Understanding Standard Setting in the Accounting industry
The Financial Accounting Standards Board hereinafter referred to as FASB is a standard-setting organization in the United States of America based in Norwalk, Connecticut. The organization is private, independent and non-profit. Its aim and purpose reflect on establishing and improving accounting principles commonly accepted within the United States. The accounting principles, known as Generally Accepted Accounting Principles (GAAP) are applied in financial reporting. The GAAP are used by Public companies, and some private and non-profit organizations. In 1973, the Securities and Exchange Commission (SEC) selected the FASB to carry the mandate of establishing accounting standards for compliance by the U.S. companies. The FASB was a replacement of the American Institute of Certified Public Accountants’ (AIPCA) Accounting Principles Board (APB).
The FASB’s mission is centered on enhancing financial accounting and reporting standards to advance financial reporting by companies in the provision of information used by investors and other users in decision-making (FASB, 2017). These accounting standards are mandatory for public companies. The Boards of Accountancy and the American Institute of Certified Public Accountants also recognize the authority of the standards. To accomplish this mission, FASB is involved in a comprehensive and independent process in which it considers all views and encourages broad participation. FASB is also extensively involved with educating stakeholders on understanding and implementing those standards.
The FASB commenced their project on Conceptual Framework in 1973. In the year 1984, the FASB formed EITF. The Emerging Issues Task Force was mandated with providing timely responses to financial issues as they arose. EITF comprises of 15 members from public and private sectors, and representatives from FASB and SEC. An EITF Issue is validated as a FASB pronouncement even without FASB’s involvement and is included in the GAAP. In 2002, Connecticut, the FASB held a conference with the International Accounting Standards Board (IASB) in a bid to talk over plans on converging International Financial Reporting Standards (IFRS) and US GAAP. The FASB implemented SFAS 157 in 2006, which provided new standards for disclosure. In the year 2009, the FASB pronounced that their Accounting Standards Codification authoritative and generally accepted accounting standards in the U.S (USGAAPplus, 2017). In 2015, FASB and the International Accounting Standards Board (IASB) resumed after a hiatus of some years.
To better facilitate its services, FASB liaises with many groups through sharing views, ideas and experiences. The main category of groups is the Advisory Group. The Advisory Group comprises of various committees and council that offer advice to the FASB through letters and public advisory meetings (SEC: Dodd-Frank Act. 2017). The advice lies on various agendas such as practice of new standards and potential new agenda items. The members of Advisory group are Financial Accounting Standards Advisory Council (FASAC), Investor Advisory Committee (IAC), Not-for-Profit Advisory Committee (NAC) and Small Business Advisory Committee (SBAC). There are also other groups, which collaborates with FASB to facilitate broad discussion of vital financial and accounting issues. The main group is the Private Company Council (PCC), which provides FASB with advice on private company matters using the Private Company Decision-Making Framework. Another group is the Emerging Issues Task Force (EITF), which offers advice on improving financial reporting in a timely manner. All the changes proposed by these groups are subject to endorsement by the FASB.
In 1934, the Securities Exchange Commission was formed. The SEC came to be following the Securities Exchange Act of 1934. SEC is tasked with 3 primary roles. These include protection of investors, facilitation of capital formation and lastly to maintain efficiency, orderliness and fairness in the U.S. markets. The SEC recognizes FASB as the designated accounting standard setter (FASB, 2017). The FASB is tasked with the role of establishing standards for financial accounting and reporting. The AICPA is involved in many roles including undertaking research on legislation, developing credentialing programs, sponsoring advocacies, which benefit Accounting Professionals, setting Standards of Ethics for Accounting Professionals and preparing publications related to accounting matters.
