The potential implications of the financial reporting expectations gap for the development of corporate governance

Author: Higson Andrew  

Publisher: Palgrave Macmillan Ltd

ISSN: 1746-6539

Source: International Journal of Disclosure and Governance, Vol.10, Iss.3, 2013-08, pp. : 234-245

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Abstract

Following the collapses of Enron and WorldCom, Sarbanes-Oxley aimed to strengthen corporate governance structures. However, the crisis in the Banking sector must bring into question the success of Sarbanes-Oxley, and perhaps more significantly the success of corporate governance in the modern business world. This article suggests that a lack of understanding of the financial statements, which are regarded as an important aspect of accountability, may be a fundamental stumbling block in the development of corporate governance. Indeed, the claims being made on behalf of what the financial statements can deliver appear to be contributing to the financial reporting expectations gap - comprising the much discussed audit expectations gap and the almost ignored financial statements expectations gap. Without a clear understanding of the scope and limitations of the financial statements, the accountability of directors must be problematic and thus the effectiveness of corporate governance questionable.