Ethical And Legal Obligations
by Takara Alexis

The dominant means of communicating the financial effects of organizational activities and transactions of a company to outsiders is the financial reporting system. This reporting system includes communicating financial information through various forms such as a prospectus, forecasts, annual reports, and other financial releases. Financial statements are the main source of information given to external parties.

The reporting process is a means of maximizing the trust placed by investors, lenders, and others in the entities with which they deal. The financial reporting process itself relies on trust of its users, and this trust has been threatened due to unreliable and deceptive accounting reports. The difficulty in securing reliable information may be most apparent when a manager's compensation is directly tied to accounting based performance measures. Since these measures are created inside the firm, essentially by the same group of people whose decisions are driving the business performance, the opportunity for manipulation is present.

Does fraudulent financial reporting represent the Achilles' heel of the U.S. Corporate Financial market? Accounting scandals are not new. Episodes of fraudulent accounting have occurred numerous times in the history of the U.S. Financial markets. The SEC, FASB, and PCAOB were put together to provide government enforcement of corporate honesty.

In the aftermath of the stock market crash of 1929, public attention and congressional investigation led to allegations of unlawful practices by some financial market participants during the preceding boom. This activity led directly to the creation of the Securities and Exchange Commission in 1934. One of the founding principles of this agency was that companies publicly giving securities for sale in interstate commerce have to tell the public the truth about their business. The primary means of communicating the financial effects of organizational activities and transactions of a company to outsiders is the financial reporting system.

In the early 1970s as with today, accounting issues raised concern within the accounting profession. To settle the critics the Financial Accounting Standard Board (FAS was created and began work on the Conceptual Framework Projects.

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