Chat with us, powered by LiveChat week 6 term Paper | Gen Paper
+1(978)310-4246 credencewriters@gmail.com
  

ACCT 601 – ACCOUNTING CAPSTONE

The role of the FASB

The role of the FASB in monitoring and controlling business reporting and accounting practices in the modern organization

ACCT 601-Accounting Capstone

Table of Contents
I. Executive Summary 3
II. Introduction 3
III. Review of Literature 4
IV. Analysis 6
V. Recommendations 11
VI. Summary and Conclusions 14
VII. References 16

I. Executive Summary

The information in this research paper was collected from different data sources, such as web published articles to a peer-reviewed article in scholarly journals. This paper will explain what the FASB is, how it was formed and what the role of the FASB is in today’s modern organizations. The paper will provide the analysis, recommendation and conclusion on the role of the FASB.

This paper looks deep into why the FASB was formed, and how the accounting standards developed by the FASB impact business reporting. The research looks into the FASB function and its challenges as well as the Securities and Exchange Commission (the SEC) and its function related to the FASB and financial reporting.This paper will look into the fraud cases in the past and the benefits of the FASBand the SEC today. The research shows how the FASB in correlation with the SEC help create and enforce accounting rules and regulations to mitigate and eliminate fraud.

II. Introduction

This term paper will research the role of the FASB in monitoring and controlling the accounting practices in today’s modern organizations. It will also have an overview of the SEC’s unique position in the financial reporting process. This paper will look into the previous cases of accounting fraud and what hastriggered the FASB and the SEC to improve and enforce accounting standards. In addition, it will look into the benefits that the FASB brought to the shareholder and the public. All this will bring us to the conclusion on the effectiveness and the efficiency of the FASB in monitoring and controlling accounting processes in the organizations and reducing the occurrences of accounting fraud.

The research and analysis section talks about the main functions of the FASB. The FASB constantly needs to look into the ways to improve the accuracy of financial reports. The FASB job is to establish and improve standards of financial accounting and reporting so that the financial statements are free from misstatements. In addition, the SEC needs to enforce the standards to eliminate the fraud so financial statements will provide accurate and useful information not just to the investors but to general public as well.

At the end this paper will draw a conclusion on the effectiveness of the FASB. It will point out to the public what the FASB function is and what they can do for the investors and shareholders. Lastly, it will look into the changes that the FASB implemented since the Enron collapse and how much it improved the accuracy and validity of financial statements. Also, it will give some suggestions for the future improvements.

III. Review of Literature

Literature used in this research paper deeply covers the role of the FASB in monitoring and controlling business reporting and accounting practices in the modern organization. Many organizations got hurt by fraudulent practices to the point they could not recover and had to dissolve or claim bankruptcy. The major cause of these mega meltdowns has been determined to be financial manipulation and questionable accounting practices (Chatzkel, 2003). The fall of these organizations has also risen questions as to how could this happen and what changes FASB plans to implement to prevent the reoccurrence of such incident in other such organizations. Until this catastrophe happened, the majority of general population was unfamiliar with FASB and what role the FASB plays in business organizations.

To support the problem statement I have conducted an intensive research and the following literature provides lots of information and facts. “The Collapse of Enron And the Role of Intellectual Capital” by Chatzkel talks about the FASB and the Enron incident. The FASB is the authority on financial accounting and in the Enron incident, its implications mandated changes in measuring and managing for goodwill and intangibles as well as changes in the accounting framework to ensure the integrity of an intellectual capital (Chatzkel, 2003).

“The Role of FASB to Business” by Dietrich elaborates on FASBs position in the financial reporting. The FASB has the authority to set, but not enforce, accounting standards. Enforcement falls under the jurisdiction of the SEC (Security and Exchange Commission). The FASB takes recommendations from the SEC and the AIPA (American Institute of Public Accountants) when devising or improving standards; however, it is not required to. It also considers the feedback from businesses when making changes to current standards (Dietrich, 2010).

Public wants to know about FASB and its members. In the article “ What are the Qualifications for the Financial Standards Board Members?” Wicks talks about FASB members qualifications.

Members of the FASB have extensive experience in areas that relate to the accounting and the financial profession. Often this experience spans to up to 20 years in senior management positions. Typical management positions for FASB members include senior analysts, audit partners, chief financial officers and senior accountants. Areas of experience for these members include financial reporting and analysis, financial services investment and financial planning (Wicks, 2011). The general public needs to be informed of important developments about the FASB’s operations and activities and if necessary amend or replace past decisions in a timely fashion. Board, F. A. (2012). “Rules of Procedure” by Board elsborates on SEC and the formation of standards. Besides the Foundation’s Board of Trustees, the board is also accountable to the Securities and Exchange Commission (SEC) and, its stakeholders for establishing standards and concepts by following these principles (Board, 2012).

