In 2001 and 2002, several accounting scandals were uncovered which resulted in very significant financial losses for investors and creditors of U.S. corporations. This led to legislation that placed the primary players in the financial reporting process, including reporting companies and their auditors, under closer government scrutiny. In a BusinessWeek article, "Annual Reports: Still Not Enough Candor," dated March 14, 2003, author Mike McNamee raises the question, "Did corporate America get the message?"

McNamee goes on to state that he believes the answer to this question is "no." He describes accounting practices that still result in vague information that does not meet the needs of financial statements users. He specifically cites the rules by which accountants count revenue as an example of an area where practices are inadequate, particularly in the high-tech, energy, pharmaceutical, and retail industries.

Instructions

a. Identify the objectives of external financial reporting discussed in this chapter. How would information that meets these objectives help investors make a decision concerning a potential investment in a company?

b. What institutional and other features that are part of the accounting profession are intended to enhance the integrity of financial reporting?