Theoretical Analysis Of The Legal Liability Of False Financial Report

Abstract: legal obligation is the premise of legal liability.

The legal liability of financial report is generated when the information obligor fails to fulfill the obligation of financial reporting properly.

To provide a true and complete financial report is the inherent requirement of the entrusted responsibility of the enterprise management and the requirement of shareholders' equity.

In order to protect the interests of financial providers and promote the development of capital market, all countries adopt mandatory information disclosure system, and investigate the legal liability of false statements, and punish the behavior of providing false financial reports.

A listed company provides false financial reports, and the relevant responsible persons of a company and its directors and managers shall bear corresponding legal liabilities, including civil liabilities, administrative liabilities and even criminal liabilities.

At present, it is mandatory for the listed companies to provide financial reports and accountability for misrepresentation, which has become a common practice of securities law and company law in various countries.

However, why the provision of false financial reports should bear legal responsibility, or why the law should be so oriented, perhaps because people think it is self-evident, few people have studied it.

This article intends to make a preliminary theoretical analysis.

The one or two basic concepts of "[1].": "legal obligation" and "legal liability", "legal liability" refers to "negative evaluation and condemnation of violations of legal obligations or violations of statutory rights". It is a means to force offenders to bear legal adverse consequences, to make certain actions or prohibit them from making certain actions, so as to remedy the infringed legitimate rights and interests and restore the damaged social relations and social order. Another concept that needs to be mentioned here is legal obligation.

In people's habitual thinking, the two words of duty and responsibility are often mixed.

For example, the interpretation of responsibility in Xinhua dictionary is: (1) the duties to be done; (2) the fault that should be borne.

The first explanation here is actually what we normally call obligation, and the second entry is what we call responsibility here.

In fact, legal liability and legal obligation are two concepts which are mutually different and interrelated.

Kelsen (1949) pointed out: "the concept of legal liability is a concept associated with legal obligations. A person is responsible for a certain act in law, or he assumes legal liability here, which means that if he does the opposite act, he should be punished."

Ceng Shixiong (2001), a scholar in Taiwan, has a very clear exposition of the relationship between duty and obligation: the private legal relationship under the normal life of human beings is the relationship of rights, legal interests or obligations; and the private legal relationship of human beings in the opposite state of life is a right or responsibility relationship.

The right (or legal interest) under normal plane is the original power (or the original legal interest), and the right under the opposite side is the right of relief.

The obligation under normal plane is turned into an opposite state, that is, responsibility.

Therefore, responsibility and obligation are pformed into each other.

If the obligation body fulfil its obligations and the legitimate interests of the rights subject are fully realized, the legal relationship will be eliminated normally.

If the obligation body fails to fulfill its obligations, the act should not be done and should not be done in order to infringe upon the legitimate interests of the right subject, then the obligation will be pformed into responsibility [2]. in short, the legal liability is based on the existence of the legal obligation.

Responsibility is essentially a legal consequence resulting from breach of obligation by a perpetrator.

As far as financial reporting is concerned, the principal responsible for legal liability must be those who provide financial reports and related obligations, and only those who disclose information violating the requirements of information disclosure may assume legal liability.

That is to say, violation of the relevant information disclosure requirements, act or omission is a general premise for the legal responsibility of financial reporting.

Two, the legal obligations of financial reports arise. (1) from the perspective of business management authorities, the responsibility of modern companies has shifted from shareholders to operators, that is, the separation of management rights and ownership. Financial providers often do not personally participate in the management of enterprises, but entrust enterprises to specialized managers.

In this way, a principal-agent relationship is formed between managers and shareholders and other resource providers. In accounting, it is called accountability or management responsibility, and the provider is the accountable person, and the manager is the trustee.

After receiving the entrustment, the trustee and manager of the company will have the responsibility of reasonably and effectively managing and using the resources entrusted by the client. He must conscientiously manage and manage the entrusted resources, ensure the safety and integrity of the assets of the enterprise, realize the value of assets and increase the value, and achieve the goal of maximizing the value of the enterprise.

In order to release their fiduciary duties, managers should faithfully provide financial reports to external resource providers to explain the financial position and operating performance of enterprises, so as to indicate the fulfillment of entrusted responsibilities.

Moreover, there should be no concealment or deception in financial reports.

The Commission will determine whether the trustee is conscientious in accordance with his financial report.

As far as accounting is concerned, its role is mainly the latter, that is, the performance of trustee liability is reported to the client, so as to relieve the fiduciary duty.

Therefore, the fiduciary duty includes two aspects: behavior (Management) obligations and reporting obligations.

The trustee must report the performance of his liability to the client, so that the client can make a judgement on whether to continue to delegate the trust, and the trustee also relieves the responsibility.

The reporting obligation is a joint and several liability attached to the duty of conduct. [3]., as professor Yang Shizhan (1992) points out, when a person accepts the resources entrusted by the other party and the power to use and manage the resources, he must bear the responsibility entrusted to the client.

The purpose of accounting is to determine the accomplishment of the entrusted responsibility, which is to clarify the accountability. [4]. needs to point out that there are two kinds of universities in the accounting field: stewardship and decisionusefulness.

The above is actually a view of accountability.

The usefulness of decision making is the prevailing view on accounting objectives. The American Accounting Association (AAA) and the US financial accounting standards board (FASB) adopt a useful view of decision-making.

Are these discussions inappropriate?

The answer is No.

In traditional enterprises, the relationship between asset managers and managers is a direct entrusted relationship.

