Financial Statement Discussion 2022

DISCUSSION
SUMMARY
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DISCUSSION
The last two decades have seen a host of corporate scandals which has dented the
confidence of the investor community and led to increasing role of compliance. This has been
done in order to ensure that the information provided to external users in the form of financial
statements provides a true and complete view of the financial performance of the underlying
organisation. Post the Enron debacle, Sarbanes Oxley Act 2002 was introduced with a view
to strengthen the corporate reporting standards by strengthening accounting, internal
procedures and IT mechanism (Franklin, 2016). The external users tend to make a host of
crucial decisions assuming that the financial reporting accurately reflects the performance of
the company. As a result, the accuracy of financial statements is highly desired to ensure that
confidence in financial markets is retained (Damodaran,2014).
A key role with regards to accurate corporate recording is played by ethics of the top
management and managers involved in the various aspects. Ethics also become crucial in the
wake of the flexibility that is provided to the management with regards to choices in matters
of recognition of various items in the most appropriate manner based on the nature of
business and underlying practices (Parrino & Kidwell, 2014).. Additionally, there are some
items which are more vulnerable than others for misreporting. One of these is the outstanding
debt on the company. Increasingly, there is a trend to use off balance sheet financing
arrangements which remain off the books and thereby underestimate the total amount of debt.
An extreme example of this was evident in case of Enron where the burgeoning liabilities
were hidden away from balance sheet through the use of SPV (Special Purpose Vehicles). It
is imperative that the concerned executives must act with integrity and avoid unethical
conduct which does not pay in the long run (Lasher, 2016).
Also, there is incidence of practices which lead to window dressing of accounts so
that the actual results do not miss the analyst and shareholder estimates. In order to enable the
same, the company may book some fake sales at the end of the reporting period only to
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DISCUSSION
refund the same in the next quarter (Petty et. al., 2016). SOX compliance also has a crucial
role to play in enhancing accuracy of corporate accounting. It increases the accounting of the
top management as they have to mandatorily sign on the financial statements. Additionally, it
strengthens the IT infrastructure which enables better record keeping and protection from
external and internal threats thereby reducing the incidence of frauds (Franklin, 2016).
Ethical reporting can allow the firm to formulate the goals in terms of corporate
reporting. This can be made possible since the firm can quantify the various performance
metrics and the desired performance levels it wants to achieve. IF the corporate reporting
framework is not reliable, then the quantification of the goal becomes meaningless as the
external users cannot ascertain whether the goals have actually been met or not (Damodaran,
2014). In these regards, ethics and SOX compliance tend to strengthen the corporate
reporting framework and ensure that corporate reporting does not lose relevance as a means
of communication regarding performance.
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DISCUSSION
References
Damodaran, A. (2014) Applied corporate finance: A user’s manual, 3rd ed. New York:
Wiley, John & Sons
Franklin, M. (2016). Sarbanes-Oxley section 404: A historical analysis. Journal of
Accounting & Finance (2158-3625), 16(4), 56-69
Lasher, W. R., (2016) Practical Financial Management, 5thed. London: South- Western
College Publisher.
Parrino, R. & Kidwell, D. (2014), Fundamentals of Corporate Finance, 4th ed., London:
Wiley Publications
Petty, J.W., Titman, S., Keown, A., Martin, J.D., Martin, P., Burrow, M., & Nguyen, H. (2016).
Financial Management, Principles and Applications, 6thed. NSW: Pearson Education,
French Forest Australia.
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