This entry is part 4 of 8 in the series Intro to Financial Reporting
As previously discussed, financial statements can sometimes have their own “dialect,” in a manner of speaking. Additionally, financial statements can be subject to accounting fraud because management is usually rewarded based on their firm’s performance which is measured based on the financial statements that they prepare. It is for these reasons that oversight and regulation of financial reporting is necessary. In addition to the Generally Accepted Accounting Principles (GAAP,) financial reporting is regulated by organizations such as the Securities Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the International Accounting Standards Board (IASB) (Wild, Shaw, & Chiappetta, 2009, p. 9).
The mission of the Securities Exchange Commission, or SEC (2010), is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation” (para. 1). The SEC maintains that all investors, whether larger or small, should have all of the basic information of a security required to make investment decisions (para 6). As a result, the SEC requires all publicly traded companies to disclose “meaningful financial and other information to the public” (para 6). The SEC was formed under the Securities Act of 1933 and the Securities Exchange Act of 1934 in the wake of the great depression to restore confidence in the stock markets (para 16).
Next, we have the Financial Accounting Standards Board, or FASB. Similar to the SEC, the FASB aims ensure that investors have useful information for making investment decisions. More specifically, the FASB’s mission is to “establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports” (para 3). The FASB notes on their website that while the SEC has the legal authority to establish the financial accounting and reporting standards, the SEC’s position is to rely on private organizations, like the FASB, for this function (para 2).
Finally, we have the International Accounting Standards Board, or IASB. The IASB (2010) is responsible for developing and publishing International Financial Reporting Standards (or IFRSes,) ensuring that these standards are enforceable, and promoting their use (para 1).
To conclude, because financial statements can sometimes have their own “dialect” and are subject to accounting fraud there are various organizations that are required to regulate the preparing and publishing of them. The major organizations responsible for this are the Securities Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and the International Accounting Standards Board (IASB).
Chiappetta, B., Shaw, K., Wild, J. (2009). Principles of Financial Accounting (19th ed.). McGraw-Hill/Irwin.
Financial Accounting Standards Board [FASB]. Facts about FASB. Retrieved from http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176154526495
International Accounting Standards Board [IASB]. (2010). About the IASCF Foundation and the IASB. Retrieved from http://www.iasb.org/The organisation/IASCF and IASB.htm
Securities Exchange Commission [SEC]. (2010). How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation. Retrieved from http://www.sec.gov/about/whatwedo.shtml