1. Copyright © Cengage Learning. All rights reserved Why Accounting Information Is Important Recent accounting problems for corporations and their auditors –Pressure on corporate executives to look good to analysts and investors Why audited financial statements are important –Bankers, creditors, investors, and government agencies rely on an auditor’s opinion 17| 1

2. Copyright © Cengage Learning. All rights reserved Why Accounting Information Is Important (cont’d) What is an audit? –An examination of a company’s financial statements and accounting practices –Generally accepted accounting principles (GAAP)—an accepted set of guidelines and practices for companies reporting financial information and for the accounting profession –Organizations that influence the methods used by the accounting profession: FASB, AICPA, IASC –An audit does not guarantee that a company has not “cooked” the books 17| 2

3. Copyright © Cengage Learning. All rights reserved Why Accounting Information Is Important (cont’d) Reform: The Sarbanes-Oxley Act of 2002 –The SEC must establish an oversight board to police the accounting industry –Top executives are required to certify periodic financial reports and are subject to criminal penalties for violations –Accounting firms cannot provide many types of consulting services to the companies they audit –Auditors must maintain financial documents and audit work papers for 5 years –Auditors and accountants can be imprisoned for up to 20 years for destroying documents and violating securities laws –A public corporation must change its auditing firm every 5 years –There is protection for whistle-blowers who report violations of the Sarbanes-Oxley Act 17| 3