Int. Acc. FA LECT 1: Introduction and recap part 2 (PRINCIPAL FINANCIAL…
Int. Acc. FA LECT 1: Introduction and recap part 2
WHY ALL THAT?
Stock and credit markets cannot function properly if managers and outsiders
have unequal information
Two major problems arise
“Information” and “Agency” problems
Shareholders are the owners (principals)
But senior managers (CEO, CFO, ...) are the ones making the business decisions on behalf of shareholders (agents)
Separation of ownership and control of the company
The main purpose of financial accounting and reporting is to provide financial information about a company to investors, lenders and other creditors in
making their investment/lending decisions
EXAMPLE AUDIT FEES
Average number of hours spent on the audit
Why so costly/time-consuming?
Analysts, investors, and creditors heavily rely on the auditor’s opinion on the accuracy of financial statements.
Accurate and verified financial accounting information matters!
Independent auditors verify how accurately the financial statements reflect a company’s results and financial position (recall information and agency problems discussed earlier).
Average audit fee for a publicly listed firm
PRINCIPAL FINANCIAL STATEMENTS
Statement of cash flows (or
cash flow statement
Statement of changes in
Statement of comprehensive income (or
to the financial statements
Statement of financial position (or
Assets = Liabilities + Shareholders' Equity
Assets = Liabilities + Contributed Capital + Retained Earnings
Resources = Claims to Resources
SEE SLIDE 32/72
was introduced in 2002: most extensive set of new business regulation since the Securities and Exchange Acts in the 1930s