Integrity essential in reporting financial results

Corporate scandals have recently rocked the business world, shocked shareholders and the public at large, and led to the downfall of several large-scale firms. Congress responded to abuses with the Sarbanes-Oxley Act of 2002 which requires sign-offs from company officers when reporting financial results and greater attention to the auditing process.

This action is designed to help stem reporting abuses and to provide more accurate information to owners about the true financial health of companies. It was also designed to make officials more accountable to shareholders of publicly held companies.

Technically, cooperatives are not covered by this new legislation, unless they have issued securities to the public. These securities are most often in the form of debt instruments, such as bonds, debentures or preferred trusts. As user-owned businesses, cooperatives rarely have outside equity holders. The very few that do hold them as preferred stock investments rather than trading them on public markets.

So are cooperatives required to have officers vouch for the integrity of the numbers they are reporting to members? Technically no, but in a practical sense that is precisely what they should do.

As reported in several articles and Newsline items in this issue, the operating climate for cooperatives, like that for other businesses, is very challenging. This is heightened by low commodity prices and the drought, both of which have plagued the agricultural sector in many parts of the country for over 3 years.

In addition, there have been situations where hired management has been fraudulent and has been discharged or prosecuted. Despite the isolated instances of ethical failures, cooperatives can generally be pleased with the integrity of boards and management.

In these times though, extra diligence is required and some provisions of the new law should be considered by cooperatives management, boards and auditors. The requirements for effective board policies for hiring management officials with a reputable record of maintaining accurate financial records, use of auditing committees, limits on speculative trading and hiring reputable outside auditors are important to achieving performance and maintaining a record of reporting reliable financial results.

One of the underlying strengths of cooperatives is the practice of keeping members informed. Knowledgeable members can deal with both good and bad economic news, but keeping them in the dark can lead to an atmosphere of mistrust and skepticism that undermines the internal strength and cohesiveness of the organization. The first step is board action to ensure that its own directors understand the financial condition of the cooperative and that it obtains accurate and timely information from accountants, management and auditors.

Randall Torgerson, Deputy Administrator
Rural Business-Cooperative Service

November/December Table of Contents