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Quality and Reliability in Financial Reporting
Publicly-traded companies have an obligation to provide accurate and reliable financial statements to current and potential investors. Investors and others users of financial statements depend on this information to make investment and business decisions (McEwen, 2009). The Sarbanes-Oxley Act (SOX) and the Securities and Exchange Commission (SEC) acknowledge the importance of truthful, material, and dependable financial reporting. Based on SOX provisions and SEC reporting requirements, this paper discusses the significance of ensuring quality and reliability in financial reporting. The paper specifically focuses on the role of the board of directors and the chief executive officers (CEO) in ensuring the reliability of financial statements, strategies a CEO can use to ensure quality and reliable financial reporting, and how corporate management can increase investor confidence in financial reporting. Attention is also paid to possible consequences to a publicly traded company due to unreliable financial reporting as well as the effectiveness of the Sarbanes-Oxley Act in ensuring quality and financial reporting.
The Sarbanes-Oxley Act was introduced in 2002 in an attempt to enhance corporate accountability. The legislation was enacted in the wake of the infamous Enron scandal, a scandal that revealed glaring shortcomings in corporate accounting (Holt, 2008). SOX offers comprehensive guidelines that publicly traded companies must comply with in financial reporting. Publicly quoted firms have a duty to protect the interests of shareholders and investors by reporting accurate and reliable financial information. Further financial reporting requirements are provided by SEC, which obligates publicly listed firms to periodically file financial reports with the commission. The commission requires public firms to implement strong internal controls to ensure quality and reliable accounting.
As per SOX and SEC guidelines, the board and the CEO of a publicly traded company have an instrumental role to play in ensuring quality and reliable financial reporting. More specifically, the board...
Investigations conducted following the Enron scandal revealed that financial malpractices occurred in large part due to governance and ethical failures on the part of leadership (Vallabhaneni, 2008). Accordingly, top decision makers in a firm have an obligation to create and maintain an ethical environment that ensures quality and reliable financial reporting. This specifically involves designing and implementing internal accounting controls. These controls relate to aspects such as data access and protection, auditing, risk management, accounting policies, provision of loans to senior officers, ethical codes of conduct, recruitment of executives, and regulation of executives (Holt, 2008). Strong corporate governance guidelines establish transparency and accountability, consequently ensuring ethical responsibility in the preparation and reporting of financial reports.
The CEO is particularly responsible for enforcing a climate of ethics within an organisation. As the person in charge of everyday operations of an organisation, the CEO must play a frontline role in creating an ethical environment: the CEO must maintain strong internal control (Vallabhaneni, 2008). Based on risks identified by the board in the overall risk plan, the CEO should undertake and communicate to the relevant internal stakeholders a string of control activities (guidelines, instructions, and procedures) aimed at ensuring accurate financial reporting. These activities ensure inconsistencies and inaccuracies are detected and rectified early enough. The reporting structure starts at the operational level (Bragg, 2009). A typical organisation has various functions or divisions handling different processes that ultimately contribute to the achievement of the organisation’s goals and objectives. Each function or division is headed by a manager or executive that reports to the CEO. The CEO should ensure each aspect of operations is monitored regularly to ensure all transactions are recorded in a complete and accurate manner. When transactions are monitored…
References
Bragg, S. (2009). Accounting control best practices. Hoboken: John Wiley & Sons.
Holt, M. (2008). The Sarbanes-Oxley Act: Costs, benefits and business impacts. New York: Elsevier.
McEwen, R. (2009). Transparency in financial reporting: A concise comparison of IFRS and US GAAP. Great Britain: Harriman House Limited.
Monks, R., & Minow, N. (2011). Corporate governance. 5th ed. Hoboken: John Wiley & Sons.
Vallabhaneni, S. (2008). Corporate management, governance, and ethics best practices. Hoboken: John Wiley & Sons.
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