The accuracy of finance reporting is critical for the general efficiency of capital markets and the proper valuation of a company’s publicly traded securities.  Shareholders rely on accurate reporting in order to make an informed evaluation of strategy, business model, and risk.  Further, the board of directors awards performance compensation to management based on the achievement of predetermined financial targets.  Accurate financial reporting is critical to ensuring that results are stated honestly and that management has not manipulated results for personal gain.

The audit committee of the board of directors is responsible for ensuring that the integrity of financial reports.  It does so in two ways:

1. By working with management to set the parameters for accounting quality, transparency, and internal controls
2. By retaining an external auditor to test the financial statements for material errors.

The Sarbanes-Oxley Act of 2002 mandates many of the requirements for financial reporting in the U.S., but this is also an ongoing legislative and regulatory process.