As required by the Securities and Exchange Commission (SEC), publicly traded business entities are required to issue corporate annual reports that outline their business operations over the past year and provide an outlook on the future. Corporate annual reports are required to contain a variety of sections, including the following three: management discussion and analysis (MD&A), a report on internal control, and a report on fairness of the presentation of the financial statements.
The management discussion and analysis section of the corporate annual report outlines both the operation's results from the past year and future plans. In most instances, regardless of the business entity, MD&A includes a detailed explanation of notable changes in financial performance, significant accounting principles impacted by practitioner judgment, and the impact of any changes in significant accounting principles or practices. Additionally, the management discussion and analysis section of the corporate annual report should include a discussion of an entity's liquidity and capital access. Risk exposure and mitigation of such risks should be included in the corporate annual report, as well as the disclosure of any off-balance-sheet arrangements.
In compliance with the Sarbanes-Oxley Act (SOX) of 2002 for public companies, all corporate annual reports must include a report on internal control presented by management. The Sarbanes-Oxley Act of 2002 was enacted to restore the public's trust in the financial statements of publicly traded companies after a few notable accounting scandals. The report on internal control identifies the party entrusted with the task of establishing and maintaining internal control. The report is twofold in that management has to confirm internal control and an independent accounting firm outside the business entity must present its confirmation of internal control. Consequently, management's assertion of the effectiveness of the internal control should be included.
An independent certified public accountant (CPA) firm must also issue an opinion regarding the fairness of the presentation of the financial statements. An unqualified designation means the auditor certifies that the financial statements are accurate without reservation. A qualified designation means the auditor certifies that the financial statements are overall accurate but with reservations. Adverse means that the auditor certifies that the financial statements are not accurate. A disclaimer signifies that the auditor was unable to certify the financial statements as accurate.