Chapter 1 - ing: The Language Of Business 6r5b6x
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Learning Objectives (LO) After studying this chapter, you should be able to
ING: The Language of Business
© 2010 Pearson Education Inc. Publishing as Prentice Hall
CHAPTER
1. Explain how ing information assists in making decisions 2. Describe the components of the balance sheet 3. Analyze business transactions and relate them to changes in the balance sheet 4. Prepare a balance sheet from transactional data 5. Compare the features of sole proprietorships, partnerships, and corporations
1
Introduction to Financial ing, 10/e
1 of 35
Learning Objectives (LO)
LO 1 - ing and Decision-Making
After studying this chapter, you should be able to 6. Identify how the owners’ equity section in a corporate balance sheet differs from that in a sole proprietorship or partnership 7. Explain the regulation of financial reporting including differences between U.S. GAAP an IFRS 8. Describe auditing and how it enhances the value of financial information 9. Evaluate the role of ethics in the ing profession
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
3 of 35
LO 1 - ing and Decision-Making • Types of ing:
–Financial – aimed for external decision makers (owners, creditors, suppliers, regulators, unions, etc.)
• Financial ing answers the questions of financial strength and performance through the use of three major financial statements: – Balance Sheet – Income Statement – Statement of Cash Flows Introduction to Financial ing, 10/e
• ing is the language of business. • It is the process of identifying, recording, summarizing, and reporting economic information to decision makers. • ing information helps decisions makers answer questions on various topics, such as: – Investment alternatives – Product development – Employee evaluations – Loan levels, – Cash needs, etc. © 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
4 of 35
LO 1 - ing and Decision-Making • Principal Components of Annual Financial Reports
– Managerial – aimed for internal decision makers (budgets, planning, costing, pricing, managing product mix, etc.)
© 2010 Pearson Education Inc. Publishing as Prentice Hall
2 of 35
5 of 35
– A letter from corporate management – Management’s discussion and analysis of past and possible future transactions, events, circumstances – Financial statements – Footnotes explaining many elements of the financial statements in more detail – Independent auditor’s report – A statement of management’s responsibility for preparation of the financial statements – Other corporate information © 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
6 of 35
LO 1 - ing and Decision-Making • Characteristics of Financial Reports
• Accessing Financial Reports and Statements – Available to all via the Internet from company’s website – Formally sent or made available to owners by preparer – Formally filed with the U.S. Government (Securities and Exchange Commission) (10-Q, 10-K, and numerous other forms) and subsequently accessible from the SEC’s EDGAR system
– Prepared by management – Provided to outsiders quarterly and/or annually – Primarily about past transactions and events – Tell very little about future transactions, events, or circumstances
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
7 of 35
LO 2 - The Balance Sheet
• s – subdivision of the element Liabilities Current Assets
Introduction to Financial ing, 10/e
9 of 35
Introduction to Financial ing, 10/e
10 of 35
• The balance sheet (statement of financial position) shows the financial status of a company at a particular instant in time
owners in, or remaining claims against the organization's assets after deducting liabilities. • s – subdivision of the element Equity
• Reflects the basic ing equation, which is
– Sole Proprietorships - XX Capital – Partnerships - YY Capital
Resources = Claims against those resources
- Capital (Common) Stock - Paid in Capital in excess of par/stated value (See LO 6)
Introduction to Financial ing, 10/e
© 2010 Pearson Education Inc. Publishing as Prentice Hall
LO 2 - The Balance Sheet
Owners’ equity is the residual interest by the
© 2010 Pearson Education Inc. Publishing as Prentice Hall
– s Payable – Notes Payable – Long-term debt
Long-term Assets
LO 2 - The Balance Sheet
– Corporations
8 of 35
organization to outsiders, or claims against its assets by outsiders (debt to the bank, etc.).
