Summary: Public confidence in the fairness of financial reporting is critical to the effective functioning of the securities markets. Federal securities laws require public companies to disclose information that accurately describes the financial condition of a company. These laws also require that financial statements filed with the Securities and Exchange Commission (SEC) by public companies be audited by independent public accountants. During the past 20 years, costly, well-publicized, and unexpected business failures--such as the savings and loan crisis and the resulting government bailouts--have raised questions about what the public expects from an independent audit of public companies and how well the audit function meets those expectations. More recently, the globalization of business, the increasing complexities of business transactions, and advances in information technology have challenged the relevance and usefulness of traditional financial reporting and the auditor's role in serving the public interest. These issues, along with major litigation involving independent auditors, prompted many studies of financial reporting and auditing during the past two decades, resulting in hundreds of recommendations to the accounting profession. This report (1) identifies recommendations made from 1972 through 1995, and actions taken, to strengthen accounting and auditing standards and the performance of independent audits of publicly owned companies required by federal securities laws and (2) identifies unresolved issues and determines their impact on the performance of independent auditors, the setting of effective accounting and auditing standards, and the scope of business reporting and audit services. GAO found that although the accounting profession has made changes to improve financial reporting and auditing of public companies, several major issues remain unresolved. These issues include auditor independence, auditor responsibility for detecting fraud and reporting on internal controls, public participation in standard setting, the timeliness and relevance of accounting standards, and maintaining the independence of the Financial Accounting Standards Board. The appendices to this report can be found in GAO/AIMD-96-98A.
