Market Regulatory Authorities
Typical features of a regulatory regime that most directly affect financial reporting quality include the following:
- Registration requirements
- Disclosure requirements
- Auditing requirements
- Management commentaries
- Responsibility statements
- Regulatory review of filings
- Enforcement mechanisms
Auditors
Audit opinions provide financial statement users with some assurance that the information complies with the relevant set of accounting standards and presents the company’s information fairly.
Private Contracting
Aspects of private contracts, such as loan agreements or investment contracts, can also serve as mechanisms to discipline poor financial reporting quality. Many parties that have a contractual arrangement with a company have an incentive to monitor that company’s performance and to ensure that the company’s financial reports are high quality. For example, loan agreements often contain loan covenants, which create specifically tailored financial reporting requirements that are legally binding for the issuer.
