Financial Fraud Prevention and Detection: Governance and Effective Practices

CHAPTER FOURTEEN

The Future of Financial Reporting

WE HAVE AT THIS POINT LOOKED at fraudulent financial reporting from almost every angle. We've looked at its origin. We've looked at prevention. We've looked at detection and its aftermath, including investigation, the SEC, criminal implications, and class action litigation. Seemingly, the entirety of the subject has been explored.

But there is another question left: Why? Why is it that, over the last twenty years, we have seen such a dramatic increase in fraudulently reported financial results? And a good follow-up question is: Have we adequately addressed the problem?

The answer to the first question has more to do with the nature of financial reporting systems than anything else. The fact is that we have entered a period in which financial market demands for information are not being met by the financial reporting system that happens to be in place. On the one hand, financial markets are demanding instantaneous, nonstop financial information. On the other hand, our financial reporting system is designed to provide information only periodically—once a quarter at best. The consequence is misreported financial results.

As to whether we've adequately addressed the problem, the answer is: Probably not. The same basic financial reporting system problems that gave rise to an upsurge in fraudulent financial reporting still exist. And, while new laws and regulations may impede fraudulent financial reporting, there is only so much that ...