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Rebuilding Public Confidence in Financial Reporting

Introduction

Historically, financial statements have been the mirror reflecting the financial activities of a company. It is based on this information that shareholders, investors and the company’s board of directors themselves make financial decision regarding the company. The reported information mainly by the auditors allows investors for example to make critical decisions including injecting more capital into the company or cause them to completely withdraw.

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The same reports protect or expose the company to its competitors, it is from audit reports that competitors gauge themselves against the company and take necessary actions needless to say to the disadvantage of the company in questions. However, reduced trust in financial statements has led to deteriorating business performances if not business failure and eventual closure.

Deceiving financial statements have led to global economical crisis both in the past and in the present and the ongoing global financial crisis is not an exception. Qualified and trusted accounting firms have been reported to terribly fail in their duties and this has continuously impeded the economic development both at national and international levels.

Despite the formation many boards and organizations including Public Company Accounting Oversight Board (PCAOB), deception continues to affect our economical status. It was unfortunate for example to recently experience irresponsibility on the part of established international auditors such as Deloitte partner Christopher E Anderson and Thomas Flanagan just as was witnessed in the 80s and 90s, when names such as Britain’s’ Maxwell, German’s Metalgesellschaft and Schneider, and France’s Credit Lyonnais to name but a few, reported serious reporting failure. The above two recent examples are just a tip of the iceberg a good look at the PCAOB list will reveal more non performing auditing firms and it wont be a wonder to see that despite the publications of frauds on the part of these firms, they are still in business.

There is clearly no confidence in the global financial system. An International Monetary Fund’s (IMF) Global Financial Stability Report (GFSR) released to the press on 8, October 2008 expressed the need to restore trust in the global financial system especially now that the markets are experiencing difficult times, noting that failure to do so would result to a costly economy both now and in the future. The report appreciated the importance of engaging with international policy makers noting that the credibility of financial organizations was not only a national but also an international issue and that actions were needed at both levels.

At the same time, it is important to appreciate the fact that globalization demands that countries open their financial markets to other countries for investments, expansion and growth, international trade, stock exchange, among many other purposes, and so there is a need to have a commonly understood financial frameworks. For there to be consistent and improved financial practices, there will be need for companies to adopt international standards by mainly adjusting their national standards to comply to commonly agree international standards.

However standardization of frameworks will not be effective by itself, there also will be need to incorporate all stakeholders involved either directly or indirectly with financial reporting, as their corporate efforts will bring more success in restoring confidence to the financial systems. This will include mainly those who are charged with the responsibility of supplying financial information from the lowest level of any financial systems including standard setters, regulators, lawyers, accreditation agencies, financial analyst among many others who should also be held accountable if there is any reporting error since they are interrelated.(Mulgan, R.2007)

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As mentioned earlier, business failure is not a new phenomenon in the global market. There has been as mentioned more recent failures that has caused the strongest world economy like the USA to come down to a point government injecting capital to try and salvage business like General motors that would have otherwise went down. However this is not a solution in since it is well known that, that debt will have to be paid sooner if not later. In his speech during budget reading, the South African finance minister xxxxxx warned that if we continue increasing public loans, our future we will be putting our future generation in debt. Though reporting failure cannot entire be blamed for business failure, one thing since obviously lead to another.

A report failure normally give room for poor business practice since initial stage mistakes that would have otherwise be solved are let to slip and eventually grow into major errors. However, misreporting especially where huge sums are involved can actually be directly linked to business failure. Governments are also to blame for business failure when because they have been found to relax on their structures to either prevent or detect fraudulent auditing process.

Interrelation between business failure and reporting failure demand that governance should be tightened so as to fill loopholes that would gradually cause businesses great failure. Though it is clear from the above that improved reporting structures and good governance can improve the situation and regain public trust again, it is also important to note that all that without integrity there is too little that can be gained since there has been many bodies and organizations that have been set up to regulate auditing firms. (Downe, J and S Martin, 2007)

As a practice, companies and organizations have set out their code of ethics and have gone ahead and trained their members on how to follow the codes. However auditors have been accused of not adhering to the set code of ethics cases of report failure, misleading information, disguising information, abuse of trust unbalanced advice to name but a few have continued to be reported. It has therefore become apparent that the success of the rules and regulations settings is solely determined by the observance of integrity both at individual and corporate levels.

As discussed earlier since globalization has made interactions between national and international organizations critical, the solution is to have a neutral set of standards that will be agreed upon not only in the economically but also politically since we are well aware that finance an economics are inseparable. However, it is important to note that regulation will remain a national matter and therefore home standards will largely affect how international standards are adopted in many countries and it must be appreciated that a lot of time and input will be required for that to finally happen. Notwithstanding, Global financial reporting will have enormous benefit which includes greater comparability of information, higher economic growth, broader investment opportunities, reduced capital cost, wider resource allocations, etc.

Challenges Facing Auditors

Before looking into the challenges facing the rebuilding of public confidence in financial reporting, it would be prudent to look into the issues affecting auditors. This will help appreciate their efforts despite their many shortcomings. Auditors are ideally supposed to be independent but this is practically not possible since it is unwise to bit the same hand that feeds you. Therefore there is nothing really as auditors’ independency.

