The Importance of Accounting Standards - Essay Example

They are the ones responsible for listing and analyzing every figure that comes in and out of the company's pocket. The main tool used by company's to determine their financial condition is the financial statement. It aims to supply important information concerning a company's financial position. Accounting practitioners have recognized the need to formulate accounting standards to be followed by every organization. They realized that it is of utmost importance not only to them but to all individuals who are engaged in business Part I Purpose and Significance of Financial Accounting Standards There are three considerations that Accounting Practitioners refer to when asked about the purpose of Accounting Standards.

First is that it aids in sustaining the effectiveness of various accounting policies by getting rid of the discrepancies in financial statements. Second, it provides assistance to efficiently present credible and comparable data found in the financial statement of companies. Lastly it functions as an accounting alternative that lessens the notion of subjectivity in financial statements (Chandra, 2011). Accounting practitioners follow a set of guidelines while in the process of gathering financial information.

They refer to it as Generally Accepted Accounting Principles (GAAP). In the United States, Generally Accepted Accounting Principles (US GAAP) prepared by the Financial Accounting Standards Board (FASB) serve as the primary basis for entries that are required to be present in financial statements of private companies (Kuppapally, 2008). So that organizations can sustain and expand their operation, internationally accepted accounting standards were formulated, also known as the International Financial Reporting Standards (IFRS).

The existence of IFRS in the global market made possible the reduction of incompatibilities in capital flows, leading to an increasing rate of investment in the global market. The International Accounting Standards Board (IASB) is the body in charge of regulating the standards that are listed under IFRS (Chandra, 2011). Last October 29, 2002, FASB and IASB entered into a covenant known as "The Norwalk Agreement," which has recognized their duty to establish accounting standards that are adaptable to both domestic and international financial reporting.

The two standard governing bodies of financial accounting made a deal to finally reconcile their differences in order to attain the objective of the agreement, which is to establish internationally accepted standard suited to the needs of the different companies in nations around the world. The signed memorandum of understanding focused on the convergence of the two. The gradual process of eliminating the differences with the help of joint projects will eventually result to an enhanced comparability of financial statements not only in the US but also in other nations (Financial Accounting Standards Board, 2002).

Independent auditors strictly follow the Generally Accepted Auditing Standards (GAAS). These auditing standards supply the benchmark on the quality of audit that auditors must comply with. The American Institute of Certified Public Accountants (AICPA) made possible the implementation of GAAS in auditing nonpublic companies. Auditors are obliged to know all the statements on auditing standards (SAS) because the basis of making the final decision in auditing financial reports is their judgment on what standard