Reasons for low quality financial reporting

At a seminar recently, gathered the following points from the presenter, who highlighted the ‘Deadly Sins of Financial Reporting.’ Since it captured some very important causes for misreporting or fraudulent reporting I thought of summarizing them here for the benefit of the blogging community.

# Underestimating the Capital Markets.

Preparer’s present the positive aspects of financial information, leaving out or down playing and obscuring the negative effects and they treat the capital market participants as passive absorbers of financial information.

# Obfuscating.

Leaving out useful information or clouding the truth, that creates more uncertainty and raises the company’s capital costs.

# Hyping & Spinning.

The sin of hyping and spinning involves deliberately trying to fool the markets by focusing only on good news or overstating the goodness of the good news.

# Smoothing.

Smoothing out unanticipated variations in reported Net Income to negate any volatility. Management sometimes think that volatility of their reported numbers reflect some sort of operational risks and therefore try to avoid by smoothing any ups or downs.

# Minimum Reporting.

Companies aim to comply with the minimum disclosure requirements in Standards and provide the least information to users.

# Minimum Auditing.

Using auditors to only fulfill a compliance requirement rather than to help add value to management. Evidence of such minimums are:

Appointment on minimum price quotes.

Restricting scope thru fees or limiting time available.

Opinion shopping.

Failure to rotate to improve independence, rather rotate for other reasons.

Distract the auditors with extensive non-audit services.

# Preparation Costs Myopia.

Focusing on the costs of preparing without looking beyond them to the benefits of informed markets. This happens usually when setting up the CFO shop as a “cost center” and evaluating on the basis of amounts spent. Corporates should realize that p reparation costs are borne by the users, not management, and not by the customers.


About surenraj

“Views expressed are my own”
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