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What is a Reporting Entity?
Mary McMahon
Mary McMahon
A reporting entity is a business with an obligation to prepare external financial reports for the benefit of parties with an interest in its operations, such as suppliers and investors. The term “accounting entity” can be used in a similar way. Among accountants, including those involved in setting standards and practices, there is some debate about the precise definition of a reporting entity. The latest opinions of the industry are available from professional accounting organizations.
Reporting entities have what are known as “dependent users,” or individuals, companies, and organizations who need access to financial information but may not be able to obtain it directly. Investors are an excellent example; they need information about how well a company is performing so they can make investment decision, but they don't have access to the company's internal accounting records. These entities are also distinct from their owners and employees. A chain of grocery stores, for example, has finances separate from those of the owners and workers.
Sometimes a reporting entity is very easy to identify. A publicly traded company meets the basic standards, for example. Investors need access to financial information, suppliers need to know how well the company is doing to decide whether to offer credit, and other companies need recent information to negotiate deals with the company. With a privately held company, some of these criteria may still be met; for example, suppliers who offer letters of credit need to know that the company is not a big risk.
Smaller companies are more nebulous. It may be difficult for a small business owner to separate business and personal assets, especially since some may use personal assets like a residence to secure loans and other sources of funding. This blends the business and the owner, and would make it appear to be something other than a reporting entity. There may still be parties with an interest in its economic health and performance, however.
When a business is classified as a reporting entity, it needs to prepare external and public reports on its financial health. These must meet standards and be consistent in nature so individuals reviewing them know the information is useful for multi-year comparisons. The reports need to be available on request to parties with an interest, and the company may also need to send them out to specific groups, like shareholders, who are entitled to an annual report on the company for their use in making investment decisions.
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
Learn more...
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
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![A reporting entity may produce financial reports for their suppliers and investors.]()
By: NataliiaA reporting entity may produce financial reports for their suppliers and investors. -
![Shareholders are entitled to an annual report on the company for their use in making investment decisions.]()
By: thinglassShareholders are entitled to an annual report on the company for their use in making investment decisions.
Discussion Comments
@everetra - Well, I did work for a publicly traded company and they certainly were classified as a financial reporting entity. Unfortunately some of the reporting turned out to be a little shady.
A scandal broke where it turned out the company had been cooking the books, as they say, to hide their losses and make it appear as if we were making money when we were hemorrhaging money left and right.
Investors dumped the stock, the company filed for bankruptcy and the CEO wound up in jail. Well, I found out how we were doing, for better or worse. I still say it’s better to work for a public company, all of this notwithstanding.
I work for a small business, which based on the definition in this article I would have to classify as a non reporting entity. I wish it were a reporting entity, however. I would like a public disclosure of how the company is doing.
As an employee I am privy to some of the internals, but I don’t necessarily know how to interpret them, even if we are making a profit. You can be making a profit, but how do you square with your competitors, for example?
If we were a reporting entity, the numbers could be made public, and then both investors and market analysts could weigh in, letting us know how well we were doing (at least in their opinion).
We did kick around the idea of having a public IPO at one point but I don’t think they’re going to follow through on that.
I'm not sure if this is an example of a reporting entity, but I worked for an accounting firm that had as a customer a small corporation. Well, the corporation went belly-up during the year and naturally stopped paying us.
The investors needed their tax forms (they may have been a kind of 1099, but I'm not sure) and since they knew we were the accountants, they would call us to ask for them.
The problem is that we couldn't just prepare the forms for free, and there was no money to pay us. The corporation was pretty well dead; it was a can't-get-blood-from-a-stone situation. I don't know what the investors wound up doing, but I'm sure that extra paperwork was involved!
When I worked in retail my store was very preoccupied with their reporting requirements. The head company needed to know about losses, and sales, and items per sale, and all sorts of things. We were required to get people to buy more than one item at a time whenever possibly.
I didn't like this, partly because I felt like a bully when I tried to get customers to look at things they didn't want, and also because we were not paid directly on commission; there was just this mysterious warning that you'd better "try" to have multiple item sales and things like that. If I work again in a job where reporting entities are important, I just hope the expectations are clearer, both of me and of what happens if the company's not doing as well as expected.
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