Generally Accepted Accounting Principles (GAAP).” 2 The opinion from the independent auditors regarding a publicly traded company is filed for public inspection, along with the financial statements of the publicly traded company. According to the Center for Audit Quality, “By law, public companies’ annual financial statements are audited each year by independent auditors-accountants who examine the data for conformity with U.S. Internal auditors of a company are not the auditors that provide an opinion on the financial statements of a company. The audit committee oversees the auditors’ work and monitors disagreements between management and the auditor about financial reporting. The nonprofit Center for Audit Quality explains auditor independence: “Auditors’ independence from company management is essential for a successful audit because it enables them to approach the audit with the necessary professional skepticism.” 1 The center goes on to identify a key practice to protect independence by which an external auditor reports not to a company’s management, which could make it more difficult to maintain independence, but to a company’s audit committee. The auditors of a company are required to be employed by a different company so that there is independence. The accounting department of a company and its auditors are employees of two different companies. The auditor conducts the audit under a set of standards known as Generally Accepted Auditing Standards. The role of the Auditor is to examine and provide assurance that financial statements are reasonably stated under the rules of appropriate accounting principles. It is important to remember that auditing is not the same as accounting. The PCAOB is the organization that sets the auditing standards, after approval by the SEC. When a publicly traded company in the United States issues its financial statements, the financial statements have been audited by a Public Company Accounting Oversight Board (PCAOB) approved auditor. The basics of accounting discussed in this chapter are the same under either set of guidelines. The SEC regulates the financial reporting of companies selling their shares in the United States, whether US GAAP or IFRS are used. Some companies that operate on a global scale may be able to report their financial statements using IFRS. The SEC not only enforces the accounting rules but also delegates the process of setting standards for US GAAP to the FASB. As a result, financial statement users are more informed when making decisions. By having proper accounting standards such as US GAAP or IFRS, information presented publicly is considered comparable and reliable. You also learned that the SEC is an independent federal agency that is charged with protecting the interests of investors, regulating stock markets, and ensuring companies adhere to GAAP requirements. Publicly traded companies (those that offer their shares for sale on exchanges in the United States) have the reporting of their financial operations regulated by the Securities and Exchange Commission (SEC). International accounting rules are called International Financial Reporting Standards (IFRS). If US accounting rules are followed, the accounting rules are called US GAAP. In Introduction to Financial Statements, you learned that the Financial Accounting Standards Board (FASB) is an independent, nonprofit organization that sets the standards for financial accounting and reporting, including generally accepted accounting principles (GAAP), for both public- and private-sector businesses in the United States.Īs you may also recall, GAAP are the concepts, standards, and rules that guide the preparation and presentation of financial statements. Accounting Principles, Assumptions, and Concepts We go into much more detail in The Adjustment Process and Completing the Accounting Cycle. This chapter explains the relationship between financial statements and several steps in the accounting process. These statements are discussed in detail in Introduction to Financial Statements. A set of financial statements includes the income statement, statement of owner’s equity, balance sheet, and statement of cash flows. Financial statements are created with this purpose in mind. If you want to start your own business, you need to maintain detailed and accurate records of business performance in order for you, your investors, and your lenders, to make informed decisions about the future of your company.
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