• s – subdivision of the element Assets
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
Liabilities – economic obligations of the
– Left side of the balance sheet, – Resources that the company owns or controls from past transactions/events, – Resources that it expects to help generate future cash inflows or reduce/prevent future cash outflows. Cash and cash equivalents s Receivable Inventories (Merchandise, Supplies, Parts) Prepaid Expenses (taxes, utilities, insurance) Property Plant Equipment
© 2010 Pearson Education Inc. Publishing as Prentice Hall
LO 2 - The Balance Sheet
Assets
– – – – – – –
LO 1 - ing and Decision-Making
11 of 35
Assets = Liabilities + Owners’ equity
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
12 of 35
LO 3 - Balance Sheet Transactions
LO 3 - Balance Sheet Transactions • Every transaction of a company or entity affects the balance sheet equation – An entity is an organization that stands apart from other organizations and individuals as a separate economic unit for which the balance sheet is being prepared – A transaction is any event that affects the financial position of that entity and that can be reliably recorded in money
Transaction 1: Initial Investment of $400,000 Assets
=
Liabilities
+
Owners’ Equity
Cash (1)
Lopez, Capital
+ $400,000
=
+$400,000 (Owner Investment)
• At least two s will be affected for every entry recorded (compound entry = > 2 s) © 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
13 of 35
LO 3 - Balance Sheet Transactions
LO 3 - Balance Sheet Transactions Transaction 3: Acquire Store Equipment for Cash, $15,000
Transaction 2: Loan of $100,000 from Bank Assets
=
Cash
Liabilities Note payable
(1)
+ $400,000
=
(2)
+ $100,000
=
+ $100,000
$500,000
=
$100,000
Bal.
$500,000
+
Owners’ Equity
Assets
Lopez, Capital
Cash
+$400,000
= Store Equipment
Bal. $500,000 $400,000 $500,000
Introduction to Financial ing, 10/e
15 of 35
LO 3 - Balance Sheet Transactions
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
Note payable
+
Owners’ Equity Lopez, Capital
= $100,000
(3)
–15,000
+15,000
=
Bal.
485,000
15,000
=
$500,000
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Liabilities
© 2010 Pearson Education Inc. Publishing as Prentice Hall
$400,000
100,000
400,000 $500,000
Introduction to Financial ing, 10/e
16 of 35
LO 4 – Preparing the Balance Sheet
17 of 35
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
18 of 35
LO 5 – Comparative Ownership Features
• Advantages of a Corporation
• Sole proprietorship – a single owner
– Limited liability (claims against corporate assets only – not personal assets of managers) – Ease of transfer of ownership – Ease in raising ownership capital – Continuity of existence – Separation of ownership and management – Prestige
• Partnership – two or more co-owners • Corporation – created under (U.S.) state laws – Publicly owned – Owned by the public through the sale of shares; potentially thousands of owners – Privately owned – Owned by families or a small group of shareholders; shares are not sold or traded
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
19 of 35
LO – 6 Differences in Reporting Owners’ Equity • Proprietorships and Partnerships
• Disadvantages of a Corporation – Unfavorable tax laws. Corporations and taxed as separate entity, i.e. double taxation on distributed earnings – Regulation © 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
20 of 35
LO – 6 Differences in Reporting Owners’ Equity • Shareholders elect a board of directors to look out for their interests
– Owners ’ equities = “Capital”
• Corporations
• Board of Directors
– Owners ’ equities = “Stockholders ’/Shareholders’ equity” – Total capital investment = Paid-in capital (e.g., $20) • Common stock recorded at par/stated value – Par/stated value = what is printed on the stock – One share ? $5 par value = $5 • Paid-in capital in excess of par value – One share ? ($20 – $5 par value) = $15
© 2010 Pearson Education Inc. Publishing as Prentice Hall
LO 5 – Comparative Ownership Features
Introduction to Financial ing, 10/e
21 of 35
– Often include outsiders such as CEOs and presidents of other corporations, academics, attorneys, and community representatives – Can also include insiders – company’s CEO, CFO, etc. – Majority must be independent if stock is regulated – Set strategic direction of the company
• Senior Managers – run day to day operations © 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
22 of 35
LO – 7 Regulation of Financial Reporting
LO – 7 Regulation of Financial Reporting
• Generally Accepted ing Principles
• Financial ing Standards Board (FASB)
– Common set of measurement rules – Common language to report information
• Two different languages in ing – International Financial Reporting Standards (IFRS) – Financial ing Standards/ US GAAP
• Standard setting bodies – International ing Standards Board for IFRS – Financial ing Standards Board for US GAAP
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
23 of 35
– Independent nonprofit entity established in 1973 – Writes ing/reporting standards for not-forprofit organizations – Has delegated authority from SEC to create and amend financial ing/reporting standards for for-profit organizations subject to control by the SEC – Published 168 standards between 1973 and 2009 and put those into a single searchable database – FASB Financial Standards Codification. – Is working on convergence of US GAAP with IFRS © 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
