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Chapter 6 BU227.docx

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Wilfrid Laurier University
Carolyn Mac Tavish

BU227 Chapter 6 – Communicating and Interpreting Accounting Information Week 12 Players in the Accounting Communication Process Regulators (CSA, AcSB, AASB, Stock Exchanges) -Canadian publicly traded corporations must comply with provincial securities regulations that are coordinated by the Canadian Securities Administrators (CSA) -The CSA’s mission is to protect investors from unfair, improper, or fraudulent practices and to foster fair, efficient, and vibrant capital markets -Securities regulators work closely with the Accounting Standards Board (AcSB) that is responsible for establishing standards of accounting and reporting by Canadian companies -External auditors ensure that companies prepare their financial reports in accordance with these standards, and their audit work is guided by International Standards on Auditing which have been adopted by the Canadian Auditing and Assurance Standards Board as Canadian Auditing Standards -As intermediaries, the stock exchanges may also enforce their rules through penalties ranging from temporary cease trade orders to fines and delisting of companies Managers (CEO, CFO, and Accounting Staff) -The CEO and CFO must sign the statement of management responsibility that is included in the annual report -These two officers must certify that: each report riled with the provincial securities commission does not contain any untrue material or omit a material fact and fairly presents in all material respects the financial condition, results of operations, and cash flows of the company; there are no significant deficiencies and material weaknesses in the internal controls over financial reporting; they have disclosed to the auditors and audit committee of the board any weaknesses in internal controls or any fraud involving management or other employees who have a significant role in financial reporting -The members of the accounting staff who actually prepare the details of the report also have professional responsibility for the accuracy of this information Board of Directors (Audit Committee) -Board of directors – elected by the shareholders to represent their interests, is responsible for maintaining the integrity of the company’s financial reports Auditors -Unqualified (clean) audit opinion – Auditors’ statement that the financial statements are fair presentations in all material respects in conformity with Canadian Auditing Standards -KPMG is an auditing firm Information Intermediaries: Analysts and Information Services Financial Analysts -Financial analysts receive accounting reports and other information about the company from electronic information services -The results of their analyses are combined into analysts’ reports -Analysts’ reports normally include forecasts of share price and future quarterly and annual earnings per share; a buy, sell or hold recommendation for the company shares; and explanations for these judgments -Earnings forecasts – predictions of earnings or future accounting periods BU227 Chapter 6 – Communicating and Interpreting Accounting Information Week 12 -Analysts make recommendations to buy, hold, or sell a company’s shares based on their earnings forecasts Information Services -Canadian companies actually file financial statements and other securities-related forms electronically with SEDAR (System for Electronic Document Analysis and Retrieval), which is the official site for the filing of documents by public companies as required by security laws in Canada -Financial analysts and other sophisticated users obtain much of the information they use from the wide variety of commercial online information services Users: Institutional and Private Investors, Creditors, and Others -Institutional investors include private pension funds; public pension funds; mutual funds; and endowment, charitable foundation and trust funds -Institutional investors – managers of pension funds, mutual funds, endowment funds, and other funds that invest on behalf of others -Private investors – individuals who purchase shares in companies -Lenders (creditors) – suppliers and financial institutions that lend money to companies -Lenders include suppliers, banks, commercial credit companies, and other financial institutions that lend money to companies -Customers evaluate the financial health of suppliers to determine whether they will be reliable up-to- date sources of supply -Supplier evaluate their customers to estimate their future needs and ability to pay debts -Competitors attempt to learn useful information about a company from its statements The Disclosure Process Press Releases -To provide timely information to external users and to limit the possibility of selective leakage of information, most public companies announce quarterly and annual earnings through a press release as soon as the audited annual figures are available -Press release – a written public news announcement normally distributed to major news services Annual Reports -Annual reports are simple documents photocopied on white paper -They include: -Basic financial statements -Related notes -Report of independent accountants (auditor’s opinion) -The annual reports of public companies are significantly more elaborate, both because of additional reporting requirements imposed on these companies by securities commissions and because many companies use their annual reports as public relations tools to communicate non accounting information to shareholders, customers, the press, and others -The annual reports of public companies are normally split into two sections -The first “non-financial” section includes a letter to shareholders from the chairperson and CEO, along with descriptions of the company’s management philosophy, products, and successes -The second “financial” section includes the core of the report BU227 Chapter 6 – Communicating and Interpreting Accounting Information Week 12 -The principal components include: -Summarized financial data for a 5- or 10- year period -Management’s Discussion and Analysis, covering financial condition and results of operations -The basic financial statements -Notes (footnotes) -Report of Independent Accountants (Auditor’s Opinion) and Management Certificate -Recent stock price information -Summaries of the unaudited quarterly financial data -Lists of directors and officers of the company and relevant addresses -The order of these components varies -The Management’s Discussion and Analysis contains important non-financial and strategic informa
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