Financial reporting in adapting financial systems
Igor Yaremko, Olena Tyvonchuk Financial reporting in adapting financial systems
U N I V E R S I T A T I S
VOL. XLVII, 4
Financial reporting in adapting fin a n cia l systems
Warunki transformacji współczesnego systemu finansowego
In modern global financial area, monetary parameters are deeply intertwined
and intersected with institutional entities. Liberalization and further globalization of
financial systems, facilitating capital mobility leads to the emergence of a number
of factors that increase financial and economic risks.
Current market of financial services develops rapidly, constantly complicating
its infrastructure. Classic financial instruments are supplemented with the new ones,
which systematically provoke the development of debt instruments. Further processes
of capital virtualization cause hybridization of financial instruments, the combination
of debt assets with investment, which further generates a debt economy area.
The global financial and economic crisis has revealed a number of problematic
aspects, has become an indicator for the necessity of changes in the principles and
methods of financial system management. Formalized information base, including
indices of financial (corporate) reporting should be considered as an important com
ponent of these principles and methods. Modern crisis processes influence the change
in the architecture of the global financial system, but at present it is impossible to
characterize the objectivity of these declared changes. This leaves a wide scope for
analysis and research of the world financial market development. In such circumstances
scholars and practitioners lead an active scientific dialogue on the determination of
modern vectors of financial services market development [
1, 2, 6, 7, 15, 20
1. Financial system: preconditions for modernization and the imperatives of development
The postulates of classical economics state that the development capabilities of
national economies correlate with the degree of development of the financial system.
Undoubtedly, the high level of the financial system multiplicatively facilitate accel
eration of economic growth rate, accumulation of capital assets, increase of social
production. However, acute problems of disproportionate development of the financial
and real sectors of the economy arise now. The severity of these problems has received
a qualitatively new level of theoretical discussions on the above canonical foundations
of economic theory, has given rise to active scientific-practical dialogue concerning
the determination of feasible vectors of development of financial services market
and the theory of financial intermediation. Based on the above “the consideration of
entities and processes of financial and economic character as systems is becoming
the rule of modern scientific research” [Lukashenko S.V., 2011, p.8].
The ambiguity of the proposed ways of the global financial system stabilization
requires thorough research, and, therefore, as the basis for these studies, by reference
to the real financial market conditions, can be considered as mainly theoretical and
empirical foundations. In the opinion of many scientists “today the studies of changes
that have occurred in the global financial architecture in the post-crisis recovery are
currently central” [Glushchenko O.V., 2010, p. 136], in particular, this is the analysis
of changes in the financial markets and parameters of a new financial architecture
modelling. The basis of the modern financial architecture is integration, and therefore,
first of all, it is important to establish how a violation or a gap of integration ties will
impact the global financial system, within the framework of what institutional building
(institutional architectonics) the formation of a new financial system will be held .
The term “globalization of finance” includes an idea of interrelated, interdependent
integrated market with no borders for unregulated capital. Financial globalization
precedes financial integration in content, scope of coverage and business segment,
but in shape and depth of the financial mechanisms the processes swap over. It can
be considered as paradox of the world economy globalization that globalization of
finance exists and has proved itself post factum, without being integrated in the
direction of convergence. That is why scientists refer “the methods of controls on
international capital flow” [Dmitrenko D.M., 2008, p. 116] to the urgent measures
for modernization of financial system.
By the level of globalization the financial sector, ahead of the other sectors of
the real economy, not only insufficiently accelerates economic development, but
also increases the risk of international financial transactions, extends the sphere of
influence of local financial cataclysm. Stock crashes, public finances crisis cover
entire regions and can grow in the global financial turmoil. As important causes
of global financial instability increase scholars consider “institutional failure of the
global financial architecture” [Sofischenko I., 2011, p. 140] on the one hand, and on
the other - “increasing self-sufficiency and independence of financial sector of the
regulatory mechanisms of macro-economic policies of the world impact” [Stolyarchuk
Y.M., 2009, p. 43]. Independently defining the parameters of the global financial
aggregates, the formed financial system is able to ensure super-profits, causing fi
nancial imbalances in global economy, which neither national no regional or global
institutional system can withstand.
