Chapter 5 COMMUNICATING AND INTERPRETING ACOUNTING INFORMATION UNDERSTANDING THE BUSINESS Corporate governance the procedures designed to ensure that the company is managed in he interests of the shareholders Much of its corporate governance system is aimed at ensuring integrity in the financial reporting process PLAYERS IN THE ACCOUNTING COMMUNICATION PROCESS Regulators SEC FASB PCAOB Stock Exchanges The mission of the U S Securities and Exchange Commission SEC is to protect investors and maintaining the integrity of the securities of the markets As part of this mission the SEC oversees the work of the Financial Accounting Standards Board FASB which sets generally accepted accounting principles GAAP the Public Company Accounting Oversight Board PCAOB which sets auditing standards for independent auditors CPAs of public companies and the stock exchanges which along with state governments set overall corporate governance standards Managers CEO CFO and Accounting Staff Chairman and chief executive officer CEO and the chief financial officer CFO certify that o Each report filed with the securities and exchange commission does not contain any untrue material statement or omit a material fact and fairly presents in all material respects the financial condition results of operations and cash flows of the company o There are no significant deficiencies and material weaknesses in the internal controls over financial reporting o They have disclosed to the auditors and audit committee of the board any weaknesses in internal controls or any fraud involving management or other employees who have a significant role in financial reporting Chapter 5 COMMUNICATING AND INTERPRETING ACOUNTING INFORMATION Executives who knowingly certify false financial reports are subject to a fine of 5mill and 20 years of jail Board of Directors audit Committee The board of directors elected by stockholders is responsible for ensuring that processes are in place for maintaining the integrity of the company s accounting financial statement preparation and financial reporting Auditors By singing an unqualified audit opinion a CPA firm assumes part of the financial responsibility for the financial statements and related presentations o An auditor s statement that the financial statements are fair presentations in all material respects in conformity with GAAP This opinion which adds credibility to the statements is also often required by agreements with lenders and private investors Information Intermediaries Financial Analysts and Information Services Financial analysts receive accounting reports and other information about the company from electronic information services They also gather information through conversations with company executives and visits to company facilities and competitors Earnings forecasts predictions of earnings for future accounting periods a quick unbiased reaction to information is called market efficiency in finance Users Institutional and private Investors Creditors and Others Chapter 5 COMMUNICATING AND INTERPRETING ACOUNTING INFORMATION Institutional investors include pension funds mutual funds and endowment charitable foundation and trust funds Managers of pension mutual endowment and other funds that incest on the behalf of others Private investors include large individual investors such as Ely Callaway and his friends who originally invested directly in Callaway Fold as well as small retail investors who buy shares of publicly traded companies through brokers such as Charles Schwab o Individuals who purchase shares in companies Lenders Creditors include suppliers banks commercial credit companies and other financial institutions that lend money to companies Cost benefit constraint suggests that the benefits of accounting for and reporting information should outweigh the costs Guiding Principles for Communicating Useful Information For accounting information to be useful it must be relevant and reliable Relevant information can influence a decision it is timely and has predictive and or feedback value Reliable information is accurate unbiased and verifiable Consistent information can be compared over time because similar accounting methods have been applied These characteristics of useful information along with the full disclosure principle guide the FASB in deciding what financial information should be reported THE DISCLOSURE PROCESS SEC regulation FD fair disclosure requires that companies provide all investors equal access to all important company news Press Release a written public news announcement normally distributed to o Companies announce quarterly and annual earnings through press Press Releases major news services releases Annual Reports Annual reports are relatively simple documents photocopied on white bond paper They normally include the following o Four basic financial statements income statement balance sheet stockholders equity or retained earnings statement and cash flow statement o Related notes footnotes o Report of Independent Accountants if the statements are audited The annual reports of public companies are normally split into two sections The first nonfinancial section usually includes a letter to stockholders from the Chairman and CEO descriptions of the company s management Chapter 5 COMMUNICATING AND INTERPRETING ACOUNTING INFORMATION philosophy products successes and exciting prospects and challenges for the future The principal components of the financial section include o Summarized financial data for a 5 or 10 year period o Management s discussion and analysis of financial condition and results of operations and disclosures about market risk o The four basic financial statements o Notes o Report of independent accountants and the management certification o Recent stock price information o Summaries of the unaudited quarterly financial data o Lists of directors and officers of the company and relevant addresses Quarterly Reports Quarterly reports normally begin with a short letter to shareholders This is followed by a condensed income statement for the quarter which often shows less detail than the annual income statement and a condensed balance sheet dated at the end of the quarter o These condensed financial statements are no audited and so are marked unaudited SEC Reports 10 K 10 Q 8 K Public companies must file periodic reports with the SEC They include the annual report on form 10 K quarterly reports on form 10 Q and current event reports on form
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