major issue in corporate reporting
What is Corporate reporting
To
understand the corporate reporting statements, one needs to appreciate the
auditors' work and opinion, and, conversely, to understand the auditors' work
and opinion, it is necessary to appreciate the scope and limitations of the corporate
reporting statements. All too often, corporate reporting and external auditing
are treated and discussed in isolation despite being inextricably linked.
However, the corporate reporting statements may come about as a result of
negotiations between management and their auditor’s ± with the auditors
examining the reasonableness of management's justification for their representations.
Indeed, the modern audit with its emphasis on high-level business risks could
almost be viewed as the `audit of motivations' ± to understand the corporate
reporting statements, it is important to understand management's motivations.
Financial reporting and auditing are not just technical subjects, but they
encompass a multitude of judgments and assumptions
Major issue in corporate reporting
Globalization
This has given rise to the push for the
international harmonization of accounting standards and the resultant debate
about whose standards should be adopted. In the European Union, by 2005
publicly traded EU incorporated companies will have to follow the international
corporate reporting standards of the International Accounting Standards Board
(IASB) ± formerly the International Accounting Standards Committee (IASC). Therefore,
the adoption of international standards needs to be viewed as much in a
political context as in an accounting one. However, `[i]international
accounting standard-setting is currently in crisis' (Horton and Macve, 2000:
26).
The influence of
management
v
This is a critical constituency when it comes to
developments in accounting: `Management is central to any discussion of corporate
reporting, whether at the statutory or regulatory level, or at the level of official
pronouncements of accounting bodies' (Moonitz, 1974: 64).
v
One of the reasons for the failure of the
current cost experiment in the early 1980s was the lack of support from corporate
statement preparers (they were not convinced of the validity of the exercise).
v
Current values are now starting to creep into
the corporate statements, and corporate executives concerned about the
volatility of reported results have claimed that standard-setters have a hidden
agenda to undermine the bedrock of historical cost by introducing piecemeal
requirements for current value measurement' (Miller and Loftus, 2000: 5).
v
There is a concern that the standard setters may
be requiring data for external reporting that management does not useful for
its own internal uses. The debacle regarding current cost accounting in the
1980s should not be forgotten.
Extreme market
pressures
v
The pressures from the capital markets are
forcing management to achieve earnings targets: These pressures are exacerbated
by the unforgiving nature of the equity market as securities valuations are
drastically adjusted downward whenever companies fail to meet `street'
expectations.
v
Pressures are further magnified because
management's compensation often is based in large part on achieving earnings or
other corporate goals. (Panel on Audit Effectiveness, 2000: 3) One consequence
of these market pressures is the danger of `aggressive earnings management'
that `results in stakeholders and the capital markets generally, being misled
to some extent about an entity's performance and profitability (Auditing
Practices Board, 2001: 3).
v
Recent financial scandals may be viewed as
coming about as a result of extreme disclosure and earnings management.
The emphasis is now on the provision of information to
enable the users of the financial statements to take decisions and to make
assessments of future cash ¯flows of the reporting entity.
Since the 1960s, users have been actively involved in
dialogue about accounting principles and are represented on some accounting
standard-setting bodies. `An outsider, however, might it remarkable that
accounting knowledge should be articulated not only by professional
accountants, but also by accounting information users ± much like doctors and
patients collaborating on the development of medical knowledge' (Hines, 1989:
80). In 1994, the AICPA issued a report containing the ®endings of a special
committee aimed at improving business reporting. The intention was to `influence
future agendas of standard setters and regulators and the direction of their
projects'
The `statement of corporate performance' (ASB, 2000)
combines the statement of total recognized gains and losses and the profit and
loss account, one reason for this being that users seemed to be ignoring the
`statement of total recognized gains and losses'. However, there is a question
as to what is meant by the word `performance' and whether just focusing on `corporate
performance' will really indicate an enterprise's overall performance.
The operating and financial review aims to expand on the
contents of the financial statements,
but in the management accounting area, the recognition of the limitations of financial
performance indicators has resulted in
the search for complementary indicators, such as the balanced scorecard (Kaplan
and Norton, 1996). These issues are now being recognized in relation to
external reporting (Upton, 2001).
This has resulted in a questioning of the relevance of the corporate
statements: `The demand for more timely
and broader information comes from decision makers, such as potential
investors, creditors, customers and suppliers, who are doing, or may want to
do, business with an entity
Audit developments
As a result of the above factors, there has been a perceived
change in audit emphasis ± from `audit efficiency' (aiming to reduce audit
costs) to `audit effectiveness' (with an emphasis on whether the audit is
achieving its objective). This has resulted in a re-engineering of the audit
process, which will need to continue (Panel on Audit Effectiveness, 2000), and
in the drive to add value to the external audit.
The pressure to `add value' to the external audit has
resulted in the consideration of how to extend the audit function. The Elliott
Committee (1997a) identified opportunities for assurance services to expand to
the new types of information used by decision makers. It denied `assurance
services' as `independent professional services that improve the quality of
information, or its context, for decision makers'
Fraud `
Accounting history is littered with examples of financial information
used as a means of deception' the detection of fraud is an often cited
expectation of the external auditors. In Victorian times, the audit did have
the detection of fraud as its primary objective (Lee, 1986: 31); however,
auditors are now required to plan their work in order to have a reasonable
expectation of detecting material misstatements arising from error or fraud
(APB, 1995: para. 18). Given the multiplicity and magnitude of the problems
relating to the production and utilization of the corporate statements, it is
critical that there is a conceptual
basis underpinning corporate reporting
in order to have a foundation.
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