Gannon (2010) talks about achieving a single global standard. From the research I have concluded that the mission of the FASB is to establish and improve standards of financial accounting and reporting to provide decision-useful information to investors is of an importance for the whole society and the economy in general and not just the immediate users of the financial reports. It would be an understatement to say that the past couple of years have been chaotic for financial reporting. Issues related to the financial crisis – the use of fair value accounting, consolidation policy, and financial asset de-recognition – have dominated the Board discussion. The financial crisis has shown that at times there is disconnect between the accounting outcome recognized in the financial statements and the economic reality that underlies the transactions that are being accounted for (Gannon, 2010). All these issues point out the challenges that the FASB faces in trying to improve the quality of financial reporting and the need for more transparent financial information and accounting outcomes that reflect an actual economic reality.

IV. Analysis

The role of the FASB

To understand the role of the FASB, we have to understand what the FASB is and what its main functions are. As per Dietrich, the FASB or Financial Accounting Standard Board is a private, not for profit organization, established in 1973 to develop a set of financial accounting standards known as generally accepted accounting principles for the private sector. GAAP instruct companies on how to prepare financial reports. Having a set of standards ensures businesses disclose the same information in a uniform manner (2010). The FASB is the authority on financial accounting and in the Enron incident, its implications mandated changes in measuring and managing for goodwill and intangibles as well as changes in the accounting framework to ensure the integrity of an intellectual capital (Chatzkel, 2003).

The goal of most businesses is to make a profit. Accounting procedures allow businesses to record, report and analyze their company’s financial information. The financial statements provide information relating to income, cost of goods sold, expenses, assets, liabilities and owner’s equity, and are used to measure the company’s financial performance as well as for important business decision making. The FASB has a unique position in the financial reporting process. Its main goal is to provide leadership for companies in establishing and improving the accounting methods used to prepare financial statements. The FASB has the authority to set, but not enforce, accounting standards. Enforcement falls under the jurisdiction of the SEC (Security and Exchange Commission). The FASB takes recommendations from the SEC and the AIPA (American Institute of Public Accountants) when devising or improving standards; however, it is not required to. It also considers the feedback from businesses when making changes to current standards (Dietrich, 2010).

As per the article “The Roles of the SEC and the FASB in Establishing GAAP,” the SEC is on the front line of financial reporting and often is among the first to identify emerging issues and areas of accounting that need attention. Issues needing attention often can be attributed to new and unique transactions that arise in the marketplace, but they also may arise from the authoritative literature” (2002).

Accounting standards are essential in promoting a credible and transparent business environment. The Financial Accounting Standards Board is the national custodian of accounting practices in the U.S. and has the role of ensuring that corporations uphold ethics in accounting. The FASB is composed of seven members. The Financial Accounting Foundation Board of Trustees is responsible for overseeing, funding, and appointing members of the FASB. The FASB includes three members from the field of public accounting, two members from the industrial community, such as manufacturers, one member from the investment field and one from the academic community. Members of the FASB have extensive experience in areas that relate to the accounting and the financial profession.

Members appointed to the FASB come from various sectors. Typically members come from the business community, legal and accounting professions, as well as from government agencies. Members also come from the investment and capital market industry and from academia, along with elected officials who served in state or municipal government positions. From these related sectors, members have an in-depth understanding of governance, accounting and financial principles. They also must be able to identify problems in corporate accounting practices and find a way of resolving these issues promptly. Additionally, due to the nature of their responsibilities, integrity is an essential personal requirement for FASB members (Wicks, 2011). In order to ensure the independence of Board members and it sixty plus staff personnel, the Foundation has created policies about personal investments and other personal activities that are designed to prevent potential conflicts of interest (Board, 2012).

According to the FASB book of guidelines, the FASB establishes and improves standards and concepts through a comprehensive and independent process that encourages broad participation, objectively considers all stakeholder views, and is subject to oversight by the Foundation’s Board of Trustees. FASB members are guided by different principles when exercising their judgment. These principles are the objectivity in the decision making and the neutrality of information resulting from its standards. They must actively solicit and carefully weigh the views of stakeholders in developing standards and concepts. The ultimate determinant of standards and concepts, however, must be the FASB’s judgment, based on research, public input, and careful deliberation, about the usefulness of the resulting information (Board, 2012).

