Accounting and Financial Statements (Ethics)
Accounting and Financial Reporting is a rather board topic being defined in many ways. This report will refer to accounting and financial reporting as the way companies record their business transactions and report that information to their investors through Financial Statements. The topics covered will demonstrate how laws affecting accounting and financial reporting play a key role society today and the ethics behind these decisions. With the recent changes being made to the accounting profession, it is important to understand the new laws being enacted with the Sarbanes-Oxley Act of 2002, the new role of the SEC, and AICPA Rule 101 on independence. There are many ethical issues arising due to the behaviors of companies; especially in the way they display information to their investors and the rest of the public stakeholders.
GAAP – Accounting Foundations
The main guidelines for accounting and financial reporting are contained in the GAAP Hierarchy. The SEC has allowed various private-sector organizations to come up with these accounting standards for the United States. The resulting standards make up the generally accepted accounting principles, or GAAP. GAAP is not a definite rule but rather it is a Hierarchy, which is made up of varying degrees of authority. The highest authority is FASB Statements and Interpretations, APB Opinions, and CAP Accounting Research Bulletins. The second group of authority is FASB Technical Bulletins, AICPA Industry Audit and Accounting Guides, and AICPA Statements of Positions. The third grouping of authority is the Consensus Positions of EITF and AICPA Practice Bulletins. The lowest level of authority is AICPA Accounting Interpretations, FASB “Question and Answer” guides, and other widely recognized industry practices (Skousen, 16). These guidelines help structure how accounting and financial reporting should be preformed to ensure completeness and accuracy. Stakeholders must realize the importance of standards because they are “essential to the efficient functioning of the economy because investors, creditors, auditors, and others rely heavily on credible, transparent and comparable financial information” (www.fasb.org/news/nr021402.shtml).
Importance of Accurate Financial Statements
John M. Foster, a Financial Accounting Standards Board (FASB) member, explains the significance of neutral, high quality financial reporting. Investors and other stakeholders must believe the information found in financial statements is credible. It is evident that stakeholders believe “financial statements prepared under GAAP, are reliable, relevant, consistent, and comparable” (Foster). Ultimately, stakeholders must trust auditors to make sure that information is being properly presented.
Additionally, the numbers contained in financial statements must be useful and credible. To achieve this, the numbers must record all economic activities of a company and its subsidiaries, not just selective activities that make the company “look good”. Credible financial statements are ones that do not omit information nor print a better picture of a company’s activities. Having financial statements that stakeholders and investors alike can have faith in fuel our economy. To further ensure useful and credible information in the financial statements, FASB [next page]