Professional investment
analysts
and individual or institutional investors evaluate the value of a company's shares, the quality of its debt, and the competence of its management and strategy based on the information in its 10-k and other financial reports.
Unfortunately, some companies have filed financial statements that vastly overstated earnings by employing deceptive accounting procedures. Overstated earnings harm investors in the long run, but they're profitable for executives compensated according to earnings growth or increases in share prices.
In response, the Sarbanes-Oxley Act of 2002 now requires both CEOs and CFOs to take greater responsibility by certifying that their annual and quarterly financial statements accurately represent the company's financial condition. Certifying false results is punishable by prison time as well as hefty fines. In addition, there are now greater restrictions on what business relationships are acceptable between companies and the accounting firms that
audit
their financial statements. This wall is designed to discourage financial relationships that could compromise the quality of audits.
