Ethical and Legal Obligations Paper
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Ethical and Legal Obligations Paper
Accountants have been working since the early 1900s to establish rules and regulations pertaining to the accounting profession. But it was not until 1933 that the Securities and Exchange Commission obtain the authority to establish accounting principles for companies whose securities had to be registered with the SEC, from that point on other entities were created such as the Financial Accounting Foundation (FAF) which established the Financial Accounting Standards Board also known as FASB. Furthermore, the Sarbanes-Oxley Act of 2002 created the Public Company Accounting Oversight Board (PCAOB) after the scandals this country had faced with the public auditing firms. (Marshall, McManus, Viele, 2005).
First, lets take a detail look at each entity. The Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports. They are officially recognized as authoritative by the Securities and Exchange Commission (Financial Reporting Release No. 1, Section 101 and reaffirmed in its April 2003 Policy Statement) and the American Institute of Certified Public Accountants (Rule 203, Rules of Professional Conduct, as amended May 1973 and May 1979). Such standards are essential to the efficient functioning of the economy because investors, creditors, auditors and others rely on credible, transparent and comparable financial information (FASB, par. 1, 2005).
The mission of the Financial Accounting Standards Board (FASB) is to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors and users of financial information. Accounting standards are essential to the efficient functioning of the economy because decisions about the allocation of resources rely heavily on credible, concise, transparent and understandable financial information. Financial information about the operations and financial position of individual entities also is used by the public in making various other kinds of decisions (FASB, par. 3, 2005). The FASB develops broad accounting concepts as well as standards for financial reporting. It also provides guidance on implementation of standards. Concepts are useful in guiding the Board in establishing standards and in providing a frame of reference, or conceptual framework, for resolving accounting issues. The framework will help to establish reasonable bounds for judgment in preparing financial information and to increase understanding of, and confidence in, financial information on the part of users of financial reports. It also will help the public to understand the nature and limitations of information supplied by financial reporting (FASB, par. 6, 2005).
The FASB is part of a structure that is independent of all other business and professional organizations. Before the present structure was created, financial accounting and reporting standards were established first by the Committee on Accounting Procedure of the American Institute of Certified Public Accountants (1936-1959) and then by the Accounting Principles Board, also a part of the AICPA (1959-73). Pronouncements of those predecessor bodies remain in force unless amended or superseded by the FASB (Wikepedia, 2005)
The Securities Exchange Act of 1934 gives the SEC the power to establish accounting standards. The SEC has allowed private-sector standard-setting bodies such as the FASB and GASB to establish such standards. However, the SEC has considerable influence in setting accounting and auditing standards as evidenced by recent staff accounting bulletins on materiality, revenue recognition, and restructuring changes. The SEC has also issued a major rule on independence that prohibits providing auditing services and certain consulting services such as valuation, appraisal, and executive search for managerial positions for the same client. All the entities work closely with the SEC when formulating accounting and auditing standards (Messier, p. 41, 2003).
The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud. Crucial to the SECs effectiveness in each of these areas is its enforcement authority. Each year the SEC brings hundreds of civil enforcement actions against individuals and companies for violation of the securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them (SEC, par 1, 2005).
The Public Company Accounting Oversight Board (PCAOB) is a private-sector, non-profit corporation created by the Sarbanes-Oxley Act of 2002 to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports (PCAOB, 20005).
Four basic assumptions underlie the financial economic structure: economic entity, going concern, monetary unit and periodicity. The economic entity assumption means that economic activity can be identified with a particular unit of accountability, meaning that the activity of a business enterprise can be kept separate and distinct from its owners and nay other business unit. Furthermore, the entity concept does not apply solely to the segregation of activities among given business enterprises. An individual, a department or division, or an entire industry could be considered a separate entity if we chose to define the unit in such a manner, therefore the entity concept does not necessarily refer to a legal entity. A parent and its subsidiaries are separate legal entities, but merging their activities for accounting and reporting purposes does not violate the economic entity assumption (Kieso, Weygandt, Warfield, p. 42, 2001).
Going concern assumption means that the business enterprise will have a long life. Implications of this assumption are profound. For instance, the historical cost principle would be of limited usefulness if eventual liquidation were assumed, and depreciation and amortization policies are justifiable and appropriate only if we assume some permanence to the business. The going concern assumption applies in most business situations, and only where liquidation appears inevitable is the assumption inapplicable(Kieso, Weygandt, Warfield, p. 42, 2001).
Monetary unit assumption means that money is the common denominator of