Evolution of U.S. Regulation and the Standard-Setting Process for Financial Reporting: 1930s to the Present

The political nature of accounting standard setting is becoming increasingly apparent. Both professional and academic journals have discussed the political characteristics of the environment in which the Accounting Principles Board (APB) and the Financial Accounting Standards Board (FASB) have functioned (see, for example, Horngren [1973], Meyer [1974], May and Sundem [1976], Armstrong [1977], Rockness and Nikolai [1977], Ronen and Schiff [1978], Solomons [1978], Newman [1981], and Brown [1981]). One feature of this environment which has been given little specific attention is the influence of the Securities and Exchange Commission (SEC) (vis-A-vis the APB or the FASB) on the process of selecting accounting standards. The Metcalf staff report (U.S. Congress [1976]) critically evaluates the existing approach of the SEC to the accounting policy process [1976, pp. 17-18]: Congress gave the SEC broad authority to establish accounting and reporting standards as part of its mandate to administer and enforce the provisions of the Federal securities laws. Soon after its creation, the SEC decided by a vote of three to two votes not to exercise its authority to set accounting standards. Instead, the SEC decided to rely on accounting standards established in the private sector as being protective of the public interest, as long as such standards have substantial authoritative support. In effect, the SEC has delegated the establishment of accounting standards which are binding on all publicly-owned corporations to the special interest groups which control the FASB, and has reserved a mere oversight role for itself. The Metcalf staff thus implies that the SEC has not satisfied its public responsibilities since private-sector boards control the initiative in standard setting.

One reason for an engineer to estimate the value of oil and gas properties is to prepare an offer to purchase. Another reason is to respond to a request from the accounting department. By reading about selected IRS rulings, SEC rules, and FASB Statements and Concepts, the reader will better understand why the guidelines were adopted and how valuation methods and assumptions can be changed to comply with different guidelines in the United States. This paper is intended to be illustrative in nature and to provide a basis for a common understanding between engineers and accountants. This paper is not intended to be a definitive text. Interpretations of the guidelines and regulations may change and new rules or interpretations may be adopted from time to time. Other regulations and guidelines exist on the country, state, and local levels. They can vary by area and require local expertise. Introduction Before discussing the requests of accountants, we need a little background. The Internal Revenue Service (IRS) issues rulings regarding Federal taxes. The Financial Accounting Standards Board (FASB) adopts Statements of Financial Accounting Standards (FASB Statements) that define Generally Accepted Accounting Principles (GAAP) as well as Statements of Concepts (Concepts) that guide accounting practice. The Securities and Exchange Commission (SEC) requires public companies to follow GAAP and additional guidelines from the SEC. As the purpose of the valuation changes, different regulatory guidance becomes applicable. Understanding these differences will allow the engineer to play his or her proper role in maximizing the value of the business. The first section of this paper discusses definitions, and the statements, and concepts shown below. The next section provides comments on valuation and examples. The third section discusses assumptions in the cash flow projection.FASB 69 Disclosures about Oil and Gas Producing Activities,FASB 141 Business Combinations,FASB 142 Goodwill and Other Intangible AssetsFASB 143 Accounting for Asset Retirement ObligationsFASB 144 Accounting for the Impairment or Disposal of Long-Lived Assets (supersedes FASB 121)FASB Concepts 7 Using Cash Flow Information and Present Value in Accounting Measurements Definitions, Statements, and Concepts Definitions Fair Market Value is defined by the IRS in Estate Tax Regs., Sec. 20.2031–1(b); Revenue Ruling 59–60, 1959–1 C.B. 237 as the price at which the subject asset or business entity would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. There is a stated goal that an estimate of fair market value should reflect the value that could be obtained in the marketplace, rather than value to the current owner. Fair value is defined in FASB 144, paragraph 22, as the amount at which the asset (liability) could be bought (incurred) or sold (settled) in a current transaction between willing parties, that is, other than a forced or liquidation sale. Definitions Fair Market Value is defined by the IRS in Estate Tax Regs., Sec. 20.2031–1(b); Revenue Ruling 59–60, 1959–1 C.B. 237 as the price at which the subject asset or business entity would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. There is a stated goal that an estimate of fair market value should reflect the value that could be obtained in the marketplace, rather than value to the current owner. Fair value is defined in FASB 144, paragraph 22, as the amount at which the asset (liability) could be bought (incurred) or sold (settled) in a current transaction between willing parties, that is, other than a forced or liquidation sale.

