Financial reporting: recommendations from the Committee on the Future of California's Professional Accountants.

• Author: Lacey, John M.
• Position: FUTURES REPORT

Financial reporting is facing a crisis of credibility. Problems involving financial executives and accountants too often have appeared on the evening news. The fallout, in terms of the public's perception of the financial reporting community, has been profound.

Confidence in financial reports and the work of auditors has been shaken, which has carried consequences for the future of the accounting profession in terms of its status, reputation and attractiveness as a career.

In 2002, CalCPA assembled an independent committee to recommend changes that could be made in California to improve financial reports and the process involved in preparing and auditing those reports. To that end, the Committee on the Future of California's Professional Accountants--a group of California civic, business and professional leaders--was formed to prepare a report recommending changes.

The report (available at www.calcpa.org/futures.htm) represents the committee's recommendations and does not necessarily represent the views of CalCPA or the view of every individual member on each issue.

The committee's report recommends actions to improve (1) the financial reporting process, (2) published financial statements and (3) the conduct of audits.

These recommendations apply to the conduct of professional accountants and auditors, and the financial statements with which they are associated, for both SEC registrants and for nonpublic companies and organizations with substantial outside capital or public trust. It's expected that such nonpublic companies and organizations would engage a CPA firm to conduct an audit of their financial statements. Some of the recommendations also may be of interest to accountants employed by or serving companies and organizations that do not prepare audited financial statements.

Federal securities laws have changed in the past three years, most notably through passage of the Sarbanes-Oxley Act. These changes, however, apply only to public entities subject to federal securities laws.

The committee's report addresses all entities with substantial outside capital or public trust. Some of the recommendations broaden the reach of some provisions of the federal securities laws to other entities to which they do not currently apply.

Other recommendations go beyond what is included in the federal securities laws and would apply to all companies, including those subject to the federal securities laws.

The committee believes that these recommendations will help restore confidence in published financial statements, the financial reporting process and the work of independent auditors. The committee further believes that leaders of the profession must clearly communicate to California's professional accountants their duty to the public trust and the types of behavior that will not be tolerated.

RECOMMENDED BEST PRACTICES: FINANCIAL REPORTING PROCESS

Financial reports reflect the company management's performance and there always will be a basic incentive for management to report favorable results. The financial reporting system should be designed to provide unbiased financial statements in which financial statement users can have confidence. The independent audit committee provides oversight of the financial reporting process while the independent auditor provides an outside opinion on the fairness of the financial statements.

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The corporate financial reporting system includes everyone from the CFO to the employee who performs daily data entry. The relationships between the financial reporting team members are critical to the quality of the financial reports.

The following best practices should help to improve confidence in the financial reporting process. Not all companies should necessarily follow all the recommendations, but this provides a menu of possibilities.

Chief Accounting Officer (CAO)--Financial reporting personnel are the most critical element of the financial reporting process for public or nonpublic companies. The quality of the company's financial reports depends upon the competence...