FASB, SEC, and PCAOB: Accounting Ethics and Principles

Introduction to FASB, SEC, and PCAOB

The Financial Accounting Standards Board (FASB) is an important organization whose primary goal is to devise Generally Accepted Accounting Principles (GAAP) in the United States. It closely resembles the Governmental Accounting Standards Board (GASB), which operates in the sphere of local and state governments. The FASB originated in 1973 with the abolition of the Accounting Principles Board and the Committee on Accounting Procedure of the AICPA. It is responsible for maintaining independent accounting standards as conferred by Congress.

The U.S. Securities and Exchange Commission (SEC) has the necessary statutory powers to devise financial accounting and reporting standards for publicly held companies under the Securities Exchange Act of 1934. Traditionally, however, the commission's policy has been to rely on the private sector for this function to the extent that the private sector demonstrates the capability to serve the public interest. The FASB operates independently of all other business and professional organizations. The FASB is also engaged in a convergence process with the International Accounting Standards Board (IASB) to enable companies to report financial statements without requiring separate filings for U.S. and international markets. As part of this convergence project, the FASB initiated a transition from the principle of historical cost to the fair value approach favored by the IASB.

The Public Company Accounting Oversight Board (PCAOB) is a private-sector, non-profit corporation that originated through the Sarbanes-Oxley Act. The primary objective of the PCAOB is to supervise the auditors of public companies in the interest of investors. It is also responsible for promulgating auditing and related attestation and ethics standards for audits and assessments of public companies. The Sarbanes-Oxley Act authorizes the PCAOB to devise auditing and related professional practice standards to be followed by accounting firms when auditing publicly held companies. The PCAOB has established several auditing standards in pursuit of this mission.

It has been increasingly recognized that considerable challenges arise in the financial reporting system as a result of egregious accounting abuses and their influence on the investing public. Public confidence is regarded as crucial to the independence of the FASB. The Financial Accounting Foundation (FAF) is committed to preserving the independence of the FASB as the U.S. standard setter, enhancing awareness and understanding of the FASB and its standards among constituents, safeguarding the FASB's efforts with regard to the convergence of global accounting standards, and ensuring more productive relationships between the FAF and the FASB to accomplish these objectives.

Relationship Among the FASB, SEC, and PCAOB

SEC Chairman William Donaldson, emphasizing the restoration of investor confidence, stressed the importance of a period of significant transition and a more collaborative effort. He highlighted the different procedures adopted by the SEC to crack down on abuses and to enhance its own operations and resources in order to better address the contemporary marketplace. Mr. Donaldson underscored the significant roles that the FASB, PCAOB, and SEC play in restoring confidence, declaring that the investing public is relying on the coordinated activities of all three organizations. He further assured the public of the SEC's continued oversight of the private sector in establishing accounting standards.

With regard to the role of the FASB, Mr. Donaldson expressed that the SEC is committed to ensuring the independence of the FASB and to continuing and deepening the collegial working relationship developed with the FASB over the previous 30 years. PCAOB Chairman William J. McDonough emphasized the many factors that gave rise to the formation of that Board, explaining why oversight of the accounting profession is so significant and how the organization would review auditing practices. Mr. McDonough highlighted four key tasks: registration, inspection, enforcement, and standard setting for the auditing profession. On the occasion of the FASB's thirtieth anniversary as a private-sector, independent U.S. accounting standard setter, the chairmen of the FAF, SEC, PCAOB, and FASB all emphasized the necessity of continued coordinated activity among these organizations to generate confidence among the investing public.

The Generally Accepted Accounting Principles (GAAP) govern the preparation of financial statements for publicly traded companies and many private enterprises in the United States. The Governmental Accounting Standards Board (GASB) administers its own distinct sets of assumptions, principles, and constraints for local and state governments. In the United States and other nations that practice the English common law system, the government does not directly establish accounting standards, on the understanding that the private sector possesses greater knowledge and resources in this area. GAAP is not a written law, although the SEC requires that it be scrupulously followed by publicly traded companies. Financial reporting is required to incorporate information that is helpful to current and prospective investors, creditors, and other users in making reasonable investment, credit, and other financial decisions, and in evaluating the timing, amounts, and uncertainty relating to prospective cash receipts.