Intermediate Accounting - Role of Financial Accounting Standards Board in Modern Organization - Essay Example

Introduction

Business reporting and accounting practices have taken a center stage in discussions that involve new economy, contemporary economy, and application of financial reporting. Traditional business reporting many argue does not fully represent the value of the new economy. They also argue that the value of a company is not well reported in traditional business reporting which only represent accounting book value and overlooks the market capitalization, which is the value of that company. The new economy has the characteristics of taking equal consideration for assets, liabilities, intangible assets and important value drivers as the true value of a company. As a result, there is a pressing need to come up with a standard set of rules and regulations on how to improve accounting processes and financial reporting. But long before this, the traditional economy also was in dire need of a harmonized set of principles that guides how financial accounting and reporting should be done. This is the reason why the United States government came up with Financial Accounting Standards Board (FASB) which is an independent board. This paper will discuss the role played by FASB in monitoring and controlling business reporting and how the rules and regulations they set implies to businesses.

FASB is a board that has seven appointed members who are professionals in accounting field and whose main duty includes overseeing the establishment and implementation of generally accepted accounting principles (GAAP). These principles consist of accounting standards that define value measurement and methods that are fair to all players in the financial market. It was formed as a result of the need to break away from dependency on the private sector for setting the pace for financial reporting.

The Role of FASB

Standard Setting and Information Provision to Businesses and Other Stakeholders

FASB is tasked with setting accounting standards that are conventionally accepted for all businesses and other financial institutions, therefore, offers a guideline on how businesses are expected to operate in the United States. They form accounting guidelines that are Plausible, comparable and applicable when determining costs and benefit in businesses. In addition, they offer crucial financial information that enables businesses and other stakeholders to make an informed financial decision that is viable to the business or the stakeholder. Disclosure of certain financial information also acts as a guideline to those who may be thinking of engaging in any financial business venture because is reliable and consist of actual financial records. Therefore, it informs about accountability and transparency of businesses that engage in the market in such a way that it is easy to obtain information concerning assets and liabilities with the aim of making a relevant financial decision in a professional manner.

Setting, Reviewing and Approving Accounting Methods

Another important role played by FASB include setting up, reviewing and approving various methods and regulations that are useful in the construction of financial statements used in financial reporting. Being the sole authority that is mandated to establish and review the rules and regulations governing financial reporting, they are capable of detecting error promptly and coming up with a corrective measure that ensures smooth preparation of financial statements. They can also actively intervene in any accounting and financial reporting to ensure that all stakeholders including investors and creditors obtain relevant reliable information that will enable them to make a financial decision that is compatible with the current market requirements without incurring costs that associated with inaccurate financial accounting and reporting.

Limitations of FASB Rules to Businesses

Influence’s Business Financial Statement Reporting

There are so many inadequacies that rules and regulations authorized by FASB cause to many businesses that operate in the United States. First of all, every business and financial institution make their financial decisions with the regard to prevailing accounting standards. Therefore, these rules and regulations will influence certain aspects both in asset, liability and event reporting in financial statements of many businesses and firms. This means that whatever will appear in the financial statements will be dictated by the rules and regulations set by FASB. These accounting standards will dictate financial statement demonstration. The second influence that FASB rules and regulation has on businesses and financial firms is due to the complexity of the market frameworks.

Many businesses go through complex processes of financial accounting that in practice do not comply with the rules and regulation established by FASB therefore, many firms and businesses will not be in compliance completely with these standards. For instance, different businesses have different approaches in their efforts to comply with the accounting standards set. This implies that every business and institution’s financial accounting has a relative difference in attempts to comply with the accounting standards therefore when conducting financial accounting, there should be considerations of manipulating business financial accounting for individual business or firm to align to conform to generally accepted accounting principles. Care should be taken to all inventory entries that make up financial records of any business to avoid problems of understated ending that are caused by imperfect down valuation.

Unrealistic Cost to Businesses

Another limitation of the standards set by FASB to businesses is the cost implication that goes with the implementation of the accounting standards. Many contemporary firms find it costly to adjust to the financial accounting standards set, and they suggest that the FASB board should review some of the new regulations they formulated. However, the FASB board requires that the businesses align their financial policies so that it conforms to the new set of accounting standards set by it. This in effect requires that the businesses constantly review their financial policies to ensure that they are aligning to the rules and regulations of FASB and in the process they incur cost while changing the reporting methods. Also FASB rules and regulation sometimes have a loophole that occasionally gives exaggerated information on financial accounts which does not meet the required financial thresholds because of the system used in the determination of real value and this is particularly harmful in exposing revenues, assets and other possessions to devaluation.

