The information contained in published financial statements is of specific importance to external users, as shareholders and investors. Without any information they would not be capable to take the right decisions regarding their investments. As in some other country, Parliament in India, given the Companies Act, the kind and minimum level of information that companies must disclose in financial statements. This is the responsibility of the accounting profession to make sure that the needed information is appropriately presented. This is evident that there must not be too much discretion to companies and their accountants to current financial information the manner they like. Conversely, the information comprised in financial statements must conform to carefully identified standards. Public confidence in accounting information comprised in financial statements will produce if they are satisfied like to the logic, fairness and consistency of the figures demonstrated therein. For illustration, a company could incur a loss and still pay dividends through manipulating the loss in a profit. In the long run, it course may have a disastrous consequence upon the company and its investors also.
You would be better capable to appreciate the function of accounting standards through relating them to the basic purpose of financial statements that is the communication of information affecting the allocation of resources. Perfectly, that information must make it possible for investors to estimate the investment opportunities offered through various firms and to assign scarce resource to the most efficient ones. Inside theory, such process should result in the capital distribution of resources within the economy, and should maximize the potential advantage to society.
In this context, unless there are reasonably suitable standards, neither the reason of the individual investor nor the nation like a whole such can be served. The reason is likely to be acts if the accounting methods used through various firms for presenting information to investors permits correct comparisons to be made. For instance, they should not permit a company to report profits that result simply from a verification in accounting methods quite than from increase in efficiency. If companies were free to decide their accounting methods in this manner, the consequences might be which deliberate distortions are introduced, leading finally to misapplication of resources in the economy. The relatively less able companies will be efficient to report fictitious profits, and like a consequence scarce capital of society will be diverted away from the more capable companies that have adopted more strict and consistent accounting methods.