1.5 Other Organizations Important to Financial Reporting

Securities and Exchange Commission

The SEC was created by an act of Congress in 1934. Its primary role is to regulate the issuance and trading of securities by corporations to the general public. Prior to offering securities for sale to the public, a company must file a registration statement with the Commission that contains financial and organizational disclosures. In addition, all publicly held companies are required to furnish annual financial statements (called a 10-K filing), quarterly financial statements (10-Q filing), and other periodic information about significant events (8-K filing). The SEC also requires companies to have their external financial statements audited by independent accountants.

The Commission’s intent is not to prevent the trading of speculative securities but to insist that investors have adequate information. As a result, the SEC is vitally interested in financial reporting and the development of accounting standards. The Commission carefully monitors the standard-setting process. The Commission also brings to the Board’s attention emerging problems that need to be addressed and sends observers to meet with the EITF.

When the Commission was formed, Congress gave it power to establish accounting principles as follows:

The Commission has generally refrained from fully using these powers, preferring to work through the private sector in the development of standards. Throughout its existence, however, the Commission has issued statements pertaining to accounting and auditing issues. These SEC statements are authoritative for companies that are publicly traded in the United States. This fact is made clear in FASB ASC paragraph 105-10-05-1, as follows.

The formal SEC rules are found in the Code of Federal Regulations (CFR). For example, on March 4, 2008, Chapter II of Title 17 of the CFR was amended by the SEC to allow non-U.S. companies to use International Accounting Standards, instead of U.S. GAAP, in their financial statement filings with the SEC. This was an extremely interesting development at the time and one that may yet have a significant impact on the financial reporting of U.S. companies.

Although the SEC is generally supportive of the FASB, there have been disagreements between the two bodies. One of the most public of these disagreements occurred in the late 1970s and concerned the accounting for oil and gas exploratory costs. The FASB issued a standard in 1977, and the SEC publicly opposed the standard; the FASB finally succumbed to the pressure and reversed its position in 1979. In recent years, the SEC and FASB have increased their efforts at behind-the-scenes coordination and consultation. Still, the two bodies are not in complete harmony. For example, the SEC has been impatient with the FASB’s slow progress on improving financial reporting. Often, the SEC establishes broad disclosure requirements in an area while the FASB deliberates about the specific accounting rules. In recent years, this was the pattern with stock-based compensation, environmental disclosures, and derivatives.

As mentioned above, the SEC requires all publicly traded companies in the United States to have their financial statements audited. The auditors of those financial statements must be registered and periodically inspected by the Public Company Accounting Oversight Board (PCAOB), which is a private-sector organization created by the Sarbanes-Oxley Act of 2002. The SEC has congressional authority to oversee the PCAOB’s activities.

American Institute of Certified Public Accountants

The American Institute of Certified Public Accountants (AICPA) is the professional organization of practicing certified public accountants (CPAs) in the United States. The organization was founded in 1887, and it publishes a monthly journal, the Journal of Accountancy. (Note: Anyone interested in current developments in accounting should regularly read the Journal of Accountancy.) The AICPA has several important responsibilities, including certification and continuing education for CPAs, quality control, and standard setting.

The AICPA is responsible for preparing and grading the Uniform CPA Examination. This computer-based examination is offered year round in authorized testing centers around the United States. In addition to passing the examination, an individual must meet the state education and experience requirements in order to obtain state certification as a CPA. Most states now require CPAs to meet continuing education requirements in order to retain their licenses to practice. The AICPA assists its members in meeting these requirements through an extensive Continuing Professional Education (CPE) program.

The AICPA is also concerned with maintaining the integrity of the profession through its Code of Professional Conduct and through a quality control program, which includes a process of peer review of CPA firms conducted by other CPAs. For CPA firms that audit publicly traded clients, these AICPA peer reviews are now somewhat overshadowed by the registration and inspection program of the PCAOB mentioned previously.

