Accounting -- Standards Setting Process

Who Sets Accounting Standards? The Financial Accounting Standards Board (FASB), American Institute of Certified Public Accountants (AICPA), Securities and Exchange Commission (SEC), and the International Accounting Standards Board (IASB) work together to create new and amend older standards in order to establish and maintain a common language for communicating financial information. The passage of the Sarbanes-Oxley Act and the creation of the Public Company Accounting Oversight Board (PCAOB) signals many signficant forthcoming changes in GAAP and the current standards setting process.

Sarbanes-Oxley Act of 2002
American Institute of Certified Public Accountants (AICPA)
Financial Accounting Standards Board (FASB)
Securities & Exchange Commission (SEC)
International Accounting Standards Board (IASB)
Public Company Accounting Oversight Board (PCAOB)
Generally Accepted Auditing Standards ( GAAS)
Government Accounting Standards
Industry Accounting Practices

Sarbanes-Oxley Act of 2002. The S-O Act was passed as a direct result of a series of major corporate financial accounting scandals. This legislation directly impacts accountants and attorneys, officers and owners of publicly traded companies, as well as brokers, dealers, investment bankers, and financial analysts. The Act, PL 107-204, established the Public Company Accounting Oversight Board (PCAOB), responsible for registering, monitoring, investigating, and disciplining the activities of public accounting firms, including establishing the guidelines for the conduct of several key auditing procedures nd delineating the types of services that CPAs are prohibited from providing to audit clients. The Act additionally sets forth a number of requirements for corportions, their officers and Board members, by redefining working and reporting relationships with their internal audit committee members and public accounting firms, creating changes in internal controls procedures and enhancing financial disclosures.

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AICPA. Originally, the AICPA, the memberhips association for CPAs, was the body responsible for defining accounting standards.

1939-1959 - issues Accounting Research Bulletins (ARB)
1959-1973 - Accounting Principles Board (APB) issues series of opinions
1973 - Accounting Principles Board disolved and standards setting responsibility is tranferred to FASB. The AICPA continues its role as authoritative body for establishing auditing standards (Statement of Auditing Standards, SAS)

In 1973, the AICPA shifted its focus to supporting it membershp and constituency and bringing to the attention of the FASB and SEC issues that it determined important to the accounting and auditing professional communities. While the AICPA continued issuing auditing standards, this responsibility is now being assumed by the Public Company Accounting Oversight Board (PCAOB), a body created by the Sarbanes-Oxley Act of 2002. The Oversight Board's recent authorization to become directly involved with issues auditing standards could have significant impact on the current standards setting process.

Click HERE to research AICPA accounting standards.

FASB. Since 1973 the FASB has been the organization designated to establish authoritative financial accounting and reporting standards (Statements of Financial Accounting Standards, SFAS) for business and other private-sector entitites. Its mission is to be responsive to the entire economic community and to operate in full view of the entire community through a due-process system.

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SEC. Under the Securities and Exchange Act of 1934, the SEC has statutory authority to establish financial accounting and reporting standards for publicly-held companies. Recent accounting-related scandals, such as Enron, prompted the SEC and Congress to get more directly involved in the oversight of the standards setting process and the monitoring of corporate governance. In August 2002, as part of the Sarbanes-Oxley Act, the SEC's Public Company Accounting Oversight Board (PCAOB) was created to crack down on corporate accounting scandals. Authorized to conduct inspections and discipline accountants, the oversight board supplants the self-regulation of CPAs who audit public companies.

Click HERE to research SEC accounting standards.

IASB. Formed in January 2001, the ISAB replaced its predecessor, the International Accounting Standards Committee (IASC), as the international standards setting body. Looking towards greater formalization of international accounting standards, IASB is structured similarly to the FASB. It is currently the focus of the IASB, in collaboration with the FASB and other accounting focused organizations, to "converge" standards and develop a single, universally accepted set of biding international accounting standards. The IASC, and now IASB, issue a series of standards known as International Financial Reporting Standards (IFRS), formerly called International Accounting Standards (IAS).

Click HERE to research IASB accounting standards.

PCAOB. Formed in 2002 to oversee the audit of public companies that are subject to the securities laws in the preparation of informative, fair and independent audit reports. The Board's authority includes:

..Registering public accounting firms that prepare audit reports for issuers
..Conducting inspections of registered public accounting firms
..Conducting investigations and disciplinary proceedings and impose appropriate sanctions
..Enforcing compliance by registered public accounting firms relating to the preparation and issuance of audit reports and the obligations and liabilities of accountants
..Establishing auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for issuers

Click HERE to research IASB accounting standards.

Other Accounting Standards. Following are the other major accounting industry standards.

Generally Accepted Auditing Standards (GAAS). Established by the AICPA, thse stnadards govern the conduct of external audits by public accountants. The Statement of Auditing Standards (SAS) provide guidelines for the auditors' field work and financial reporting. They frame the format and contents of the Auditor's Report or Opinion, which is the formal expression of their examination of a company's financial statements. In May 2003, the PCAOB was given the official go-ahead to assume respnosibility for establishing GAAS. It remains to be seen exactly how the PCAOB's new role will play out, its impact on the AICPA's responsibilities, and the form in which the two entities will co-exist.

Click HERE to research auditing standards.

Governmental Accounting Standards (GAS). While GAAP defines the accounting for public and private business entities, there also exist standards specific to governmental organizations. Organized in 1984 to establish standards of financial accounting and reporting for state and local governmental entities, the Governmental Accounting Standards Board (GASB), began issues these standards to guide the preparation of external reports for these types of organizations.

Industry Accounting Practices. Some industries have created their won accounting practices to fill gaps not covered by floors 1-4 of GAAP. Thse practices are often available in print publications issued by the overseeing industry association. On occastion they are also posted on the assoications web site. Examples of industries which have adoped their own practices are healthcare and insurance.