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American Sports company fails to properly disclose perks for Executives

Most countries in the world, including South Africa, are subject to the International Financial Reporting Standards(IFRS); whereas the United States has the U.S. Generally Accepted Accounting Principles(GAAP). There are differences in which these standards require companies to report their financial positions, however the idea behind disclosing significant financial movements is consistent.

MusclePharm Corporation was investigated by the U.S. Securities and Exchange Commission(SEC), and it was discovered that MusclePharm understated nearly $500million rewarded to its executives. Read more about this in the article attached.

The failure to correctly disclose information such as this, as well as the other questionable accounting practices that the company adopted, is not only an financial issue but a Corporate Governance one as well. By understating liabilities, the company is able to boost profit figures and make the company stock seem more attractive.

Moreover, it is generally the case that directors’ remuneration needs to be approved by shareholders — the actions of MusclePharm suggest that shareholders where not consulted regarding the rewards that executives enjoy (which is at the expense of the shareholders considering that they also have a share in the profits). This is unethical and illegal. The board of directors needs to act in the best interests of shareholders, it is a fiduciary duty (acting in good faith).

Furthermore, auditors must be cognisant of fraud if it does exist. Auditors have an obligation to look for fraud.

Side: Relatively, South Africa hardly ever has cases of accounting fraud due to the fact that the application of accounting standards (IFRS) in South Africa is one of the best in the world. 

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