The International Federation of Accountants (IFAC) has released a report with recommendations for strengthening corporate governance, improving audit effectiveness, and raising the standard of regulation of issuers.
"Rebuilding Public Confidence in Financial Reporting: An International Perspective," is a multinational effort, with input from representatives from Australia, Canada, France, Japan, the United Kingdom, and the United States.
The Task Force had three critical goals to address:
- Identify and analyze the causes of the loss of credibility in financial reporting
- Consider alternative courses of action which might restore credibility; and
- Consider recommendations as to best practice in the areas of financial and business reporting, corporate governance and auditor performance.
"In crafting our recommendations, we have kept in mind that public reporting is intrinsically a public-interest activity. So, our report addresses the roles of all those who are involved in the process, including groups such as lawyers, bankers, brokers, analysts, and public relations advisors. All parties, besides the management, board of directors, and independent auditors, have an unavoidable duty to ensure that public reporting presents the information fairly, and the rules and regulations surrounding corporate reporting should clearly reinforce them."
Specific recommendations include the following:
- Effective corporate ethics codes need to be in place and actively monitored; such codes should be supported by training.
- Corporate management must place greater emphasis on the effectiveness of financial management and controls.
- Codes of conduct need to be put in place for other participants in the financial reporting process - such as investment analysts and lawyers - and their compliance should be monitored.
- Incentives to misstate financial information need to be reduced, and companies must refrain from forecasting profits with an unrealistic level of precision.
- Audit effectiveness needs to be raised, primarily through greater attention to audit quality control processes.