The present research focuses on the impact of the Financial Accounting and Standards Board (FASB) on public corporations. The research has several objectives one of which is providing an overview of the history of FASB. Other objectives include:
- the identification of the requirements imposed on public corporations by FASB;
- assessing the impact FASB has on the investment community, and finally
- the needs of the investment community which is satisfied by the board.
The research uses secondary data collected from sources such as books and accounting journals. The findings of the research reveal that FASB alone cannot ensure the efficiency of the capital market and therefore, there is a need for other parties to be involved, such as auditors, regulators, and reporting entities, who are to carry out their respective roles for the interest of the public. Those parties must carry out their roles according to the standards established by FASB.
The research also pointed out that an efficient and strong economic system will be created once there is a financial reporting system characterized by high-quality standards. The research supports such a point through the fact that generally accepted accounting principles helped to shape the reporting principles of public corporations in the United States.
The study recommends that FASB should continue with its role in setting accounting standards, with assistance provided by auditors, regulators, and other policymakers. Public corporations should also maintain FASB principles in their financial reporting, to restore the confidence of the public.
Introduction
Following the Great Depression that started with the fall of the stock market in 1929, many steps were taken to prevent such economic downfalls in the future. One direction of those steps can be seen through the creation of financial regulations and financial regulatory bodies, and examples of which can be seen through General Accepted Accounting Principles (GAAP) and Security Exchange Commission (SEC) respectively. The relationship between the aforementioned regulations and regulatory bodies is represented through the main objective of the SEC, which is enforcing the GAAP. Another important regulatory body was created through Financial Accounting Standards Board commonly referred to as FASB. FASB is an independent board comprised of accounting professionals vested with the role of establishing and communicating financial accounting throughout the United States. The board has the role of ensuring that the main principles of financial reporting are followed in public corporations. FASB also provides guidelines for preparing financial reports, thus, creating uniformity in the financial statements of corporations.
The history of FASB dates back to 1973 when it was created as a replacement for other accounting boards that were existent at the time. FASB stakeholders include investors, the general public, staff, members of the board, private businesses, and others. There are many interests involved for those stakeholders, many of which might be different in purpose. For instance, the concern of the government might revolve around taxation issues. The concern of investors, on the other hand, might revolve around the reliability of the financial information submitted by different companies, an aspect which is critical when deciding whether to invest in a particular organization or not.
The responsibility of enforcing accounting standards is not vested within FASB, in that regard. The responsibility of ensuring that financial statements conform to the accounting requirements lies within the competencies of the directors, auditors, SEC, and the CEOs of corporations.
The guidelines issued by FASB are vital in improving the standards of financial accounting. On the other hand, the users of the companies’ financial statements are also interested in the reliability of accounting reports and their conformance to standards. To create an environment for an efficient and strong economic system, there is a need for ensuring that financial reporting is of high quality. FASB has five full-time members appointed by the Trustee’s Foundations Board. FASB members are deemed to serve for a maximum period of ten years. Therefore, the maximum period that board members can serve is two terms with each term comprising of five years.
The board is also supported by staff members which number should not exceed 60. Staff members along with board members have certain concerns regarding the general public, investors, and other users of financial information such as business and government organizations. Staff and board members are required to have experience and knowledge concerning such topics as accounting, investments, finance, and business research to be able to perform their tasks efficiently and effectively. Since the creation of FASB, some personal activities were introduced, e.g. entrepreneurship, which aim was to improve the autonomy of the staff and the board. The latter helped in improving the performance of public corporations, as it contributed to the elimination of any conflicts of interest. Additionally, it should be stated that FASB has a conceptual framework that serves as a constitution in providing investors with guidelines regarding their financial operations.
