholders with a summary of what is going on in their company.

Several important findings from the analysis of the Contractors’ Financial Statements are depicted in Table 4.1 and Figure 4.10 of this thesis. The first important element is the growth of the profit percentages during the financial years from 2012 onwards. A boom in the construction industry could be one reason for this. The second reason may be that the remains of the accumulated risk factors are shown as savings during a troubled weather.

The second important element is the growth of assets. An average contractor increased fixed assets by 10 times during the period of 2011 to 2013 compared to what they had increased by in 2006.

Table 4.1 : Summarised data from the financial statements

Year ICTAD Indices % Contractor's Average Revenue % Contractor's Average Profit % Contractor's Average Assets % 2,006 100.00 100.00 100.00 100.00 2,007 111.00 106.79 125.28 114.11 2,008 126.30 86.24 115.95 87.97 2,009 126.71 121.13 165.52 77.75 2,010 129.49 109.46 226.45 97.33 2,011 138.12 158.65 303.32 178.16 2,012 157.17 238.91 432.88 276.69 2,013 164.44 420.81 1,192.00 407.24

From the summarised data extracted from the financial statements, it is apparent that contractors are applying various profit maximisation techniques. A company with an indexed profit of 100 in 2006 increased its average assets by four (4) times and by 25.6 times for its profits within 7 years in 2013. The researcher believes that

these unimaginable profits are being generated via the salvaged finances reserved for the welfare of construction operatives and the cascade effects of risk multiplication described in Section 5.4 and Figure 5.3.

Figure 4.10 : Outcomes from the financial statement analysis

From Figure 4.10 it can be seen that there is no significant changes to the ICTAD cost indices. Despite all the factors present, contractor’s average revenues, average assets and average profits have increased unpredictably due to an unknown factor. This highlights that reviewing the suitability level of usual financial formulas described in Section 4.6 of this thesis for the evaluation of Construction Organisations. Similarly, auditing mechanisms too are required to be fine tuned for the purpose of evaluating the construction organisations as well.

4.3.1 The profit and loss account

The profit and loss account shows the results of a company's trading over the last financial period, normally a year. If, for example, a company has made profits of £15 million in the first eight months and losses of £10 million in the last four months, the profit and loss account would just show the outcome, i.e., a profit of £5 million. There would be no obligation to give the shareholders an indication of the poor trading (which may be more indicative of future performance).

4.3.2 The balance sheet

The balance sheet gives a snapshot of a company's position on the last day of the financial year. Summarising everything that the company owns and owes on the balance sheet date is usually the best measure available to those outside the company of the company's financial health. However, interpretations of the balance sheet should be made with caution. The position at the last day of the year could be very different from that of a month before, or a month after, the year end, especially if the business is of a seasonal nature. The construction industry too has some seasonal features but such seasons in the construction industry are not annual and do not occur in regular intervals or cycles. From time to time, the industry moves towards either boom or bust or can appear as boiling depending on the political and socioeconomic environment.

Some companies have a trend of 'window dressing' the balance sheet by deliberately bringing forward some items and trailing others so that the balance sheet becomes untypical of the company's usual position. For example, it is required for companies to uplift the value of their assets by including a valuation of their brand names as an intangible asset. For this reason, both the law and the accountancy profession aim to standardise the treatment of assets and liabilities on the balance sheet, and income and expenditure in the profit and loss account.

4.3.3 The directors' report

Along with the annual accounts, companies are legally required to present a report from the directors. The aim of the director’s’ report is to add further information and explanation to the financial statements (Accounting Standards Board, 1999). However, in practice, the majority of directors' reports give only the bare minimum information that is required by the law and ASB recommendations.

4.3.4 The auditors' report

Annexed to each set of annual accounts, the company auditors are required to produce a report of their own. It is the auditor’s job to act on behalf of the shareholders to assess whether the financial statements present a ‘true and fair view’ of the company's profit and loss for the period and of the financial position of the company at that date. If the auditors qualify their report and state that the

accounts do not present a true and fair view, the reliability of the figures presented should be questioned by the users.

4.3.5 Format, users, timing, and content

The format of financial accounts is governed by law and is the same for all companies to the extent that all use the same wording and include items in the same order, whereas internal reports can take any format depending upon their purpose. External reports are used by many different groups of people other than the shareholders:

 Banks

A set of audited annual accounts will obviously be important to a company's bankers, particularly if the company has an overdraft or loan facility. Broadly speaking, the bank will be looking to ensure that the company is sufficiently profitable to repay loans and interest as they fall due, that the company's performance is in line with any forecasts submitted to the bank, and that there is sufficient security in the company's assets to cover any borrowings.  Creditors

As with banks, firms owed money by a company and those planning to give credit to a company will be looking to the annual accounts to ensure that debts will be repaid.

 Government

In the UK, both the Inland Revenue and HM Customs and Excise use company annual accounts. The Inland Revenue will require a reconciliation between the accounting profit and the taxable profit to ensure that the tax computation has been correctly prepared. HM Customs and Excise make occasional checks to ensure that the Value Added Tax returns are consistent with the annual accounts.

 Potential investors

Figures from listed companies' accounts are used to calculate certain key ratios that are quoted daily in newspapers like the Financial Times. These

ratios will be carefully monitored by existing and potential investors in deciding whether to sell or buy shares.

 Employees

Obviously, employees can utilise the annual accounts to assess their employer’s overall performance. Trade Union groups will consider aspects of the accounts when preparing claims for increased wages.

External reports are prepared annually. Usually the publication occurs several months after the year end making them out of date by the time the recipients receive them. Some companies will produce abridged accounts in interim reports on the first half of their accounting year.

Financial accounts are prepared to contain the minimum disclosure required by the law and accounting standards. They are prepared on a historic cost basis, meaning that assets are recorded at what they originally cost and not what they might be worth to the business.

4.3.6 Application of financial information

Ratio analysis is the main tool used to interpret the figures in a set of published accounts (Perera, 2007). It is essential to take great care before making any firm conclusions about the state of a company from this information alone (Cole, 1996). According to Cole, particular points that should be treated carefully when using published financial information are:

 Timing

The published accounts of a company are already well out of date by the time they reach the recipient and seasonal variations can mean large fluctuations in the balance sheet over a financial period

 Valuation

As demonstrated, no account is made for the current value of the assets of a company. This makes it virtually impossible to value a business just by

looking at its balance sheet. This makes a true assessment is very difficult for investors, creditors and the bankers.

 Accounting policies

Two companies trading at the same level could produce very different accounts due to their choice of accounting policies.

 Trends

The published accounts only have to show results for the current and previous accounting period, thus making it very difficult to consider any 'trend' information that would indicate whether the company is growing or declining.

After understanding why financial statements are prepared, the next step of the research was to consider how the widest meanings can be extracted from a set of financial statements and how management might use the information obtained from the prior mentioned financial documents.