The general public is to be informed of important developments about the FASB’s operations and activities and if necessary amend or replace past decisions in a timely fashion. Besides the Foundation’s Board of Trustees, the board is also accountable to the Securities and Exchange Commission (the SEC), and, its stakeholders for establishing standards and concepts by following these principles (Board, 2012).

The goal of financial accounting standards is to help stakeholders make informed investment decisions based on honest financial statements. The standards are designed to promote transparency in financial reporting. When information is transparent, it is visible and understandable to the public. This enables potential investors and creditors to make accurate evaluations of the businesses’ finances. Accounting standards also help the board of directors to assess management’s effectiveness. Financial statements identify areas that need improvement and enable the boards to take early corrective actions (Dietrich, 2010).

The accounting standards developed by the FASB directly impact how businesses report items such as inventory costs, debt, assets, revenue, stockholder’s equity and taxation. For example, in 2010 the FASB announced that businesses must report revenue in the period it is earned. Previously, companies were able to report revenue when it was received. This standard greatly affects the income statement — a statement of the company’s profits and losses. When all companies in one industry are required to report revenue in the same manner, the public can compare their financial statements to each other more easily (Dietrich, 2010).

The FASB allows businesses to choose how they depreciate assets on their financial statements, but they must disclose the method they use and use it consistently for the life of the assets. Since the method of depreciation affects areas such as expense accounts and net income, it affects the amount of income taxes due. The Internal Revenue Service also allows businesses to choose their method of depreciation, but like the FASB, they must disclose the method and use it consistently. Most businesses choose the depreciation method that results in the least amount of taxes owed (Dietrich, 2010).

Due to emerging trends, the FASB receives many requests to add new topics and to reconsider the existing pronouncements. The FASB is alert to trends in financial reporting through observation of published reports, liaison with interested organizations, and discussions with the Emerging Issues Task Force (EITF). In addition, the staff receives many technical inquiries, which may provide evidence that a particular topic, or aspect of an existing pronouncement, has become a problem. The FASB also is alert to changes in the financial reporting environment that may be brought about by new legislation or regulatory decisions (Board, 2012).

The Board turns to many other organizations and groups for advice and information on various matters, including its agenda. As part of the agenda process, the Board may make available for public comment agenda proposals that concisely describe the scope of potential projects. The FASAC regularly reviews the Board’s agenda priorities and advises on major technical projects. The FASB’s Investors Technical Advisory Committee, Investors Task Force, Small Business Advisory Committee, and Private Company Financial Reporting Committee also serve as resources to the Board both in formulating the FASB technical agenda and in advising on specific agenda projects. After receiving input from the constituency and consultation with the other members of the FASB, FASAC, and others as appropriate, the chairman decides what projects to add to the Board’s technical agenda (Board, 2012).

V. Recommendations

The FASB is obligated to issue standards only when the expected benefits exceed the perceived costs. While reliable quantitative cost-benefit calculations are seldom possible, the FASB strives to determine that a proposed standard will fill a significant need and that the perceived costs it imposes, compared with possible alternatives, are justified in relation to the overall expected benefits. The standards issued are to be of high quality, grounded in a consistently applied conceptual framework, and stated in clear and unambiguous language (Board, 2012).

The FASB should also balance the desire for comprehensive improvements in standards with the need for incremental changes that produce timely reporting improvements in areas important to users as well as manage the process of improving standards in ways that balance the desire to minimize disruption of accounting and financial reporting processes with the need to improve the decision-usefulness of information in financial reports. The general public is to be informed of important developments about the FASB’s operations and activities and if necessary amend or replace past decisions in a timely fashion. Besides the Foundation’s Board of Trustees, the board is also accountable to the Securities and Exchange Commission (SEC), and, its stakeholders for establishing standards and concepts by following these principles (Board, 2012).

I believe that accounting standards are essential to the efficient functioning of the economy due to the fact that the decisions about the allocation of resources rely heavily on credibleand understandable financial information which can be used by the public in making various other kinds of decisions. The goal of financial accounting standards is to help stakeholders make informed investment decisions based on honest financial statements. The standards are designed to promote transparency in financial reporting. When information is transparent, it is visible and understandable to the public. This enables potential investors and creditors to make accurate evaluations of the businesses’ finances. Accounting standards also help the board of directors to assess management’s effectiveness. Financial statements identify areas that need improvement and enable the boards to take early corrective actions (Dietrich, 2010).

The FASB allows businesses to choose how they depreciate assets on their financial statements, but they must disclose the method they use and use it consistently for the life of the assets. Since the method of depreciation affects areas such as expense accounts and net income, it affects the amount of income taxes due. The Internal Revenue Service also allows businesses to choose their method of depreciation, but like the FASB, they must disclose the method and use it consistently. Most businesses choose the depreciation method that results in the least amount of taxes owed (Dietrich, 2010).

