New Financial Reporting

New financial reporting requirements have been put in place to deal with the latest accounting and corporate scandals. Although major laws were passed to prevent abuses in the financial world, and cure weaknesses in the reporting system, after the stock market crash of 1929, recent financial collapses made clear that better safeguards were needed. The Securities and Exchange Commission (SEC) has issued guidelines, and Congress has passed legislation to deal with obvious problems in financial reporting.

The Securities Act of 1933 demands "full disclosure" of all "material facts" about a company's financial condition so the public can make informed investments. In the following year, the Securities Exchange Act mandated continuous disclosure of a company's financial decisions and operations, again, so the public can decide whether or not management is running an efficient, profitable business. These and other laws were intended to bring "transparency" into financial analysis and reporting for the benefit of the investing public.

Sarbanes-Oxley Act of 2002 Updates Requirements

Generally accepted accounting principles (GAAP) are the standard laid out by the SEC for accounting and reporting. Increasingly, some corporations used non-GAAP accounting and reporting methods that concealed the true nature of certain financial arrangements. When these methods were revealed as companies collapsed and went bankrupt, the SEC emphasized the necessity for GAAP to be used throughout the financial world.

Sarbanes-Oxley implemented measures to attain appropriate accounting and auditing methods in corporations in order to protect investors. The SEC declared that oversight of the accounting and auditing functions had failed, and that tighter restrictions and new financial reporting requirements would be put in place. It is now quite clear, for instance, that auditors must be independent and must not become a part of managerial policies.