We consider modern approaches to financial imbalances studies due to fragmen
tation and isolation of the individual factor causes, etc., that are quite common in of
scientific and analytical literature, including upheld views of well-known scientists
and practitioners, as those that essentially narrow (veil) the existing problems. Obvi
ously, the most objective modern financial imbalances should be seen through deep
transformations in the global economy, primarily related to the rapid growth of the gap
between the material content of the global gross product and its value form through
the separation of capitalization processes of the company from the real basis of social
and economic development. Today, especially acute is the question of theoretical un
derstanding, methodological formalization and justification methods for measuring
the totality of information and intellectual capital components of market economy,
which fundamentally influence the stock price and investment attractiveness.
2. Financial reporting as a tool of financial system
The systems of accounting and financial reporting are the only models that give
estimation of economic unit capital in a formalized way. However, systems of ac
counting and reporting in the context of the modern standardization do not reflect the
current totality of intangible economic resource, which economic entity objectively
possesses. The inability to reflect and represent for external users the significant
amount of intangible assets of the enterprise it is accented in papers [
9, 10,13, 16,22
The existing problems promote the use of weakly-formalized information models
(or example, Value Reporting, Enterprise Value Map, Value Explorer, etc.) for the
purpose of the financial system. It can be argued that none of the weakly-formalized
models is able in practice to objectively identify the capital value characteristics of
an economic unit, especially its such important components as the information and
At the present time the differences in evaluating the potential of financial and
economic stability and development of economic systems of different hierarchical
levels have become, to some extent, a regularity. The economic literature provides
a number of examples of the gap between the company market and book value. Rat
ing agencies of various types, financial analysts, market institutions, etc establish
all kinds of estimates regarding the characteristics of the capital of one or another
market economy entity. Many experts hold the view that the important component
of analytical assessment fallacy is the low level of basic and aggregate information
objectivity, and insufficiency of its formalization.
For the analysis of two main measures of financial system performance (ef
ficiency and stability) a number of “asymmetric information problems” [Mishenin
E.V., 2010, p. 11] is pointed out by the scientists. Assessing the causes and conse
quences of global economic crisis of 2008, Nobel laureate Paul Krugman noted in
the September issue of “The New York Times” for 2009 that “in the «Golden years»
economists believed that the markets are basically stable in essence, price, shares and
other assets were always assessed properly. There was nothing in common models
that foreshadowed the possibility of such a collapse, which occurred” [Kurylyak V.,
2010, p. 162]. Taking into account the above factors Ukrainian analysts justify the
need for “ongoing review of the requirements for the capital minimum of financial
institutions on the basis of inclusion in the calculation of all significant risks in ac
cordance with the parameters of the financial system development” [Belinskaya Y.V.
and others, 2012].
One of the main factors of the relevance loss of the information in the financial
markets is the discrepancy between financial (corporate) reporting and conditions of
functioning of post-industrial type economic systems, which compounds the problem
of information and analytical gaps of various financial institutions.
In many scientific publications and analytical surveys a number of arguments
about inadequate reflection of financial and property position of post-industrial
type economic entity in public reporting is adduced, a distorted representation of
real productive assets and capital. The inadequacy of the accounting and reporting
information causes impossibility to implement on its basis the audit confirmation of
financial-economic position of market economy entity, and, as a consequence, the loss
of values of the indicators for the shareholders, investors, managers, in the processes
of governance and regulation of the economy as a whole.
Objective disclosure of information on the effectiveness of modern economic sys
tems functioning, and the transparency of financial reporting, which, in turn, affects
the transparency of corporate governance, play a key role in ensuring the efficiency
of the capital markets, lowering of the level of economic and financial risks in the
economic environment in general. At the same time, we can uphold the position that
on the basis of the commonly accepted modern liberal principles on the global capital
and investments markets, even perfect corporate reporting does not provide elimina
tion (minimization) of financial risks on free capital markets. Although, as it is noted
by the leading scientists, “more advanced reporting will allow the market to react
more quickly to events, alleviating their consequences” [DiPiazza S., 2003, p. 23].
