Should The Feds Change their Method of Analysis for Troubled Firms?
By Syreeta L. McNeal, CPA, JD
Should the United States federal government bailout companies like Freddie Mac, Fannie Mae, Lehman Brothers, Merrill Lynch, and American International Group (AIG) or should some level of responsibility be given to the executive leadership of these companies?
Every time I view the latest news on our federal government’s bailout of these companies, I wonder if our government is covering up another mess on how they failed to regulate unethical business practices.
It appears that the Enron, Worldcom and Arthur Andersen saga of 2000 is happening all over again. In response to this prior fiasco, the federal government passed The Sarbanes-Oxley Act of 2002. This legislation was intended to establish standards for all U. S. public companies’ board, management, and public accounting firms. The caveat is that this legislation does not apply to privately held companies. The legislation established the Public Company Accounting Oversight Board (PCAOB) overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies.
As recent news reports show that Balance Sheet manipulation occurred with the growing list of companies seeking bailout from federal government, bankruptcy protection or for companies to acquire them to stave off financial ruin, it is time for the federal government to finally advocate emphasis on a company’s Statement of Cash Flows as the basis for investment and financial strength for companies.
Most accountants know that analysis of a company’s Statement of Cash Flows is the only way to ensure financial stability. However, most companies and investment analysts want to emphasize the amount of revenue generated on the company’s Income Statement or the amount and value of assets they have listed on their Balance Sheet. Generally, a company’s Income Statement and Balance Sheet is where manipulation can occur by key executives and in my opinion, these financial instruments do not truly show the financial strength of a companies operating business.
If the federal government really wants to protect the tax payers from having to bailout faltering companies, it is time for the federal government to start emphasizing to companies and Wall Street that the Statement of Cash Flows will be the basis of analysis for investment purposes. But, will the federal government do this? I am not betting on it, but hopefully advocating for it. As tax payers, we should too.
Source: http://en.wikipedia.org/wiki/Sarbanes-Oxley_Act
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This is a difficult question to answer. We should said people now are smarter than before. That’s why they could find way (s) to make their financial statements look better than what they suppose to be to beat the wallstreet’s expectation while escape from those rules and regulations.
huali22 - September 21, 2008 at 5:56 pm |
I agree that there needs to be an increased emphasis on the statement of cash flows for investing purposes. The fact of the matter is finance has become so inordinately complex that there is barely anyone that truly understands the various facets of our economy/markets. In addition to the frustrating level of complexity there are some securities that are just too hard to price (or at least we haven’t come up with the correct way to price them at this time) which is a large reason that major Wall St. firms have been collapsing recently…no one knows how to value some of the securities they possess so stock prices do not accurately reflect the true value of the company.
zackpien - September 22, 2008 at 12:17 am |
There must be a firm resolution created by the federal government to ensure that this crisis never happens again. Tax payers will feel the pain in the present and in the future due to the deficit that the United States Government is building up. It will be intereshit come election time as to how this will play out.
ahmedmadry - September 23, 2008 at 2:13 pm |