24 of 35
LO – 8 Auditing and Credibility of Financial Information
LO – 7 Regulation of Financial Reporting
• Principal–agent problem
• International ing Standards Board (IASB)
• Managers are prone to inflate the bottom-line
– Not a U.S. governmental agency – United States is represented on the board – Creates and amends financial ing and reporting standards for European Union and many other countries (over 100 countries use IFRS) – Selected current projects: • Convergence with U.S. GAAP
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
– To send positive signals to stock market – To be able to reward themselves – They may be overoptimistic about own decisions
• Auditors – third-party assurance – Examine information managers use to compile financial statements – Provide assurances about the credibility of those statements
25 of 35
© 2010 Pearson Education Inc. Publishing as Prentice Hall
LO – 8 Auditing and Credibility of Financial Information
• The four largest international public ing firms are
• Standard report includes the following topics:
– – – –
– Introduction – what was audited? – Scope – how was the audit conducted? – Opinion as to • fairness of financial statements • degree to which GAAP was followed – Other topics (e.g., changes in principals, adequacy of management’s review of internal controls)
• Offer fee-based tax, consulting, auditing services 27 of 35
• 1929 Stock Market Crash – Senior managers
Introduction to Financial ing, 10/e
28 of 35
• Sarbanes Oxley Act – 2002
– Rewarded in part by content of financial statements – Prepare financial statements – Potential for bias
– Regulates ing profession • Established the Public Company ing Oversight Board (PCAOB) to set standards for audit procedures • Prohibits public ing firms from providing clients with certain non-audit services • Requires rotation every 5 years of the lead audit or coordinating partner and the reviewing partner – Regulates corporate governance • Board of directors must have an audit committee composed only of “independent” directors • Management must examine and certify the adequacy of internal controls used by its company (CEOs and SFOs sign the statements) • Criminal penalties for knowingly misreporting financial information
• SEC Act of 1934 required public companies to – have their financial statements audited by independent outside auditors who are As – File results with the SEC
• Shareholders – audit report adds credibility to the financial statements they use when making decisions Introduction to Financial ing, 10/e
© 2010 Pearson Education Inc. Publishing as Prentice Hall
LO – 8 Auditing and Credibility of Financial Information
LO – 8 Auditing
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Deloitte Touche Tohmatsu Ernst & Young KPMG International PricewaterhouseCoopers • 97% of the firms listed on the NYSE are clients of these four firms
• National, regional and local firms also exist
• A – licensed public ant entitled to issue official opinion on financial statements in the US Introduction to Financial ing, 10/e
26 of 35
LO – 8 Auditing and Credibility of Financial Information
• Audit – examination of a company’s transactions and the resulting financial statements
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
29 of 35
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
30 of 35
LO – 9 Ethics • Auditors have a professional obligation to truthfully report their findings to the public as they are public ants. • Auditors ’ code of conduct – Independence (from management’s influence) – Integrity – Objectivity Professional societies (AIA, IMA, state societies) Regulatory bodies (SEC, PCAOB, etc.) ing firms (international, national, regional, local) Publically traded firms (set the “tone at the top”)
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
• More CEOs started out in finance or ing than any other area, • ing provides an excellent training ground for future managers and executives • ants have access to all financial information in the company and interact with all levels of management
• Ethics is stressed in guidance from the following: – – – –
Career Opportunities for ants
• ants are well rewarded (starting salary in an ing firm - $50,000 in 2009 and over $1MLN for the top partner)
31 of 35
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
32 of 35
ING: The Language of Business
© 2010 Pearson Education Inc. Publishing as Prentice Hall
CHAPTER
1. Explain how ing information assists in making decisions 2. Describe the components of the balance sheet 3. Analyze business transactions and relate them to changes in the balance sheet 4. Prepare a balance sheet from transactional data 5. Compare the features of sole proprietorships, partnerships, and corporations
1
Introduction to Financial ing, 10/e
1 of 35
Learning Objectives (LO)
LO 1 - ing and Decision-Making
After studying this chapter, you should be able to 6. Identify how the owners’ equity section in a corporate balance sheet differs from that in a sole proprietorship or partnership 7. Explain the regulation of financial reporting including differences between U.S. GAAP an IFRS 8. Describe auditing and how it enhances the value of financial information 9. Evaluate the role of ethics in the ing profession
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
3 of 35
LO 1 - ing and Decision-Making • Types of ing:
–Financial – aimed for external decision makers (owners, creditors, suppliers, regulators, unions, etc.)
