The CPA s Professional Standards: What Are They? Who Sets Them? What Are the Key Issues Today?

Transcription

1 The CPA s Professional Standards: What Are They? Who Sets Them? What Are the Key Issues Today? Sally L. Hoffman AcSEC refers to Accounting Standards Executive Committee; AICPA, to the American Institute of Certified Public Accountants; APB, to Accounting Principles Board; ARBs, to Accounting Research Bulletins; ASB, to Auditing Standards Board; FASB, to Financial Accounting Standards Board; FRR, to Financial Reporting Release; GAAP, to Generally Accepted Accounting Principles; GAAS, to Generally Accepted Auditing Standards; GASB, to the Governmental Accounting Standards Board; OCBOA, to Other Comprehensive Basis of Accounting; SAB, to Staff Accounting Bulletins; SASs, to Statements on Auditing Standards; SEC, to Securities and Exchange Commission; SOPs, statements of position; and Statements or SFAS to Statements of Financial Accounting Standards. A. GAAP 1. Financial statements summarize the financial transactions of an entity as of a particular date and for a period then ended, for example, as of December 31, Sally L. Hoffman, CPA, CFE, is a partner and Co-Director of Berdon LLP s Forensic Accounting and Investigative Services Department. A complete set of the course materials from which this outline was drawn may be purchased from ALI-ABA. Call CLE-NEWS, and ask Customer Service. Have the order number of the course materials SG081 handy. 5

2 6 ALI-ABA Business Law Course Materials Journal June X, and for the year then ended. GAAP are the body of accounting concepts, principles, standards and practices that provide guidance on how to record and report financial transactions in the financial statements. In certain circumstances financial statements are prepared on an OCBOA such as on the tax basis or on the cash basis. 2. Unlike laws, GAAP are not legislated, and are not codified in a single body of literature. Instead, accounting principles have been developed largely by a series of organizations, committees, and boards within the accounting profession. Accounting principles emanate from a wide variety of sources, including general practice within an industry; no single source dictates the appropriate accounting treatment for all transactions. Some sources are more authoritative than others. However, it is not uncommon to have an issue for which there is no guidance in formal accounting pronouncements. B. Sources of GAAP 1. FASB. The FASB establishes accounting standards for commercial entities. A parallel organization, the GASB, sets standards for governmental units and bodies. a. The FASB sets the most authoritative accounting standards. The FASB, formed in 1973, consists of seven full-time members with varied backgrounds, including members from public accounting, private industry, academia and the financial analysis sector. A large technical staff provides support for the work of the FASB. b. The FASB issues the following pronouncements and documents: i. Statements are the most authoritative pronouncements, of which there are 144 as of December 2001; ii. iii. Interpretations of Statements, issued by the FASB; Technical Bulletins, issue by the staff of the FASB; iv. Concepts Statements, non-authoritative statements providing a framework for establishing accounting standards; and v. Other publications, such as Q & A publications that provide implementation guidance for particular Statements, discussion memoranda, and research studies.

3 CPA s Professional Standards 7 2. AICPA. Before the establishment of the FASB in 1973, the AICPA established the most authoritative accounting principles. It continues to participate in the accounting standard process through the Accounting Standards Executive Committee, as described below. 3. APBs. From 1959 to 1973, the APB issued 31 Opinions which were carried forward as authoritative when the FASB was established. Many of these have since been superseded by FASB Statements. 4. ARBs. Before the establishment of the APB, the AICPA published a series of ARBs. Although most of these have since been superseded, a small number remain authoritative. 5. AcSEC. AcSEC, comprised of 15 volunteer members from public accounting, private industry, and academia, is the senior technical accounting committee of the AICPA. In addition to commenting on proposals of the FASB, AcSEC issues the following accounting guidance. 6. SOPs. Although SOPs generally deal with industry specific or narrow issues, some with broad application (for example, accounting for advertising expenses and disclosure of risks and uncertainties) have been issued. 7. Practice Bulletins. Practice bulletins are used to disseminate AcSEC s views for the purpose of providing guidance to AICPA members on narrow financial accounting and reporting issues. 8. Industry Audit and Accounting Guides. AcSEC oversees the accounting sections of these Guides. 9. Emerging Issues Task Force. The EITF was established in 1984 under the aegis of the FASB to deliberate emerging issues and provide non-authoritative guidance on how to account for new and unusual transactions. Comprised of 13 members from public accounting and private industry serving on a volunteer basis, the EITF discusses new and evolving issues and attempts to reach consensuses. An observer from the SEC and an FASB representative attend all meetings. 10. SEC. Although authorized by Congress to prescribe accounting principles for companies under its jurisdiction, the SEC has generally yielded this right to the private sector. While it recognizes pronouncements of the FASB and the AICPA as authoritative, the SEC is by no means a passive observer in the

