Individuals, groups, or organizations that have an interest in a company or project. They can affect the business or be affected by its activities because they have a stake in its success or failure. Any person, group of people, or organization connected with a business in any way can be considered a stakeholder.
However, stakeholders should not be confused with shareholders. Shareholders are a specific type of stakeholder who own shares (stock) in a company. While all shareholders are stakeholders, not all stakeholders are shareholders.
Types of Stakeholders:
The users of financial reports can be divided into two categories:
- Internal users
- External users
Accounting information requirements of different stakeholders:
A. Internal Users:
An internal stakeholder has a first-hand association with a business, which creates their interest in it. They are directly impacted by the actions or decisions of a corporation. These include the following:
1. Management: It uses financial reports for analysing the performance of the company in relation to other similar companies as well as the entity's own performance over a period of time. This evaluation helps the management in planning and controlling for the future and taking appropriate measures to further improve the results of the company.
2. Employees: Employees are generally concerned about the financial health of the company and their future financial incentives, as well as their job security depending upon the company's profitability. So they make use of these reports for assessing the company's profitability.
3. Shareholders/Owners: Those who have invested in the company want their investment to be safe. As the shareholders are scattered over different places and do not participate in the day-to-day working of the company, so for analysing the viability and the profitability of their Investments, they rely upon such financial reports.
B. External Users: External stakeholder doesn't collaborate with a business in any way. However, a firm's actions and choices have an indirect impact on them. These include:
1. Creditors: Creditors include both short-term as well as long-term lenders. Those who supply the basic raw material, goods, etc. to the firm on a credit basis are short-term creditors while those who give loans to the company are long-term creditors. Both these parties need information about the financial health of the company to determine whether the amount owed to them will be paid when due or not. So they use the financial reports to draw any conclusion as to whether to extend or restrict the credit.
2. Investors: Potential investors, as well as current investors, need information about the profitability and financial position of a company before investing their resources. They want to assure themselves about the safety of their investment and thus rely upon these reports before reaching any conclusion.
3. Taxation Authorities: Tax authorities need financial information to assess the tax liability of an entity as well as to authenticate information provided by the company while filing returns.
4. Competitors: Companies competing against each other require financial statements of their competitors so that they can evaluate their performance and financial conditions. It helps them gain knowledge about the firm’s competitive strategies and make decisions accordingly.
5. Regulatory Authorities: In order to protect the interest of investors and to safeguard them from malpractices, regulatory agencies, like SEBI use these financial reports to ensure that the company is disclosing information as per the set rules and regulations.
6. Government: Governments across the globe make use of these financial statements to compile statistics relating to the profitability of the industry, computation of national income, compile national accounts, determination of industrial growth rates, fixation of tax rates and for making policies regarding the allocation of scarce resources.
7. Stock Exchanges: Stock exchanges use financial information in connection with the listing of securities and various other aspects of dealing in the stock exchange.
8. Foreign Investors: Globalisation has resulted in the free flow of investment from one country to another. Foreign direct investments are being encouraged. So, foreign market players are interested in knowing the profitability and financial standing of certain enterprises in other countries before making investment decisions. To get the same, they resort to financial reports.
