The FASB, SEC, and PCAOB
Ethical financial reporting is critical to ensure consumer confidence within an economy. Accounting entries record cash transactions in the form of financial reports. Financial reporting is used to interpret and analyze business activities for the purpose of investing and efficient management. Misrepresentations, whether intentional or accidental, can send the wrong signal to interested parties resulting in wrong decisions being made. Companies have an ethical and legal obligation to financial reporting. To ensure correct reporting is followed, several agencies are employed to regulate business. The Financial Accounting Standards Board, FASB, Securities and Exchange Commission, SEC and Public Company Accounting Oversight Board, PCAOB, are all agencies involved in promoting fair accounting principles for United States businesses.
The most commonly known regulating agency is the SEC. It is the government ruling agency that oversees accounting for publicly traded companies in the United States. This agency was created in 1934 in response to the events which lead to the Great Depression. The mission statement of the SEC is "to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation" (U.S. Securities and Exchange Commission, 2006).
Instead of implementing its own rules, the SEC has chosen the FASB to set high quality accounting standards to protect public interests (Wikipedia, 2006a). In response, the FASB has developed Generally Accepted Accounting Principles, GAAP, to regulate U.S. companies. As a non-profit, private organization, the FASB has no influence by government agencies or other groups. As business changes, the FASB updates GAAP to remain applicable to...
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...York: McGraw-Hill.
Marshall, D., McManus, W. and Viele, D. (2004b). Financial Statements
and Accounting Concepts/Principles. In M. Marcus (Ed.) Accounting: what the numbers mean (pp. 29-50). New York: McGraw-Hill.
U.S. Securities and Exchange Commission. (2006). The Investor's Advocate:
How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation. Retrieved May 7, 2006 from http://www.sec.gov/about/whatwedo.shtml
Wikipedia Contributors. (2006a). Public Company Accounting Oversight Board. Wikipedia, The
Free Encyclopedia. Retrieved May 5, 2006 from http://en.wikipedia.org/wiki/PCAOB
Wikipedia Contributors. (2006b). Financial Accounting Standards Board. Wikipedia, The Free
Encyclopedia. Retrieved May 5, 2006 from http://en.wikipedia.org/wiki/FASB
Ethics plays a vital role in developing accurate and high quality financial statements for management, financial institutions, and investors. As management utilizes financial statements to make decisions regarding the operations of the business, it is necessary to review accurate financial statements to make strategic decisions about the future of the organization. Investors and financial institutions require accurate financial statements to make informed decisions upon whether to invest funds into the organization or the wisdom of lending funds to said organization.
FASC did not change GAAP, but it does now ask non-governmental entities to “apply the American Institute of Certified Public Accountants Technical Inquiry Service Section 5100, Revenue Recognition”.
Reimers, Jane L. (2003). Financial Accounting A Business Process Application. Upper Saddle River, New Jersey, Prentice Hall.
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
The PCAOB has the authorization to provide rules governing the following areas; ethics, independence, and quality control for any registered accounting firm...
In the early 1930s Congress passed two major statues, which are the hub of federal securities regulation in the United States today. These two statues, the Securities Act of 1933 and the Securities Exchange Act of 1934 have three basic purposes
What makes the Sarbanes-Oxley Act effective is that it is “Administered by the U.S. Securities and Exchange Commission (SEC), SOX sets deadlines for compliance and publishes rules on requirements, covering a wide range of rules. The consequences for failing to comply with certain provisions range from fines to imprisonment” (Cunningham). The SOX also creates, “accountability of company executives and members of the board of directors” (Jahmani). The act essentially created several provisions to regulate and protect shareholders along with the general public from accounting errors and fraudulent practices in the enterprise. The accounting industry, financial reporting, and the auditing of public companies in particular must follow these provisions.
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
Gibson, C. H. (2011). Financial reporting & analysis: Using financial accounting information. (12th ed.). Mason, OH: South-Western Cengage Learning.
Albrecht, W. S., Stice, J. D., Stice, E. K., & Skousen, k. F. (2002). Accounting Concepts and Applications. Cincinnati: South-Western.
Accounting ethics has been difficult to control as accountants and auditors must keep in mind the interest of the public while that they remain employed by the company they are auditing. The accountants should take into account how to best apply accounting standards when company faces issues related financial loss. The role of accountant is crucial to society. They serve as financial reporters to owe their primary constraint to public interest. The information provided is critical in aiding managers, investors and others in making crucial economic decisions. An accountant is responsible for any fraudulent financial reporting. Some examples of fraudulent reporting are:
Private and public accounting has long been discussed and disputed in regards to financial reporting. Since the Financial Accounting Standards Board (FASB) was created in 1973, accountants have called for different accounting regulations for private and public accounting sectors, as private companies do not have the resources to meet the complex requirements of public companies. Private companies currently are not required by law to issue annual or quarterly financial statements (James, 2012). Private companies do, however, have the option to apply the U.S. Generally Accepted Accounting Principles (GAAP), cash basis, or accrual accounting to their financial statements (James, 2012).
One of the most debatable topics in the accounting industry today is the extent to which we should make the financial statements understandable to the general population.... ... middle of paper ... ... While there is a great deal of controversy over neutrality, it is again important that FASB maintain a careful balance between cost and effectiveness.
Marshall, D. H., McManus, W. W, & Viele, D. (2002). Accounting: What the Numbers Mean. 5th ed. San Francisco: Irwin/McGraw-Hill.
The second organization was designed by the SEC in 1973. The FASB was designed with the purpose of creating financial accounting and reporting standards for the public. “The mission of the FASB is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information” (FASB n.d. ¶ 3). The FASB is designed much like the FASB in which they are to protect the public from fraud and misleading information from the company.