Under such circumstances, the responsible person will make corresponding awards and punishment decisions according to the performance of the trustee's responsibility in the trustee's report, that is, the management of the delivered resources, including the preservation and increment of the entrusted resources, the safety and integrity of the assets.

In this context, financial reporting is, of course, the purpose of reporting and relieving accountability.

In modern enterprises, shareholders choose managers to manage enterprises through the board of directors, and shareholders and managers rarely have direct relationship.

Especially in the developed securities market, the share rights are very dispersed, and the relationship between resource providers and managers through capital market.

Because the stock can be freely pferred, especially the majority of small and medium shareholders who buy shares through the two tier market, the purpose of holding stocks is not to earn dividends but to earn the share price difference for speculation.

They tend to be short in holding period and often lack the motivation to participate in the general meeting of shareholders.

Therefore, compared with the initial stage of accounting development, the entrusted trust relationship is indirect and vague.

But this does not mean that accountability does not exist.

Under the modern corporate system, many shareholders are faced with the decisions of holding, buying, selling and earning of stocks. These decisions are mainly based on the performance and financial status of the enterprise, that is, the performance of the entrusted responsibility of the management.

The entrustment is based on the performance of the management reflected in the audited financial report, to continue the original contract, or to terminate the decision of the contract.

When the management of the company is not well managed, the business efficiency is low, the performance of the company will decline, and the stock price will fall. The active majority shareholder will punish the manager through the board of directors "voting by hand".

Minority shareholders vote with their feet and sell shares of the company.

Whether vote by hand or foot vote all depend on the financial reports that reflect the management performance of the listed company management authorities.

The above analysis is also applicable to creditors. The performance of the trustee responsibility of the management and its consequences will directly affect the solvency of the company, which is the concern of creditors when making decisions.

Therefore, the implementation of accountability is the basis of decision making, and accountability will inevitably lead to the corresponding decision: whether to terminate or continue to entrust.

Of course, decisions also include other terms related to entrustment, such as remuneration.

Therefore, the author thinks that the theory of decision usefulness and accountability is just a different point of view, and it is a statement of different levels of accounting objectives.

In contrast, the fulfilling of accountability is a deeper goal of accounting. The concept of accountability is concerned with the inside, while the decision usefulness view focuses on the decision itself.

Accountability is the essence. Decision usefulness is the necessary logic of accountability. The two are different understandings of the same thing from different perspectives, and the essence is consistent.

What we need to point out is that users of financial reports are no longer confined to direct providers of wealth - investors and creditors, including other stakeholders, such as employees, suppliers, consumers, etc.

That is to say, the entrusted responsibility of modern financial reports is generalized, and the objects of its help decision-making are diverse.

This is also the inherent reason for modern financial reporting to provide information about social responsibility and environment.

This study focuses on shareholders rather than creditors and other stakeholders.

(two) from the perspective of shareholders, from the perspective of shareholder equity, from the perspective of the most important user shareholder of accounting information, financial reports provided by management authorities are a part of equity, and more accurately, is an important part of shareholders' right to know or information right.

Shareholding refers to shareholders' rights to direct investment in companies.

As for the nature of equity, there are five viewpoints: ownership, creditor's rights, members' rights, shareholder status and aggregate theory. [5][6]. does not propose more comments on this, but tends to adopt the view of Lei Xing Hu (1997), that is, equity is an independent right regulated by the company law and shareholders' direct investment in establishing a company.

It is a comprehensive right which is pferred from the ownership of the capital contribution to the [5].. The fourth provision of the company law of the PRC stipulates that "shareholders as investors shall enjoy the rights of owners' assets, major decisions and selection managers" according to the amount of capital invested in the company.

Specifically, equity includes voting rights, the right to know, the right to propose, the right to question, the right to preemptive right, the right to distribute residual property, the right to distribute dividends, and so on.

The right to know is the derivative right of investors' property right. It means that shareholders have the right to obtain real, accurate and timely information about the company, that is, investors are informed when making investment choices.

Because shareholders invest their assets in an enterprise, they have the right to know their operation.

As a comprehensive reflection of enterprise's economic activities and results, financial reports are the simplest way for shareholders to understand the operation of enterprises.

The right to know is an important right of shareholders. It is a necessary prerequisite and means to protect shareholders' effective form of supervision and correction of company's business. It is an important part of protecting shareholders' rights and interests in a comprehensive way. The realization of other rights largely depends on the realization of the right to know.

First, the right to know will affect whether an investor buys or sells the company's stock, that is to say, whether he will become the "shareholder" of the company.

For those who are interested in investing, they need to evaluate the value of the company. Information provided by the financial report becomes an important basis for value assessment. For those investors who are interested in obtaining stock price differentials, financial reporting is one of the most important sources of information affecting stock prices (though not the only source).

False financial reports make false, incomplete or misleading disclosures on the company's financial status, business performance, cash flow, etc., which will interfere with investment judgment and induce investors to buy or sell shares of the company at an unsuitable price, thereby causing losses.

Therefore, the right to know has a major impact on the premise of equity ownership - becoming a shareholder.

Secondly, the right to know is an important basis for the exercise of the right to vote.

Shareholders elect directors and senior managers to a large extent, depending on the understanding of the company's operating conditions. The main source of shareholders' access to the company's business is financial reports and other accounting books.

The selection of directors by shareholders and indirect selection of managers are mainly based on their operational ability, and their operating ability is mainly reflected by a series of indicators and data reflected in financial reports.