• Financial ing answers the questions of financial strength and performance through the use of three major financial statements: – Balance Sheet – Income Statement – Statement of Cash Flows Introduction to Financial ing, 10/e
• ing is the language of business. • It is the process of identifying, recording, summarizing, and reporting economic information to decision makers. • ing information helps decisions makers answer questions on various topics, such as: – Investment alternatives – Product development – Employee evaluations – Loan levels, – Cash needs, etc. © 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
4 of 35
LO 1 - ing and Decision-Making • Principal Components of Annual Financial Reports
– Managerial – aimed for internal decision makers (budgets, planning, costing, pricing, managing product mix, etc.)
© 2010 Pearson Education Inc. Publishing as Prentice Hall
2 of 35
5 of 35
– A letter from corporate management – Management’s discussion and analysis of past and possible future transactions, events, circumstances – Financial statements – Footnotes explaining many elements of the financial statements in more detail – Independent auditor’s report – A statement of management’s responsibility for preparation of the financial statements – Other corporate information © 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
6 of 35
LO 1 - ing and Decision-Making • Characteristics of Financial Reports
• Accessing Financial Reports and Statements – Available to all via the Internet from company’s website – Formally sent or made available to owners by preparer – Formally filed with the U.S. Government (Securities and Exchange Commission) (10-Q, 10-K, and numerous other forms) and subsequently accessible from the SEC’s EDGAR system
– Prepared by management – Provided to outsiders quarterly and/or annually – Primarily about past transactions and events – Tell very little about future transactions, events, or circumstances
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
7 of 35
LO 2 - The Balance Sheet
• s – subdivision of the element Liabilities Current Assets
Introduction to Financial ing, 10/e
9 of 35
Introduction to Financial ing, 10/e
10 of 35
• The balance sheet (statement of financial position) shows the financial status of a company at a particular instant in time
owners in, or remaining claims against the organization's assets after deducting liabilities. • s – subdivision of the element Equity
• Reflects the basic ing equation, which is
– Sole Proprietorships - XX Capital – Partnerships - YY Capital
Resources = Claims against those resources
- Capital (Common) Stock - Paid in Capital in excess of par/stated value (See LO 6)
Introduction to Financial ing, 10/e
© 2010 Pearson Education Inc. Publishing as Prentice Hall
LO 2 - The Balance Sheet
Owners’ equity is the residual interest by the
© 2010 Pearson Education Inc. Publishing as Prentice Hall
– s Payable – Notes Payable – Long-term debt
Long-term Assets
LO 2 - The Balance Sheet
– Corporations
8 of 35
organization to outsiders, or claims against its assets by outsiders (debt to the bank, etc.).
