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Financial markets operations are based on the information. Information provided determines the price of the securities, which influences the decision of the interested parties, especially the investors. The accounting standards provide key information required to determine the prices of the securities. The financial markets reflect the firm's correct position if credible information is provided. On the other hand, if the wrong information is provided, the financial markets reflect inaccurate information of the firm. The information provided is relevant since it helps the users to make financial decisions. If imperfect information is provided, it can mislead the users, especially investors, by making erroneous investment decisions.
Standardized account principles help to eliminate the problem of earnings management. Earning management is a common practice where firms gradually increase their earnings in different accounting periods to indicate that the firm is operating well (Kliestik et al., 2021). The earning management can mislead the investors since it indicates that the firm is operating efficiently, but that is not the case. The management uses earnings management practices to indicate an increase in profit, yet the profit might be decreasing. The role of standardized accounting cannot be neglected regarding earnings management. The accounting standards principles help to monitor earning management which reduces adverse selection and moral hazard problems in financial markets, helping them operate efficiently.
In financial markets, investors are concerned with selecting a good investment. There must exist a way to indicate a good or bad investment in the financial market. The standardized accounting principle provides a platform for investors to value investment and choose a good investment. If the accounting standards do not exist, investors cannot differentiate good investors from bad investments. Standardized accounting principles helps different firms to prepare financial statement uniformly, which helps the investor compare their operations and make investments decisions. Applying standardized accounting principles by different firms helps investors make the proper investment decision in financial markets. The selection problem in financial markets is dealt with by using standardized principles which make the markets operate efficiently.
There exist an agency problem in the firm. The principal (shareholders) and agents (managers) always have different interests. The management might need to influence the outcome of the firm to cater for its interest. For instance, the management may decrease expenses, which indicates that the firm is operating efficiently. The management acts might influence the firm's performance provided to the financial markets, which affects the decision-making process, especially when selecting investments by investors. The use of standardized accounting principles helps reduce the agency problem experienced in most firms, which decrease moral hazard problems in the financial markets.
Standardized accounting principles are relevant for efficient operations of the financial markets. It is hard for the financial markets to operate efficiently if standardized accounting principles are neglected. The standardized accounting principles helps to monitor earning management, agency problem and enable investors to select good investment from good and bad investment in financial markets. The role of standardized accounting principles is summarized as reducing the adverse selection of the investment and moral hazards problem in the financial markets, making them operate efficiently. For the financial markets to operate efficiently, standardized accounting principles must be emphasized. The financial markets movement accuracy is based on accounting information which needs to be standardized.
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