When financial statements are not fairly presented it

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such situations, the financial statements are not fairly presented. When financial statements are not fairly presented, it frustrates our attempt at determining where the company is currently. This leads to reductions in our ability to accurately determine where the company is going and impacts our estimate of what the company is worth. For most of its existence, the FASB has promulgated standards that were quite complicated and replete with guidelines. This invited abuse of the type embodied by the Enron scandal. In recent years, the pendulum has begun to swing away from such rigidity. Now, once financial state- ments are prepared, company management is required to step back from the details and make a judgment on whether the statements taken as a whole "fairly present" the financial condition of the company as is asserted in the company's audit report (see below). Moreover, since the enactment of the Sarbanes-Oxley Act, the SEe requires the chief execu- tive officer (CEO) of the company and its chief financial officer (CFO) to personally sign a state- ment attesting to the accuracy and completeness of the financial statements. This requirement is an important step in restoring confidence in the integrity of financial accounting. The statements signed by both the CEO and CFO contain the following declarations: Both the CEO and CFO have personally reviewed the annual report. There are no untrue statements of a material fact that would make the statements misleading. Financial statements fairly present in all material respects the financial condition of the company. All material facts are disclosed to the company's auditors and board of directors. No changes to its system of internal controls are made unless properly communicated.
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1-21 Module 1 I Framework for Analysis and Valuation The Sarbanes-Oxley Act also imposed fines and potential jail time for executives. Presumably, the prospect of personal losses is designed to make these executives more vigilant in monitor- ing the financial accounting system. More recently, Congress passed The Wall Street Reform and Consumer Protection Act of 2010 (or the Dodd-Frank Act). Among the provisions of the act were rules that strengthened SOX by augmenting "claw-back" provisions for executives' ill-gotten gains. l04 Explain and apply the basics of profitability analysis. Analysis of Financial Statements This section previews the analysis framework of this book. This framework is used extensively by market professionals who analyze financial reports to evaluate company management and value the company's debt and equity securities. Analysis of financial performance is crucial in assessing prior strategic decisions and evaluating strategic alternatives. Return on Assets Suppose we learn that a company reports a profit of $10 million. Does the $10 million profit indi- cate that the company is performing well? Knowing that a company reports a profit is certainly positive as it indicates that customers value its goods or services and that its revenues exceed expenses. However, we cannot assess how well it is performing without considering the context.
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