• s – subdivision of the element Assets
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
Liabilities – economic obligations of the
– Left side of the balance sheet, – Resources that the company owns or controls from past transactions/events, – Resources that it expects to help generate future cash inflows or reduce/prevent future cash outflows. Cash and cash equivalents s Receivable Inventories (Merchandise, Supplies, Parts) Prepaid Expenses (taxes, utilities, insurance) Property Plant Equipment
© 2010 Pearson Education Inc. Publishing as Prentice Hall
LO 2 - The Balance Sheet
Assets
– – – – – – –
LO 1 - ing and Decision-Making
11 of 35
Assets = Liabilities + Owners’ equity
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
12 of 35
LO 3 - Balance Sheet Transactions
LO 3 - Balance Sheet Transactions • Every transaction of a company or entity affects the balance sheet equation – An entity is an organization that stands apart from other organizations and individuals as a separate economic unit for which the balance sheet is being prepared – A transaction is any event that affects the financial position of that entity and that can be reliably recorded in money
Transaction 1: Initial Investment of $400,000 Assets
=
Liabilities
+
Owners’ Equity
Cash (1)
Lopez, Capital
+ $400,000
=
+$400,000 (Owner Investment)
• At least two s will be affected for every entry recorded (compound entry = > 2 s) © 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
13 of 35
LO 3 - Balance Sheet Transactions
LO 3 - Balance Sheet Transactions Transaction 3: Acquire Store Equipment for Cash, $15,000
Transaction 2: Loan of $100,000 from Bank Assets
=
Cash
Liabilities Note payable
(1)
+ $400,000
=
(2)
+ $100,000
=
+ $100,000
$500,000
=
$100,000
Bal.
$500,000
+
Owners’ Equity
Assets
Lopez, Capital
Cash
+$400,000
= Store Equipment
Bal. $500,000 $400,000 $500,000
Introduction to Financial ing, 10/e
15 of 35
LO 3 - Balance Sheet Transactions
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
Note payable
+
Owners’ Equity Lopez, Capital
= $100,000
(3)
–15,000
+15,000
=
Bal.
485,000
15,000
=
$500,000
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Liabilities
© 2010 Pearson Education Inc. Publishing as Prentice Hall
$400,000
100,000
400,000 $500,000
Introduction to Financial ing, 10/e
16 of 35
LO 4 – Preparing the Balance Sheet
17 of 35
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
18 of 35
LO 5 – Comparative Ownership Features
• Advantages of a Corporation
• Sole proprietorship – a single owner
– Limited liability (claims against corporate assets only – not personal assets of managers) – Ease of transfer of ownership – Ease in raising ownership capital – Continuity of existence – Separation of ownership and management – Prestige
• Partnership – two or more co-owners • Corporation – created under (U.S.) state laws – Publicly owned – Owned by the public through the sale of shares; potentially thousands of owners – Privately owned – Owned by families or a small group of shareholders; shares are not sold or traded
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
19 of 35
LO – 6 Differences in Reporting Owners’ Equity • Proprietorships and Partnerships
• Disadvantages of a Corporation – Unfavorable tax laws. Corporations and taxed as separate entity, i.e. double taxation on distributed earnings – Regulation © 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
20 of 35
LO – 6 Differences in Reporting Owners’ Equity • Shareholders elect a board of directors to look out for their interests
– Owners ’ equities = “Capital”
• Corporations
• Board of Directors
– Owners ’ equities = “Stockholders ’/Shareholders’ equity” – Total capital investment = Paid-in capital (e.g., $20) • Common stock recorded at par/stated value – Par/stated value = what is printed on the stock – One share ? $5 par value = $5 • Paid-in capital in excess of par value – One share ? ($20 – $5 par value) = $15
© 2010 Pearson Education Inc. Publishing as Prentice Hall
LO 5 – Comparative Ownership Features
Introduction to Financial ing, 10/e
21 of 35
– Often include outsiders such as CEOs and presidents of other corporations, academics, attorneys, and community representatives – Can also include insiders – company’s CEO, CFO, etc. – Majority must be independent if stock is regulated – Set strategic direction of the company
• Senior Managers – run day to day operations © 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
22 of 35
LO – 7 Regulation of Financial Reporting
LO – 7 Regulation of Financial Reporting
• Generally Accepted ing Principles
• Financial ing Standards Board (FASB)
– Common set of measurement rules – Common language to report information
• Two different languages in ing – International Financial Reporting Standards (IFRS) – Financial ing Standards/ US GAAP
• Standard setting bodies – International ing Standards Board for IFRS – Financial ing Standards Board for US GAAP
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
