Accounting Policy & Practice Series
Managing Legal Risk in the Financial Reporting Process
Portfolio Description
Portfolio 5503, Managing Legal Risk in the Financial Reporting Process (Accounting Policy and Practice Series), discusses the legal risks public companies face in the financial reporting process and offers some advice for how to manage such risk.
Financial reporting by public companies is one of the foundations of the free enterprise system. Modern capitalism is built upon the financing of large entities by investors. Investors demand accountability for the capital they provide. The financial reporting process is the means by which public companies provide that accountability. Having a reputation for sound financial reporting will likely instill investor confidence in a company and enhance its ability to raise capital and use its securities to make acquisitions. Conversely, improper financial reporting will likely diminish investor confidence and lead to government investigations, shareholder litigation, and the costly measures needed to resolve these problems.
Written primarily for the benefit of the executive management and directors of public companies, this Portfolio analyzes the financial reporting process. It identifies risk factors in the financial reporting process and explains how those risk factors can increase the likelihood of violations of law. These include certain high-risk areas in the financial reporting process, where companies should be especially careful in their accounting and disclosures. To illustrate the problems that can occur, the Portfolio presents actual cases. The Portfolio also discusses the importance of establishing a record of good faith effort to comply with the financial reporting rules in order to lessen the potential for fraud and criminal charges, the most serious charges that a company may confront. It also provides insight into the perspectives of the SEC and its staff on the financial reporting process. Moreover, the Portfolio calls attention to the problem of one company assisting another company to violate financial reporting requirements, an area of intensified focus for regulators at the beginning of the 21st century. Finally, this Portfolio suggests various steps that a company may take to reduce its legal risks, strengthen its financial reporting processes, and build a record of a good faith effort to comply with the financial reporting rules.
This Portfolio is deliberately written in language designed to render it accessible to all users including those not legally trained. Securities law attorneys will appreciate that this Portfolio covers an enormous range of topics within the body of the federal securities laws and should understand that the citations of cases and other authorities herein are illustrative, not comprehensive. This Portfolio is intended first and foremost to be a practical aide to the management and directors of public companies, and not a traditional legal treatise. In the interest of making the issues discussed herein accessible to nonlawyers, this Portfolio is written in the vernacular, and gives preference to comprehensibility for the layperson over technical legal precision. A reader seeking a more detailed and technical discussion of relevant issues should refer to BNA Accounting Policy and Practice Series Portfolios concerning particular bodies of law or accounting rules.
This Portfolio should be cited as BNA Tax and Accounting Portfolio 5503, Wang, Managing Legal Risk in the Financial Reporting Process (Accounting Policy and Practice Series). Within the Accounting Policy and Practice Series, however, references to the Portfolios will include only the Portfolio numbers and titles.
Leonard W. Wang, B.A. (Economics and Political Science) and J.D., University of Wisconsin-Madison, elected to Phi Beta Kappa, Phi Kappa Phi, the Order of the Coif, and the editorial board of the Wisconsin Law Review; member, the District of Columbia Bar and the State Bar of Wisconsin.