Prior to the formation of the FASB, accounting principles were established under the direction of the AICPA. Both the CAP and the APB were AICPA committees. Although the FASB replaced the APB as the official standard-setting body for the profession, the AICPA continues to influence the establishment of accounting standards. The AICPA helps the FASB identify emerging issues and communicates the concerns of CPAs on accounting issues to the FASB.

American Accounting Association

The American Accounting Association (AAA) is an organization for accounting professors. The AAA sponsors national and regional meetings where accounting professors discuss technical research and share innovative teaching techniques and materials. The AAA also organizes working committees of professors to study and comment on accounting standards issues. In addition, the AAA publishes a number of academic journals, including The Accounting Review, a quarterly research journal, and Accounting Horizons, which contains articles addressing many realworld accounting problems. In fact, Accounting Horizons is an excellent journal to read for more depth on intermediate accounting issues.

One of the most significant actions of the AAA is to motivate and facilitate curriculum revision. As the accounting profession changes, it is critical that accounting educators continually revise their curricula to keep pace with these changes. The AAA provides forums for educators to share ideas about changes in curriculum and rewards innovative curriculum revision efforts. For example, in 1993, our university (Brigham Young University) was given the Innovation in Accounting Education Award for the integrative revision of our intermediate financial accounting, managerial accounting, tax, audit, and information systems courses. By the way, Brigham Young University received this accounting education innovation award again in 2007 (the only university to receive it twice), but we probably shouldn’t tell you any more because you might think we are bragging.

Internal Revenue Service

Tax accounting and financial accounting are different, but the popular perception is that they are one and the same. Tax accounting and financial accounting were designed with different purposes in mind. In the Thor Power Tool case (1979), the Supreme Court stated:

Although this text on intermediate financial accounting is not a study of income tax accounting, the U.S. tax rules as administered by the Internal Revenue Service (IRS) will still be discussed from time to time. In most areas, financial accounting and tax accounting are closely related. For example, your study of leases, depreciation, and inventory valuation in this text will aid your understanding of the corresponding tax rules.

What Is GAAP?

With all of these different bodies (FASB, EITF, AICPA, and SEC) being involved with accounting rules and accounting guidance, what is GAAP? Historically, the Auditing Standards Board of the AICPA has defined GAAP in the context of the phrase included in the standard auditor’s opinion: “present fairly . . . in conformity with generally accepted accounting principles.”2 Both the SEC and the AICPA have recognized the FASB as the body entrusted with establishing GAAP in the United States. So, it is the FASB that determines what GAAP is. With the activation of the FASB Accounting Standards Codification in July 2009, the FASB clarified exactly which accounting rules and statements are “authoritative” GAAP and which are merely nonauthoritative suggestions. In FASB ASC paragraph 105- 10-05-1, the FASB clearly states that the standards contained in the Codification itself are “the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB.” In paragraph 3 of the same section, the FASB states: “Accounting and financial reporting practices not included in the Codification are nonauthoritative. . . . The appropriateness of other sources of accounting guidance depends on its relevance to particular circumstances, the specificity of the guidance, the general recognition of the issuer or author as an authority, and the extent of its use in practice.” These sources of nonauthoritative guidance include widely recognized industry practices, the standards of the IASB (discussed later in this chapter), FASB Concepts Statements (also discussed later in this chapter), and even lowly accounting textbooks such as the one you are reading right now. The chapters in this textbook will, of course, focus on the authoritative standards in the FASB ASC.

For firms required to file financial statements with the SEC, the SEC rules and interpretive releases have the same authority as the FASB’s Codification. These authoritative pronouncements are of particular importance to auditors because Rule 2.320.001 of the AICPA Code of Professional Conduct specifies that an auditor must not express an unmodified opinion when there is a material departure from these authoritative pronouncements.

In the description of the authoritative pronouncements, note that the Statements of Financial Accounting Concepts are relegated to a low-priority position, equal in authority with accounting textbooks(!). The FASB plans to address this issue in a broader project to improve the conceptual framework. As discussed later in this chapter, the conceptual framework embodied in the Statements of Financial Accounting Concepts forms an increasingly important foundation for all financial accounting standards.