Discussion On Accounting Quality And Other Issues Of BODs (Essay Sample)

Accounting Quality
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Accounting Quality
Quality control is an essential construct in the accounting practices of most commercial entities. In a way, this attribute facilitates the prevalence of an ethical environment when disclosing financial reports to the stakeholders. However, some companies contravene their moral codes and tamper with their financial statements for personal gains. This move results in the unrealistic financial position and performance of an organization. Such an act is unethical since it contributes to poor investment decisions, which might affect the financial stability of the investors. For this reason, SEC reporting requirements and the Sarbanes-Oxley Act provide a framework that guides the CEOs, Board of Directors (BOD), and other stakeholders in bolstering the prevalence of accounting quality in an entity
Role of BODs and CEOs in Ensuring Accounting Quality
Notably, the CEOs and BODs in a public company play an integral role in fostering honesty and ethical conduct when disclosing the financial reports of their firms. For example, the CEOs ensure the existence of an active relationship between various workers in an organization (Naciri, 2010). In most cases, dishonesty arises due to the disagreements between personal and professional interests. Thus, the CEO must first embrace and ethical conduct to ensure the presence of honesty in the entire organizations. As well, they respect the autonomy of different professionals in the accounting sector. For instance, they do not coerce accountants and auditors to influence the contents of the financial statements. Instead, they respect the independence of these employees as explained in the Sarbanes-Oxley Act (Holt, 2006). The executives also certify the integrity of the financial statements before being submitted to the SEC for filing. In a way, this role shields the investors from misleading information that might trigger poor decisions.
The Sarbanes-Oxley Act also involves protecting the investors from the material misstatements embedded in a firm's financial statements. It does so through the prevention of moral behaviors that undermine the tenets of corporate governance in an entity (Kimmel, Weiygandt, & Kieso, 2008). Unethical practices in financial reporting might include fraud, insider trading, and the alteration of information contained in an entity’s website. Thus, the BODs act as the custodians of the financial records in an organization. They ensure the documents are prepared in agreement with both global and local accounting standards. Moreover, they facilitate the integration of accounting principles in the preparation of financial statements to enhance their credibility and accuracy (Naciri, 2010). In some instances, the BODs compile the information submitted by the auditors and compare it with the records in other departments. Such an act leads to an ethical environment in financial reporting since it fosters awareness concerning the audit information.
Recommended Strategy to Ensure Accounting Quality
Strengthening the internal controls is a core strategy that a CEO can utilize to ensure high-quality accounting, reporting, and forecasting. In essence, the internal controls in an organization refer to the mechanisms employed by an entity to foster operational efficacy and enhance the realization of organizational objectives (Kimmel et al., 2008). Examples include information systems, company policies, financial reports, and regulations. According to the SEC filing requirements, an entity should submit high-quality and reliable statements, which portray an actual financial position and performance of the entity. Disclosing false records is unethical since it misleads the investors and culminates into their financial insecurity.
In most cases, weak internal control systems motivate the accountants and auditors to manipulate the financial statements of an entity (Needles, Powers, & Crosson, 2011). For example, lack of authentication and security measures in the accounting information systems foster fraud. Moreover, inadequate company policies that fail to integrate the principles of international accounting standards contribute to an unethical environment (Jones & Ratnatunga, 2012). Thus, enhancing the strength of the underlying internal controls grants the CEO the perfect opportunity to bolster accounting quality. For instance, stressing the compliance with laws will minimize the tendency of the accounting professional to interfere with financial information (Needles et al., 2011). As well, implementing data security measures and limiting access to authorized personnel will reduce cases of fraud.
Corporate Management Assurances to the Investors
Sometimes, the volatility of the stock price might hinder investors from investing in a publicly traded company. However, the SEC filing requirements insist that the managers should provide assurances that the forecasts and expected earnings will be achieved (Naciri, 2010). A core corporate management practice that facilitates this process includes the constant provision of information to the customers that interfere with the stability of the stock price. For this case, the firm must sign Form 8-K with the SEC.
Apparently, this provision discloses substantial or extraordinary activities implemented by an organization, which might influence the performance forecasts or expected earnings (Needles et al., 2011). Examples include mergers, takeovers, material agreements, changes in regulations, and the provision of unregistered securities. Furthermore, the management of an entity should embrace the fair disclosure (FD) regulations enacted in 2000 (Kimmel et al., 2008). This law compels the firm to provide vital information publicly instead of sharing it with stock analysts secretly. Doing so reduces the anxiety among the investors. Contrarily, it boosts their confidence in the firm's ability to analyze its operations and predict the changes in its activities.
Consequences of Poor Accounting Quality
Diminished quality of financial accounting and reporting within publicly traded companies hinder their operational fluidity. For example, it might impair the public image of the firms, which leads to a significant reduction in the number of investors (Kimmel et al., 2008). Such a reduction leads to a decrease in the stock prices, which limits the overall performance of the firm in the capital market. In extreme cases, the company might be unable to raise sufficient funds to implement its expansion ambitions. Moreover, poor quality culminates into obsolete financial statements of a publicly traded company.
According to the SEC filing requirements, high-quality reporting is important in attracting investors and preventing them from the adverse implications of unethical accounting practices (Holt, 2006). The presence of one false or poorly represented information renders all other figures useless. Not only the business but also the investors cannot rely on the compromised information to make well-informed decisions (Jones & Ratnatunga, 2012). Diminished quality in financial accounting and reporting also underscores the sustainability of an entity in highly competitive markets. In the past, most companies with poorly prepared financial statements such as Enron have failed to thrive in their operations. Misstatements and inadequately represented information affect business efficiency in future, which might cause liquidation due to bankruptcy.
Requirements of Sarbanes-Oxley Act
Section 302 of the Sarbanes-Oxley delve on the essence of disclosure controls as a key provision in enhancing the quality of financial reporting. Certainly, thi...