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Ethical And Legal Obligations Of Financial Reporting

1214 words - 5 pages

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....

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