Latin American Capital Markets

214 PIETRO MASCI AND IVAN SOTOMAYORThe filing followed large losses in the previous quarters, repeated restatements ofearnings, revelations of partnerships that kept debt off the balance sheet, and inquiriesfrom the U.S. Securities and Exchange Commission (SEC).The Enron case shows thatfailures of the information disclosure systems can have a devastating impact even in awell-developed financial system. Therefore, it emphasizes the need for continuousoversight of a complex capital market system that requires the intervention of variousplayers and stakeholders.Even before the Enron debacle, economic and financial crisis broke out inemerging economies in the late 1990s. Crises began in 1998 in Asia and spread toother regions of the world, showing the need for reliable and transparent accountingand financial reporting to support sound decisionmaking by investors, lenders, andregulatory authorities. In 1998, the G-7 finance ministers and central bank governorscommitted to endeavor to ensure that private sector institutions in their countriescomplied with internationally agreed principles, standards, and codes of best practices.The ministers and governors called on all countries that participate in global capitalmarkets to equally commit to comply with the internationally agreed codes and standards.In the international context, the objective was to achieve financial stability as aglobal public good.Financial Information, Accounting, and the Capital MarketInvestors as well as lenders have a clear interest in the value of the businesses in whichthey invest. Assuming efficient markets, a firm's value is defined as the present valueof expected future net cash flows discounted at the appropriate risk-adjusted rateof return. Within this framework, the firm's performance as reported in its financialstatements is important, but does not constitute the only input for the so-calledfundamental analysis that establishes the value of the firm. The Financial AccountingStandards Board (FASB) confirms this conceptual framework when it declares thatfinancial statements should help investors and creditors in making correct decisionsand "in assessing the amounts, timing and uncertainty" of future cash flows. 2 Therefore,there must be a time association between financial performance and net futurecash flows as well as a more direct association between security prices and financialperformance. Fundamental analysis plays a crucial role in that it entails the use of in-2 FASB Statement of Financial Accounting Concepts, No. 1, 1978.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub