Ethical and Legal Obligations in Financial Reporting Term Paper

  • Length: 4 pages
  • Subject: Business
  • Type: Term Paper
  • Paper: #83102397

Excerpt from Term Paper :

Ethical and Legal obligations in financial reporting is extremely important in today's world, fraught as it is with corporate frauds and accounting scams and scandals of every other sort. One Company, the Thornburg Investment Company, has taken a firm stand on financial reporting within its company, wherein all concerned officials are expected to report accurately, any actual, as well as suspected violations and breaches in the laws and rules and regulations of the company, to the appropriate personnel, immediately. (Code of Business Conduct and Ethics) Another Company, the 'Trinity Capital Corporation' stresses the importance of adhering to the rules and regulations created by the Company so that the company's loyalty to its numerous shareholders may be apparent. Where financial reporting is concerned, all the employees of the firm are expected to comply with the generally accepted rules laid down by the accounting principles of the United States of America, so that the assets of the company may be safeguarded adequately. (Business Conduct and Ethics Policy)

The FASB is an association made up of accounting professionals who not only decide on accounting principles, but also maintain them and communicate these 'Generally Accepted Accounting Principles' to the private sector, and are responsible for the maintenance of a standards board that has been created by them for the purpose of accurate financial accounting, and this is the FASB. (Definition of FASB) The FASB was founded more than thirty years ago, and has been an independent and an excellent standard setter for U.S. Accounting, and today, it is being faced with more and more challenges in tackling complex and complicated financial reporting issues, and also in its search for improving the efficiency and the standardization of these reporting issues. The FASB Chairman Robert H. Herz, in the effort to bring together all the various participants of the FASB who have been constantly striving towards better goals, together, invited these various participants to a Forum, to which he invited all the important leaders of the FAF, the SEC, and the PCAOB, all of which are intricately linked together in the total plan. (FASB: 30 years of setting the standard)

The issue that was discussed was the ways in which the FASB, the PCAOB and the SEC would be able to restore the lost confidence of the shareholders of large corporations, and this, he states, would be achieved by coordinating efforts between the three. While the SEC would still be primarily responsible for looking into the private sector and the establishment of financial accounting and reporting standards, the PCOAB, headed by the Chairman William J. McDonough, would continue its overseeing of the accounting profession. However, since the question and the issue of 'breach of trust' has gained so much importance today, he stressed, it is imperative that the PCOAB does its bit in earning back the people's trust in corporations and companies, especially in view of the latest corporate scandals that have been rocking the world. The most important tasks that the PCOAB does, that is, registration, inspection, enforcement, and the setting of standards for the auditors, must not lose its priority and its importance in the face of these scandals, and it is time that the confidence of the people is won back. (FASB: 30 years of setting the standard)

When the AICPA held its Annual National Conference in December 2003, present were the various representatives from the SEC, the PCAOB, the FASB, and the IASB. The topic that was discussed was the fact that the expectations of the general public that the main role that auditors and accountants of any large firm was to 'do the right thing'. This means that although at the present time the auditing and accounting professions are in the midst of a large number for changes, what is important is that the age old traditions of a complete commitment to integrity and honest and ethical behavior and an endeavor to improve the quality of auditing must stay the same as always. The AICPA has passed a number of measures for the prevention and interception of fraud in accounting and financial reporting, and this has led to the formation of the 'Special Committee on Enhanced Business Reporting'. (Current SEC and PCAOB Developments)

In addition, the 'Center for Public Company Audit Firms' will from henceforth concentrate on the development and creation and the management of technical and developmental information on SEC and also PCAOB related activities, in a manner that would benefit all the other member firms. The Center would also provide a platform on which to base discussions of all matters pertaining to public company audits, and also act as a link between the SEC and the PCOAB wherever required by the member firms. The Sarbanes-Oxley Act authorizes the PCAOB to create and establish standard auditing and other related accounting practice standards that all accounting firms are expected to follow when in the process of auditing publicly held companies. (Current SEC and PCAOB Developments)

The basic rules of financial management are that the critical and most important areas of bookkeeping and accounting are managed by the Manager or the non-profit leader of the company, so that he may not have to claim, later one, that he as not aware of imbalances and frauds. Bookkeeping must be done following the basic accounting rules of financial controls so that the basic integrity in the financial process is not lost out. (Basic Guide to Non-Profit Financial Management) Since it is an undeniable fact that financial accounting relies on a number of underlying ideas that are based on accounting practices, it would do the manager well to be familiar with these accounting principles and practices so that he may conduct his business in an ethical and acceptable manner. (Accounting Concepts, underlying assumptions, principles, and conventions)

The first among several accounting assumptions is that the manager must be aware of the fact that the business is a separate and individual entity that is actually different from its owners, and this would mean that the finances of the firm would not be co-mingled or mixed up with the finances of the owners of the company. Another is the 'going concern' assumption, which means that for all purposes, one must believe that the business would be in operation in the foreseeable future. Another important assumption is the stability of the monetary unit in consideration, like for example, the stability of the U.S. Dollar. The 'fixed time period' assumption states that all pertinent information would be prepared and reported to the public, either annually or quarterly, or otherwise periodically specified.

The assumptions above would result in certain accounting principles, and these are the 'historical cost principle', wherein all assets would be reported as well as presented at their original existing cost, and this also means that no adjustments to its price would have to be made. The second is that of 'matching principle', wherein the revenues and the expenses in the particular specified period would be matched against the incurred and the earned revenues. The 'revenue recognition' principle is when revenue is realized, and has been reported in the books as 'earned' revenues. This principle applies when everything that is needed to earn that revenue has been completed successfully. The fourth principle is that of 'full disclosure', and this is used when all the pertinent information about the business has been disclosed in comprehensible format. (Accounting Concepts, underlying assumptions, principles, and conventions)

However, what must be remembered is that an ethical foundation is required for any civilization anywhere in the world, and without such a strong foundation, the society would break down and collapse. It could be understood that when men and women within a certain society lack integrity and character then the society would be faced with threats of extinction. When people find that ethical values are lacking or failing, they inevitably turn for help to the government; even knowing fully well that when a society is basically corrupt, there is nothing that the government would be able to do for the people. Within a business, the men and women involved are expected to follow a set of rules and ethical guidelines, so that the public would feels confident and trust the business. (Business and Accounting Ethics)

As far as accounting is concerned, the AICPA controls and maintains the ethical conduct of public accountants. Similarly, the IMA, and the IIA are responsible for maintaining a proper code of ethical conduct. Although it is a fact that ethics cannot be taught, within a business sense, the code of ethics must be taught, so that the functioning of the business may go on without fear of scandals and scams and fraudulent practices, even though it is widely acknowledged that societal values are declining rapidly, and more and more people are succumbing to their natural greed and avarice to make more profits for themselves than for the company or for the shareholders who have invested their life savings and even pensions in the business. (Business and Accounting Ethics)

The importance…

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