Generally Accepted Accounting Principles - Essay Example

FINANCE AND ACCOUNTING al Affiliation) Key words: Financial ments, auditors, board of directors. INTRODUCTIONAll profit making organizations have an obligation to collect, summarize, and communicate its financial information. They do so by preparing financial statements used internally and externally by various users. The information presented in these financial statements should present the true and fair view of the company in a clear and concise manner for the entity and other external users. Generally Accepted Accounting Principles (GAAP) requires all organizations to present financial statements to maintain continuity and presentation of information across international borders (Gee, 2006). These financial statements act as guidelines for tax, financing, and/or investing purposes. It is the core responsibility of the board of directors to ensure that the company’s financial statements are honest. The auditors perform a check on these financial statements to ensure that they reflect the true and fair view of the respective organization (Drake, & Fabozzi, 2006). An audit tests the authenticity of the financial statements and their validity for use by the public. The internal users of these statements are the management and the board of directors while external users include; shareholders, investors, tax authorities, and the interested public. Therefore, all public listed organizations must make their financial statements accessible for all. Presenting the true and fair view of financial information has faced criticism from analysts due to the recent financial scandals. Disclosing financial statements is an activity subject to fraud and misconduct from the relevant bodies. Financial scandals arise from this disclosure as organizations tend to; misusing funds, overstating the value of organization assets, overstating revenues, understating expenses, or the underreporting the existence of liabilities. Financial scandals are often orchestrated by the organization’s officials, which include the board of directors, who, sometimes, tend to collude with the auditors. DISCUSSION A board of directors is an independent body, either elected or appointed, to oversee the activities of an organization (Belcher, 2014). A company’s board of directors must include individuals responsible for the functioning of the accounting department. The main objective of this body is to ensure a fair representation of both management and shareholders’ interests. These members normally play a huge role in the preparation of financial statements and the prevention of fraud. The board of directors has a good understanding of the organization and should always present the organization in a true and fair view in all its departments. The board of directors must be well represented by experts in all the relevant fields that run an organization. Appointing directors that will be in charge of the accounting department requires stringent vetting and selecting the best among the accountants. The selected should be responsible for the accounting department and should ensure that preparation of financial statements is free from fraud. Shareholders also play a part in the appointment of directors since; the appointed director should consider shareholders’ interest and integrate them with the management of the organization. The board of directors is responsible for the preparation of financial statements. It compiles the yearly financial activities of the respective organization; compare the organization’s objectives to the financial balances, and to prepare the financial statements (Belcher, 2014). The board of directors should value all assets, liabilities, expenses, and incomes and these should be reflected in the financial statements. The objective of doing this is; to ensure that the financial statements reflect the true and fair view of the organization’s current value. They do so since they are agents of both the organization and shareholders with an aim protecting shareholder interest, and to work in accordance to the organization’s rules. In the prevention of fraud, the board of directors ensures that the shareholders’ investments in the organization are efficiently used in a transparent and wise manner. Shareholders are not managers, and so, they cannot control how their investments are used. All they do is waiting for yearly reports and see how the organization is operating in terms of profits. The board of directors oversees how these investments are managed and ensure that shareholders’ funds are not embezzled by management. The board of directors is responsible for preparing financial statements that represent the true and fair view of the organization’s financial information. Auditors perform a check on the validity and legality of these financial statements in regards to the financial information. Therefore, it is the core responsibility of this body to prevent financial scandals as it contains the primary information regarding an organization. Auditors are independent experts who analyze and review an organization’s accounts to ensure the legality and validity of its financial records (Drake, & Fabozzi, 2006). Auditors are either internal or independent external experts who have a broad knowledge in accounting, that is, all auditors are accountants but not all accountants are auditors. Internal auditors provide reasonable assurance that an organization’s financial statements are free from material misstatements and render an unqualified opinion on these statements. These auditors provide a platform for the external auditors to perform a validity and legality check on financial statements. External auditors do not provide absolute assurance since; all they do is to perform a check on the financial statements, check whether they reconcile, and are true according to the financial information provided to them. External auditors are expected to detect fraud and any illegal acts, which affect the integrity of financial reports. These auditors are concerned with material misstatements in the financial statements as audited by internal auditors. Auditors prevent financial scandals in the disclosure of financial statements to the public by detecting these material misstatements. Auditor independence requires that auditors should carry out their work freely and in an objective manner and should not be influenced by parties that may have a substantial interest, financially, in the business. An auditor is supposed to be independent and governed by integrity to ensure that the audit process is free from bias. By not favoring any party, auditors achieve their objective of ensuring that the true and fair value of financial information disclosed to the public is free from material financial scandal. Auditor independence is made possible by a successive