The Reliability of Disclosure and Audits
Anaive observer might consider it overkill to scrutinize a company's financial statements for signs that management is presenting anything less than a candid picture. After all, extensive regulations compel publicly traded corporations to disclose material events affecting the value of their securities. Even if a company's management is inclined to finagle, investors have a second line of defense in the form of mandatory annual certification of the financials by highly trained auditors. The Securities and Exchange Commission's (SEC) Corporation Finance and Enforcement divisions provide an additional line of defense.
These arguments accurately portray how the system is supposed to work for the benefit of the users of financial statements. As in so many other situations, however, the gap between theory and practice is substantial when it comes to relying on legal mechanisms to protect shareholders and lenders. Up to a point, it is true, fear of the consequences of breaking the law keeps corporate managers in line. Bending the law is another matter, though, in the minds of many executives. If their bonuses depend on presenting results in an unfairly favorable light, they can usually see their way clear to adopting that course.
Getting the job done, in the corporate world's success-manual jargon, most definitely includes hard-nosed negotiating with auditors over the limits to which the accounting standards may be stretched. Technically, ...