How are accounting principles incorporated into policy and practice?
Is accounting an "objective" profession? Why or why not?
Please see response attached, which is also presented below.
1. How are accounting principles incorporated into policy and practice?
Accounting standards or principles are those conventions, rules, and procedures necessary to define acceptable accounting practice at a particular time. Accounting standards include broad guidelines of general application and may also include detailed practices and procedures.
Because accounting principles are legislated into governmental policy, law mandates these principles and compliance is expected. In addition, legal firms usually have their own set of principles or expected standards of performance, which are in line with the principles legislated into Law.
To understand the process of how this works, let's look a little closer.
On October 19, 1999, the American Institute of Certified Public Accountants' (AICPA) Council designated the FASAB as the accounting standards-setting body for federal government entities under Rule 203 of the AICPA's Code of Professional Conduct. Rule 203 provides, in part, that an AICPA member shall not (1) express an opinion or state affirmatively that the financial statements or other financial data of any entity are presented in conformity with GAAP or (2) state that he or she is not aware of any material modifications that should be made to such statements or data in order for them to be in conformity with general accepted Accounting Principles (GAAP), if such statements or data contain any departure from an accounting principle promulgated by bodies designated by Council to establish such principles, that has a material effect on the statements or data taken as a whole. The AICPA Council designated the Financial Accounting Standards Board (FASB) as the standards-setter for the private sector in 1973 and the Governmental Accounting Standards Board (GASB) as the standards-setter for states and local governments in 1986. These are authoritative standard-setting bodies under Rule 203. Until the AICPA action, the federal government did not have a Rule 203 designated accounting standards setter. With this designation, federal government reporting entities will be able to obtain audit opinions that indicate that the financial statements are presented in conformity with GAAP rather than an "other comprehensive basis of accounting."
The FASAB develops accounting standards taking into consideration the financial and budgetary information needs of the Congress, executive agencies, other users of federal financial information and comments from the public. The FASAB then exposes the proposed standard for public comment. The Board considers comments and then decides whether to adopt the standard with or without modification. The standards are published by the FASAB as Statements of Federal Financial Accounting Standards.
Compliance to these accounting is mandatory by law; therefore, organization incorporate the accounting principles into their organizational policies, which are intended to guide practice. If audited, the organization hopefully has complied with the legislated accounting principles (GAAP). Like Enron, if the books are "cooked", the organization could find themselves in hot water and before the courts for fraud and the likes (See more on compliance of accounting principles by example http://184.108.40.206/search?q=cache:dyOKMxGq8ooJ:www.dod.mil/comptroller/fmr/01/01_08.pdf+accounting+principles+incorporated+into+policy+and+practice&hl=en).
Let's look at an example to illustrate the process and the kinds of things that the policy makers need to consider when principles (expected performance measures to guide accounting practice) are formulated incorporated into policy:
May 20, 1993
TO THE HEADS OF EXECUTIVE DEPARTMENTS AND AGENCIES SUBJECT: Financial Accounting Principles and Standards
1. Purpose. This Circular establishes the policies and procedures for approving and publishing financial accounting principles and standards. It also establishes the policies to be followed by Executive Branch agencies and OMB in seeking and providing interpretations and other advice related to the standards.
2. Background. The Secretary of the Treasury, the Director of the Office of Management and Budget (OMB), and the Comptroller General of the United States ("the Principals") established the Federal Accounting Standards Advisory Board (FASAB) in October 1990 by a memorandum of understanding (MOU). The role of FASAB is to deliberate upon and make recommendations to the Principals on accounting principles and standards for the Federal Government and its agencies. The MOU states that if the Principals agree with the recommendations, the Comptroller General and the Director of OMB ...
This solution discusses how accounting principles are incorporated into policy and practice, and whether or not accounting is an "objective" professionism (why or why not).