Ceo/Cfo Certification and Emerging Needs to Separate Facts and Forecasts: Exploring 'Intertemporal Financial Statements' with Two Time-Phases

Abstract

The Sarbanes-Oxley Act of 2002 created mandatory certification of financial reports by chief executive officers and chief financial officers, possibly exposing them to forecast risks. This is because accounting standards have moved to include more and more forecasts, while the public expects financial statement figures to be much more solid than they actually are. Presenting forecasts separately from facts seems most important now and also to qualify them for the SEC's Safe Harbor protection. "Intertemporal financial statements" are explored here. Their amounts are presented in three columns, "facts," "forecasts," and "total," where the total column is exactly the same as those in conventional statements. All completed transactions and all cash transactions appear in the fact column and all non-cash transactions awaiting terminating transactions appear in the forecast column. Each column is like pre-consolidation statements for a subsidiary and balances on its own in all statements. Investors and regulators will welcome this added breakdown of conventional numbers since hard and soft numbers are clearly separated for a better assessment of corporate financial positions and performances. We also present a principal-agent setting in which it is optimal to remove contractual pressure from forecasts when the environment is unknown or subject to rapid change.

JEL Classification: D82, E37, G10, K22, M41, M45, O16