Organizations that influence current practice in accounting include the (FASB), (SEC), and (PCAOB)

University Degree Business and Administrative studies

Accounting Standards

Professional ethics are a code of conduct for financial accountings that addresses whether the action is right or wrong. Accounting principles are guidelines that financial accountants must abide by in the preparation of financial statements to ensure the legitimacy and accuracy of the report. Many organizations have been created to make sure that financial accountants are following guidelines and acting ethically in the business. Some of these organizations include the Securities and Exchange Commission (SEC), the financial Accounting Standard Board (FASB), and the Private Company Accounting Oversight Board (PCAOB).

Financial Statements

The exercises in the simulation (“Accounting Fundamentals,” 2002) explain and relate the four principle financial statements of accounting. These four financial statements are the income statement, the statement of owners’ equity, the statement of cash flow, and the balance sheet. The income statement is a report that shows the revenue, expenses, and resulting net income or net loss over a period of time. The statement of owner’s equity presents the changes that take place in the owner’s equity over a period of time. Changes in owner’s equity can occur as a result of variation in the amount of investment, net income, and drawing. The statement of owner’s equity relies on the results of the income statement to determine the change in equity. The balance sheet shows the financial position of a business on a specific date. The body of the balance sheet shows assets, and liabilities and capital. The balance sheet is usually prepared after the preparation of the income statement and the statement of capital because it needs the new capital balance information. The statement of cash flow shows the difference in the owner’s cash balance over a period of time. This statement is related directly to the other three statements. Its net income comes from the income statement, investments and withdrawals come from owner’s equity statement, and other items such as accounts receivable, accounts payable, and etc. come from the balance sheet. However, the cash balance from the statement of cash flows is important in the balance sheet for calculating the value of the total assets.

The financial statements prepared for businesses are audited by certified public accountants to ensure that the statements are in accordance with the “generally accepted accounting principles” (GAAP). GAAP is a set of practices used by financial accountants as guidelines to ensure that financial statements are accurately prepared and information presented are unbiased (Anderson, Caldwell, Mills, & Needles, 1996, p. 24). Accounting practices can be created or modified in response to changes in society to better serve decision makers.

Accounting Organizations

Many organizations have been created to review and monitor accounting practices to prevent confusion and fraud. Organizations that can ...

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Accounting Organizations

Many organizations have been created to review and monitor accounting practices to prevent confusion and fraud. Organizations that can influence current practice in accounting include the SEC, the FASB, and the PCAOB.

SEC is a federal agency that oversees and regulates accounting practices for companies whose securities are offered for sale to the general public. Its mission “is to protect investors and maintain the integrity of the securities market,” (“United States Securities and Exchange Commission [U.S. SEC],” n.d.). The stock market crash in 1929 resulted in great loss of fortunes by investors and banks. In addition, the incident made the public lose confidence in the capital markets. To restore public confidence, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws require that public companies disclose their financial and other information to the public so that any investors, whether large corporations or private individuals, should have enough facts prior to making decisions about doing investments. SEC has the legal authority to bring civil enforcement actions against any companies or individuals that violate the securities laws such as, insider trading, accounting fraud, and falsifying information about securities.

Before 1973, the standard-setting process was controlled by the Accounting Principles Board (APB). However, this board failed to develop a common conceptual framework for financial reporting. The work was delegated to the FASB, whose mission has been to establish and improve standards of financial accounting and reporting so that investors, creditors, auditors, and others can rely on financial information to make business decisions. To accomplish its mission, the FASB acts to change and improve several issues. The board requires that the financial report be reliable and consistent; kept current to reflect changes in business dealing; and reviewed for deficiency that might be improved (“Financial Accounting Standards Board [FASB],” n.d.).

As a result of Enron’s collapse, public blamed the FASB; therefore, in July 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002 (“Accounting: What the Numbers Mean,” 2003, p. 10). This act created the Public Company Accounting Oversight Board (PCAOB) and gave the board the authority to oversee and inspect the auditors of public companies to produce informative, fair, and independent audit reports (Public Company Accounting Oversight Board [PCAOB],” n.d.). The board also has the authority to impose disciplinary penalties for violations of the auditing standards, as well as securities laws.

Ethics

All accountants are required to follow a code of professional ethics that addresses whether everyday actions are right or wrong (Anderson, Caldwell, Mills, & Needles, 1996, p. 26). In addition, “Accountants must act with integrity, objectivity, and independence, and they must exercise due care in all their activities ((Anderson, Caldwell, Mills, & Needles, 1996, p. 29). Integrity is a characteristic that encompasses honesty and candidness; and objectivity means to act impartially. Furthermore, independence means having no direct connection or interest with the clients. To exercise due care is to work with competence and diligence. Suspension from practicing accounting is a disciplinary action for violators.

Discussion

Professional ethics and accounting principles are important aspects in the practicing of accounting. Many important organizations such as the SEC, the FASB, and the PCAOB were created to provide a check and balance system of accounting practices in the United States. These organizations were not created at the same time; instead, they were formed only when changes were necessary. This goes to show that accounting principles can be created, eliminated, or modified to reflect the changes in business dealing.

References

Accounting Fundamentals, 2002. Retrieved March 20, 2005, from University of Phoenix web site:

Accounting: What the Numbers Mean, 2003. Retrieved March 20, 2005, from University of Phoenix Web site:

Anderson, H., Caldwell, J., Mills, S., and Needles, B. (1996). Financial and managerial accounting: A sole proprietorship approach. Boston, MA: Houghton Mifflin Company.

Financial Accounting Standards Board, n.d.. Retrieved March 27, 2005, from

Public Company Accounting Oversight Board, n.d.. Retrieved March 27, 2005, from

United States Securities and Exchange Commission, n.d.. Retrieved March 27, 2005, from