Clear, accurate financial reporting is a crucial element of corporate governance and crucial to the health of the capital markets. Accounting depicts corporate performance in financial terms. Institutional investors rely on audited financial statements when making investment decisions. And the well-being of the financial markets depends directly on the quality of the information contained in audited financial statements and related disclosures.
Accounting rules aim to ensure consistency and comparability in corporations’ disclosures of assets and liabilities on their balance sheets and income and expenses on their earnings statements. In the United States, accounting rules are governed by a set of standards known as Generally Accepted Accounting Principles (GAAP). Those standards are not set in stone, however; GAAP allows for some degree of flexibility in the way items are recognized, measured and defined. Taken to extremes, that flexibility can cause reporting to be misleading and mask poor results or financial wrongdoing. Accounting shenanigans at Enron and a slew of other companies cost shareowners millions of dollars in investment losses and undermined confidence in U.S. markets. The scandals led Congress, in 2002, to pass the Sarbanes-Oxley Act, a law aimed, in part, at stiffening the spines of accountants. SOX, as it is often called, created a regulator for the auditing profession, the Public Company Accounting Oversight Board. It bars independent auditors from most consulting work for companies they audit. And it requires auditors to report directly to audit committees of corporate boards, rather than management.
Section 404 of the Sarbanes-Oxley Act
The most controversial provision of Sarbanes-Oxley is Section 404, which calls for managements to assess their companies' internal financial controls and for outside auditors to review those controls annually. The Council believes that Section 404 is a core element of SOX and plays a vital role in ensuring high quality financial reporting and investor confidence in the markets. For more information about Section 404, please click here.
International Convergence of Accounting Rules
Historically, accounting rules and practices have differed widely from country to country. But today, globalization is driving demand for uniform financial reporting standards. The most widely accepted set of accounting standards currently are the International Financial Reporting Standards (IFRS) issued by the independent London-based International Accounting Standards Board (IASB). More than 100 countries, including the European Union member states, either use or plan to adopt a version of IFRS rules. The Securities and Exchange Commission (SEC) is currently considering whether U.S. companies should have the option or be required to prepare their financial statements using IFRS or GAAP in the near future. To learn more about international convergence, please visit that page in our Resource Center or click here.
To read the Council's policy on Independence of Accounting and Auditing Standard Setting please visit the Council Policies page or click here.
To read the Oct. 1, 2008 joint statement of the Council, the Center for Audit Quality and the CFA Institute on mark-to-market accounting, click here.
To read a July 11, 2008 Council white paper on fair value, or mark-to-market, accounting, click here.
To read CII General Counsel Jeff Mahoney's testimony before the Aug. 4, 2008 SEC roundtable discussion on accounting issues click here.