Maire Loughran - Financial Accounting For Dummies

Here’s a brief explanation of each of the six principles:

Responsibilities: As an accountant, you hold yourself to high moral and ethical standards so you maintain the public’s confidence in your financial reporting. For example, financial accountants have the responsibility to participate in self-governance by performing peer reviews of other CPA/financial accounting firms’ work to check for accuracy and consistency among the profession.

Serving the public interest: A financial accountant’s public interest is the company for whom she is preparing the financial statements, as well as the users of the financial statements (such as people and entities thinking about purchasing shares of the company stock).The public interest also includes banks and other businesses that are considering granting credit to the company, governmental agencies such as the Internal Revenue Service (which measures the company’s compliance with the tax code), investors, and other members of the business and financial community who rely on the objectivity and integrity of CPAs.

Integrity: This characteristic means you are honest when dealing with others. In the world of financial accounting, integrity means that you serve the company for whom you are preparing the financial statements to the best of your ability, keeping in mind that this may not be the same thing as completely agreeing with the way the company wants its financial statements prepared. You can’t be worried that business management is going to be mad at you or fire you if you disagree with them.

Objectivity and independence: When you are objective, you are neutral and unbiased in all decision-making processes. You base your opinions only on facts and not on any preconceived notions you may have. You interpret rules and policies, such as generally accepted accounting principles (GAAP), in a truthful and sincere manner — staying true to both the form and spirit of the particular principle or regulatory issue.Financial accountants who provide auditing and other attestation services must be independent in both fact and appearance. Being independent means you have no special relationship to or financial interest with the company that would cause you to disregard evidence and facts when evaluating them. For example, preparing the financial statements for a business owned by a close relative can justifiably cause those viewing your report to doubt its veracity or your objectivity.

Taking due care: In a nutshell, this principle means you have the education and experience to perform the work at hand. You must be both competent diligent. In addition, due care means you plan and supervise adequately any professional activity for which you are responsible.

Scope and nature of services: All the above principles lead up to this final one. Financial accountants consider all the preceding principles when determining whether they can provide specific services in individual circumstances.

If being a member of the AICPA isn’t mandatory in order to get a job as a financial accountant, you may wonder why its code of conduct is such a big deal. Well, if you want to be a financial accountant practicing as a CPA (see Chapter 22), you must be licensed by your state, which recognizes the authority of the AICPA. State and federal courts consistently hold that all practicing CPAs, regardless of membership in the AICPA, must follow the professional ethical standards contained in the AICPA’s Code of Professional Conduct.

In addition to the AICPA, other organizations give financial accountants official guidance on how to prepare financial statements. Public and nonpublic corporations have different agencies monitoring them and keeping them on the right course.

In this section, I discuss the U.S. Securities and Exchange Commission (SEC), which was created during the Great Depression that followed the stock market crash of 1929. It was charged with regulating the stock market and preventing corporate abuses relating to the offering and sale of securities and corporate reporting. Also in this section, I explain the Sarbanes-Oxley Act of 2002 (SOX), which was enacted in response to corporate abuses that took place in the 1990s and early 2000s. Finally, you find out about the enforcement arm of SOX, the Public Company Accounting Oversight Board (PCAOB).

In response to the stock market crash of 1929 and the ensuing Great Depression, the Securities Exchange Act of 1934 created the SEC. The SEC’s mission is to make sure publicly traded companies tell the truth about their businesses and treat investors in a fair fashion by putting the needs of the investor before the needs of the company.

The SEC is run by five commissioners who are appointed to five-year terms by the president of the United States. Their terms are staggered, and no more than three commissioners can be from the same political party at the same time. These commissioners ride herd over the SEC’s power to license and regulate stock exchanges, the companies whose securities are traded on them, and the brokers and dealers who conduct the trading.

If you personally dabble in the stock market, you should be quite interested in the workings of the SEC. The SEC enforces the statutory requirement that public companies submit quarterly and annual reports, as well as other periodic reports that are crucial for making sound investment decisions. Additionally, company management is required to submit a narrative outlining their previous year of operations, which explains how well the company performed. Wondering where to find all this great info? The SEC maintains an online database called EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system) from which investors can access this and other information filed with the agency.

You can access EDGAR at the SEC website, www.sec.gov . From the home page, under Filings, click on the How to Search EDGAR link for the lowdown on how to use EDGAR.

The enforcement authority given by Congress allows the SEC to bring civil enforcement actions against individuals or companies alleged to have committed accounting fraud, provided false information, or engaged in insider trading or other violations of the securities law. The SEC also works with criminal law enforcement agencies to prosecute individuals and companies alike for offenses that include criminal violations.

As a financial accountant, your exposure to the regulatory authority of the SEC will be limited unless you work for a company whose shares of stock are publicly traded or you work for a CPA firm conducting financial statement audits for publicly traded companies.

Beware, fraudulent companies: SOX may sound like a cuddly kitten, but it has claws! The bankruptcies of Enron Corporation and WorldCom, Inc. — and the subsequent billions of dollars of investor losses — prompted the U.S Congress to pass the Sarbanes-Oxley Act of 2002 (SOX) in an effort to renew investor confidence in the regulation of publicly traded companies. (SOX got its name because the legislation was sponsored by U.S. Senator Paul Sarbanes and U.S. Representative Michael G. Oxley.)

Abiding by SOX is mandatory for all publicly traded organizations regardless of size. SOX introduced major changes to the regulation of financial practice and corporate governance.