Auditing firms’ selection is not done out of the blues. For an auditing firm to be engaged by any company there must have been a relationship with the management of the company. This alone puts the company into a compromised situation because both the company and the auditing firm depend on the outcome of the audit for their income. It is therefore not logical to expect either an individual auditor and or an auditing firm to be honest especially when the company is at the verge of closure. The issue of timing is also always a big challenge to the auditors. Auditors are expected to complete an immense and complex amount of work in the shortest time possible.

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This is normally possible since auditors require a great deal of time especially when the management has neglected their work of ensuring that company’s internal control and reporting guidelines are adhered to. As a result, auditors have to spend a lot of time in streamlining the company’s financial structures and since they can only work with the information provided, auditors are more often overwhelmed and this leads to compromised standards and error reporting. These challenges are by no means comprehensive but they are just a representation of what the auditors go through. (Lord Sharman 2001)

Challenges in Implementing International Standards

Given the prevailing differences both in intra national and international regulations, it is not easy to attain international convergence where we have internationally accepted high quality financial standards. First there is the issue of adoption of international standards into individual national policy which is dependent on given environment of a country. International convergence is therefore a process and consideration need to be given as to how best and quick a country can adopt the standards.

Government’s cooperation should be sought during this period in order to facilitate for provision of legal and regulatory environments that can comply with the international standards. National standard setters should also take the issue of international convergence as a priority so that they can not only quicken the process but can act as mediators between their countries and international regulators. It is at this point that the national standards setters are expected to not only pick from international standards elements to be adopted but also include important information that could help formulate international standards so that their countries opinions can also be included as well.

Another challenge that has been identified as a barrier to international convergence is the limited accessibility to some parts of international standards. This mainly affects the developing countries and the European Union whose major concerns are the issue of affordability of the standards and also of funding for implementation in case of access. (Midwinter 2001)

Language barrier is a major limitation not only to regions that use different languages but also to regions where same language is used. This is mainly because language is very much dependent on people’s culture and therefore same words have different meanings to different people. The international Accounting Standards Committee (IASC) established a translation process for International Financial Reporting Standard (IFRS) in a bid to ensure successful translations.

However due to the complexities involved international standards setters are expected to be more aware of the challenges facing national standard setters and should give them time for both adoption and implementation of the standards. Development of principle based formula should be adhered to so that implementation can become easier and faster. Jargon should be avoided and when not possible interpreted. This will not only ease understanding but also allow for easier assimilation in the national laws and regulations. To ensure consistency, it is also recommended that regions that use the same language join and remove ambiguities by having one a common understanding of key words.

Another challenge that faces establishment of international standards is the need for change. As discussed earlier, globalization brings with it demands for many changes and international standards are not an exception. However, given the complexity and the time consuming nature of adoption of international standards it is imperative that the concerned international setters do thorough research of the field and try and be as accurate as they can be in their forecasts in order to avoid need for sudden change and or repetitive changes.

Conclusion

Given the prevailing situation, I believe it would be prudent for anyone to forecast that the world is headed for nothing less than One World Order no matter which angle one looks at it. Governments have since time in memorial sought to work together and today no government can boast to be controlling the world without a strong ally. According to the IMF report (IMF) Global Financial Stability Report (GFSR) it is clear that the fight towards regaining public confidence to financial reporting is an international approach. It is however important to appreciate that there it will take time to come to that level and that the process has to start somewhere.

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Extensive action is therefore required from the lowest level of financial reporting in a developing country to the highest level of reporting in countries of the developed world. Participants who are mainly standard setters, regulators, financial analysts, accountants and of course editors themselves will first of all have to change their mentality of seeking how to gratify themselves but also look into the good of the businesses and companies at large. However as we saw earlier, these professionals have their own challenges that need and could be resolved if there is will power from all the stakeholders.

Though International convergence is clearly the way forward to regaining public trust to financial reporting, it is however important to note that this is not going to happen overnight but at the same time it could take a longer period than it deserves if the concerned parties do not act appropriately. Nations as we said earlier will need to make it a priority to adopt international standards as quickly as they can since high quality and consistent reporting systems are keys to regaining public confidence. A journey of a thousand miles starts with one step and in I am optimistic enough that if all that is recommended is done, the world of business will definitely regain its central position in the functioning of the market economy eventually.

References

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Davies, HTO, S Nutley and A Powell, 2002 regulating for Improvement in Public Services: a review of activity and issues. Centre for Public Policy and Management, University of St Andrews.

Downe, J and S Martin, (2007) Regulation inside government: processes and impacts of inspection of local public services. The Policy Press 2007 ISSN 0305 5736: Policy and Politics vol 35 no 2 – 215-32.

Midwinter, A and N McGarvey, (2001) In search of the regulatory state: evidence from Scotland. Public Administration Vol.79 No.4 pp.829-845.

Mulgan, R.(2007) Public Sector Reform in New Zealand: Issues of Public Accountability.

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The Panel on Audit Effectiveness, Report and Recommendations, Report to the Public Oversight Board, 2000.

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