The need for creating strict universal standards

by Shawn Harville

 Abstract

There are basic business and accounting guidelines that most company managers and accountants try to follow, However because these standards are broad in nature two accountants can report the same information differently but ultimately come up with similar findings.  The broad rules of acceptable accounting practices can cause problems and conflicts when trying to report, audit, and control and regulate the balance sheet, income statement, owner’s equity, and cash flow reports by The Accounting Profession.  The United States Congress created the Securities Exchange Commission to help them regulate and set universal standards for financial reporting to try to prevent another depression or stock market crash and keep the information true and accurate.  I will use the text, lecture notes, and web sites of agencies that have been created to help regulate stabilize and monitor the accounting profession and give suggestions for improvement.

Ethical and Legal Obligations in business and Accounting

The need for creating strict universal standards

The public trust is important when a public company offers shares of stock ownership to the public the accuracy of the financial statements is paramount for most investors to decided on choosing one company over another.  In a broad sense, accounting is the process of identifying, measuring, and communicating economic information about an organization for the purpose of making decisions and informed judgments (marshal p 4).

Integrity and ethics in accounting is important to preserve the rights of the free market system to protect the individual money right to invest in the market and make profit.  Because of the depression government has taken steps to protect the investors confidence when considering investing in a publicly traded company. The SEC protects the information entities; owners, managers, and investors use to make economic and financial decisions.  Protecting the economy is also part of the SEC responsibilities while trying to keep an open free market system. The accounting, financial reporting, and auditing weaknesses related to the 1929 stock market crash gave impetus to this effort(marshal p 3).  Congress created the Securities and Exchange Commission (SEC) these acts apply to securities offered for sale in interstate commerce. These laws allowed The SEC significant control, and effect on the standard-setting process because the SEC has the authority to establish accounting principles to be followed by companies whose securities had to be registered with the SEC (marshal p9).

The SEC because of its broad duties appointed another commission the AICPA which created the FASB which goals is to set uniform standards of accounting practices, and comply with the SEC duties to regulate monitor and enforce rules for fair interstate commerce.  SEC is concerned with Securities When reviewing for compliance with SEC regulations, analysts determine and Exchange whether or not financial statements issued to investors fully disclose all required Commission information (marshal p4). 

The integrity of the companies reporting factual information was minimal and many believe helped cause the market crash that started the depression.  The ethical and integrity of the economic accounting reporting system is important if the SEC is to prevent a complete collapse of the economy from happening again.

The SEC gave responsibilities to the AICPA, which created the FAF, which created the Financial Accounting Standards Board (FASB) as the authoritative standard-setting body within the accounting profession. The FASB embarked on a project called the Conceptual Framework of Financial Accounting and Reporting (marshal p 10) The FASB deals specially with accounting practices and tries to set standards that will help create uniform practices.  The FASB does have the power to set rules and regulations but must go to the SEC for enforcement.  They also operate and are completely independent when making there decisions or creating policies. 

Trustees of the Financial Accounting Foundation the (FAF) wants the FASB’s standards-setting proposals; to remain independent of the standards-setting process, which they believe is threatened by current legislative proposals. Because of Enron and what happened with Arthur Anderson auditing practices, George W. Bush, Congress and the SEC reaffirmed the need for the Sarbanes-Oxley Act of 2002(PCAOB ). 

The U.S. Securities and Exchange Commission (SEC) used this act to establish the PCAOB which created a five-member Public Company Accounting Oversight Board (PCAOB), which has the authority to set and enforce auditing, attestation, quality control, rule making and enforcing auditing standards.  The PCAOB has direct control of public accounting firms that audit publicly traded companies (marshal 10,11).  PCAOB's rulemaking process results in the adoption of rules that are then submitted to the Securities and Exchange Commission for approval. PCAOB rules do not take effect unless approved by the Commission. PCAOB rules include auditing and related professional practice standards, Forms, and the Board's Bylaws and Ethics Code.

The fundamental importance of the independent private sector accounting standard setting to our capital markets has long been recognized and was recently reviewed. The FAF has acted to preserve the independence of private sector accounting standard setting so that the FASB is able to develop standards in a thorough, objective, and open way. (FASB). The broad rules and the different interpretation give rise to new problems to be exploited.  The Acceptable accounting practices should be condensed and the different interpretations to get the same results should be eliminated for better accuracy and consistancey.  The FASB has done little when it comes to uniformity in developing quality financial accounting and reporting standards The need to create more committees for auditing is proof they are not strengthen our capital markets and keep our economy in a constance wait and see mode waiting for the next crisis management situation by enabling the lack of honesty and integrity when reporting economic accounting information to entities.