The primary means of communicating the financial effects of organizational activities and transactions of a company to outsiders is the financial reporting system. This reporting system includes communicating financial information through many forms such as a prospectus, forecasts, annual reports, and other financial releases. Financial statements are the main source of information transferred to external parties.
The reporting process is a means of establishing the trust placed by investors, lenders, and others in the entities with which they deal. The financial reporting process itself relies on trust of its users, and this trust has been threatened due to unreliable and deceptive accounting reports. Financial reporting is developed to meet the needs of users by giving information that is relevant to making rational investment and credit decisions, and other informed judgments.
Does fraudulent financial reporting represent the Achilles’ heel of the U.S. Corporate Financial market? Accounting scandals are not new. Episodes of fraudulent accounting have occurred repeatedly in the history of the U.S. Financial markets. The SEC, FASB, and PCAOB were established to provide government enforcement of corporate honesty.
In the after-effects of the stock market crash of 1929, public attention and congressional investigation led to allegations of distressing practices by many financial market participants during the preceding boom. This activity led directly to the creation of the Securities and Exchange Commission in 1934. One of the founding principles of this agency was that companies publicly offering securities for sale in interstate commerce must tell the public the truth about their business. The primary means of communicating the financial effects of organizational activities and transactions of a company to outsiders is the financial reporting system.
In the early 1970s as with today, accounting issues raised concern within the accounting profession. To settle the critics the Financial Accounting Standard Board (FASB) was created and began work on the Conceptual Framework Projects.
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