ACC305_Final_Paper

ACC305_Final_Paper - Role of FASB The Role of the FASB in...

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Role of FASB 1 The Role of the FASB in Accounting Principles
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Role of FASB 2 The Role of the FASB in Accounting Principles In a highly liquid capital market it is essential to have useful financial information to allow investors to make informed decisions. To be useful, financial information must also be reliable, comparable, consistent, and transparent. Transparency refers to high quality financial statements that are very clear and easy to understand. Transparency in financial reporting enables investors, creditors, and the market to properly evaluate a business entity. Transparency also increases confidence in the fairness of our markets and is an excellent tool for companies to internally evaluate the effectiveness of management and take corrective action when financial problems arise. To maintain an efficient capital market it is necessary to have quality, transparent financial reporting. One way to aid in quality reporting is to establish standards in financial reporting. This is the reason for the creation of GAAP or generally accepted accounting principles. GAAP was created to protect companies, investors and other stakeholders from questionable accounting practices. GAAP helps to hold companies responsible for their financial reporting activities. Because investors and creditors rely so heavily on receiving transparent and comparable financial information that is credible, GAAP is vital to the efficient performance of the economy. In an article on the importance of GAAP, Sabah Karimi writes, “Most companies in the United States adhere to Generally Accepted Accounting Principles to maintain consistency in reporting of financial information and to reduce the risk of fraud and error. The principles have been derived from traditional accounting systems and can be adapted to an organization's management style and industry. If GAAP did not exist, companies would not be able to provide accurate and consistent financial information to investors, creditors and stakeholders of a company” (Karimi, 2008). Since 1973 the task of creating these GAAP standards has fallen on
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Role of FASB 3 the Financial Accounting Standards Board or FASB. Throughout its history the FASB has helped to protect stakeholder interests by creating standards for financial reporting. Although FASB is held accountable through oversight, it has been the subject of much scrutiny and criticism. Despite not always being looked upon favorably, FASB remains the authoritative standard setting board in the United States. The Securities and Exchange Commission, or SEC, was created by the Securities Act of 1933 and the Securities Exchange Act of 1934. This inception was in response to the stock market crash of 1929 and the subsequent depression. The government felt that it was necessary to establish standards for preparing and auditing the financial statements of publicly held companies. The SEC was given statutory authority to set accounting standards and also given oversight over the activities of auditors. Originally, the American Institute of Certified Public
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ACC305_Final_Paper - Role of FASB The Role of the FASB in...

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