The Portable MBA in Finance and Accounting, 4th Edition

10

The Integrity of Financial Reporting

Les Livingstone

Introduction

Until the late 1990s, only a few occasional scandals disturbed the calm scene of U.S. corporate financial reporting. Certainly, there had been major corporate frauds and audit failures over the years, such as:

• McKesson & Robbins (1940).

• BarChris Construction (1968).

• Continental Vending (1969).

• National Student Marketing (1975).

• Equity Funding (1978).

• The savings and loan debacle of the early 1990s.

But these scandals were isolated events, and, on the whole, the CPA profession retained the trust of the investment community. Investors had faith in the accuracy of the financial statements of our largest corporations because they carried the blue-chip imprimatur of one or another of the well-known and respected Big Five auditing firms.¹

In the late 1990s U.S. stock markets soared to new highs on optimistic expectations. Few observers would have predicted the coming financial scandals that were soon to afflict U.S. financial markets. The symptom of trouble ahead was the increasing number of restatements of previously issued audited financial statements by U.S. corporations. A restatement is required when it is found that information in the previously issued financial statement has been materially misstated. By law, the previously issued financial statement must be withdrawn, and the restated financial statement must be issued.

The restatement of financial statements does not necessarily indicate that there ...