Accounting standards are necessary to promote high quality financial reporting. The fundamental role of accounting is to communicate economic information about businesses and other organization to various stakeholders including government, investors, shareholders, suppliers, lenders, customers and the general public. These stakeholders use such information to take decisions and to assess the stewardship of people appointed to manage such organizations. If this information is not of a high quality standard, then the stakeholders would be unable to take effective decisions that will benefit them. For example, if a financial report is manipulated to show higher profits, investors would hold on to their shares with the belief that the company is doing well.
Accounting standards came to be developed from the mid sixties onwards to promote the integrity of the accounting profession by way of ensuring uniformity in the way accountants report transactions in their books and also in their preparation of the final accounts of businesses. This is by and large aimed at boosting the confidence of stakeholders, particularly shareholders and potential investors in the accounting profession.
Good and useful information should have the essential characteristics of understandability, comparability, relevance and reliability in order to play its role effectively.
Accounting standards serve to promote the understandability , comparability, relevance and reliability of financial reports.