Financial reporting shortcomings in corporate governance

They could rely on the numbers to make intelligent estimates of the magnitude, timing, and uncertainty of future cash flows and to judge whether the resulting estimate of value was fairly represented in the current stock price. And they could make wise decisions about whether to invest in or acquire a company, thus promoting the efficient allocation of capital.

Unfortunately, that is not what happens in the real world, for several reasons. Firstly, corporate financial statements necessarily depend on estimates and judgment calls that can be widely off the mark, even when made in good faith.

They could rely on the numbers to make intelligent estimates of the magnitude, timing, and uncertainty of future cash flows and to judge whether the resulting estimate of value was fairly represented in the current stock price. And they could make wise decisions about whether to invest in or acquire a company, thus promoting the efficient allocation of capital.

Unfortunately, that is not what happens in the real world, for several reasons. Firstly, corporate financial statements necessarily depend on estimates and judgment calls that can be widely off the mark, even when made in good faith. 

Secondly, standard financial metrics intended to enable comparisons between companies may not be the most accurate way to judge the value of any particular company, especially the case for innovative firms in fast-moving economies, giving rise to unofficial measures that come with their own problems. Finally, managers and executives routinely encounter strong incentives to deliberately inject error into financial statements.

Despite the raft of reforms, corporate accounting remains murky. Companies continue to find ways to game the system, while the emergence of online platforms, which has dramatically changed the competitive environment for all businesses, has cast into stark relief the shortcomings of traditional performance indicators. The Institute Chartered Secretaries and Administrators in Zimbabwe is committed to train professionals who cemented with integrity and ensures good corporate governance in the entities that they are engaged in.

This report looks at the more insidious, and perhaps more destructive practice of manipulating not the numbers in financial reports but the operating decisions that affect those numbers in an effort to achieve short-term results. Finding ways to reduce such behaviour is a challenge for the accounting profession, but one that new analytic techniques can address.

Back in 2002, the world seemed to be on the verge of an accounting revolution. An initiative was under way to create a single set of international accounting standards, with the ultimate aim of uniting the US Generally Accepted Accounting Principles (GAAP) and the International Financial Reporting Standards (IFRS) that European countries were in the process of adopting. By 2005, all public companies in the European Union had, in theory, abandoned their local accounting standards in favour of IFRS. Today, at least 110 countries around the world use the system in one form or another.

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