The Rules and Guidelines for Accountants - Essay Example

In order for accountants to perform their jobs they have to comply with the rules and guidelines that rule the profession. The conventions, rules andprocedures that accountants follow while performing their work are called the general accepted accounting principles (GAAP). The GAAP are created by an organization called the Financial Accounting Standards Board (FASB). The FASB was founded in 1973. For more than three decades the FASB has been the institution that rules the profession in the United States. The FASB consist of seven full time members and it is considered an independent creation of the private sector (Horngren & Sundem & Stratton & Burgstahler & Schatzberg, 2008, p.701). The FASB is a standard setter institution that is recognized by the practitioners of the profession. “The mission of the FASB is to establish and improve standards of financial accounting and reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports” (Fasb, 2010). The organization is structured independent of the government and other private institutions. The FASB only attends to the needs of the domestic accountants practicing in the United States. Accountants working outside the United States are regulated by an institution called the International Accounting Standards Board (IASB). Compliance with GAAP is mandatory by all businesses operating in the United States. There are certain corporations that due to the fact that they are public companies their affairs and compliance is closely monitored by the Securities and Exchange Commission. At the start of the 21st century there a high number of financial scandals such as the Enron and WorldCom debacles in which the companies involved did not comply with GAAP. Enron created science fiction out of accounting and in the process its executives robbed the public out millions of dollars. Since GAAP was not followed the income and value of the company was terribly inflated. After the Sarbanes-Oxley Act was developed in 2002 public corporations had to hire auditors that were completely independent of the firm. “To ensure that companies abide by GAAP, the financial statements of publicly held corporations are subject to an independent audit…”(Horngren, et. al., 2008, p.700). The auditing standards used in audits in the United States are set by the Public Company Accounting Oversight Board (PCAOB). The PCAOB is a division of the Securities and Exchange Commission. Federal law gives the SEC power to establish and specify the GAAP that public companies must follow. The annual report of public companies has a section called the independent auditors report which summarizes the results of the independent audit. The International Accounting Standards Board was founded on April 1, 2001. The 21st century marked an era in which multinational corporations dominated the global business scene. Companies such as McDonalds have thousands of locations worldwide. Due to the need of a common accounting framework the IASB was born. The IASB is an independent privately funded standard setter for the international community. The accounting standards developed by the organization are referred to as international financial reporting standards (IFRS). The organization has 15 full time members responsible for the creation of new standards. All meetings of the IASB are held in public and are simultaneously broadcasted through webcasts. The IASB takes into consideration the opinions of its stakeholders which include investors, analyst, regulators, business leaders, accounting standard settlers and the accountancy profession (Ifrs, 2010). It is common knowledge that GAAP represent the financial framework that corporations must follow in the United States. Within this framework there are certain measurements of conventions that are very important. Three of these conventions or principles are recognition, the matching principle, and stable monetary unit. The recognition principle states that a company records revenues in its accounts only when it has earned and realized the revenue (Horngren, et. al., 2008, p.703). Revenue cannot be recognized if it has not been earn. For example a construction company obtains an order to build a second story to an existing house. The contract value is worth $50,000. The contract cannot be recognized as earning until the firm completes the job. A second important convention is the matching principle. The matching principle states that revenues must be linked to the expenses associated with them. Accountants apply the matching principle by identifying the revenue recognized during a period and by linking the expenses to the recognized revenue directly (Horngren, et. al., 2008, p.703). The third convention is the stable monetary unit. The stable monetary unit principle assumes that the currency or denomination used in the report is constant. The inflation rate associated with the accounting period is not considered in the accounting books. This principle provides comparability between the financial information of different accounting periods. There are various differences between GAAP and IFRS accounting. GAAP have been around for a longer time, thus the US framework tends to be more complex. The table below illustrates some of the differences between GAAP and IFRS. GAAP IFRS There is no guide provided to describe the analysis of financial statements. Must provide a comprehensive guide with the presentation of financial statements Financial statements convergence with IFRS is promised Financial statements convergence with US GAAP is expected Comparative financials urged Comparative financials required FASB Accounting Standard Codification is the single authoritative source of GAAP No authoritative source exists beyond IFRS (Epstein, 2008) For over three decades the FASB has been developing principles for accountants in the United to follow. The development of GAAP has been so effective that accountants in the US are self regulated. Due to the importance of accuracy in accounting the Security and Exchange Commission is responsible for the financial reporting of public enterprises. The IASB is a new organization that has created a set of accounting principles for the international community to follow. The ultimate goal of the organization is for the United States and the rest of the nations of the world to adopt the IFRS as the universal accounting standard. Due to the differences between US GAAP and IFRS this vision will take a lot of time to manifest itself. The three conventions mentioned in this paper are an example of the effectiveness of the GAAP. US GAAP has been effective over the years, but there is still room for improvement. References Epstein, B. (2008). IFRS vs. GAAP. Retrieved October 8, 2010 from http://ifrsaccounting.com/ifrsconsiderations.html Fasb.org (2010). Facts about FASB. Retrieved October 8, 2010 from http://www.fasb.org/facts/index.shtml#structure Horngren, C., Sundem, G., Stratton, W., Burgstahler, D., Schatzberg, J. (2008). Introduction to Managerial Accounting: Chapter 1-17 (14th ed.). Prentice Hall. Ifrs.org (2010). The Organization. Retrieved October 8, 2010 from http://www.ifrs.org/The+organisation/IASCF+and+IASB.htm Read More