COMMENTARY
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
