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Accounting Regulatory Agencies

Accounting Regulatory Agencies

ACCOUNTING REGULATORY AGENCIES Introduction Accounting standards are needed so that financial statements will fairly and consistently describe financial performance. Without standards, users of financial statements would need to learn the accounting rules of each company, and comparisons between companies would be difficult. Numerous accounting bodies govern the accounting environment and accommodate the success of a business. The four main financial governing bodies include the following: • Securities and Exchange Commission (SEC) • Financial Accounting Standards Board (FASB) Governmental Accounting Standards Board (GASB) • International Accounting Standards Board (IASB) Securities and Exchange Commission (SEC) The Securities and Exchange Commission is a U. S. regulatory agency that has the authority to establish accounting standards for publicly traded companies. The SEC provides financial reporting requirements both form and content – including GAAP – as well as regulation of various financial services entities and market mechanisms. The SEC retains the right to overrule FASB pronouncements, and it occasionally exercises this right.

The SEC would appear to have the most legal power in response to the establishment of standards. The Office of the Chief Accountant assists the Commission in executing its responsibility under the securities laws to establish accounting principles, and for overseeing the private sector standards-setting process. The Office works closely with the Financial Accounting Standards Board, to which the SEC has delegated authority for accounting standards setting, as well as the International Accounting Standards Board and the American Institute of Certified Public Accountants.

The Office also consults with registrants and auditors on a regular basis regarding the application of accounting and auditing standards and financial disclosure requirements . Financial Accounting Standards Board (FASB) The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U. S. The FASB employs an elaborate due process procedure prior to the issuance of an SFAS. The due process procedure consists of the following a hierarchy of steps: 1. Placement of agenda 2.

Issuance of invitation to comment or a Discussion Memorandum 3. Public Hearings 4. Issuance of an Exposure Draft 5. Public Hearings 6. Issuance of Statement of Financial Accounting Standard. These steps are the FASB’s attempt to acquire consensus as to the preferred method of accounting, as well as to anticipate adverse economic consequences. The method used by FASB is appropriate because the decisions are free from political influence due to the fact that it is an organization in the private sector. The partnership between the FASB and the SEC provides for a system of checks and balances.

Therefore, unreasonable principles that contain biases cannot be written and approved by the same body. FASB uses “RULES” based approach to develop standards where standards are usually explicit as to precise rules that must be followed for recognition, measurement and financial statements presentation. A rules-based approach states that if the rules are followed strictly when preparing financial statements, they will not be misleading. This strict adherence to the rules may not always leads to the best approach in the preparation of financial statements.

The danger is that detailed rules drive out professional judgment resulting in decisions that are consistent with the rules but inconsistent with the principle of providing the most useful financial information. Under U. S. GAAP there is more than one accounting method (or principle) is acceptable for some transactions. This provides managers with considerable discretion in preparing their financial statements. Governmental Accounting Standards Board (GASB) In 1984, the Governmental Accounting Standards Board (GASB) was formed o set standards for the financial reports of state and local government and also to report activities of the government entities to the general public. While the GASB has jurisdiction over financial reporting by governmental entities, the FASB establishes rules for private sector accounting. Both boards are independent, nongovernmental bodies whose members are appointed by the trustees of the Financial Accounting Foundation (FAF). Before issuing its standards, the GASB follows the set of “due process” activities enumerated in its published rules of procedure.

Due process is stringent and is designed to permit a thorough and open study of financial accounting and reporting issues by the preparers, auditors, and users of financial reports, in order to encourage broad public participation in the standards setting process. Significant steps in the process are announced publicly. The GASB’s meetings are open to public observation and a public record is maintained. One difference between the two organizations is that the rules of the GASB need not apply to that of FASB.

If the GASB had not covered an accounting topic that the FASB had, then the FASB standards would be used by the government entities. This sets up kind of like a default so that there are not so many different rules and possibly double standards. The GASB and the FASB both have the authority to create rules, with the GASB having the ability to create rules that override the FASB. International Accounting Standards Board (IASB) The International Accounting Standards Committee (IASC) was formed in 1973 to encourage international cooperation in developing consistent worldwide accounting principles.

In 2001, the IASC was succeeded by the International Accounting Standards Board (IASB), an independent private sector body that is structured similarly to FASB. The IASB is responsible for developing and approving International Accounting Standards (IAS). One of the important goals of ISAB is development of standards that leads towards harmonizing financial statements. But one of the criticisms of harmonized accounting standards is that the IASB has failed to fully take into account the cultural, political and social differences between countries.

This is particularly relevant to their implementation in developing countries, where language barriers, attitudes toward accounting and other socio-cultural aspects may affect their interpretation and application. One weaknesses of the IASB is that this London-based Accounting Standard Board writes the rules, but there is no international organization with the power to enforce them and assure that companies are incompliance. There is International Organization of Securities Commissioners (“IOSCO”) which does have some oversight responsibility over the development of IFRS, but it has only limited enforcement power compared to that of the SEC.

International Financial Reporting Standards (IFRS’s) are developed through an international consultation process, the “due process” which involves interested individuals and organizations from around the world. The ISAB standard setting process has several steps: (1) Setting the agenda, (2) Planning the project, (3) Developing and publishing the discussion paper, (4) Developing and publishing the exposure draft, (5) Developing and publishing the standard, (6) Procedures after an IFRS is issued.

The International Accounting Standards Board uses a “principles-based approach” to develop its standards. A principles-based approach applies fundamental concepts to ensure financial statements are not misleading. The burden is placed on the preparers and auditors of the financial statements to use their judgment and experience to ensure the financial statements are not misleading. A principles-based system is heavily dependent on the use of concepts and these are often culturally and contextually derived.

References – “IFRS – Convergence or Adoption” retrieved from http://www. accountingtoday. com/news/IFRS-Convergence-Adoption-55554-1. html – “Our Standards-Setting Process” retrieved from http://www. fasb. org/facts/index. shtml#decision-making -“About the governance and accountability arrangements of the organization” retrieved from http://www. ifrs. org/The+organisation/Governance+and+accountability/ governance+and+accountability. htm -“Facts about GASB” retrieved from http://www. gasb. rg/jsp/GASB/Page/GASBSectionPage&cid=1175804850352 -“How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation” retrieved from http://www. sec. gov/about/whatwedo. shtml – “Due process” retrieved from www. iasb. org/NR/rdonlyres/1E8D75B7927F… /DueProcess09. pdf – “The Development of financial accounting and reporting standards” retrieved from Spiceland, J. David; James F. Sepe and Mark W. Nelson, (2011) Intermediate Accounting, Sixth Edition. New York, McGraw-Hill Companies, Inc