Organizations Establish Rules for the Creation or Use of Accounting Information:
- Securities and Exchange Commission
- New York Stock Exchange
Internal Revenue Service
Describe what kind of rules each makes, why they make them, and how they enforce them. Which organizations make laws, and which publish guidelines? What is the difference? What are the different consequences for those who bend various sets of rules? (Causey Enron case) How might Causey's defense be stronger or weaker under IFRS guidelines rather than GAAP?
The rules that govern the three organizations may not be specifically made by that organization, but they are enforced by it. The Securities and Exchange Commission (SEC) is not a law or even rule making body, but the members do suggest legislation and, as one of its main functions, enforces the laws that have been passed by congress (SEC, 2012). The New York Stock Exchange (NYSE) is a private company that is also not involved in the passage of laws, but there are guidelines that its member s must follow to both gain entry, trade, and stay members of the exchange (NYSE, 2012). The Internal Revenue Service (IRS) is also not a law making body, but it does enforce the laws that congress has passed on its behalf (IRS, 2012). The basic difference in the government entities (SEC and IRS) and the private business (NYSE) is just that. Any organization such as the NYSE can set standards for membership, but these are not binding laws by which a person could be prosecuted. However, if the reason that a business is being delisted from the exchange is criminal, then the NYSE can turn a government organization, such as the SEC or IRS, if the reason for the delisting is a violation of U.S. tax or securities law. The difference then is that violating a government produced statute can land a person in jail, whereas violating the rules of an organization just means that membership privileges can be revoked.
The case against Richard Causey, Chief Accounting Officer at Enron, was that "he and [Andrew] Fastow handwrote a document known as the "global galactic" agreement that essentially ensured the Fastow partnerships would not lose money in their Enron deals. Such agreements would have made the accounting for the deals improper" (Fowler & Roper, 2005). He "faced 36 counts of conspiracy, wire fraud, security fraud, insider trading, money laundering and making false statements on financial reports" (Fowler & Roper, 2005). The main issue here is the agreement he made with Fastow, and the actions that brought on. Accounting, proper and improper, is currently governed by the what are called the Generally Accepted Accounting Principles (GAAP) which is governed by the U.S. Financial Accounting Standards Board (FASB). The standards set by the FASB as gradually being replaced by the International Accounting Standards Board (IASB) which are guidelines that can will be consistent in the global business community. In general, the U.S. standards are less forgiving (Ernst & Young, 2010), so the U.S. government has not signed the agreement yet. The International Financial Reporting Standards (IFRS) set by the IASB, have had to be tweaked many times, and the U.S. has still not agreed to them, even though the U.S. initiated the concept. With this information, it would seem unlikely that Causey's defense would have been stronger under the IASB standards. The IFRS is "broader" (Ernst & Young, 2010) in its interpretation of accounting principles which means that they may be more accepting of some of the missteps that Causey made.
The SEC, NYSE and IRS are three different entities that have very different missions and purposes. "The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation" (SEC, 2012). A stock exchange is an entity that is governed by the SEC, but it has a very different mission. The stock exchange (now called NYSE Euronext) will "trade equities, futures, options, fixed-income, and exchange-traded products" (NYSE, 2012). Finally, the Internal Revenue Service has a different purpose entirely. This federal department is to "Provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all" (IRS, 2012).
2) Regarding IFRS, answer the question below.
Earnings and therefore taxes might be higher than under GAAP. Is this fair? Under which system do you think lying, misrepresentation, or restating is most likely?
A recent study reported on in the Journal of Accounting and Public Policy stated that
"Using samples comprised of 58,832 firm-year observations drawn from 33 countries from 2002 through 2008, we find that positive earnings reported under IFRS are no more or less persistent than earnings reported under U.S. GAAP but losses reported under IFRS are less persistent than losses reported under U.S. GAAP" (Atwood, Drake, Myers & Myers, 2011).
This means that earnings are no greater, but losses are fewer under the IFRS accounting. Thus, it is possible to say that, in the end, a person would earn more under the IFRS. This leads to the question of, if a person earns more under these new standards, should they be taxed more. An individual is taxed base on what they earn from their employment and financial activities. The IFRS says that "the tax basis of an asset is determined based on the tax consequences associated with selling the asset for its carrying amount" (Price, Waterhouse & Coopers, 2009). In their report, Price, Waterhouse and Coopers argues that the tax could actually be lower (at least for the studied small to medium enterprises).
The question of whether an increased tax on earnings would be fair or not is difficult to answer. It depends on what one's definition of fair is. The government imposes the tax standard which means it is not the fault of the standard that now the company would show that it is taking in more money; so, even though the company would show more earnings through the IFRS, they may be taxed more than they were previously when they were making the same thing. The question is understandable though. Basically for the same gross income, the company is going to be charged at a higher tax rate than they would have of the U.S. GAAP standards had been maintained. Not only does this not appear to be a fair way for the government to treat businesses, it seems counter to what a free market society would want to do. The government is in place to protect the people, and this means their businesses also (especially since a corporation is treated like a person in court). To penalize a business by taxing it more when it could use the money in more productive way has little to do with fairness and a lot to do with common governing sense.
Because of these facts, it would probably lead to a greater amount of misreporting by businesses because the advantages gained from earning more as a consequence of the IFRS may be wiped out because they have to pay more taxes due to the increased bottom line. However, the government is not forced to raise taxes if they agree to the new IFRS standards. Just because the accounting standards have changed, does not mean that the U.S. is not a sovereign nation and therefore has to abide by the taxation policies of other nations. Therefore, it would seem a logical for the U.S. To adopt the IFRS if they seem to be a better set of standards, but to set tax policy as they see fit.
As a matter of fact, many politicians (especially conservative ones) are calling for the government to reduce or even eliminate taxes for corporations. The logic is that businesses poor enough money into the economy that they are, in effect, taxed already. They already add to the public trust by providing jobs and import/export duties. So, raising standards my actually cause companies to cheat rather than completely comply, and it may cause them to seek more tax-friendly locations to do business.
The difference between the U.S. GAAP and the coming IFRS guidelines is not as great as it would seem. It is basically based on how the two entities form their accounting procedures. According to a Wall Street Journal report "The most important difference is that the international standard is based on principles, whereas GAAP is based on rules. GAAP suffers from the complexity of trying to set rules for all situations, a complexity that often masks economic reality" (Crovitz, 2008). The U.S. GAAP is a set of standards whose rules are encased in two volumes containing 25,000 pages. The IFRS is not only 10% of the GAAP volume, it also standardizes accounting standards across the globe in a way that the GAAP never could. Crovitz (2008) lists three distinct advantages that the IFRS has over the U.S. GAAP. He says "A single set of accounting rules would mean more effective global disclosure…