According to Marshall (2004), "accounting is the process of identifying, measuring, and communicating economic information about an organization for the purpose of making decisions and informed judgements" (p. 3). Specifically, financial accounting "refers to the process that results in the preparation and reporting of financial statements for an entity" (Marshall, McManus, & Viele, p. 5). While many entities prepare their own financial statements, firms can also contract with a public accounting firm or a Certified Public Accountant (CPA) to perform services such as reviewing or compiling statements. (A CPA is a professional designation granted by individual states.) Entities that are publicly traded or complex in nature contract for auditing services. The provider of the auditing service will test the compliance of the entity's financial reporting against generally accepted accounting principles as issued by the Federal Accounting Standards Board (FASB). The provider will also ensure that the company, if publicly traded, complies with requirements of the Securities and Exchange Commission (SEC) and the regulations of the Public Company Accounting Oversight Board (PCOAB). This paper briefly explains the principles of financial accounting and how the deviation from ethical and legal obligations led to greater government oversight and the need for ethics training of future accounting professionals. Principles of Financial Accounting Since 1973, FASB has been the private sector organization designated to establish standards of financial accounting and reporting. Lending authority to its designation is the recognition of the SEC and the American Institute of Certified Publi... ... middle of paper ... ...e accountancy profession, and ethical training for accounting students would go far in creating ethical auditors. References Bean, D. F., & Bernardi, R. A. (2005). Accounting ethics courses: a professional necessity, CPA Journal, 75(12), 64-65. Retrieved Jan 15, 2006, from Business Source Premier database. Financial Accounting Standards Board, (2005). FactsaboutFasb. Retrieved Jan. 16, 2006, from Facts about FASB Web site: http://www.fasb.org/facts/. Marshall, D., McManus, W., & Viele, D. (2004). Accounting, what the numbers mean. 6th ed. New York: McGraw Hill Irwin. Ng, M. (2004, January). The future of standards setting. CPA Journal, 74(1), 18. Weinberg, J. A. (2003, Summer). Accounting for corporate behavior, Economic Quarterly--Federal Reserve Bank of Richmond, 89(3), 1. Retrieved Jan 15, 2006, from Proquest database.
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.
Siegel Ph.D. CPA, Joel G.; Shim Ph.D., Jae K. (2010-02-01). Dictionary of Accounting Terms (Barron's Dictionary of Accounting Terms) (p. 129). Barron's Educational Series. Kindle Edition.
Marshall, D.H., McManus, W.W. & Viele, D.F. (2011). Accounting: What the numbers mean (10 ed). New York, NY: The McGraw-Hill Companies, Inc.
Financial Accounting Standards Board. (2006, July 6). Conceptual Framework for Financial Reporting. Financial Accounting Series , 1-55.
creating situations where ethical issues such as independence and integrity are questioned making it imperative that the AICPA create guidelines from which the evolving profession must base itself. In the age of deregulation accounting jumped on the boa t, now it is becoming increasingly fashionable to re-regulate, accounting, as a profession must not miss that boat, lest they drown in the result-- government intervention.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2008). Financial accounting (6th ed.). Hoboken, NJ: Wiley.
Hoggett, J., Edwards, L., Medlin, J. (2008). Accounting, 6th Edition. John Wiley & Sons Australia Limited.
What does ethics have to do with accounting? Everything, since there have been some recent financial accounting scandals; a few examples being Xerox, WorldCom, Enron, which have generated much unwanted and unfavorable publicity for CPA's, including those working as controllers or chief financial officers for organizations.
Horngren, C.T., Sundem, G.L., Elliott, J.A., Philbrick, D.R. (2006). Introduction to Financial Accounting (9th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.
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).
Albrecht, Steve W. et al Accounting Concepts & Application (8th edition ed.). Cincinnati, Ohio: South Western. (2002).
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).
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
Garrison, R. H., Noreen, E. W., & Brewer, P. c. (2010). Managerial Accounting. New York: McGraw Hill/Irwin.
Abdolmohammadi, M., Fedorowicz, J. and Davis, O. (2009) findings indicate that despite the attention in recent years to the importance of ethics and social responsibility in the accounting curriculum and the profession, the ethical reasoning scores of those attracted to public accounting seems to have actually deteriorated over the past 15 years. This outcome suggests that there is a need for improved training and education of public accountants in ethical reasoning and decision making. The report concluded that ethical reasoning increases with age and education, but education is the primary factor in this relationship.