Ethical and Legal Obligations

The FASB, SEC, and PCAOB

Ethical financial reporting is critical to ensure consumer confidence within an economy. Accounting entries record cash transactions in the form of financial reports. Financial reporting is used to interpret and analyze business activities for the purpose of investing and efficient management. Misrepresentations, whether intentional or accidental, can send the wrong signal to interested parties resulting in wrong decisions being made. Companies have an ethical and legal obligation to financial reporting. To ensure correct reporting is followed, several agencies are employed to regulate business. The Financial Accounting Standards Board, FASB, Securities and Exchange Commission, SEC and Public Company Accounting Oversight Board, PCAOB, are all agencies involved in promoting fair accounting principles for United States businesses.

The most commonly known regulating agency is the SEC. It is the government ruling agency that oversees accounting for publicly traded companies in the United States. This agency was created in 1934 in response to the events which lead to the Great Depression. The mission statement of the SEC is "to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation" (U.S. Securities and Exchange Commission, 2006).

Instead of implementing its own rules, the SEC has chosen the FASB to set high quality accounting standards to protect public interests (Wikipedia, 2006a). In response, the FASB has developed Generally Accepted Accounting Principles, GAAP, to regulate U.S. companies. As a non-profit, private organization, the FASB has no influence by government agencies or other groups. As business changes, the FASB updates GAAP to remain applicable to current challenges (Wikipedia, 2006a) and invites input from any applicable organization or individual (Marshall, McManus and Viele, 2004a). In addition to GAAP, the FASB issues "Statements of Financial Accounting Standards" which gives direction for specific reporting issues currently in use (Marshall, et al., 2004a).

Companies and independent auditors are held to different standards of regulations. Companies are regulated by the SEC; auditors are regulated by the PCAOB. The PCAOB is a board that oversees auditors (Wikipedia, 2006b). The PCAOB is committed to "protect the interests of investors and further the public interest in the preparation of informative, fair and independent audit reports" as is stated in the company's purpose (Wikipedia, 2006b).

Basic Accounting Principles

Accounting is based on the flow of money within an organization. Accounting tracks where money goes and reports this money in various forms on spreadsheets. Accounting operates under the assumption that all entries are truthfully registered and ethical standards upheld. Without this degree of trust, economic disaster could result. The entries into spreadsheets are not just numbers, but information conveyed about the status of a business. To understand what the numbers mean, understanding the basic entries and types of spreadsheets is essential. Entries required by GAAP include the final financial position, earnings, cash flows and investments (Marshall, et al., 2004b). These entries are required on a variety of accounting spreadsheets including the balance sheet and income statement.

The most general accounting spreadsheet is the balance sheet. The information on the balance sheet shows current information on assets, liabilities and equity. Assets are the measure of resources, liabilities are the amounts owed to others and equity is the assets that remain after subtracting the liabilities (Marshall, McManus and Viele, 2004b). The balance sheet is especially important to investors and can give pertinent details to determine future changes in business operations. Investors know that as business progresses, assets and equity can later be converted to income, while liabilities reduce this income.

The income statement usually covers a specified period of business activity and may be monthly, quarterly or bi-annually. The income statement only includes revenues and expenses listed to arrive at the net income or loss for the determined period of time (Marshall, et al., 2004b). Revenue is money received from sales. Expenses refer to money owed as a result of producing a product. A net loss is determined when expenses exceed revenue. A net gain is indicated when revenue exceeds expenses (Marshall, et al., 2004b).

The Role of Ethics in Accounting

The American Institute of Certified Public Accountants, AICPA, and the Institute of Management Accountants, IMA, have developed and published their own code of ethics (Marshall, et al., 2004a). These organizations require members to abide strictly by their code of ethics or face discipline which may result in expulsion from the respective association. As accountants, they must rely upon this code of ethics to serve the organizations