The lecture discusses the impact of the Sarbanes-Oxley Act of 2002, which was enacted in response to the Enron collapse to enhance the quality of financial reporting. It outlines the roles of key regulatory bodies like the FASB, SEC, and FIRA in overseeing financial reporting standards and the importance of qualitative characteristics in financial reports. Additionally, it highlights the need for external audits to ensure the accuracy and compliance of public companies' financial statements.

1. Week Five Lecture
Evaluating the Quality of Financial Reports
The collapse of Enron in the early 2000s, which was a result of
massive financial manipulation, gave rise to a new era of
financial reporting supervision with the establishment of the
Sarbanes-Oxley Act in 2002. The Act required all executives to
give certified and accurate financial information. Various
mechanisms were put in place to reduce financial accounting
irregularities (Cunningham, 2005). Managers are therefore
required to have a clear understanding of the regulations put in
place and the bodies which enforce them in order to conform
with them accordingly.
Issuance of financial reports and sale of securities to the public
is monitored by such organizations as:
1. The Financial Accounting Standards Board (FASB)
2. The Securities and Exchange Commission (SEC), and
3. The Financial Industry Regulatory Authority (FIRA)
The Financial Accounting Standards Board (FASB) has
developed the financial accounting standards to be used in the
U.S. since 1973. Its function is to oversee the preparation of
financial reports by non-governmental entities. FASB ensures
that financial statements contain information relevant for sound
decision making. The Securities and Exchange Commission
(SEC) has been charged with the statutory authority of
establishing reporting standards for U.S. public companies.
Although it does not develop the Generally Accepted
Accounting Principles (GAAP), it has power to monitor
financial reporting. The SEC seeks its authority from three

2. security laws: The Securities Act of 1933 (SEC, 2012b), The
Securities Exchange Act of 1934 (SEC, 2012c), The Investment
Company Act of 1940 (SEC, 2012a), The Sarbanes-Oxley Act of
2002 (SEC, 2005), and The Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (SEC, 2014).
The Financial Industry Regulatory Authority (FIRA) regulates
securities firms conducting business with the public in the U.S.
The International Accounting Standards Board (IASB) develops
and Publishes International Financial Reporting Standards
through the help of its 15-full time members from different
countries working with stakeholders all over the world.
The usefulness of financial reports to readers depends on report
quality. The conceptual framework for financial reporting
categorizes qualitative characteristics of financial reports into
two broad categories: fundamental qualitative characteristics,
which include relevance and faithful representation, and
enhancing qualitative characteristics, which make financial
reports more useful and include comparability, timeliness,
verifiability, and understandability. Presentation of financial
reporting is limited by materiality and cost constraints. There
exist differences in U.S. reporting requirements and the
international requirements, although efforts have been
undertaken to congregate the U.S. GAAP rules with the
international financial reporting rules (Oxford Analytica, 2009).
Differences in U.S. reporting requirements and international
financial reporting are evident in terms of asset value, revenue
recognition, research and development, inventory and
discontinued operations.
It is a requirement by law that financial statements of a public
company be audited by an external auditing body that reviews
the company’s operations and the financial statements to ensure
that they are accurate and are in conformity with proper internal
controls. They also help cross-check financial statements for

3. creative accounting tricks that companies can use to mislead the
public. These include false reporting of revenue, assets,
expenses and liabilities.
Forbes School of Business Faculty
References:
Cunningham, C. (2005). The gain and pain of Sarbanes-
Oxley. Forbes. Retrieved from
http://www.forbes.com/2005/12/29/microsoft-guidant-sox-
in_cc_1230soapbox_inl.html
Oxford Analytica. (2009). Accounting for a difference of
opinion. Forbes. Retrieved from
http://www.forbes.com/2009/12/14/global-accounting-
standards-iasb-fasb-business-accounting-standards.html