Many United States citizens are joining the markets as first-time investors in a bid to secure their future and engage in other financial issues such as paying school fees when sending their children to college and payment of mortgages. The securities exchange has also attracted numerous global for-profit competitors. This raises the need to have investor protection and a sound market regulation. Unlike the banking sector in which deposits are certain such as from the federal government, securities can lose value, has no guarantees, and is therefore uncertain. This leaves the U.S. Securities Exchange Commission with a tight task towards promoting the capital formation to enhance economic growth.
The U.S. SEC plays vital roles in protecting investors, facilitating capital formation and maintaining fair and efficient markets. A law that requires all investors to access various important facts regarding an investment prior to buying it governs the United States securities industry. The SEC is tasked with ensuring this is achieved by necessitating all public companies to make known all important financial information and statics for use by the public. This ensures that all investors have a common pool of knowledge on which to base their investment decisions on a particular security before making a decision on whether to engage with it. In addition, the SEC collaborates with all major market participants to gain important information from them (SEC: Dodd-Frank Act. 2017). When individuals and companies violate securities laws, such as through accounting fraud or provision of misleading information to the public, SEC is responsible for bringing civil enforcement actions against them.
The SEC has oversight responsibilities related to the securities world. SEC was authorized by the Congress to oversee Public Company Accounting Oversight Board (PCAOB) operations. The Sarbanes-Oxley Act of 2002 formed the PCAOB (SEC, 2017). PCAOB Corporation is tasked with overseeing accounting professionals who offer independent audit for publicly traded companies. Other roles include enforcing compliance with Sarbanes-Oxley, conducting investigations of registered firms and establishing standards relating to public company audits. SEC takes multiple responsibilities in overseeing PCAOB’s operations. It is involved in appointing members, removing members, approving the budget, approving PCAOB’s rules, entertaining petitions of PCAOB inspection reports and entertains with appeals of PCAOB disciplinary actions.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was endorsed as a reaction towards the financial crisis to bring changes to financial regulation. It was signed into federal law by the then President of the United States of America Barack Obama. The SEC oversees the rulemaking provisions of the Dodd-Frank Act (SEC: Dodd-Frank Act, 2017). These rulemakings are aimed at enhancing a long-term stability of the U.S. financial system. During the possible worst scenarios, SEC is obligated with overseeing that Dodd-Frank Act fulfills its obligation to promote market stability, protect investors and enhance capital formation. The primary objective of these rulemakings is to enhance a longstanding sustainability of the United States’ financial system. The Dodd-Frank Act has worked closely with the SEC’s enforcement authority, such as by providing them with powerful tools including the whistleblower award program (SEC: Dodd-Frank Act. 2017).
The FASB board consists of 7 members appointed by the Financial Accounting Foundation (FAF) Board of Trustees. The FASB spins around a number of goals and missions. The key role of FASB is enhancing the financial reporting and accounting standards. It is also tasked with providing investors and other people with their required financial reports to facilitate informed decision-making. Among its many goals, FASB seeks to enhance the corporate accounting practices through timely resolving of issues, improving accounting reports guidelines and the creation of a uniform standard across the financial markets. To realize its goals and mission, the FASB embraces an open and independent reporting process, which encourages the participation of a broad range of company stakeholders. Currently, among the FASB’s primary priority is integrating the U.S. GAAP with the International Financial Reporting Standards (IFRS).
The Accounting Principles Board preceded FASB. APB was replaced by FASB in 1973. The Accounting Principles Board was formed by the AICPA in 1959. The main purpose of APB was to issue pronouncements on accounting principles. Although many of its opinions and statements have been superseded by FASB pronouncements, 19 of the APB opinions still stand as part of GAAP. Among the opinions and Statements developed by Accounting Principles Board, various were instrumental in enhancing the practice of various areas in accounting.