Research Findings
Stakeholders and Characteristics of Financial Accounting and Reporting Principles
The first aspect that was revealed through the study is that the efforts of FASB alone are not sufficient to maintain high-quality financial reporting in public corporations. Thus, there is a need for other stakeholders to be involved in the reporting process. The list of stakeholders might include auditors and regulators. The role of such stakeholders should aim at providing high-quality financial reporting and/making sure that such reporting conforms to the established standards. The reporting entities seek to explore capital markets for financing purposes. The main aim of financial reporting is to provide investors with information that enables them to decide on whether to invest in a given company or not.
The main role of auditors, on the other hand, is to examine the application of FASB standards to determine that those were appropriately applied. In that regard, auditors act as a channel through which the public evaluates the underlying information concerning an entity. Regulators have an important role as well. The role of regulators such as the SEC is to protect investors by ensuring that auditors are indeed independent and that the prepared reports follow the accepted auditing standards (Zeff, 1995).
There are four characteristics of financial accounting and reporting principles, which include relevance, reliability, comparability, and consistency. The relevance principle states that the information should be timely, predictive, and should have a feedback value. With regards to reliability, the information should be free from gross error so that it can be capable of achieving the objective for which it is prepared. Comparability relates to a situation whereby a firm can be compared with other firms within the industry. Finally, the consistency characteristic implies that the same accounting principles are used throughout the accounting period (Heck, 1994).
Providing Conceptual Framework and Transparency
The second aspect that the research revealed is related to the role of FASB in ensuring that financial reporting adopted by capital markets is of high quality. Quality financial reporting has the effect of reducing cases of inconsistency and lack of transparency. Such reporting also reduces the risks of investors and their costs as far as capital is concerned (Zarowin, 1992). In order to fully accomplish its objectives, FASB is responsible of making the standards updates so as to reflect the changes in business methods and economic environment. The main role of FASB, in that matter, can be seen in maintaining accounting information relevant and reliable. One aspect through which FASB can achieve the latter is in making financial reporting and financial accountability transparent. The latter might require that public corporations replace incompetent auditors. FASB thus enhances transparency by changing auditors’ behaviors, attitudes, and expertise, in addition to their role in preparing financial information.
The FASB provides a conceptual framework that serves as a constitution for preparing financial statements. Such conceptual framework provides investors with guidelines and principles. The framework serves as a reference for all enquiries concerning financial information. Additionally, the conceptual framework is important because it provides a communications basis with the Financial Accounting and Standards Board. It sets the required standards for the reporting process and creates uniformity in international standards settings. Finally, the conceptual framework recognizes the need for people to have a consensus concerning the financial reporting at a global level (Kieso & Weygandt, 1999)
Corporations and Concepts
Another significant area of research findings is related to importance of the standards issued by the FASB to public corporations. The standards established by FASB are important to both internal and external users. The internal users of the standards include the management of the company and its employees, while external users include the government, suppliers, lenders, shareholders, competitors, and the general public (Price Waterhouse, OPEB, 1991). Over the years, the FASB has come up with several requirements aimed at continuously improving the transparency and the accountability of the information available to investors. FASB requires reporting entities to recognize the liabilities associated with retirement benefits. Other requirements issued by the FASB might include the disclosures concerning distinct operating segments as far as a business entity is concerned. Such aspect is important because it enables investors to evaluate the risks of their diverse operations. Additionally, the FASB requires that both the hedging transactions and the derivative instruments to be well reflected in the financial statements, in case where they were not reflected previously. Finally, the FASB states that during the acquisition of a business entity by another, the acquisition costs should be well accounted for and reflected in financial statements (The University of Virginia, 1979).
The findings of the research also revealed that the concepts devised by the FASB were crucial in shaping the public corporations in the United States. Such concepts include the historic cost concept, which requires business transactions to be recognized in financial statements at the amount of cash or cash equivalents paid or the fair value of the consideration given. Another concept is the revenue recognition – a concept that enables investors to determine when to recognize revenue for accounting period and emphasizes that revenue is to be recognized when the earning process is complete. Matching concept is another important notion which measures the profitability of an accounting entity by matching the revenue against costs associated with revenue generation.