United States Securities Regulation and Foreign Private Issuers: Lessons from the Sarbanes-Oxley Act

In the U.S. there is a close relationship between the Securities and Exchange Commission (SEC), a governmental agency legally responsible for setting accounting standards, and the Financial Accounting Standards Board (FASB), a private sector body to whom the SEC has delegated this responsibility. In this paper we examine the influence of the SEC on the FASB as evidenced by all major statements issued by the FASB. Minor statements, amendments, and strictly technical pronouncements were omitted because of their limited exposure to the political process. Our analysis reveals that the SEC applied substantial pressure on the FASB in the standard setting process and has not adopted a position of benign neglect.

Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Twitter LinkedIn Tools Icon Tools Get Permissions Cite Icon Cite Search Site Citation Katherine Schipper; Principles‐Based Accounting Standards. Accounting Horizons 1 March 2003; 17 (1): 61–72. doi: https://doi.org/10.2308/acch.2003.17.1.61 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest Search

In the United States of America (US), all the accounting procedures and guidelines for measurement and reporting by business firms are governed by a body of principles and concepts known as Generally Accepted Accounting Principles (GAAP). These GAAP are presently issued by the Financial Accounting Standards Board (FASB) with the authority delegated by the Securities and Exchange Commission (SEC). Historically, each country developed its own GAAP and there was no uniformity among the GAAPs of different countries. Comparison of financial statements issued by business firms from different countries has become impossible leading toward suboptimal capital allocation across countries in the world. Gradually, with the advent of multinational corporations, there emerged a global demand for convergence of GAAP of different countries into a single set uniform accounting standards applicable to all countries. Initiative for uniform global accounting standards came from International Accounting Standards Committee (IASC) which was established in 1973. The IASC formed International Accounting Standards Board (IASB) in 2001 which began issuing International Financial Accounting Standards (IFRS). Till now about 100 countries have adopted IFRS for their financial reporting purposes. The SEC has yielded to the global pressure to adopt IFRS in the US. SEC has set a timeline for US business firms to change over from US GAAP to IFRS. This paper presents the background and development of the movement of IFRS, timeline for the change in US and the implications involved in the adoption of IFRS in the US.

International Financial Reporting Standards (IFRS) have been adopted by most of the G20 countries. Given the broad worldwide acceptance of IFRS and significance of attaining comparability to facilitate free flow of capital, the US standard setter, the Financial Accounting Standards Board (FASB) made a commitment to jointly work with the International Accounting Standards Board (IASB) to explore the possibilities of convergence of US Generally Accepted Accounting Principles (GAAP) with IFRS. In 2007, the US Securities and Exchange Commission (SEC) eliminated the requirement that foreign companies listed on the US stock exchanges reconcile their IFRS‐based financial statements with the US GAAP. In the same year the US SEC issued a concept release to the public requesting comments on a proposal to allow US issuers to prepare financial statements in accordance with IFRS. Following these initiatives by the FASB and SEC, the aim of the present study is to investigate the implications of a potential full adoption of IFRS by the US. The present study details the challenges and benefits of adoption and outlines the steps required for a successful outcome of this process.

This paper examines the performance of standard-setting arrangements between the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB). Congress, in the Securities Acts of 1933 and 1934, delegated authority over accounting standards to the SEC which, in turn, delegated the choice of accounting standards to a series of privately funded organizations, the current one being the FASB.1 Since an integral part of the delegation arrangement

Finanční účetnictví hraje nezastupitelnou úlohu v americké ekonomice, protože podporuje efektivní fungování kapitálových trhů a tím i ekonomiky jako celku. Jeho úkolem je poskytování spolehlivých účetních informací o účetní jednotce uživatelům, kteří se aktivně nepodílejí na jejím řízení. Tuto spolehlivosti zajišťují obecně uznávané účetní zásady (GAAP), jejichž vydávání zastřešuje Rada pro vydávání standardů finančního účetnictví (Financial Accounting Standards Board - FASB). Během procesu přijímání účetních standardů má každý uživatel možnost hájit své zájmy, členové FASB však mají "poslední slovo" v celém rozhodovacím procesu. Významnou roli při tom hraje Komise pro cenné papíry a burzu (Securities and Exchange Commission - SEC), se kterou v rozhodovacím procesu FASB úzce spolupracuje. Celý proces přijímání každého standardu je koncipován na základě systematického přístupu. Ten spočívá v identifikaci problému, návrh různých alternativ účetního řešení, zhodnocení alternativ a výběr výsledného řešení. Podle pravidel FASB může být standard vydán, hlasuje-li pro něj dvoutřetinová většina členů Rady. Do roku 2002 bylo vydáno 147 standardů. Další vývoj směřuje ke sbližování US GAPP s IFRS tak, aby byl vybudován jediný celosvětově uznávaný soubor účetních standardů. Tento vývoj reaguje na internacionalizaci kapitálových trhů a usiluje o zachování vysoké úrovně ochrany investorů.