23 of 35
– Independent nonprofit entity established in 1973 – Writes ing/reporting standards for not-forprofit organizations – Has delegated authority from SEC to create and amend financial ing/reporting standards for for-profit organizations subject to control by the SEC – Published 168 standards between 1973 and 2009 and put those into a single searchable database – FASB Financial Standards Codification. – Is working on convergence of US GAAP with IFRS © 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
24 of 35
LO – 8 Auditing and Credibility of Financial Information
LO – 7 Regulation of Financial Reporting
• Principal–agent problem
• International ing Standards Board (IASB)
• Managers are prone to inflate the bottom-line
– Not a U.S. governmental agency – United States is represented on the board – Creates and amends financial ing and reporting standards for European Union and many other countries (over 100 countries use IFRS) – Selected current projects: • Convergence with U.S. GAAP
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
– To send positive signals to stock market – To be able to reward themselves – They may be overoptimistic about own decisions
• Auditors – third-party assurance – Examine information managers use to compile financial statements – Provide assurances about the credibility of those statements
25 of 35
© 2010 Pearson Education Inc. Publishing as Prentice Hall
LO – 8 Auditing and Credibility of Financial Information
• The four largest international public ing firms are
• Standard report includes the following topics:
– – – –
– Introduction – what was audited? – Scope – how was the audit conducted? – Opinion as to • fairness of financial statements • degree to which GAAP was followed – Other topics (e.g., changes in principals, adequacy of management’s review of internal controls)
• Offer fee-based tax, consulting, auditing services 27 of 35
• 1929 Stock Market Crash – Senior managers
Introduction to Financial ing, 10/e
28 of 35
• Sarbanes Oxley Act – 2002
– Rewarded in part by content of financial statements – Prepare financial statements – Potential for bias
– Regulates ing profession • Established the Public Company ing Oversight Board (PCAOB) to set standards for audit procedures • Prohibits public ing firms from providing clients with certain non-audit services • Requires rotation every 5 years of the lead audit or coordinating partner and the reviewing partner – Regulates corporate governance • Board of directors must have an audit committee composed only of “independent” directors • Management must examine and certify the adequacy of internal controls used by its company (CEOs and SFOs sign the statements) • Criminal penalties for knowingly misreporting financial information
• SEC Act of 1934 required public companies to – have their financial statements audited by independent outside auditors who are As – File results with the SEC
• Shareholders – audit report adds credibility to the financial statements they use when making decisions Introduction to Financial ing, 10/e
© 2010 Pearson Education Inc. Publishing as Prentice Hall
LO – 8 Auditing and Credibility of Financial Information
LO – 8 Auditing
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Deloitte Touche Tohmatsu Ernst & Young KPMG International PricewaterhouseCoopers • 97% of the firms listed on the NYSE are clients of these four firms
• National, regional and local firms also exist
• A – licensed public ant entitled to issue official opinion on financial statements in the US Introduction to Financial ing, 10/e
26 of 35
LO – 8 Auditing and Credibility of Financial Information
• Audit – examination of a company’s transactions and the resulting financial statements
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
29 of 35
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
30 of 35
LO – 9 Ethics • Auditors have a professional obligation to truthfully report their findings to the public as they are public ants. • Auditors ’ code of conduct – Independence (from management’s influence) – Integrity – Objectivity Professional societies (AIA, IMA, state societies) Regulatory bodies (SEC, PCAOB, etc.) ing firms (international, national, regional, local) Publically traded firms (set the “tone at the top”)
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
• More CEOs started out in finance or ing than any other area, • ing provides an excellent training ground for future managers and executives • ants have access to all financial information in the company and interact with all levels of management
• Ethics is stressed in guidance from the following: – – – –
Career Opportunities for ants
• ants are well rewarded (starting salary in an ing firm - $50,000 in 2009 and over $1MLN for the top partner)
31 of 35
© 2010 Pearson Education Inc. Publishing as Prentice Hall
Introduction to Financial ing, 10/e
32 of 35
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