Describe the users of accounting information. Why do they need such information? Explain.

Accounting information is designed to meet the common information needs of decision makers. It helps them decide, for example, whether to buy, hold or sell a company’s shares, whether to lend money, or how much tax to charge. It also shows the company’s ability to pay its employees and its distributable profit. Management, investors and lenders are the most common users. Users of accounting information are broadly classified into two groups: internal users and external users.

Internal users are the various levels of management. They need accounting information to review short-term and long-term solvency, ensure effective use of resources, judge profitability in terms of turnover and investment, and decide future courses of action. Profit-linked bonuses and defending against takeover attempts also make them keen users of the numbers.

The internal users are:

1. Board of Directors (BOD): the BOD is the top level of management and is elected at the Annual General Meeting (AGM). It formulates both short-run and long-run plans and policies, and none of this is possible without accounting information on profit, assets and cash.
2. Managers: managers implement the policies and strategies set by the BOD. They need reliable information for planning, organizing, directing and controlling, so that economic and non-economic resources are used effectively. A key question for them is whether the firm’s performance and growth are satisfactory compared with its competitors.
3. Accountants and others: the accountant records and processes all business activities and needs the information to do the job. Business consultants and legal advisors also require this information for their work.

External users are parties outside the organization who have a direct or indirect interest in it. They are:

1. Investors and shareholders: as the chief providers of capital and the real owners, shareholders want to know the return on their investment and the risk attached to it. They look for good profitability, a sound financial position and high cash inflow. On this basis they decide whether to buy, hold or sell their shares and whether the company can pay regular dividends. Potential investors use the same information to judge the company’s prospects. Examples include individual shareholders, mutual funds and insurance companies.
2. Lenders: banks, financial institutions and debenture holders supply debt capital. They need information on the borrower’s financial stability to judge whether the loan and interest can be repaid on time, what security to demand and what interest rate to charge. They also use it to monitor the borrower’s condition throughout the loan period.
3. Suppliers and trade creditors: suppliers of raw materials, subcontractors and utility companies rely on the company’s performance to decide whether to supply on credit, for how long, how large the risk of bad debts is, and whether to create a provision for it.
4. Rating agencies and security analysts: equity analysts, bond analysts, stock brokers and credit rating agencies analyze financial statements to advise investors through business newspapers, TV shows, seminars and interviews. They have the same concerns as investors and lenders. Companies maintain good rapport with them to gain visibility in the market.
5. Employees and trade unions: employees want to know the stability and profitability of the organization, because their salary, bonus, pension and job security depend on its financial performance. Potential employees check the company’s future prospects, and trade unions use financial reports to negotiate wages, bonuses and other benefits.
6. Customers: customers are interested in whether the company will continue in business, especially when they depend on it in the long term. For example, buyers of cars, white goods and electronic gadgets depend on the manufacturer for warranty service and spare parts.
7. Government and regulatory agencies: the government needs accounting information to regulate company activities. It uses the information to decide on subsidies or protection for lagging industries, to check whether consumers are being overcharged and to examine whether proper disclosure has been made under the law. In Nepal, regulators such as Nepal Rastra Bank and SEBON, and the stock exchange (NEPSE), use financial reports to ensure an efficient capital market and to act against firms that fail to file returns or to show a true and fair position.
8. Tax authorities: tax authorities, such as Nepal’s Inland Revenue Department, need accounting information to assess income tax and VAT liability and to check whether the company is evading tax.
9. The public: every company has a social responsibility and depends on the local economy. It may also receive benefits from government, such as cheap land, capital subsidies or tax holidays. The public, including the local community, consumer groups and environmental activists, uses published financial statements to see whether the company exploits local suppliers, makes safe products, controls pollution and competes fairly.

The reasons these users need accounting information can be summarized as follows:

1. For investment and credit decisions: investors, lenders and suppliers need it to judge the return, risk and repayment capacity before committing their funds or goods.
2. For planning, control and evaluation: management needs it to plan, use resources efficiently, control costs and evaluate performance.
3. For protecting interests and regulation: employees, customers, the government, tax authorities and the public need it to protect their own interests, ensure compliance with laws, assess tax and judge the company’s contribution to society.