Ethical and Legal Obligations for Accounting

While there are many different government agencies that strive to create a more uniform and ethical financial practice, three of the more important ones are FASB, SEC, and PCAOB. FASB is the financial accounting standards board, SEC is the Securities exchange commission and PCAOB is the public company accounting oversight board.

The FASB works mainly with the private sector it is used to establish the standards of financial accounting and reporting. It is these set of standards that help govern the preparations of financial reports. The mission of the FASB is to “establish and improve standards of financial accounting and reporting forâÂ?¦guidance and education” (Facts about FASB, 2005). The decisions that the FASB board agrees upon affect many organization, therefore it is essential that the “decision-making process be evenhanded” (Facts about FASB, 2005). This organization is recognized by the SEC and is often asked to take actions concerning many different financial accounting and reporting topics. The SEC allows the FASB to have statutory authority in establishing the standards needed for publicly held companies. Along with the SEC the FASB will also seek the advice and information provided to them by the PCAOB.

The PCAOB “establish[es] auditing and related attestation standards, quality control standards an ethics standards to be used by registered public accounting firms in the preparation and issuance of audit reportsâÂ?¦as may be necessary or appropriate in the public interest or for the protection of investors” (PCAOB, Standards setting, 2005). At the board meetings the SEC and FASB are given observation status. These meetings help to establish the standards to be used in auditing and professional practice, the observation status also grants the organizations the right to speak and give advice.

The SEC was established in 1934 by congress. It was created to help ensure stability in the market and protect investors. The Securities Exchange act was also established in 1934, both of which were used to protect investors and help keep the securities market ethical. This organization ensures that public companies disclose their financial information to the public, allowing investors to make an informed and sound decision about their investments. The SEC enforces against, “insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issued them” (SEC, Who we are, 2005). Through the years the SEC had helped to restore investor confidence in the market and with the help of the FASB and PCAOB has worked towards making financial reporting accurate and honest.

Basic Accounting Theories, Assumptions and Principles

As accounting and the keeping of financial documents have gotten more detailed and the need for accuracy has increased many guidelines have been promulgated in order to ensure trust. In order to help ensure trust, directors of companies committed themselves to two ideas, the acceptance of general accounting procedures and independent auditing. “This led to the development of (1) the auditing profession and (2) the brand name of auditing firms, which have become a guarantee of integrity” (Whittington, Geoffrey, 2000, 181).

The GAAP devised a series of SFACs, these include providing data that is “useful in investment and credit decision makingâÂ?¦useful in assessing future cash flowsâÂ?¦providing data that is relevant and reliableâÂ?¦timelyâÂ?¦verifiableâÂ?¦[and a] faithful representation” (Yunk, Loren, 2005). The GAAP also describes the different elements in SFAC #3 and SFAC #6. Yet the GAAP is not the only organization, which has set up a set of standards, the FASB has five ways that they strive to achieve their mission. They try to make financial reporting, the provision of information, useful, focusing on “relevance and reliability and on the capabilities of comparability and consistency” (Facts about FASB, 2005). They keep up with the economic shifts in order to keep their standards current, they are aware of the areas where financial reporting may be improved, they make certain that the standards are improving the financial reporting and they strive to help make understanding financial reports easier.

The SEC also had a set of standards two of which are “Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling and the risks involved in investing [and] people who sell and trade securities – brokers, dealers and exchanges – must treat investors fairly and honestly, putting investors interests first” (SEC, Who we are, 2005).

Role of Ethics in Accounting

Ethics affect more than a person may think, ethics have a great impact on the way a person deals with their personal life and professional life. It has an even greater impact when it involves investments. “Trust is an essential ingredient in facilitating financial transactions” (Whittington, 2000, 181). A loss of trust in financial reporting weakens the market for corporate securities, “many of the problemâÂ?¦of the late 1990s contributed to the sense of malaise by shaking investor confidence in the economy’s fundamental prospects” (Weinberg, 2003, 1).

Standards help keep the economy functioning because investors “rely on credible, transparent and comparable financial information” (Facts about FASB, 2005). Many company decisions about how to allocate resources depend on the financial information available. If the information available is not accurate and not credible a company may invest large sums of money into an unethical business. Or at worst there may be another market crash like the stock market crash of 1929, where investors lost confidence and trust in the banks and securities that held their money and so they quickly withdrew causing many businesses to go into bankruptcy.

Levels of trust are extremely important that is why there are so many standards, which are in place. Auditing and professional standards are how the public develops trust in an organization. Financial reporting matters, it helps information flow and the more information a person has the more willing they to place their trust in it.

Many professionals are trusted because of their training, discipline and their code of ethics, “Trust lowers transactions costs by lessening the need for regulators or resort[ing] to law” (Whittington, 2000).