HOW TO FIX FINANCIAL REPORTING: A CRITIQUE

How to Fix Financial Reporting: A Critique



How to Fix Financial Reporting: A Critique

Introduction

Financial reporting can be defined as the process of collecting, processing, and disclosing an organization's economic activity. Data collected in the financial reporting process are typically measured on a transactional basis (e.g., buying inventory or selling merchandise) in one functional currency (e.g., such as dollars, yen, or pounds sterling) using a set of standardized accounting rules known as generally accepted accounting principles (GAAP).

Three primary financial statements serve as the basic outputs of a financial reporting system. These include: the balance sheet, which measures the assets, liabilities, and equity of an organization at a point in time; the income statement, measuring revenues and expenses of an organization over a time period lasting no longer than one year; and the statement of cash flows, measuring the sources and uses of funds over the same time period as the income statement. Other outputs of the financial reporting process are a plethora of special reports used for specific decision-making activities, such as capital expenditures, cash projections, and what-if analysis. (Bogoslaw, 2008) mentions the three primary objectives of financial reporting are:

1. Control - helping to ensure that assets of an organization are secure and under management supervision.

2. Accuracy - creating a fiscal picture or snapshot of the company at given points in time that presents the economic reality of the company in a timely and unbiased manner.

3. Accountability - providing corporate directors, shareholders, and other key stakeholders of a company with information to evaluate the performance of the company and its management.

How to Fix Financial Reporting: A Critique

In any one period, each case company faced a series of choices between public and private disclosure and secrecy, as well as decisions on the use of information reserves (such as innovation or new product information), and how these choices and decisions reflected constraints.

In the cases, the companies managed public mandatory disclosure and public voluntary disclosure first. They had no choice on mandatory requirements in areas such as the financial statements. The mandatory requirements included ASB and FASB accounting standards. The UK Listing Authority (UKLA) and UK Stock Exchange disclosure requirements (1994) for price sensitive information (PSI), and the SEC Fair Disclosure rules (Bogoslaw, 2008), were the main external standards for public (announcements) disclosure outside of the reporting season. PSI was released quickly into the public domain and information was also released to insure that there was not a false market in the companies' shares, and to satisfy all mandatory requirements.

Management then sought to voluntarily disclose enough information to satisfy market or external benchmarks for corporate communications in public. Benchmarks included requirement for textual disclosure as outlined in the Operating and Financial Review (OFR) in the UK (and Management's Discussion and Analysis (MD&A) in the US). They also included regular public ranking of corporate disclosure quality by survey companies interviewing analysts and FMs, and by members of the Investor Relations Society assessing companies, as well as corporate governance rating systems, ...