Managing the Risk of Misleading Financial Metrics in Annual Reports: A First Step towards Providing Assurance over Management's Discussion

Journal of Accounting Literature, Forthcoming

60 Pages Posted: 5 May 2016

See all articles by Dennis Caplan

Dennis Caplan

State University of New York (SUNY) at Albany

Saurav K. Dutta

State University of New York (SUNY) at Albany

Date Written: May 4, 2016

Abstract

Recent public policy initiatives seek greater transparency in financial reporting through an honest, balanced and thorough management discussion of company performance in the annual report. Management’s discussion invariably includes key performance indicators, such as financial ratios, relevant to external stakeholders. We model the impact of accounting estimates, assumptions, choices and errors on the risk of misleading financial ratios. This framework is illustrated through good and bad examples of financial reporting practices and by simulation of financial data of public companies. We provide a structured approach to inform policymakers, auditors and other stakeholders of the incremental financial reporting risk that accompanies current regulatory efforts.

Keywords: Audit Risk, Financial Ratio, Financial Reporting Transparency, MD&A

JEL Classification: C11, C15, C44, D81, M41, M40, M49

Suggested Citation

Caplan, Dennis and Dutta, Saurav K., Managing the Risk of Misleading Financial Metrics in Annual Reports: A First Step towards Providing Assurance over Management's Discussion (May 4, 2016). Journal of Accounting Literature, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2775328

Dennis Caplan

State University of New York (SUNY) at Albany ( email )

135 Western Ave
Building, Room 109
Albany, NY 12222
United States

Saurav K. Dutta (Contact Author)

State University of New York (SUNY) at Albany ( email )

135 Western Ave
Building, Room 109
Albany, NY 12222
United States

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