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On September 28 1998 Chairman of the US Securities and Exchange Commission Arthur Levitt sounded the call to arms in the financial community Levitt asked for immediate and coordinated action to assure credibility and transparency of financial reporting Levitts speech emphasized the importance of clear financial reporting to those gathered at New York University Reporting which has bowed to the pressures and tricks of earnings management Levitt specifically addresses five of the most popular tricks used by firms to smooth earnings Secondly Levitt outlines an eight part action plan to recover the integrity of financial reporting in the US market placeWhat are the basic objectives of financial reporting Generally accepted accounting principles provide information that identifies measures and communicates financial information about economic entities to reasonably knowledgeable users Information that is a source of decision making for a wide array of users most importantly by investors and creditors Investors and creditors who are responsible for effective allocation of capital in our economy If financial reporting becomes obscure and indecipherable society loses the benefits of effective capital allocation Nothing illustrates the importance of transparent information better than the pre-1930s era of anything goes accounting An era that left a chasm of misinformation in the market A chasm that was a contributing factor to the market collapse of 1929 and the years of economic depression An entire society suffered the repercussions of misinformation Families and retirees depend on the credibility of financial reporting for their futures and livelihoods Levitt describes financial reporting as a bond between the company and the investor which if damaged can have disastrous long-lasting consequences Once again the bond is being tested Tested by a financial community fixated on consensus earnings estimatesThe pressure to achieve consensus estimates has never been so intense The market demands consistency and punishes those who come up short Eric Benhamou former CEO of 3COM Corporation learned this hard lesson over a few short weeks in 1996 Benhamou and
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