Essay on Financial Reporting Misstatements

Financial statements are subjected to numerous exposures of misstatement with the personal motive of providing a financial health position that does not reflect on the accurate financial position of the company (Ruhnke & Schmidt, 2014). These misstated financial statements will result in a false interpretation by all stakeholders leading to biased financial decisions that deprive the financial reports and declarations of integrity. Financial reporting misstatement is a common phenomenon that could result in losses for investors and creditors by providing them with a false financial status of the company, but this phenomenon can be prevented through implementation of systems that can detect and prevent financial misstatement.

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Most scenarios of financial misstatement involve overstatement of assets and revenue while understating the expenses and liabilities for the purpose of making the company look profitable and healthy. (Ruhnke & Schmidt, 2014) Lack of prudence is the first signal of financial misstatement (Ruhnke & Schmidt, 2014). Companies are tempted to record revenue earned in the next financial year in the current year while intentionally postponing recognition of expenses to the next year. Capitalization of operational expenses has the effect of overstating assets, understating expenses and amplifying profit. Companies may fraudulently omit liabilities by failing to record prepayments and creditors (Ruhnke & Schmidt, 2014). These misstatements can be detected early and eventually prevented.

Through the implementation of internal controls and reporting system, business organizations can identify and avoid financial misstatement. Segregation of duties is an internal control mechanism that helps to detect and prevent financial misstatement (Ruhnke & Schmidt, 2014). Conducting independent internal and external audits using audit firms that are incorruptible and maintain a high level of professionalism will prevent financial misstatement. Investing an accounting report system that provides integrity and accuracy and is also capable of raising the alarm in case of financial misstatement or fraud will be beneficial (Ruhnke & Schmidt, 2014).

Types of Bonds

British Petroleum Capital Markets P.L.C provides two types of bonds which are corporate bonds and convertible bonds. Corporate bonds are ordinary bonds that pay interest to the bondholder, and finally, the premium is paid upon maturity (Stanton, 2011). B.P Capital Market P.L.C provides short term and intermediate corporate bonds (London Stock Exchange, 2017). Convertible bonds are special bonds that allow the bondholder to transform the bonds into equity share at a particular time (Stanton, 2011). It is highly advisable for any investor interested in investing in B.P Capital Markets P.L.Cs bonds to consider the convertible loan because they pay an almost equivalent interest rate as the corporate loan. The investor is also at an advantage of being able to choose the payout of the premium in equity share if the principal value of the shares is higher than the premium or choose to be paid the premium in cash if the principal value is lower than premium value..

References

Ruhnke, K. & Schmidt, M. (2014). Misstatements in financial statements: the relationship between inherent and control risk factors and audit adjustments. Auditing: A Journal Of Practice & Theory, 33( 4), 247-269

Stanton, E. (2011). 7 Types of Bonds and their advantages Explained. Journal Of Business And Investment, 12.

London Stock Exchange. (2017). Issue of Debt - RNS - London Stock Exchange. Londonstockexchange.com. Retrieved 22 May 2017, from http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/BP./12822813.html