2 Regulation, regulators and reporting
Accounting, reporting and auditing – not an exact science Accounting and its rules are not an exact science. These two quotations epitomize the issue:1 • •
“How do you explain to an intelligent public that it is possible for two companies in the same industry to follow entirely different accounting principles and both get a true and fair audit report?” “Every company in the country is fiddling its profits.”
This conundrum is referred to as the expectation gap. Identified by Porter in 19932 (and others), it refers to the gap between expectation and actual performance. This can be divided into deficient performance, deficient standards (together making a performance gap) and unreasonable expectations. Expectations, reasonable or otherwise, continually change. They only grow, not diminish. Auditors and standard setters consistently lag behind. We know that accounting and the preparation of financial reports is like portraying dynamic n-dimensions into static two-dimensions – many interpretations and tricks are possible. Originally the financial reports consisted of: 1 The balance sheet, a snapshot of the business at a specific date; 2 An income statement or profit and loss account measured over a period of time and the cash flow statement;3 3 Various notes to these statements and accounting policies. Not so now. It has been expanded with various additional reports and narrative reporting (sometimes referred to as the strategic report and
