Exploring the Importance of Financial Reporting

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The field of financial reporting tends to bore many people, until it makes the front page in a typically catastrophic fashion due to one scandal or another. While we are happy ignoring the important accounting function of reporting and auditing while that function works properly, as soon as it fails, we turn on corporations and the accountants that keep them running to call for justice and perhaps reform. Today, the accounting practices of publically-traded companies are governed by numerous regulations and requirements, among them the Sarbanes-Oxley Act of 2002 (SOX), a piece of legislation introduced following a number of headline accounting scandals at companies like Enron and WorldCom (HBS Working Knowledge, 2014). It is vital that users …show more content…

While the responsibility to stand behind these statements lies with management, auditors are charged with independently investigating and examining those documents and producing an opinion founded on that audit. Auditors produce an opinion on whether a company’s financial statements are presented properly in all material respects, in compliance with GAAP. Furthermore, for companies impacted by Sarbanes-Oxley requirements, auditors are obligated to, as part of their larger financial audit, audit and issue an opinion on management’s internal controls and the overall effectiveness of a firm’s internal control over financial reporting. 3M’s “Report on Internal Control Over Financial Reporting” discloses that public accounting firm, PricewaterhouseCooper LLP, conducted such an audit of the company and issued an unqualified opinion on the effectiveness of 3M’s internal control over financial accounting (Gibson, 2013). An unqualified opinion is the best possible outcome of an audit and signifies compliance with GAAP and fair representation of financial information. For better or worse, the accountants behind audits are often included as defendants in lawsuits pertaining to financial statements. If 3M’s earnings were falsified in their annual report, for instance, an investor who relied on the false information to make financial decisions might sue both 3M and their auditors who overlooked the deceptive earnings figures. Accountants and auditors are seen as responsible for the financial statements they create or audit. After all, these are the professionals that are licensed to handle and certify critical information produced by corporations. Just as a disgruntled patient may sue a doctor for medical malpractice after a botched surgery, so too might a user of financial statements who incurred a loss based on dishonest or incorrect information place blame on

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