Statement of Financial Accounting Concepts No. 1 . "Objectives of Financial Reporting by Business Enterprises," identifies investors and creditors as the primary users of financial reporting information. Investors in public companies express their
opinions about an entity's equity securities through organized exchanges such as the New York Stock Exchange. Given that investors represent one of the two primary groups to which financial reporting is directed, accountants and auditors preparing and opining on, respectively, the financial statements of public companies should be aware of the effects of the quality of financial reporting on stock prices. Required: Identify four major periods of decline in worldwide stock prices for the years 1997 through 2002 and discuss the role (if any ) of financial reporting in these declines.
The four major periods of decline in worldwide stock prices for the period 1997 through 2002 and the role of financial reporting in these stock price declines are as follows:
1 . The first period of decline occurred in 1997 . This decline was a result of concerns by investors regarding the reliability of banking and financial information in a number of Asian countries.
2 . The second period of decline occurred in 2000 . This resulted primarily from the highly speculative period associated with purported business possibilities related to the Internet. Many investors relied on nonfinancial measures of success as guides to their investment decisions. These nonfinancial measures were not found to demonstrate high correlation with the ability of a company to generate profits through the use of the Internet. Many investors failed even to consider financial information and, in many instances, were making investment decisions based on unsupported promises of managers promoting the stocks of their companies.
3 . The third period of decline occurred as a result of the political and economic uncertainty created by the September 11, 2001 terrorist attacks. Financial reporting did not have a major (if any) role in creating this decline.
4 . The fourth period of decline began in 2002 . This decline was directly related to the lack of credibility of the financial reports of U.S. corporations. This period brought to light several accounting frauds resulting from the misapplication or outright violation of generally accepted accounting principles.
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