Accounting - Trust = confidence in the truth.

(From Financial Director)

Byline: Peter Williams.

Post-Enron, much of the reason for the sluggish performance of the stock market is investor lack of confidence in the credibility of financial reporting and disclosure. Restoring that magical ingredient - confidence - is now vital. But how will such a restoration be achieved?

Almost all the high-profile disasters were powered by a triple failure in business, governance and reporting. A reporting failure occurs when the governance structure fails to prevent or detect a business issue that should be communicated to the users of the financial statements.

As a business moves closer to a business failure, the management's incentive to distort reporting increases and, therefore, so does the chance of reporting failure.

This latest wave of corporate collapses dented confidence harder than similar failures in previous decades because stock markets across the globe had seen stock prices rise rapidly to historically high levels, including notable surges in particular sectors such as telecoms and e-business. The pressures on management to deliver performance in line with the expectations of the market were correspondingly high and increasingly focused on maintaining share prices in the short term.

The International Federation of Accountants (IFAC) has published a report, Rebuilding Public Confidence in Financial Reporting, produced by a task force that identifies and analyses the causes of the loss of credibility, how to restore that credibility and best practice recommendations. It concludes that "extensive action" is required to raise credibility.