Question

• What role does honesty play in the preparation and presentation of financial statements?
• What are some of the consequences of dishonesty in the preparation and presentation of financial statements?
• Why did Congress enact the Sarbanes-Oxley Act in 2002?

Answer 1

Honesty plays an important role in preparation of financial statements. It is the duty of an organization that the information reflected in the financial statements should present true and accurate view of the financial position of an organization. Major reasons to ensure that financial statements should contain true picture are :

1. Potential stakeholders do look to the financial statements of an organization before investing in an organization.

2. Because of legal guidelines. Proper code of conduct is in place as to prevent unehical practices. Non-adherence to which will attract penalities.

3. Results presented in financial statements i.e profitability, debt equity information, assets, law suits if any, do affect the marker value of shares of an organization.

Consequences of dishonesty:

1. Dishonesty in financial statements leads to loss off credibility of an organization.

2. Share prices of the organization may fall severely. Also, if an organization is listed in any stock exchange then stock exchange might take action to remove the organization.

3. Dishonesty might attract the provisions of fraud thus leading to penalities.

4. Dishonesty may lead to compulsory dissolution of an organization.

Sarbanes-oxley act 2002:

1.Sarbanes-oxley act 2002 was enacted on 30th July 2002.

2. The main reason behind the enactment of this act was to protect the investors by laying down the provisions for the accuracy and realibility of the corporate disclosures, non-adherence to which would attract penalities.

3. Act was enacted to prevent fraud and misappropriation of financial statements.

4. This Act came in response to corporate scandals like Enron Corporation.

5. Act laid down strict rules for the auditors, accountants, corporate officers and imposed more stringent record keeping requirements