Published financial information is issued to meet the needs and demands of their users.
These range from Shareholders who will check on what direction the company is heading, whether it has achieved healthy profits, that it's solvent, the value of the company and possible signs of failure. Other users are the employees, who will want to check the statements to see whether their jobs are safe and see if possible, whether there could be wage and pension increases. This report offers information on operating results and financial conditions of companies to stakeholders as well as to shareholders. Any fraudulent financial reporting of a company like Enron for example would have a widespread and severe impact on employees, business acquaintances, investors as well as stakeholders and shareholders if the company went bankrupt.
But are financial statements as truthful as they seem? There are many different types of safety measures in place to protect the investors and the public as a whole. These include Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS) and Statements on Auditing Standards (SAS) and all professional ethics. The GAAP is a specific set of guide lines that companies follow when measuring and reporting information on their financial statements. During audits of any company it must be conducted yearly by an external and independent auditor to ensure it follows GAAP consistently and if they do not, they have to explain why not, and present justifications to show that what they are doing is both ethical and appropriate in their situation. In the case of Enron they manipulated this by bolstering balance sheets with inflated asset values and dispersing their liabilities to subsidiaries, this meant that Enron did not need to state this on their financial statements. Enron violated the GAAP through:
1. Incorrect accounting of Special Purpose Entities (SPEs) including failure to consolidate, selective use of equity methods of accounting and failure to eliminate the impact of transactions.
2. Failure to provide complete disclosure
3. Unfair financial reporting.
It is apparent that both Enron and Anderson viewed GAAP as rules rather than principles and sought to interpret GAAP in the most aggressive manner. It did not consider the fairness principle and ignored the legal precedent that ensures fairness over detailed rules. So in reality there are no accounting conventions in place to protect correct financial information because Enron and Anderson just bent the rules to suit their needs when it came to the commercial relationships.
Auditors are to be independent in both fact and appearance. If it apparent that any auditor has any connection with the company they must drop the audit immediately. Auditors in my opinion should be acting independently by doing the utmost for the company that pays for its services and also act in the interests of the general public, who have...