Standards Of Financial Accounting example essay topic

Introduction The Accounting profession has been established since the early 1900's. The profession has continued to develop in response to the needs of users of financial statements for financial information to support decisions and informed judgments. This paper will discuss the various accounting standards and their relationships, accounting theories, and evaluate the role of ethics in accounting. Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) was organized in 1973. FASB has been recognized as the designated organization in the private sector for establishing standards of financial accounting and reporting. They are officially recognized by Securities Exchange Commission as being authoritative.

The council at present consists of 30 members who are broadly representative of preparers, auditors and users of financial information. The standards "govern the preparation of financial reports and are essential to the efficient functioning of the economy because investors, creditors, auditors, and others may rely on credible, transparent and comparable financial information" (. net). Whereas, the Securities and Exchange Commission (SEC) has statutory authority to establish financial, accounting and reporting standards for publicly held companies under the Securities Exchange Act of 1934. However throughout its history, the Commission's policy has been to rely on the private sector for this function to the extent that the private sector demonstrates ability to fulfill the responsibility in the public interest. The FASB mission 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. The FASB develops broad accounting concepts as well as standards for financial reporting.

FASB also provides guidance on implementation of standards. It is found that concepts are useful in guiding the Board in establishing standards and in providing a frame of reference, or conceptual framework, for resolving accounting issues. The framework will help to establish reasonable bounds for judgment in preparing financial information and to increase understanding of, and confidence in, financial information on the part of users of financial reports. It also will help the public to understand the nature and limitations of information supplied by financial reporting. Securities and Exchange Commission Following the stock market crash in 1929, fortunes of numerous investors were lost and swarming emotions of depression was on the rise. Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934.

President Franklin Delano Roosevelt appointed Joseph P. Kennedy, President John F. Kennedy's father, to serve as the first chairman of the SEC. The SEC consists of five p residentially-appointed Commissioners, four divisions and 18 offices. There are approximately 3,100 staff members. The headquarters are in Washington, DC, the SEC has 11 regional and district offices throughout the country. The primary mission of the U.S. Securities and Exchange Commission (SEC) is to protect investors and maintain the integrity of the security markets. SEC requires public companies to disclose meaningful financial and other information to the public, which provides a common pool of knowledge for all investors to use to judge for themselves if a company's securities are a good investment.

The SEC also oversees other key participants in the securities world, including stock exchanges, broker-dealers, investment advisors, mutual funds, and public utility holding companies. The SEC is concerned primarily with promoting disclosure of important information, enforcing the securities laws, and protecting investors who interact with these various organizations and individuals. Public County Accounting Oversight Board The Public County Accounting Oversight Board (PCAOB) is a private-sector, non-profit corporation, created by the Sarbanes-Oxley Act of 2002 to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports. It consists of five board members who are appointed for five year terms. Two of the members must have been or is currently working as certified public accountants, and the remaining three must not be and cannot have been CPAs. Members of the Board are appointed by the Commission, 'after consultation with' the Chairman of the Federal Reserve Board and the Secretary of the Treasury.

FASB, SEC, and PCAOB Relationships Successful relationships amongst the FASB, SEC, and PCAOB can flourish with companies and / or professionals. Utilizing PCAOB and SEC together will qualify the individual or organization to provide services to public companies. Performing annual peer reviews to ensure the quality of work is in accordance with the company's professional standards and FASB. Accounting Theories In accounting, theories explain and predict accounting practice (positive theories), or prescribe practice (normative theories). Positive accounting theory (PAT) explains and predicts accounting practice but does not seek to prescribe particular actions. In this theory, the focus is on the relationships between various individuals involved in providing resources to an organization (agency relationship) for example managers and debt providers or owners and managers.

Agency theory is the delegation of decision making from the principal to the agent. Delegation of authority can lead to loss of efficiency and increased costs (agency problem). Agency costs will arise as a result of the relationship. The agency costs will consist of: monitoring costs, bonding expenditures, and residual loss. Some assumptions of PAT are the following: all individual action is driven by self-interest, individuals will act in opportunistic manner to increase their wealth.

Notions of loyalty and morality was not incorporated with the theory. PAT prediction states that organizations will put in place mechanisms to align the interests of managers of the firm (agents) with the interests of the co-owner (-). Some of these mechanisms rely on output of the accounting system. Mechanisms are put up front with the objective of minimizing future agency costs. Accounting methods adopted by firms best reflect the underlying financial performance of the entity. Ethics in Accounting Ethics ultimately is a matter of personal responsibility.

Consistently making ethically correct decisions is not easy. It requires commitment and practice, which require first an awareness and then a motivation to act ethically. Ethics is an important key element in the accountant profession where the individual must provide information to support the informed judgments and decisions made by users of accounting information. Having integrity, objectivity and independence are other key elements to have and utilize in this profession in order to receive respect and be able to perform the job adequately. A real life situation that everyone is familiar with is the Enron case of which Nancy Temple, lawyer, broke the code of ethics. Nancy Temple was aware of the SEC but went against their policy by having someone erase her name from file memo that disagreed with Enron's characterization of a $1 billion loss and eventual closure of the business.

Conclusion In conclusion, the accounting profession is still evolving and adjusting to the changing needs of the society. The accounting standards have undergone progress with the development of guidelines and have been generally accepted within the profession. The code of ethics will always be associated with any profession and the importance of it will always be expressed and shared.

Bibliography

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