Accounting standards are needed so that financial statements will fairly and consistently describe financial performance. Without standards, users of financial statements would need to learn the accounting rules of each company, and comparisons between companies would be difficult. Numerous accounting bodies govern the accounting environment and accommodate the success of a business. The four main financial governing bodies include the following: • Securities and Exchange Commission (SEC)
• Financial Accounting Standards Board (FASB)
• Governmental Accounting Standards Board (GASB)
• International Accounting Standards Board (IASB)
Securities and Exchange Commission (SEC)
The Securities and Exchange Commission is a U.S. regulatory agency that has the authority to establish accounting standards for publicly traded companies. The SEC provides financial reporting requirements both form and content - including GAAP - as well as regulation of various financial services entities and market mechanisms. The SEC retains the right to overrule FASB pronouncements, and it occasionally exercises this right. The SEC would appear to have the most legal power in response to the establishment of standards. The Office of the Chief Accountant assists the Commission in executing its responsibility under the securities laws to establish accounting principles, and for overseeing the private sector standards-setting process. The Office works closely with the Financial Accounting Standards Board, to which the SEC has delegated authority for accounting standards setting, as well as the International Accounting Standards Board and the American Institute of Certified Public Accountants. The Office also consults with registrants and auditors on a regular basis regarding the application of accounting and auditing standards and financial disclosure requirements .
Financial Accounting Standards Board (FASB)
The Securities and Exchange Commission (SEC) designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S. The FASB employs an elaborate due process procedure prior to the issuance of an SFAS. The due process procedure consists of the following a hierarchy of steps: 1. Placement of agenda
2. Issuance of invitation to comment or a Discussion Memorandum 3. Public Hearings
4. Issuance of an Exposure Draft
5. Public Hearings
6. Issuance of Statement of Financial Accounting Standard. These steps are the FASB’s attempt to acquire consensus as to the preferred method of accounting, as well as to anticipate adverse economic consequences. The method used by FASB is appropriate because the decisions are free from political influence due to the fact that it is an organization in the private sector. The partnership between the FASB and the SEC provides for a system of checks and balances. Therefore, unreasonable principles that contain biases cannot be written and approved by the same body. FASB uses "RULES" based approach to develop standards where standards are usually explicit as to precise rules that must be followed for recognition, measurement and financial statements presentation. A rules-based approach states that if the rules are followed strictly when preparing financial statements, they will not be misleading. This strict adherence to the rules may not always leads to the best approach in the preparation of financial statements. The danger is that detailed rules drive out professional judgment resulting in decisions that are consistent with the rules but inconsistent with the principle of providing the most useful financial information. Under U.S. GAAP there is more than one accounting method (or principle) is acceptable for some transactions. This provides managers with considerable discretion in preparing their...