Financial Accounting I: Course Notes P2

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Department
Financial Accounting
Course
MGAB01H3
Professor
Douglas Kong
Semester
N/A

Description
25 October 2012 Regulators  Canadian Securities Administrators (CSA) Primary Responsibility Protect investors and maintain the integrity of the securities market.  Financial Accounting Standards Board Primary Responsibility Set Generally Accepted Accounting Standards (GAAP).  Canadian Public Accountability Board Primary Responsibility Federal agency which oversees Canadian accounting firms (independent auditors) that perform auditing engagements of public companies.  Corporate Governance Standards (Stock Exchanges) Primary Responsibility Along with provincial governments, set overall corporate governance standards. (The most prominent is the Ontario Securities Commission). The mission of the Canadian Securities Administrators (CSA) is to protect investors and maintain the integrity of the securities markets. As part of this mission, the CSA along with the Canadian Institute of Chartered Accountants (CICA) oversees the work of the Accounting Standards Board (AcSB) that sets generally accepted accounting principles (GAAP) for private companies and that adapts International Financial Reporting Standards (IFRS) form the International Accounting Standards Board (IASB) for public companies and the Canadian Auditing and Assurance Standards Board (AASB), the Canadian Public Accountability Board (CPAB) that sets auditing standards for independent auditors (CAs) of public companies, and the stock exchanges (e.g., Ontario Securities Commission and the Toronto Stock Exchange), that, along with provincial governments, set overall corporate governance standards. Managers  Management Primary Responsibility Responsible for the information in the financial statements and disclosures. Chief Executive Officer (CEO): highest officer of the company Chief Financial Officer (CFO): highest officer associated with the financial and accounting side of the business Accounting Staff: prepare the details of the reports and bear professional responsibility for the accuracy of the information. The primary responsibility for the information in the financial statements and disclosures lies with management, specifically, the highest officer in the company often called the chairman and chief executive officer (CEO), and the highest officer associated with the financial and accounting side of the business, often called the chief financial officer (CFO). The members of the accounting staff actually prepare the details of the information. At Thomson Reuters and all public companies, the CEO and CFO must personally certify that: 1. Each report filed with the provincial securities commission does not contain any untrue material statement or omit a material fact and fairly presents in all material respects the financial condition, results of operations, and cash flows of the company. 2. There are no significant deficiencies and material weaknesses in the internal controls over financial reporting. 3. 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. Executives who knowingly certify false financial reports are subject to a fine of $5 million and a 20-year prison term. The accounting staff also bears professional responsibility for the accuracy of this information, although their legal responsibility is smaller. Board of Directors (Audit Committee)  Board of Directors Primary Responsibility Responsible for ensuring that processes are in place for maintaining the integrity of the company’s accounting, financial statement preparation, and financial reporting.  Board of Directors (Audit Committee) Primary Responsibility Is composed of non-management (independent) directors with financial knowledge and is responsible for hiring the company’s independent auditors. They also meet separately with the auditors to discuss management’s compliance with their financial reporting responsibilities. The board of directors (elected by the shareholders) is responsible for ensuring that processes are in place for maintaining the integrity of the company’s accounting, financial statement preparation, and financial reporting. The audit committee of the board, which must be composed of non-management (independent) directors with financial knowledge, is responsible for hiring the company’s independent auditors. They also meet separately with the auditors to discuss management’s compliance with their financial reporting responsibilities. Auditors  Independent Auditors Primary Responsibility Follow established auditing standards to assess the fairness of the financial statements and related presentations An unqualified, or clean, opinion states that the financial statements are fair presentations in all material respects in conformity with IFRS. The provincial securities commissions requires publicly traded companies to have their statements and their control systems over the financial reporting process audited by an independent registered public accounting firm (independent auditor) following auditing standards established by the CPAB and the AASB. Many privately owned companies also have their statements audited. By signing an unqualified (or clean) audit opinion, a independent auditing firm assumes part of the financial responsibility for the fairness of the financial statements and related presentations. This opinion, which adds credibility to the statements, is also often required by agreements with lenders and private investors. Subjecting the company’s statements to independent verification reduces the risk that the company’s financial condition is misrepresented in the statements. As a result, rational investors and lenders should lower the rate of return (interest) they charge for providing capital. In some cases, the auditor may not be satisfied that the company’s financial statements are in compliance with IFRS. A qualified opinion would then be issued if the company’s management is not willing to modify the financial reports as per the auditor’s recommendation. If the exceptions to IFRS are very serious, then the auditor may issue an adverse opinion if the company’s management cannot be persuaded to rectify the problems to avoid such an opinion. In extreme cases, the auditor may deny the issuance of an opinion if insufficient information is available to express an opinion. These latter types of opinions are rarely issued by auditors. Information Intermediaries: Financial Analysts and Information Services  Information Intermediaries Analysis and Advice 1. Receive accounting reports and other information about the company from electronic information services 2. Gather information through conversations with company executives and visits to company facilities and competitors 3. Results of their analyses are combined into analysts’ reports. Financial analysts receive accounting reports and other information about the company from electronic information services. They also gather information through conversations with company executives and visits to company facilities and competitors. The results of their analyses are combined into analysts’ reports. Analysts’ reports normally include forecasts of future quarterly and annual earnings per share and share price; a buy, hold, or sell recommendation for the company’s shares; and explanations for these judgments. In making their earnings forecasts, the analysts rely heavily on their knowledge of the way the accounting system translates business events into the numbers on a company’s financial statements, which is the subject matter of this text. Individual analysts often specialize in particular industries (such as sporting goods or energy companies). Analysts are regularly evaluated based on the accuracy of their forecasts, as well as the profitability of their stock picks. Users: Institutional and Private Investors, Creditors, and Other  Institutional Investors Includes pension, mutual, endowment and other funds that invest on the behalf of others  Private Investors Individuals who purchase shares in companies  Lenders or Creditors Suppliers, banks, commercial credit companies, and other financial institutions that lend money to companies Institutional investors include pension funds (associated with unions, companies, or government agencies); mutual funds; and endowment, charitable foundation, and trust funds (such as the endowment of your college or university). These institutional shareholders usually employ their own analysts who also rely on the information intermediaries just discussed. Institutional shareholders control the majority of publicly traded shares of Canadian and U.S. companies. Private investors include large individual investors such as Thomas Glocer, Thomson Reuters’s chief executive officer, and his friends who originally invested directly in Thomas Reuters, as well as small retail investors who buy shares of publicly traded companies through brokers such as BMO Nesbitt Burns. Retail investors normally lack the expertise to understand financial statements and the resources to gather data efficiently. Lending officers and financial analysts in these organizations use the same public sources of information. They also use additional financial information (e.g., monthly statements) that companies often agree to provide as part of the lending contract. Lenders are the primary external user group for financial statements of private companies. Institutional and private investors also become creditors when they buy a company’s publicly traded bonds. The Disclosure Process – Press Releases Press Releases are used to announce quarterly and annual earnings as soon as the verified figures are available. Annual Reports For privately held companies, annual reports are simple documents that include: 1. Four basic financial statements. 2. Related notes (footnotes). 3. Report of independent accountan
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