Ethical And Legal Obligations

Introduction

Accounting is the systematic record keeping and reporting of an organization's performance in monetary terms. Accounting provides a summary of the economic results of organizational decisions for internal use and transmits them to external stakeholders such as volunteers, donors, creditors and regulatory agencies. Accounting and financial reporting date back to clay tablets used by the Mesopotamians to record tax receipts around 3000 BC. In 1494, Luca Pacioli, a Franciscan monk and mathematics professor, published the first known text to describe a comprehensive double-entry bookkeeping system. Then in the 1800's, England began an independent audit function that added credence to financial reports. As British capital was invested in a growing U.S. economy in the late 19th century, British chartered accountants and accounting methods came to the United States. Since, no group was legally authorized to establish financial reporting standards, alternative methods of reporting financial conditions formed that caused confusion and fraud. Accounting professionals in the U.S. did not organize themselves until the early 1900's. Accounting and financial reporting has developed over time in response to users of financial statements. Financial reporting has seen a drastic change in the U.S. in the past several decades. The following few pages will address the relationship amongst the federal security agencies, basic accounting principles and the role of ethics in financial reporting.

Relationships amongst SEC

The accounting, financial reporting and auditing weaknesses that related to the 1929 stock market crash gave impetus to the creation of the Security Exchange Commission in 1934. With more responsibility being placed on the arms of the SEC there came a need to delegate some of the financial reporting regulation to a sub committee within the SEC. In 1973, as a result of congressional and other criticism of the accounting standard-setting process the Financial Accounting Foundation was created as a more independent entity. The foundation established the Financial Accounting Standards Board (FASB) as the authoritative standard-setting body within the accounting profession. Unethical practices by large corporations and scrutiny of the SEC lead to President George W. Bush signing into law the Sarbanes-Oxley Act of 2002. The act creates a five-member Public Company Accounting Oversight Board (PCAOB), which has the authority to set and enforce auditing, attestation, quality control, and ethics standards for public companies. "The PCAOB is a brand-new organization, for which the SEC has oversight responsibility, as it does for FASB. As a practical matter, the SEC coordinates its oversight of both organizations through OCA." (Colson 2004) The Office of the Chief Accountant is responsible for establishing and enforcing accounting and auditing policy. The office is to enhance the transparency and relevancy of financial reporting, and improving the professional performance of public company auditors in order to ensure that financial statements used for investment decisions are presented fairly and have credibility. "OCA is at the hub of lots of activity within the SEC, much of which includes the preparer community. We also advance the Commission's interests with the PCAOB, FASB and other agency in the international arena. FASB sets GAAP for preparers, and the PCAOB standards serve the auditor community." (Atkins 2005)

Accounting Principles

Every accountant involved in financial reporting should be aware of the basic principles. GAAP or General Accepted Accounting Principles are terms used to describe the body of rules and guidelines that govern the proper accounting for the transactions underlying financial statements. Generally accepted principles are derived from a variety of sources, including the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA). There are several accounting principles but due to a word limit only a few of these principles will be discussed. The matching principle is an extension of the revenue recognition convention. The matching principle states that each expense item related to revenue earned must be recorded in the same accounting period as the revenue the matching principle helped to earn. If the expense is not recorded in the same accounting period, the financial statements will not measure the results of operations fairly. The full disclosure principle states that any and all information that affects the full understanding of a company's financial statements must be include with the financial statements. Some items may not affect the ledger accounts directly. These would be included in the form of accompanying notes. Examples of such items are tax disputes, and company takeovers. The cost principle states that the accounting for purchases must be at their cost price. The value recorded in the accounts for an asset is not changed until later if the market value of the asset changes. An item would take an entirely new transaction based on new objective evidence to change the original value of an asset. For example, a building could be received as a gift. In such a case, the transaction would be recorded at fair market value, which must be determined by some independent means. The continuing concern concept assumes that a business will continue to operate, unless it is known that such is not the case. The values of the assets belonging to a business that is alive and well are straightforward. For example, a supply of envelopes with the company's name printed on them would be valued at their cost. The value of would not be at cost if the company were going out of business. In that case, the envelopes would be difficult to sell because the company's name is on them. When a company is going out of business, the values of the assets usually suffer because they have to be sold under unfavorable circumstances. The values of such assets often cannot be determined until they are actually sold. The revenue recognition convention provides that revenue be taken into the accounts (recognized) at the time the transaction is completed. If it is a cash transaction, the revenue is recorded when the sale is completed and the cash received. It is not always quite so simple. Think of the building of a large project such as a dam. It takes a construction company