Maire Loughran - Financial Accounting For Dummies

Most of my financial accounting students are relative newbies to the wonderful world of accounting and business-related classes. Even at the MBA level, a preponderance of my students know nothing about accounting because they transferred into business after getting their undergraduate degrees in non-business-related disciplines.

If you’re an accounting novice, my best advice to you is to forget all your preconceived notions of accounting — especially as they tie into what you feel is logical. Many times, I’ve seen students banging their heads against the wall because the way GAAP or the AICPA works doesn’t make sense to them. Sometimes, financial accountants handle transactions in a certain way simply because that’s the way it’s done. After you go through the alphabet soup of regulatory agencies in this chapter, I hope you come to realize that for this class, at least, you need to have a good overview of the regulatory system and just go with the flow.

Financial accountants absolutely must maintain the highest level of ethical behavior and operate using a code of conduct. This means that financial accountants must always attempt to act in an ethical manner and do the right thing — regardless of whether doing the right thing at that particular moment is the best choice for the accountant personally.

Why is the accountant’s ethical behavior so crucial? The reports that financial accountants prepare are used by individuals to make important investment decisions that can have a mighty future effect on the users’ housing, retirement, and education options. The users of the financial reports must be given accurate, comparable financial statements so they can make educated decisions on how to invest their money.

The American Institute of Certified Public Accountants (AICPA) is the national professional organization for all certified public accountants (CPAs). You don’t have to be a CPA or a member of the AICPA to get work as a financial accountant. However, if you think financial accounting is a career path worth exploring, keep in mind that being a CPA is a must for advancement in the field. Also, membership in the AICPA has many rewards, such as automatically informing you about new accounting standards and providing great research and educational resources.

So what exactly does the AICPA do? Through its senior technical committee, which is called the Auditing Standards Board (ASB), the AICPA is responsible for establishing auditing and attestation standards for nonpublic companies in the United States. Before we move on, let me define three key terms in that explanation:

The purpose of financial statement auditing is to gather enough evidence about a company’s documents to be able to issue an opinion on whether the documents are free of material (significant) misstatements.

A financial accountant provides an attestation service when she issues a report on a subject that is the responsibility of another person or business. For example, a company can hire you to calculate the rate of return on the company’s investments (see Chapter 14), making sure your figures match the company’s report on the same topic.

In April 2016, to address the need for clearer attestation standards, the AICPA released the Statement on Standards for Attestation Engagements (SSAE) 18, Attestation Standards: Clarification and Recodification.

Nonpublic companies are closely held (meaning privately owned). Their stock is not traded on any open-to-the-public stock exchange. For example, if you start a corporation, you aren’t required to sell any of your shares of stock unless you want to. In contrast, a publicly traded company’s shares are available for purchase in stock exchanges, such as the American Stock Exchange, or over-the-counter markets, such as the NASDAQ.

The AICPA also enforces a code of professional conduct for its members, which governs how financial accountants perform their duties. In the next two sections, I provide more information about each key role of the AICPA. First up is an explanation of the audit and attestation standards set by the ASB.

The Auditing Standards Board (ASB) is a senior technical committee of the AICPA. The ASB issues the standards and procedures that financial accountants must follow when conducting attestation and audit services for nonpublic companies. It also sets quality control standards to use when conducting peer reviews, which occur when one CPA firm evaluates the operations of another CPA firm.

The ASB has 19 members, most of whom work for public accounting firms (such as KPMG LLP), are university professors, are governmental accountants, or otherwise work in the field of accounting. Members serve one- to three-year terms and are jointly nominated by the director of the AICPA Audit and Attest Standards staff and the ASB chair. The responsibility of approving the nominations falls to the AICPA Board of Directors.

Curious about these mysterious ASB standards? They are called Statements on Auditing Standards (SAS), and as of this writing the AICPA website lists 143 of them. Here, I explain just a couple so you have some idea of what they cover:

SAS No. 1 Section 410 says the auditor must state whether the financial statements are presented using generally accepted accounting principles (GAAP).

SAS No. 143 defines the responsibilities the auditor has regarding accounting estimates and the related disclosures (see Chapter 15).

A lot of information about the ASB standards and procedures is available free of charge on the AICPA website at www.aicpa.org . From the home page, select “Research” and then “Standards.” You can access all sorts of good financial accounting info on the topics of audit, attest, compilation, and review standards.

A compilation occurs when an outside financial accountant prepares financial statements for a company using only data given to him by company management. A review occurs when the financial accountant gives limited assurance that no material modifications need to be made to financial statements prepared by company management.

The AICPA’s Code of Professional Conduct contains six principles of professional conduct by which its members must abide: responsibilities, serving the public interest, integrity, objectivity and independence, taking due care, and the scope and nature of services. You can read all about these six principles at www.aicpa.org/search.html?source=AICPA&q=code+of+professional+conduct .

Note: In this section, I use the terms financial accountant and CPA synonymously. I do so because most financial accountants are CPAs, and vice versa.