Importance of FASB Standards to Businesses and Stakeholders

Universal Harmonization of Accounting Standards

The Board tries to formulate rules and regulations that are applicable to every business and firm therefore in they hope that compliance with the established accepted standards will construct a good business environment that ensures the greatest protection. Accounting rules and regulations are very vital part of the economy that should be universal if all players are to be protected. These principles that are universally accepted minimizes regular audits to businesses and firms in the United States, therefore, limiting fines that could be imposed on the businesses as a result of not conforming to rules and regulation governing accounting standards. These fines are imposed by Securities and Exchange Commission (SEC).

Identification and Correction of Accounting Errors

Businesses and firms are protected by accounting rules and regulations that are established by FASB because they form an important tool for proper and timely identification of financial accounting problems, and this also enables businesses to report any accounting error arising from any accounting issue. This early identification and reporting to FASB board ensure that the issues are dealt with, and a working solution is arrived at. FASB also help businesses by conducting investigations on a reported issue after which the board comes up with a reviewed rules and regulations or formulate a new set of regulations to correct the problem.

Provision of Financial Record for Business Bookkeeping

FASB plays an important role in providing businesses, firms as well as other stakeholders important financial news that are particularly important to business accounting. This is a crucial role that creates awareness to all businesses and accountants thereby giving them guidelines on how to report any financial event. These accounting events can, therefore, be made available to the accountants who may find this information useful in record and bookkeeping. In addition, FASB helps the accountants on the expectations of standardized bookkeeping and recording of accounting events.

Giving direction to New Fields

The World is advancing at high speed, and every business should try to catch up with advancement in technology and other infrastructures that apply to businesses. Technologies like mobile banking and use of modern methods of transacting business for example computer assisted accounting, electronic stock market listings, mobile money transfers among others, requires set of regulations and formulated standards so that businesses and other investors are not at risk of losing. Therefore, FASB ensures that firms and businesses are protected from methods that can cause harm to their businesses through the formulation of guidelines that regulates the use of those new technologies to conform to universally accepted accounting principles. It is their duty to conduct adequate research on the financial implications of the new technologies and how businesses are expected to react to these changes before establishing rules and regulation that will protect businesses and other stakeholders from such technologies giving businesses confidence in using technology.

Facilitation of Globalization of Business

FASB has played an important role in ensuring that businesses are guided by accounting standards that are accepted globally because the world has become a global village. Many businesses conduct their activities across borders and into the international market. This international market has a great impact on local businesses, and their financial interaction has prompted for a universally accepted accounting standards. FASB has helped local and regional businesses with financial reporting that opens up world markets for financial participation. Due to harmonized accounting standards, there is fairness in financial reporting. Therefore, firms feel comfortable in conducting business across the borders. There is also smooth entry to the global markets because a firm that complies with FASB rules and regulations is more efficient in conforming to the international standards which form more or less part of FASB standards.

FASB Appointments and Accountability

FASB consists of seven members who are appointed by Financial Accounting Foundation (FAF) for a five-year term and therefore the board is accountable to FAF. The appointed members are demanded to severe any relationship they may have with any firm, business institution or company so that they became impartial in carrying out their responsibilities. FAF also appoints other sixty-eight board members who help the seven members in executing their mandate. All these members are sourced from different governmental departments, organizations as well as other private sectors. FASB works in close association with SEC to formulate and report accepted accounting principles in the United States.

Conclusion

It is important to control how financial accounting and reporting is conducted in any given economy. Contemporary economy and the new economy require set of generally accepted guidelines that businesses can use in performing financial accounting and reporting. As we have seen, financial accounting and reporting has direct influence in the way businesses are conducted and therefore a highly reputable organization must ensure the formulation, establishment and enforcement of these standards to protect all stakeholders.

FASB plays a huge role in ensuring that financial accounting and reporting is conducted according to internationally acceptable standards in the United States. It has also availed important information to many stakeholders, investors as well as creditors that are prerequisite for engagement in any business and therefore has acted as a protector of businesses in the United States. Many investors find the information from FASB very important component in helping them in the process of making a right financial decision in engaging with other businesses. It also reveals the financial information of businesses therefore it provides a better method of comparison.