The mission of the FASB to establish and improve standards of financial accounting and reporting to provide decision-useful information to investors is of an importance for the whole society and the economy in general and not just the immediate users of the financial reports. It would be an understatement to say that the past couple of years have been chaotic for financial reporting. Issues related to the financial crisis – the use of fair value accounting, consolidation policy, and financial asset de-recognition – have dominated the Board discussion. The financial crisis has shown that at times there is disconnect between the accounting outcome recognized in the financial statements and the economic reality that underlies the transactions that are being accounted for (Gannon, 2010).

These issues point out the challenges that the FASB faces in trying to improve the quality of financial reporting and the need for more transparent financial information and accounting outcomes that reflect an actual economic reality. The financial reporting environment continues to evolve and the general populations as well as the everyday economic issues are impacting how accounting and financial reporting standards are developed, written, and applied. With the standards demanding the more transparent financial statements, it will be easier for the users to determine if any fraudulent activities are taking place within the organizations and the Enron incident will be just a past occurrence that everyone is to learn from and never to be repeated again.

VI. Summary and Conclusions




This paper looks deep into FASB and the role FASB plays in business organizations. It examines the potential problems in financial statements and how the correct implementation of GAAP can save the company from collapse or bankruptcy. Many organizations have been hurt by fraudulent accounting practices. As per authors Dietrich and Chatzkel, GAAP needs to be followed because GAAP instruct companies on how to prepare financial reports. Having a set of standards ensures businesses disclose the same information in a uniform manner (Dietrich, 2010). The FASB has a unique position in the financial reporting process. Its main goal is to provide leadership for companies in establishing and improving the accounting methods used to prepare financial statements. The FASB has the authority to set, but not enforce, accounting standards. Enforcement falls under the jurisdiction of the SEC (Security and Exchange Commission). The FASB takes recommendations from the SEC and the AIPA (American Institute of Public Accountants) when devising or improving standards; however, it is not required to. It also considers the feedback from businesses when making changes to current standards (Dietrich, 2010).

Accounting standards are essential in promoting a credible and transparent business environment. The Financial Accounting Standards Board is the national custodian of accounting practices in the U.S. and has the role of ensuring that corporations uphold ethics in accounting. If financial statements are prepared in accordance to GAAP where accounting ethic is followed the risk of accounting fraud is very low.

The FASB must also balance the desire for comprehensive improvements in standards with the need for incremental changes that produce timely reporting improvements in areas important to users as well as manage the process of improving standards in ways that balance the desire to minimize disruption of accounting and financial reporting processes with the need to improve the decision-usefulness of information in financial reports.

The goal of financial accounting standards is to help stakeholders make informed investment decisions based on honest financial statements. The standards are designed to promote transparency in financial reporting. When information is transparent, it is visible and understandable to the public. This enables potential investors and creditors to make accurate evaluations of the businesses’ finances.

However, even with FASB and SEC there is still lots of room for improvement. The mission of the FASB to establish and improve standards of financial accounting and reporting to provide decision-useful information to investors is of an importance for the whole society and the economy in general and not just the immediate users of the financial reports. SEC has to step up and improve corporate environments and look into ways to enforce rules and regulations of ethics.

FASB needs to create the standards demanding the more transparent financial statements; it will be easier for the users to determine if any fraudulent activities are taking place within the organizations. In addition, code of ethic has to be followed at all times. SEC needs to put more time and effort in ensuring that the standards are followed so that any potential fraud or misstatement can be detected and corrected before it too late.

VII. References

Board, F. A. (2012). Rules of Procedure. Financial Accounting Foundation, 1-36.
Chatzkel, J. (2003). The Collapse of Enron And the Role of Intellectual Capital. Journal of Intellectual Capital, 4(2), 127-154.
Dietrich, R. (2010). The Role of FASB to Business. Business Communications and Etiquette, 5-
16. Retreived on July 15, 2014 from http://smallbusiness.chron.com/role-fasb-business-20006.html
Gannon, D. (2010). Achieving a Single Global Standard. The CPA Journal, 11-13.
Herdman, K.R. (May 14, 2002). The Roles of the SEC and the FASB in Establishing GAAP.
Retrieved on July 18, 2014 fromhttp://www.sec.gov/news/testimony/051402tsrkh.htm
Wicks, D. (2011). What are the Qualifications for the Financial Standards Board Members?
Journal of Accountancy, 26.

Page 14 of 15

error: Content is protected !!