A solid conclusion is made by Richard Stutely, who has fundamental theoreti
cal knowledge in the field of banking, finance and accounting, priceless practical
experience in NatWest, one of the largest banks in the world, an investment analyst
and economist at leading investment banks (Shearson Lehman, American Express,
Chase Manhattan), professionally Qualified member of the London Stock exchange.
In particular, this respected scholar and high practical level financial analyst notes
that currently “banking and finance are away from the mundane reality of the sur
rounding world ... have led to the formation of a thin line that separates estimation
and prediction, which is increasingly becoming to resemble a festive divination”
[Stutely R., 2006, p. 22, 176].
Robert C. Higgins (University of Washington), analyzing the financial instruments
and markets in [Higgins R., 2007, p. 172, 187], argues that in modern financial and
economic conditions, despite the fact that non-financial companies for raising funds
first of all rely on the capital markets, reliable information about the possibilities of
volumes and rates of investment growth forjoint-stock capital does not exist.
The priority role of the financial (corporate) reporting as an important formal
means of communication becomes apparent in the fact that its main goal is objective
representation of economic entity activities on the markets of capital and investment.
In modern conditions it is possible to attract the attention of potential investors or
creditors only by their objectively informing them about the available potential (assets,
equity) and efficiency of its functioning (reporting indicators of activities outcomes).
That is why researchers and practitioners of various domains of the economy hold
the view of the necessity for adequate reporting format developing, as “the global
financial markets need a more reliable structure of the corporate reporting” [Wendy
McKenzie, 2006, p. 11].
The global financial system is on the verge of profound changes and fundamental
shifts. It can be argued with a sufficient level of argumentation that in the near future
the launch of new trends and the formation of a modernized model of the global
financial system will take place. The basic principles of financial globalization mod
ernization should be the development and adoption of international short-term capital
movement rules that ensure minimization of losses from targeted speculation. As an
important component of these modernizations the development of regulatory instru
ments that will prevent uncontrolled growth and spread of fictitious capital should
also be considered. The significantly higher level of responsibility should also be
applicable in those market institutions, which, using weakly-formalized
informationanalytical models, estimate the total capital expression of modern economic systems.
Financial reporting with audited and formalized indicators on the markets of
capital and investment nevertheless should be currently considered as a constrain
ing tool of further capital virtualization and hybridization of financial instruments.
Despite this, further format of financial reporting development proper to the charac
teristics of post-industrial type companies is needed. The content and purpose of such
reporting should be viewed through more extensional representation of information
and intellectual resources and the objective value of the capital, efficiency of the
economic entity according to the criterion of total capital expansion and the level of
its reservies and insurance.
F inancial reporting in adapting financial systems
In the article the modern problems of the world financial system functioning are considered.
The basic causes of global financial instability are defined, in particular the separation of capitaliza
tion processes of the company from the real basis of social and economic development; discrepancy
between financial (corporate) reporting and conditions of functioning of economic systems. Emphasis
is placed on the necessity o f the development of regulatory instruments that will prevent uncontrolled
growth and spread of fictitious capital and creating updated format o f financial reporting proper to the
characteristics of post-industrial type companies.
W arunki transform acji w spółczesnego system u finansow ego
A rtykuł nawiązuje do ujawnionych przez kryzys finansowy problemów wymuszających istotne
zmiany zasad i metod sprawozdawczości finansowej. W najbliższej przyszłości wymagana jest mo
dernizacja globalnego systemu finansowego. Podstawą tej modernizacji powinno być opracowanie
i przyjęcie międzynarodowych przepisów dotyczących krótkookresowych przepływów kapitału. Ważnym
elementem powyższej m odernizacjijest rozwój instrumentów regulacyjnych, które mogą uniemożliwić
niekontrolowany wzrost i rozprzestrzenianie fikcyjnego kapitału. Sprawozdawczość finansowa na
rynkach kapitałowych, oparta na poddanych kontroli i sformalizowanych wskaźnikach, powinna być
traktowana jako narzędzie ograniczające dalszą wirtualizację kapitału i hybrydyzację instrumentów
finansowych. Autor podkreśla potrzebę doskonalenia finansowego raportowania właściwego dla przed
siębiorstw ery postindustrialnej.
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