Certified public accounting involves the expression of an opinion that corporate financial statements present fairly the financial positions of firms in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. Accounting (as opposed to auditing) standards are promulgated by the Financial Accounting Standards Board (FASB) and help define what information must be revealed in audited financial reports of public corporations. The FASB is operated by the Financial Accounting Foundation, a nonprofit corporation organized by the American Institute of Certified Public Accountants (AICPA) and cosponsored by five other private interest groups. The Securities and Exchange Commission (SEC) has generally recognized and endorsed the determinations of the FASB and predecessor organizations. The process by which accounting rules are established has recurrently been and is now the object of intense public scrutiny. In its recent staff report (1976),' the Senate Government Operations Subcommittee on Reports, AccountThis paper reports the results of two statistical tests for association between the positions taken by the Financial Accounting Standards Board (FASB) and individual accounting firms with regard to accounting standards and the positions expressed by the interest groups with which each deals. We find a positive, although statistically insignificant, association between client preferences and the likelihood that an auditor will support a rule. The likelihood of FASB support for a rule is found to vary directly and significantly with the strength of FASB sponsoring-organization and accounting-firm preferences.

Many allege that the accounting profession has failed to adapt to fundamental changes in the business environment because it has not developed timely guidance for reporting intangible assets. Regulatory attention has also focused on the disclosure companies make with respect to intangible assets. Accounting for the value of intangible assets acquired in a merger transaction is a key component of this issue. Specifically, the Securities and Exchange Commission (SEC) alleged that companies routinely overstated the amount allocated to purchased in-process research and development (IPR&D) and stated that the SEC would take steps to enforce generally accepted accounting principles (GAAP) to eliminate abuses of GAAP with respect to IPR&D. Others alleged that the SEC was creating GAAP, that they were unfairly singling out certain industries, and that they were unfairly generalizing abuses made by a few firms to the actions of many firms. In other words, competing hypotheses emerged with the first suggesting that the accounting treatment of IPR&D by companies was improper, while the second suggests that the SEC was establishing new accounting standards without carefully considering the issues. This research examines the stock-price reaction for industry groups that are R&D intensive to proposed changes in accounting for IPR&D. We estimate the shareholder wealth effects associated with a series of events that indicate a potential regulatory change in accounting for IPR&D to infer the capital market's assessment as to whether the problem with IPR&D is inappropriate accounting on the part of companies, or inappropriate policy and enforcement on the part of the SEC and the Financial Accounting Standards Board (FASB). The results show that the stock prices of firms in R&D-intensive industries react negatively, on average, to events that increase the probability of new rules restricting IPR&D charges or that increase the expected degree of SEC scrutiny of these charges. However, the FASB announcement that there would be no immediate changes required in accounting for IPR&D produces a positive market reaction. The results support the theory that investors perceive limitations in reporting IPR&D as detrimental to the evaluation of the present value of R&D intensive firms' future cash flows, indicating that the market is more concerned about increased regulation of IPR&D than about the reliability of accounting estimates. Cross-sectional analysis examines four firm-specific variables: firm size, R&D expenses, recent acquisitions, and industry membership. Results indicate that the predicted reactions are strongest for firms with historically high R&D expenses and specifically those in the software industry. Larger firms and those with experience in acquiring firms with current R&D expense are less negatively affected by a call for the financial community to participate in reducing IPR&D charges. Finally, results indicate that firms having the greatest exposure to regulators' concerns have the most negative valuation impact.