There are other important concepts that contributed to the accounting principles of public corporations, the overview of which can be seen as follows:
- The objectivity concept – a concept which requires that the value of transaction including the value of the assets and liabilities must be verifiable.
- The consistency concept – a concept which requires that a company should give similar treatment to comparable item from time to time.
- The full disclosure concept – a concept which requires that all the transactions that can influence the judgment of financial statement users must be disclosed.
- The materiality concept – a concept which involves the relative size and importance of a transaction to the firm.
- The prudence concept – a concept which requires companies to use the smallest values in cases where equally acceptable alternative exist, in order to avoid exaggerating the economic values of the entity.
- The industrial practices concept – a concept that requires the companies in a particular industry to employ the industrial practice used, if such industry uses peculiar practices different from the normal accounting practices in other industries (Reither, 1998).
Finally, the findings revealed that the statements of the Financial Accounting Standards Board provide Certified Public Accountants (CPA) with acceptable accounting principles. CPA, thus, uses those principles in reporting the information on the financial status of a corporation to stockholders, the general public, and the Security Exchange Commission (Heck, 1994).
Recommendations
The main recommendation in the present study states that public corporations should constantly update their reporting practices so that they correspond to the changes established by the Financial Accounting and Standards Board. Such aspect will make sure that the companies will not lag behind in terms of their financial reporting (Charles & Associates, 1992). Additionally, it is recommended that investors acknowledge the types of reporting they should apply for any given transaction, in order to ensure transparency and consistency in their transactions. Finally, investors should try to comprehend the conceptual frameworks provided by the FASB, so as to enable them to clearly understand the rationale of the FASB as far as financial issues are concerned (Fetyko & Christensen, 1977).
Conclusion
All public corporations should adopt the use the standards and the principles outlined by the FASB so as to ensure transparency and consistency in their financial reporting. This report investigated the effects of FASB on public corporations and suggested that in order to enhance quality reporting standards the responsibility should not be put on FASB alone. Other parties such as auditors and regulators should be involved. The results showed that FASB provides an enormous service to various users of financial statements. Those users include the management of companies, for decision making purposes, the government, for taxation purposes, competitors, for benchmarking, and others. In order for public corporations to enhance transparency, they should discipline incompetent and rogue auditors. The FASB can enhance the transparency of public corporations by changing the behaviors, expertise and attitude of the auditors along with any parties involved in the preparation of financial information.
Annotated Bibliography
Benston, M. (2006). Worldwide Financial Reporting: The Development and Future of Accounting Standards. Oxford: Oxford University Press.
In this editorial, the authors used the information gathered through the analysis of worldwide financial reporting and the history of the FASB in the last 30 years. The materials used include, but not limited to, public documents and historical research sources on various issue related to the FASB. The editorial examined the role that FASB had in establishing and communicating the financial accounting practices and financial reporting throughout the United States. The editorial, thus, offers relevant information concerning the history of the FASB and its role.
Charles, S & Associates. (1992). How Companies Are Responding to FASB, Based on Analysis of 1992 Annual Statements. Chicago: Charles Spenser and Associates.
In this paper, the author aims at communicating the manner in which public corporations are responding to the FASB. The paper stresses the importance for companies to keep their information up to date so as to ensure that they do not lag behind in terms of financial reporting standards and practices.
Fetyko, D & Christensen, E. (1977). CPA Review: problems and solutions. New York: Wadsworth Pub Co.
This book emphasizes the need for investors to learn the types of reporting they should apply in order to ensure that transparency and consistency is enhanced in financial transactions.
Heck, J. (1994). Accounting literature index. New York: McGraw-Hill.