process of rotating auditors. Auditor independence is hindered by familiarity. Long existence of an auditor in one organization can give rise to a familiarity threat in the validity and legality of financial statements. Auditors need to be rotated to curb the problem of familiarity threat which will enhance their independence. Audit quality refers to the ability of auditors to meet investor needs for independent and reliable audits of the financial statements, an assurance about internal control, and information on the going concern ability of an organization (Jelen, & Dowell, 2007). Audit quality places confidence to the public concerning the truthfulness and reliability of the financial statements disclosed by an organization. A quality audit means that any possible financial scandal has been placed under stringent processes and the measures put in place to determine the validity of financial statements as disclosed by an organization. Criticism about the honesty and fairness of financial statements caused by the recent financial scandals has prompted regulators and government authorities to issue new regulations and legislation. Regulators require a mandatory public disclosure for all organizations seeking access to public securities markets. Financial scandals arise because; organizations may hold back material information, which would be termed as fraud. These regulators are sufficiently competent to be entrusted with the power to intervene and to offer solutions to the criticisms. Organizations should have incentives to disclose information voluntarily at socially optimal levels. The accounting standard setting should also be regulated to enhance the regulation of financial disclosure. The regulating authorities have offered solutions to the criticisms and doubts among the users of financial statements on their validity and legality. By placing the relevant regulations, presentation of financial statements would be free from financial scandals. The UK Act 2006 was set to establish rules for the operation of companies. The first part of the act sets out the fundamentals of a company; what a company is, how it can be formed, and the naming structure of a company. The act indicates whom the officers and members of a company are indicating how each make decisions regarding the operating of a company. It sets out the ethical practices of the officers of a company and gives a wide explanation of how a company raises share capital. This act gives the regulatory framework on the application to companies not formed under the Companies Acts and matters concerning company reconstructions, takeovers and mergers (Walker, 2002). This act has simplified company administration for both private and public companies. The act recognizes that private companies have fewer shareholders as compared to public companies, which do not, require them (private companies) to comply with complex legal formalities. It, therefore, simplifies the regime for a private company administration. The act provides a platform for the establishment of companies, which was rather difficult, and the formulae was not laid out in well defined terms. This act enables every member of a company to be aware of his/her rights, duties, and legal action imposed on each member. This ensures that the members act according to their legal limits. This act offers transparency in the establishment of companies by ensuring that every company follows the right procedures as set out in the act. The major disadvantage of this act is that it sets out harsh and stringent regulations that may be strenuous to small companies. This act may lead to the fall-out of small companies that may be unable to adhere to the set regulations. Amendments to this act may be time consuming and may lead to the review of other broader areas which would cause confusion among the followers of such amendments. Despite these disadvantages, the UK Companies Act 2006 is useful in the establishment and governance of companies. With the set guidelines and regulations, the act has made it possible to for the government and relevant authorities to oversee the activities of all companies. This act reconciles the activities of companies and ensures that its activities are harmonized in regard to the act. The general structure of the act makes it easier for all companies to understand its contents as compared to if companies had to follow their own regulations. This act ensures the harmonization of all companies in terms of their structure and activities regardless of their different operations. Due to information asymmetry, a director can adjust an organization’s financial information to suit some personal interest. With the presence of the UK Companies Act 2006, government, and regulatory bodies, financial scandals have been mitigated, and this has improved the public confidence on the honesty and fairness of financial statements. CONCLUSION Accounting, being one of the most basic functions of a company, is very sensitive, and it must be free from bias from the involved parties. With the regulations and legislations put in place, organizations have a duty in preparation of financial statements and preventing fraud. With the board of directors and auditors responsible for this duty, financial scandals have been fairly combated and confidence restored upon the preparation and use of financial statements. The UK Companies Act 2006 provides the basic knowledge about companies and guidance on how to undertake various operating activities. With the act, legal action against perpetrators of financial scandal can be brought to book and face the law. The act stipulates the legal measures against parties held liable for such activities. In general, finance and accounting would not have been possible without the presence of regulatory bodies and this act. Therefore, preventing fraud is a responsibility that lies on everyone’s performance objectives. Although auditors perform a check on the activities undertaken by an organization, the board of directors should provide an assurance that the financial statements prepared and presented are free from bias and present a true and fair view of the respective organization. Bibliography Belcher, A. 2014. Directors Decisions and the Law Promoting Success.. Hoboken: Taylor and Francis. Drake, P., & Fabozzi, F. J. 2006. Analysis of financial statements 2nd ed.. Hoboken, N.J.: Wiley. Gee, P. 2006. UK GAAP for business practice New ed.. Amsterdam: Elsevier/CIMA. Jelen, B., & Dowell, D. K. 2007. Excel for auditors. Uniontown, Ohio: Holy Macro Books. The role of boards. 2010. Edinburgh: Audit Scotland. Walker, D. M. 2002. Protecting the publics interest considerations for addressing selected regulatory oversight, auditing, corporate governance, and financial reporting issues. Washington, D.C.: U.S. General Accounting Office. Read More