1. ‘Improving the quality of financial reporting necessarily involves the imposition of certain burdens and costs on publicly listed companies. Despite these costs, it is believed that a more...

1. ‘Improving the quality of financial reporting necessarily involves the imposition of certain burdens and costs on publicly listed companies. Despite these costs, it is believed that a more transparent and reliable financial reporting process ultimately results in a more efficient allocation of resources and in a lower cost of capital. Nevertheless, in terms of cost and benefit, these additional costs need to be offset against the impact of reduction of outright fraud and other practices that result in lower quality financial reporting.’

Discuss the following questions with regard to the conflicts of interest between companies’ shareholders and management, and corporate lenders such as bankers:

(a) Provide some examples of actions the company’s shareholders and management can take that are at variance with the interests of corporate lenders.

(b) Give examples of actions management can take that are at variance with the interests of shareholders.

(c) What mechanisms might serve to reduce potential conflicts between the various parties involved in corporate financial reporting (e.g. between shareholders and corporate lenders and/or management and shareholders)?