Characteristics of Financial Accounting

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Characteristics of Financial Accounting

• Accounting identifies, measures and communicates
  financial information.
• This information is about economic entities.
• Information is communicated to interested parties
  such as investors, creditors, managers, unions
  and governmental agencies.

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Objectives of Financial Reportingby Business
Enterprises

• The objectives are specified in Statement of
  Financial Accounting Concepts No. 1. and are as
  follows
• Information provided must be useful in investment
  and credit decisions
• Information must be useful in assessing cash flow
  prospects
• Information must be about enterprise resources,
  claims to those resources and changes therein.

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Generally Accepted Accounting Principles (GAAP)

• The profession has developed GAAP that present
  fairly, clearly and completely the financial
  operations of the enterprise.
• GAAP consist of authoritative pronouncements
  issued by certain accounting bodies.

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The Standard Setting ProcessParties Involved

• Securities and Exchange Commission (SEC)
• American Institute of Certified Public
  Accountants (AICPA)
• Financial Accounting Standards Board (FASB)
• Governmental Accounting Standards Board

• A federal agency with oversight powers.
• The national professional organization of
  practicing CPAs.
• Private sector agency that establishes and
  improves reporting standards.
• Regulates state and local governmental reporting
  issues.

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Public Company Accounting Oversight Board

• The Public Company Accounting Oversight Board
  (PCAOB) was established to
• oversee the audits of public companies
• protect the interests of investors
• further the public interest in the preparation of
  independent, accurate, and informative audit
  reports.

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Public Company Accounting Oversight Board

• The board is a non-profit corporation, not an
  agency or establishment of the United States
  Government.

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Public Company Accounting Oversight Board

• Membership on the board
• five financially-literate members
• appointed for five-year, full-time terms
• two of the members must be or have been certified
  public accountants
• the remaining three must not be and cannot have
  been CPAs.

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Public Company Accounting Oversight Board

• Duties of the Board
• register public accounting firms
• establish, or adopt, by rule, "auditing, quality
  control, ethics, independence, and other
  standards relating to the preparation of audit
  reports for issuers"
• conduct inspections of accounting firms
• conduct investigations and disciplinary
  proceedings, and impose appropriate sanctions

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Public Company Accounting Oversight Board

• Duties of the board (continued)
• perform such other duties or functions as
  necessary or appropriate
• enforce compliance with the Act, the rules of the
  Board, professional standards, and the securities
  laws relating to the preparation and issuance of
  audit reports and the obligations and liabilities
  of accountants with respect thereto
• set the budget and manage the operations of the
  Board and the staff of the Board.

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Public Company Accounting Oversight Board

• Auditing standards
• Accounting firms must prepare and maintain for at
  least 7 years audit work papers and other
  information related to any audit report
• 2nd partner review is required

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Public Company Accounting Oversight Board

• Registration of accounting firms
• Only registered public accounting firms may
  issue, prepare, or participate in the issuance or
  preparation of audit reports for public
  companies.
• The board will collect a registration fee and
  annual fee from each registered public accounting
  firm.

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Public Company Accounting Oversight Board

• The SEC has oversight and enforcement authority
  over the board
• The SEC must conduct a study on the adoption of
  principles-based accounting standards in the U.
  S.

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The Financial Accounting Standards Board (FASB)

• The FASB, the Financial Accounting Foundation
  and the Advisory Councils make up the standard
  setting structure.
• The FASB enjoys the following advantages
  compared to its predecessor, the Accounting
  Principles Board
• smaller membership
• greater autonomy
• increased independence of members
• broader representation on the Board
• full time, paid members

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FASB Due Process

• In establishing financial standards, the FASB
  follows due process.
• Due process gives time to interested persons to
  make their views known to the Board.

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FASB Due Process
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Due Process
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Major Types of FASB Pronouncements

• Standards and Interpretations
• modifications or extensions of standards
• Financial Accounting Concepts
• objectives and concepts used in the development
  of standards
• Technical Bulletins
• provide timely guidance on reporting issues
• Emerging Issues Task Force Statements
• reach consensus on accounting for new and unusual
  financial reporting practices

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GAAP and Other Authoritative Pronouncements

• GAAP consists of FASB Standards and
  Interpretations, APB Opinions and AICPA
  Accounting Research Bulletins.
• There are other documents that are considered to
  provide authoritative support.
• See next slide for a hierarchy of these
  pronouncements.

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Impact of User Groups on Standard Setting
Procedures
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Challenges Facing Financial Accounting

• Non financial measurements need to be developed
  and reported.
• More information needs to be provided regarding
  soft assets (intangibles)
• Forward-looking information, in addition to
  historical information, must be provided.
• Statements may have to be prepared on a real time
  basis (and not just periodically)

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International Accounting Standards

• The International Accounting Standards Committee
  (IASC) was formed in 1973 and recently renamed
  International Accounting Standards Board (IASB)
• The objective was to narrow divergence in
  international financial reporting.
• There are many similarities between U.S. and
  International accounting standards.