In this editorial, the authors argue that in order for transparency to be achieved in public corporations, there is a need for financial information to have the primary characteristics of relevance and comparability as well as the secondary characteristics of comparability and consistency. The above characteristics are important as they ensure faithful representation of financial information. Additionally, such characteristics ensure that the information is neutral, verifiable, timely, and have feedback and predictive value. The authors state that the FASB determines the accounting principles that enable Certified Public Accountants to report the information regarding the financial status of a corporation to the SEC, the public, and the stockholders.
Kieso, D & Weygandt, J. (1999). Intermediate Accounting, 7th Edition. New York: John Wiley and Sons.
The authors of this article argue that the FASB provides a useful conceptual framework that gives investors the guidelines and the principles that govern accounting transactions. The authors emphasize that the conceptual framework serve as a constitution in which all the enquiries of accounting are made. The authors, thus, made a clear point that there are certain issues that might arise, such as difficulties in establishing the true and the fair value of a given business enterprise, and issues related to the disclosure and the discretion of information. The conceptual framework, thus, plays an important role in addressing those issues.
Price Waterhouse, OPEB. (1991). The New Direction, Understanding and Applying FASB. New York: Waterhouse.
The authors of this article emphasized the need to understand the users of the standards issued by the FASB, such as potential customers, existing customers, and the government amongst others. This article is relevant because it contributes to understanding the main functions of financial reporting, which is providing information for users to help them in the decision-making process.
Reither, L. (1998). What are the Best and Worst Accounting Standards? US: Accounting Horizons.
This article argues that the concepts issued by the FASB such as consistency, disclosure, materiality, and others, provide the directions for accountants, in terms of the rules and guidelines for financial accounting period. Additionally, the article outlines that accounting principles should be taken for granted when preparing financial statements.
The University of Virginia. (1979).The Accountants digest, Volume 45. Charlottesville: Germain Pub.
The main aim of this article is outlining the main requirements issued by the FASB. The article outlined requirements such as the need for reporting entities to recognize the liabilities associated with retirement benefits and the requirement for hedging transactions to be reflected in the financial statements among others. These requirements are important as they ensure a continuous improvement in transparency as well as accountability of the information available to investors.
Zarowin, S. (1992). How Business is dealing with FASB. Journal of Accountancy.
In author of the article emphasizes that those public corporations that apply the FASB standards are characterized with high quality financial reporting. The high quality financial reporting in turn leads to reduced cases of inconsistency. Thus, the article stresses out that the FASB is an important regulatory body that ensures the transparency, the consistency, and the reliability of the financial information.
Zeff, S. (1995). A Perspective on the U.S. Public /Private –Sector Approach to the Regulation of Financial Reporting. US: Accounting Horizons.
In this article, the author indicates that the FASB alone is not sufficient for good financial reporting in public corporations. The article, therefore, calls for the need to incorporate auditors, regulators, and reporting entities. Auditors and regulators, in that regard, should perform their respective roles in the interest of the public.
Reference List
Benston, M. (2006). Worldwide Financial Reporting: The Development and Future of Accounting Standards. New York: Oxford University Press,
Charles, S & Associates. (1992). How Companies Are Responding to FASB, Based on Analysis of 1992 Annual Statements. Chicago: Charles Spenser and Associates.
Fetyko, D & Christensen, E. (1977). CPA Review: problems and solutions. New York: Wadsworth Pub Co.
Heck, J. (1994). Accounting literature index. New York: McGraw-Hill.
Kieso, D & Weygandt, J. (1999). Intermediate Accounting, 7th Edition. New York: John Wiley and Sons.
Price Waterhouse, OPEB. (1991).The New Direction, Understanding and Applying FASB. New York: Waterhouse.
Reither, L. (1998). What are the Best and Worst Accounting Standards? US: Accounting Horizons.
The University of Virginia. (1979).The Accountants digest, Volume 45. Charlottesville: Germain Pub.
Zarowin, S. (1992). How Business is dealing with FASB. Journal of Accountancy.
Zeff, S. (1995). A Perspective on the U.S. Public /Private –Sector Approach to The Regulation of Financial Reporting. US: Accounting Horizons.