4 8 ALI-ABA Business Law Course Materials Journal June 2002 standard setting process. It makes its views known through discussion with the FASB and AICPA and attendance at EITF meetings. In addition, the SEC publishes its views on accounting practices for publicly held companies through Regulation S-X and FRRs. The staff of the SEC publish SABs. In 1999, the SEC staff issued three significant SABs: SAB99 Materiality; SAB100 Restructuring and Impairment Charges; and SAB101 Revenue Recognition. 11. GAAP Hierarchy. Included in the auditing standards issued by the AICPA is an explanation of the various sources of accounting principles and a categorization of the principles into a hierarchy. Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity with GAAP, ( SAS 69 ) states, Independent auditors agree on the existence of a body of generally accepted accounting principles, and they are knowledgeable about these accounting principles and in the determination of their general acceptance. Nevertheless, the determination that a particular accounting principle is generally accepted may be difficult because no single reference source exists for all such principles. SAS 69, 5. GAAS differ from GAAP in that they provide guidance to independent accountants on the procedures that must be performed in auditing financial statements, whereas GAAP provide guidance in preparing the financial statements. SAS 69 goes on to describe the various sources in the order in which they should be considered. Attached as Exhibit 1 is a summary from SAS No. 69 of the GAAP Hierarchy. 12. Key GAAP Principles. The following are the basic principles and assumptions upon which GAAP is founded. a. Accrual Basis. On the accrual basis, income is recognized when earned, as opposed to when cash is received, and expenses are recognized when incurred, as opposed to when the cash is disbursed. Accounts receivable and accounts payable are established to record the amounts owed to and by an entity. b. Going Concern. Financial statements, unless otherwise indicated, assume an entity is a going concern, that its existence is indefinite and liquidation is not imminent. c. Consistency. Unless otherwise indicated, accounting principles are applied consistently from period to period, with no changes in policies and practices.

5 CPA s Professional Standards 9 d. Conservatism. FASB Concepts Statement No. 2 describes conservatism as [a] prudent reaction to uncertainty to try to ensure that uncertainty and risks inherent in business situations are adequately considered. FASB Statement of Concepts No. 2, Qualitative Characteristic of Accounting Information, Glossary of Terms. e. Bases of Measurement. Introductory accounting texts have in the past frequently discussed the historical cost basis as a fundamental accounting concept. While the historical cost basis, in which assets and liabilities are valued at cost as of the date of acquisition, is still the predominate basis, certain assets are currently presented in financial statements at fair value. Further, fair value accounting is championed by many as a goal. f. Materiality. FASB Concepts Statement No. 2 describes materiality as [t]he magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. Ibid. 13. Financial Statements. To present a complete set of financial statements, GAAP require that the following be included: balance sheet, income statement, and statement of cash flows. In addition, a statement of stockholders equity is sometimes presented. Also, some companies may also provide a statement of comprehensive income. If a separate statement is not presented, information regarding comprehensive income is generally presented in the statement of stockholders equity. 14. Balance Sheet. A balance sheet, often referred to as a statement of financial position, is a snapshot of an entity at a specific point in time. The balance sheet summarizes the entity s financial position, providing information on an entity s assets, liabilities, and owners equity as of a particular point in time. It derives its name from the fact that it balances, reflecting the basic accounting equation: assets = liabilities + owners equity. Assets are resources the entity owns or controls that have probable future economic benefits. Liabilities are claims against an entity that must be satisfied with cash, other assets, new obligations, or services. Owner s equity is the residual, the difference between the assets and liabilities. 15. Income Statement. The income statement, sometimes called the operating statement or statement of operations, summarizes an entity s revenues and expenses to arrive at net income (or net loss) for a given period. In contrast to