Every company has a legal obligation to publish its financial statements and related information.
How much, and how often, depends on how large the organisation is, whether it is listed on stock markets, which regulatory regimes, such as financial services affect it, whether it has obligations to major customers or financial funders to report (even if only to them) to specified standards and in which jurisdictions it operates.
While you won’t need to be a financial expert, you will, as an in-house lawyer, have a stake in ensuring your organisation meets this legal commitment.
How businesses must prepare their accounts
The statute that governs how organisations prepare their financial statements is known as Generally Accepted Accounting Principles (GAAP).
In most countries, GAAP comprises the accounting standards laid down by the national accounting regulator and relevant local company law.
As an in-house lawyer, you won’t need to have the same depth of knowledge about these matters as the finance and accounts functions. However, you may find it helpful to understand the overall financial reporting framework that applies to your organisation and know when and how it’s obliged to submit and publish its financial statements.
This is can be particularly important when looking at contractual delivery, acceptance, payment, revenue recognition and claw-back terms, dispute and litigation costs, claims, prospects of success, intra group and cross border contracting arrangements, and other areas where legal and accounting standards may touch the same areas of business activity but not necessarily have the same needs out of them.
Accounting standards
Historically, every country had its own version of GAAP, with slight nuances on how to treat various accounting matters. However, the last two decades have seen a major international effort to create common standards. As a consequence, there are now just two versions of GAAP globally:
- US GAAP, which is overseen by the US Financial Accounting Standards Board (FASB) under the authority of the US Congress; and
- International Financial Reporting Standards (IFRS), overseen by the International Accounting Standards Board (IASB), based in London. IFRS has been adopted by more than 70 countries, including those in the European Union.
US GAAP and IFRS overlap to the point where, for most accounting issues, they’re similar in principle. Even so, the formal project to fully align the two approaches has largely stalled, though both standard-setting bodies continue to work collaboratively to reduce differences where possible.
Most multinational companies, and all those listed on both US and non-US stock exchanges, prepare and file accounts under both standards.
US financial reporting
In the US, the Securities & Exchange Commission (SEC) require publicly listed companies to prepare an annual report and quarterly financial statements. In-house counsel must be vigilant in monitoring regulatory changes and their potential impact on compliance and reporting rhythms.
Even without a new rule change, companies may decide to update investors more or less frequently. The legal team's role in guiding disclosure strategy and managing risk remains constant.
For privately held companies, financial reporting is typically less demanding. However, compliance has become more complex. In-house counsel should be aware that new beneficial ownership information laws may now apply. Creditor agreements are also a key driver for reporting frequency, requiring counsel to ensure contractual compliance.
UK financial reporting
UK financial reporting is governed by a framework set by the Financial Reporting Council (FRC), which includes UK GAAP (comprising various FRS standards) and UK-adopted IFRS. In-house counsel must be aware that the FRC regularly updates these standards.
Many companies also adhere to industry-specific Statements of Recommended Practice (SORPs), which are developed by other bodies but approved by the FRC.
All UK companies must publish annual accounts. Publicly listed companies face more extensive disclosure rules. While not mandatory, many large companies voluntarily provide periodic updates to keep investors informed. The legal team is central to managing continuous compliance, ensuring accurate disclosure, and mitigating risk as rules evolve.
Types of accounts
Different users of a company’s accounts require different types of financial information. For this reason, most companies prepare at least three sets of accounts:
- Financial accounts
The standardised document prepared for external users such as investors, creditors and customers; - Tax accounts
Books complied in accordance with tax legislation, which can be significantly different to the GAAP framework. Tax accounts are used to compute the amount of tax a company has to pay in relevant jurisdictions; and - Management accounts
Bespoke figures calculated only to support internal decision-making. Most organisations prepare management accounts monthly using internally defined specific to the organisation’s strategy. Management accounts are not governed by any standards or regulations, however most organisations prepare them using their appropriate GAAP framework to avoid misalignment between internal and external perspectives.
It is really important that in-house lawyers have a good working understanding of the different types of accounting practices, standards and reports that affect their businesses. Understanding these pervasive effects is critical, as a failure to do so will almost certainly result in us misunderstanding and failing to support the organisations served.
Conclusion
Following a concerted international effort, there are now essentially just two dominant global accounting frameworks, and while work continues to reduce differences between them, the effort to fully unify these into a single set of GAAP has largely stalled.
Though identical in many ways, there are subtle differences between US GAAP and IFRS. How the frameworks apply to your organisation will depend on which jurisdictions it operates in, whether it’s publicly listed or privately held and whether it has any major creditors.
It is very hard to be a good senior in-house lawyer and to service your business properly without having a good understanding of how the different types of accounting practices, standards and reports apply in your business and shape the way that it is run.