Financial Reporting Challenges.

• Author: Hunt, Isaac C. Jr.
• Position: Brief Article

Isaac Hunt Jr. was nominated to the Securities and Exchange Commission by President Bill Clinton in August 1995 and confirmed by the Senate and sworn in as a Commissioner in 1996. Prior to being nominated to the Commission, Mr. Hunt was Dean and Professor of Law at the University of Akron School of Law from 1987 to 1995 and was Dean of the Antioch School of Law in Washington, D.C. In addition, Mr. Hunt served during the Carter and Reagan Administrations as Principal Deputy General Counsel. He worked with the law firm of Jones, Day, Reavis and Pogue from 1977 to 1979 and began his career at the SEC as a staff attorney from 1962 to 1967.

(Mr. Hunt's views are his own and do not necessarily reflect the views of the Securities and Exchange Commission, other Commissioners or the Commission's staff.)

Securities and Exchange Commission regulation aims to maintain fair and orderly markets and to protect investors by requiring that securities issuers make full and fair disclosure of all material information. The quality and credibility of disclosure documents that public companies file with the SEC is key to this approach. Evidence suggests that market stability is largely based on the veracity of the information underlying the market. Investors rely in part on management's representations and the auditor's opinion that a particular company's financial statements fairly reflect its financial position, results of operations and cash flows.

In the fiscal year ending Sept. 30, 2000, more than 14,000 registrants filed annual reports with the commission. The commission staff reviews filings but can't monitor them all in detail. We must rely heavily on the accounting profession to be primarily responsible for the large volume of financial information that forms the cornerstone of the commission's full disclosure system.

Troubling Trends

Unfortunately, the commission has recently noticed certain worrisome trends relating to the integrity of financial information. Because companies feel increased pressure to meet past or projected earnings levels, some managers have manipulated earnings to prop up share prices. The inevitable restatements of earnings have caused investors to lose billions of dollars, and perhaps, confidence in the market.

The second troubling trend we're watching is the increasing use of what has been called "pro forma" information. This is a tool that some companies use to disseminate an idealized version of their performance. It may...