Issues Surrounding Forecasting in a Business Entity

In our present economy and computerized society, investors and creditors would like as firm an analysis as possible of the present and the past activities of a business. They also would like a preview of the future. This thesis presents the issues surrounding forecasting and discusses how they relate to a firm\u27s legal liability. The major problem is how to make forecasting information available while avoiding the danger of legal liability for the preparer. This paper presents an overview of the existing legislation and rulings concerning business forecasting promulgated by the SEC, AICPA and FASB. All of these elements focus on the issues surrounding legal liability. An overriding concern is that if a company is constantly concerned about being sued it is unlikely it will attempt to forecast the future of the company. The problem of legal liability is paramount to a discussion of forecasting. The SEC\u27s Safe Harbor Ruling and various court cases will be presented to help bring the problem of legal liability into proper perspective. Also an understanding of the various aspects of forecasting and the relevant statements by the SEC, AICPA and FASB are essential in order to create a background upon which the issue of legal\u27 liability can be more readily comprehended. For example, the same financial concepts that are important to a financial statement are also essential to a forecast. The method of research for this thesis was library work. Publications written by the AICPA, SEC and FASB were reviewed and information gathered from the big eight accounting firms were analyzed. Articles from the following business and accounting journals were integrated: Journal of Accountancy, Forbes , Management Accounting and Harvard Review. This thesis brings together much of the literature being written on the topic of forecasting. Chapter I presents an introduction to the topic of forecasting and reviews the elements that will be presented in the following chapters. It explains that forecasting is essential for showing the investor or the corporate organization the probable financial position of the company in the future and the possible resulting changes in financial position. Chapter II covers regulatory agencies opinions and rulings on accounting methodology. The Securities and Exchange Commission has published two statements on financial forecasting. They are the Guides for Disclosure of Projections of Future Economic Performance and the Safe Harbor Rule for Projections. The AICPA covers some of the same premises as the SEC rulings. The three publications are the Guidelines for Systems for the Preparation of Financial Forecasts, Statement of Position 75-4 and a Guide for a Review of a Financial Forecast. Chapter III analyzes the various components essential to forecasting. Management\u27s goals and assumptions which precede the development of a forecast are presented first. Next the format that can be used in the presentation of the financial forecast and an analysis of the elements of the forecast are presented. The qualitative characteristics of reporting described in the Trueblood Report and later updated in the FASB statement of Financial Accounting Concepts No. 2 are reviewed. The fourth chapter discusses the many ramifications of legal liability. The legal liability rulings initiated by the SEC and the common law courts are examined and relevant court cases such as the Monsanto Case are presented. Finally opinions by noted accountants and surveys done round out the presentation of liability. The fifth and final chapter summarizes the preceding information and reaches the conclusion that it is evident by the studies and rulings initiated by the SEC, AICPA and FASB that forecasting is an important part of the financial picture for the future