Corporate Governance Role in Financial Reporting

Abstract

Reported financial scandals have galvanized considerable interest in and discussion on the role of corporate governance in the financial reporting process. Many factors, including high-profile financial scandals, well-publicized restatements of financial reports, and concerns over auditors' independence have resulted in loss of investor confidence in financial reports. The Sarbanes-Oxley Act of 2002 (the Act) was passed in response to these financial scandals to reinforce corporate accountability and professional responsibilities, and to rebuild investor confidence. The SEC has issued more than 20 rules to implement provisions of the Act. Other professional organizations (AICPA, NYSE, NASDAQ, AMEX, Conference Board) have issued standards and corporate governance guiding principles to restore public trust in corporations, the capital markets, and the financial reporting process. Mere compliance with these measures may not be adequate in rebuilding investor confidence and public companies should improve their corporate governance structure. This paper introduces a corporate governance structure consisting of seven interrelated mechanisms of oversight, managerial, compliance, audit, advisory, assurance, and monitoring functions. A well-balanced functioning of these seven interrelated functions can produce responsible corporate governance, reliable financial reports, and credible audit services.

Keywords: financial reporting scandals, Sarbanes-Oxley Act, investor confidence, corporate governance

JEL Classification: G34, G38, M41, M49