An accounting system involves keeping
records of business transactions as they occur
and producing reports that summarize the results
of the transactions. The reports, called financial
statements, are typically prepared according to
generally accepted accounting principles (GAAP).
The most basic and most frequently encountered
financial statements are:
- the balance sheet
- the income statement
- the statement of cash flows
These reports are meant to provide financial
information useful to persons making economic
decisions about a company, including the owners,
managers, investors, and creditors.
Reading financial statements
For publicly-traded companies
these essential accounting statements
are typically found in a company's annual
report.
How do you read an annual report? The Motley
Fool has some suggestions. |
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Accounting 'Cheat Sheet'
10 tips to keep your company out of trouble
Stanley Siegel Corporate
Counsel 10-08-2002
The mere mention of financial
statements these days sends shivers down the
spines of many corporate attorneys. Even before
this year's debacles in accounting and financial
disclosure, many lawyers doubted their ability
to draw meaningful conclusions from these invariably
complex and often ambiguous documents.
Today, with multiple revelations
of accounting failures grabbing the headlines,
forming these opinions has become even harder
and more important. How should an in-house lawyer
review the financial statements of his employer,
and those of companies with whom his business
is involved?
Here are 10 rules of the road.
(More>>)
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| What is GAAP? These
are the rules of thumb that must be followed by
most publicly held corporation in the United States
when they report their financial operations to
the public. GAAP is not codified, but instead
is a set of rules and principles that describe
how accountants should report business/fianancial
events.
Who sets GAAP? It's kind of
like the question - who creates the common law?
The most authoritative accounting standards are
published by the Financial Accounting Standards
Board (FASB), a panel created by the main financial
disclosure regulator (Securities & Exchange
Commission) and the leading accounting professional
group (American Institute of Certified Public
Accountants). (The predecessor of FASB was the
Accounting Principles Board, whose pronouncements
hold weight to the extent FASB has not overruled
them.)
Since 1973, 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 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.
From FASB Statement of Mission and Structure
(www.fasb.org).
Next in the hierarchy are accounting standards
published by AICPA, followed by general principles
found in practice and the accounting literature.
Although the SEC has statutory authority to set
accounting rules, the agency has mostly deferred
to the accounting profession.
Public Company Accounting
Ovesight Board. In response to
the spate corporate scandals, the Sarbanes-Oxley
Act of 2002 created a new Public Company
Accounting Oversight Board to oversee the
audits of public companies. The board's
functions include --
- registering public accounting firms
- establishing rules to govern auditing,
quality control, ethics, and independence
- inspecting public accounting firms (and
those associated with the firms)
- enforcing compliance by disciplining
and sanctioning auditing firms.
The Board has five financially-literate
members, appointed for five-year terms and
serving on a full-time basis. Exactly two
of the members must be or have been certified
public accountants. Board members are appointed
by the SEC, after consultation with the
Chair of the Federal Reserve Board and the
Secretary of the Treasury. (This is where
Harvey Pitt got into trouble when it first
seemed he would appoint John Biggs, the
retiring head of TIAA-CREF, and then appointed
William Webster, without disclosing that
Webster had served on the audit committee
of a company engaged in questionable accounting
practices.) |
SEC
EYES ACCEPTING REPORTS USING INTERNATIONAL
ACCOUNTING STANDARDS
The Securities and Exchange Commission
staff will keep working toward accepting
foreign firms' financial filings made under
international accounting standards and a
key task in the process will be gauging
annual reports to be completed by mainly
European-listed companies for 2005 and 2006,
the SEC's chief accountant says. He pledges
to work "for full acceptance of international
accounting standards to the point that we
believe" public company accounting
carried out under them is close to accounting
done under U.S. generally accepted accounting
principles. . . .
http://pubs.bna.com/ip/BNA/car.nsf/is/a0a8g5j8m7 |
Under the Board's audit standards, auditors must
evaluate whether company records accurately and
fairly reflect company transactions, be reasonably
sure that company transactions are authorized
by senior management or the company's board, be
reasonably sure transactions are recorded so financial
statements can be prepared in accordance with
GAAP, and describe any material weaknesses in
the internal controls.
Auditors of public companies (including foreign
firms that audit US-traded companies) must register
with the Board. Public companies (based on their
equity capitalization) must pay fees to fund the
Board, as well as to fund FASB which will continue
to set GAAP.
The Board is to conduct annual quality reviews
(inspections) for firms that audit more than 100
public companies; all others must be conducted
every 3 years. The Board can discipline or sanction
registered firms and their associates for intentional
conduct or repeated instances of negligent conduct.
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3.1.1 History of Accounting