SYNOPSIS: The Securities and Exchange Commission (SEC) has recently expressed concern that auditors' use of materiality allows misstatements to go uncorrected. Auditors do not require their clients to correct the financial statements for immaterial misstatements. According to the professional standards, an immaterial misstatement is defined as one that has no effect on a typical or average users decisions. However, little is known about users' materiality perceptions, especially in relation to common materiality measures used by auditors, such as the percentage effect on earnings or the percentage effect on sales. To help clarify what is considered to be material from the stockholders point of view, we investigate empirically various quantitative factors that stockholders consider important in assessing whether earnings are materially misstated. For each factor, we identify a materiality threshold where potential misstatements exceeding the threshold are material. Keywords: materiality; threshold; earnings-response; auditing. INTRODUCTION Auditors' applications of materiality are critical to earnings quality. The Securities and Exchange Commission (SEC) has recently expressed concern that liberal materiality standards might result in financial statements that are not fairly stated. Auditors do not require their clients to correct the financial statements for immaterial misstatements. Former SEC chairman, Arthur Levitt, contends that auditors do not sufficiently prohibit client firms from fabricating earnings in an attempt to attain earnings projections, which in turn may affect the firm's stock price. Levitt (1998) says, markets where missing an earnings projection by a penny can result in a loss of millions of dollars in market capitalization, I have a hard time accepting that some of these so-called non-events simply don't matter. According to the Financial Accounting Standards Board (FASB), Statement of Financial Accounting Concepts (SEAC) No. 2 (AICPA 1984), an immaterial misstatement is defined as one that has no effect on a typical or average user's decisions. For example, an immaterial misstatement, if known to a stockholder, is not expected to result in a security price change. To help clarify what is considered to be material from the stockholder's point of view, we investigate empirically various quantitative aspects of earnings that stockholders consider important in assessing whether earnings are materially misstated. For each quantitative factor, we identify a materiality threshold beyond which potential misstatements are material. Auditors have received little guidance in choosing materiality thresholds. Few court cases have rendered judgments defining materiality and definitions of materiality are not precise. The SEC defines materiality similarly to SFAC No. 2. Rule 1-02 of Regulation S-X describes a material misstatement as information...about which an average prudent user ought reasonably be informed. The professional literature provides no quantitative guidelines and consequently, the choice of materiality involves auditor judgment. The SEC issued Staff Accounting Bulletin (SAB) No. 99 (SEC 1999) to provide more guidance concerning auditors' materiality decisions. However, SAB No. 99 does not suggest that all misstatements should be found and corrected, regardless of their size, because the related benefits do not exceed the costs. As in SFAC No.2 and Rule 1-02, SAB No. 99 does not provide any quantitative criteria for determining materiality. In practice, auditors use materiality to identify the necessary precision of audit tests and to identify the amount of misstatement that requires adjustment in the financial statements. Auditors consider the size of misstatement that would cause a material misstatement of earnings and/or a material misstatement of a particular account. Prior research has identified three quantitative measures that auditors commonly use to determine materiality of an earnings misstatement. …

In 1974, the Securities and Exchange Commission (SEC) noted that an increasing number of companies were capitalizing interest costs, and that this practice was not being adequately disclosed (FASB, 1979, par. 26). In light of the alternative practices concerning the accounting for interest and lack of adequate disclosure by companies that were already capitalizing interest, the SEC recommended that the Financial Accounting Standards Board (FASB) consider the issue of accounting for interest cost. As a result of the SEC's initiative, in 1979 the FASB issued Statement of Financial Accounting Standards [SFAS] No. 34, Capitalization of Interest Cost, which mandated uniform interest capitalization rules in accounting for interest costs associated with the acquisition of qualifying non‐current assets.The purpose of this article is to examine SFAS 34 in terms of its financial statement impact, the congruence of its assumptions with economic behaviour, its effect on subsequent standards related to interest capitalization, and its implications on financial accounting standard setting.To explore these issues we first illustrate the extent to which interest capitalization affects financial statements. We then empirically analyse the measure employed in SFAS 34 for the capitalization of interest cost in cases where debt is not directly linked with the acquisition of qualifying non‐current assets. In addition, we critically examine the treatment accorded interest cost in subsequent FASB standards. Our research suggests that SFAS 34′s rationale for interest capitalization is incompatible with firm behaviour, and that the rules for interest capitalization as reflected in various accounting standards are inconsistent. These findings suggest that in the case of interest capitalization the benefits of comparability in financial reporting are not realized. A policy recommendation is then offered to alleviate some of these difficulties. The recommendation is to disallow the capitalization of interest cost in the absence of a direct link between the debt and the acquisition of qualifying assets.

This article puts forward an interpretation of the reform of the French accounting standard-setter initiated by Decree no. 20076629 of 27 April 2007 relating to the national accounting standards board, the Conseil National de la Comptabilité (CNC). This reform, if it goes to term, will give birth to a French accounting standards authority, the Autorité des Normes Comptables (ANC). The proposed interpretation fits within a neo-institutionalist framework. In particular, it uses the notions of path dependency and institutional mimetism. The new CNC is first put into context as an institution in relation to its predecessors. It is then compared with two institutions, the architecture of which may have inspired its conception, the Financial Accounting Standards Board (FASB) and the Autorité des Marchés Financiers (AMF). It would appear that the new CNC clearly departs from the historical path traced by French accounting regulation and tends to mimic French autorités administratives indépendantes (independent administrative authorities) of the AMF type. However, such ‘authorities’ are strongly inspired by the American Securities and Exchange Commission (SEC). So paradoxically, the model of the new French Accounting Standards Authority would be a SEC rather than an FASB.

The auditing and accounting environment in the United States is dominated by the Securities and Exchange Commission (SEC), the accounting profession and a private sector standard-setting body called the Financial Accounting Standards Board (FASB). The SEC is a government agency and represents the main government influence on financial reporting. There are no influential company laws dealing with financial reporting issues. The auditing and accounting environment is itself influenced by a number of legal and cultural factors.KeywordsProfessional EthicAccounting ProfessionAudit Financial StatementFinancial Account Standard BoardAudit StandardThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.