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Unformatted text preview: CHAPTER 6 Full and Fair Reporting THINKING BEYOND THE QUESTION How do we ensure that reports to external users fairly present business activities? Full and fair reporting should help external users understand the de- cisions made by managers. It is not intended to protect those users from management’s bad decisions. The effects of management decisions should be reported to outsiders on a timely basis so they can make in- formed investment decisions. Businesses may suffer financial losses for many reasons. These losses are likely to affect the value of the com- pany’s stock and the wealth of its stockholders. Financial reporting should describe business activities in sufficient detail for stockholders, creditors, and others to evaluate the performance of a business and its managers. If that performance is good, the financial reports should indic- ate the performance was good. If it was bad, the financial reports should indicate it was bad. Financial reporting is not intended to protect stake- holders from a company’s bad financial performance, and financial re- ports should not be biased to protect them or to conceal a company’s true performance from them. QUESTIONS Q6-1 A variety of individuals rely on financial statements to make decisions. For example, stockholders and creditors make stock purchasing and lending decisions based upon financial information. In addition, government authorities use financial information to determine whether companies have met legal requirements and regulations. Customers and suppliers rely upon financial information to determine a company’s viability. Q6-2 Investors need assurance that the shares they are evaluating are reasonably priced and represent actual business activities. They use financial statements to make these determinations. Investors should be able to assume the financial information is reliable. GAAP help ensure reliability. Q6-3 Sarbanes-Oxley is intended to restore investor confidence in the financial markets by making management more accountable for the accounting reports they certify. SOX mandates heavy fines and jail terms for 169 170 Chapter 6 managers who certify fraudulent financial information. SOX also imposes restrictions on external auditors to help ensure they remain independent. Q6-4 The audit committee is responsible for selecting, compensating, and overseeing the corporation’s auditor. The auditor reports directly to the audit committee, rather than to management. Thus, the auditor is less likely to be influenced by management and more likely to remain unbiased and independent. Q6-5 Accounting standards are issued through a political process. Groups that use and prepare financial information must agree that a proposed standard improves the quality of financial reporting. “Generally accepted” refers to this agreement. The exposure draft allows all interested parties to express an opinion about the proposed standard. A discussion memorandum (DM) alerts interested groups to the issues...
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- Fall '11
- Balance Sheet