The principal opinions in disbanding the APB and creating a new rule-making body (the FASB) was to enhance the effectiveness in creating accounting standards. The FASB was to be smaller and fully independent since the APB and the related SEC were incapable of operating wholly independent from the United States government. The APB had a membership of 18-21 participants, which was a big number. Additionally, these members worked on part-time basis thus leading to a low-level output. It was, therefore, necessary to create a new rule-making body that would comprise of fewer fully funded full-time participants. Additionally, the need to form a new rule-making body was also fueled by the consideration that there was a high potential of APB being influenced by its parent organization. The FASB was therefore created with a membership of only 7 individuals, as an independent body and with full time employees.
A close regulatory relationship exists between the Financial Accounting Standards Board and the Securities and Exchange Commission. The SEC is a governmental agency mandated with establishing and enforcing accounting standards while FASB is a private body which the SEC has designated the aforementioned obligation (Palmon, Peytcheva & Yezegel, 2009). By assigning FASB the responsibility of standard setting, the SEC avoids being directly involved with the regulation. However, SEC’s involvement is still paramount since it controls the FASB. For instance, although fees collected from public companies fund the FASB, its budget has to be approved by the SEC. The delegation of standard setting to FASB has enabled the SEC to avoid succumbing to the influence of regulated industries, as has been the case with most federal regulatory agencies. However, this, on the other hand, puts the FASB more susceptible to condemnation of succumbing to private interests.
In the standard setting, contrasting between responsibility and power is necessary (Epstein and O’Halloran, 1999). A distinction between the two is especially relevant in regulation. Regarding standard setting, the power of regulation has been given to the SEC. However, the SEC has delegated to the accounting profession the mandate of setting accounting standards. Yet though, the SEC has not fully relinquished its regulation power, and still maintains much control and involvement over the decisions made by FASB.
The American Institute of Certified Accountants was founded in 1887. Currently, its membership is more than 418,000 and spans in 143 countries. The organization seeks to represent certified public accountants in various settings. The organization also plays advocacy roles before other professional organizations and legislative bodies. Other roles of AICPA includes representing its members before public interest groups, monitoring member compliance, providing educational guidance materials and enforcing compliance with technical and ethical standards (AICPA, 2017). Most importantly, the AICPA stands in for the Certified Accountants Professions concerning standard setting and rulemaking.
The AICPA plays an important role in advising the FASB. Since the FASB is mandated with making accounting rules of the United States as designated by the U.S. SEC, the AICPA gets itself involved as well since it represents the public accountants. The role in advising the FASB falls into 3 main categories namely providing technical support, providing guidelines and providing standard-setting. The AICPA provides all the aforementioned in conjunction with the FASB’s work. The AICPA also offers resources and guidance to the FASB in relation to enhancement of the standard-setting procedures that involves accounting principles. The AICPA members are obligated to abide by the set Code of Professional Conduct when performing their professional responsibilities in various sectors such as the government, public practice and education.
Until 1973, the AICPA was a virtual monopoly in setting CPA’s professional and technical standards. The responsibility of setting the GAAP was later transferred to FASB. However, the AICPA retained standard setting in various areas including financial statement auditing. Therefore, the AICPA is mandated with setting the standards to be followed by Public Accounting Firms. The AICPA drafts and enforces professional standards, guidelines and clarified statements on auditing standards. It also clarifies the objectives of the auditor and the obligatory compliance requirements when conducting an audit.
The International Accounting Standards Board (IASB) was created in the year 2001 as a replacement of International Accounting Standards Committee (IASC). It serves as an accounting standard-setting body of the International Financial Reporting Standards (IFRS). The Governmental Accounting Standards Board (GASB) is mandated with establishing and improving standards related to the state and local governmental accounting and financial reporting to enhance the usefulness of information to users. The Healthcare Financial Management Association (HFMA) Principles and practice Board is an organization meant for healthcare finance leaders. It collaborates with healthcare associations to seek consensus on how to curb challenges facing the United States healthcare system (HFMA, 2017). All these three authoritative rulemaking boards are in various points involved with accounting related concerns. Since the AICPA offers guidelines and professional standards in various settings of accounting, these boards require a mutual relationship with the organization for collaborations and professional cooperation.
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