of the AICPA. The ASB issues the standards and procedures that financial accountants must follow when conducting attestation and audit services for nonpublic companies. It also sets quality control standards to use when conducting peer reviews, which occur when one CPA firm evaluates the operations of another CPA firm.
The ASB has 19 members, most of whom work for public accounting firms (such as KPMG LLP), are university professors, are governmental accountants, or otherwise work in the field of accounting. Members serve one- to three-year terms and are jointly nominated by the director of the AICPA Audit and Attest Standards staff and the ASB chair. The responsibility of approving the nominations falls to the AICPA Board of Directors.
Curious about these mysterious ASB standards? They are called Statements on Auditing Standards (SAS), and as of this writing the AICPA website lists 143 of them. Here, I explain just a couple so you have some idea of what they cover:
SAS No. 1 Section 410 says the auditor must state whether the financial statements are presented using generally accepted accounting principles (GAAP).
SAS No. 143 defines the responsibilities the auditor has regarding accounting estimates and the related disclosures (see Chapter 15).
www.aicpa.org. From the home page, select “Research” and then “Standards.” You can access all sorts of good financial accounting info on the topics of audit, attest, compilation, and review standards.
AICPA Code of Professional Conduct
The AICPA’s Code of Professional Conduct contains six principles of professional conduct by which its members must abide: responsibilities, serving the public interest, integrity, objectivity and independence, taking due care, and the scope and nature of services. You can read all about these six principles at www.aicpa.org/search.html?source=AICPA&q=code+of+professional+conduct.
Note: In this section, I use the terms financial accountant and CPA synonymously. I do so because most financial accountants are CPAs, and vice versa.
Here’s a brief explanation of each of the six principles:
Responsibilities: As an accountant, you hold yourself to high moral and ethical standards so you maintain the public’s confidence in your financial reporting. For example, financial accountants have the responsibility to participate in self-governance by performing peer reviews of other CPA/financial accounting firms’ work to check for accuracy and consistency among the profession.
Serving the public interest: A financial accountant’s public interest is the company for whom she is preparing the financial statements, as well as the users of the financial statements (such as people and entities thinking about purchasing shares of the company stock).The public interest also includes banks and other businesses that are considering granting credit to the company, governmental agencies such as the Internal Revenue Service (which measures the company’s compliance with the tax code), investors, and other members of the business and financial community who rely on the objectivity and integrity of CPAs.
Integrity: This characteristic means you are honest when dealing with others. In the world of financial accounting, integrity means that you serve the company for whom you are preparing the financial statements to the best of your ability, keeping in mind that this may not be the same thing as completely agreeing with the way the company wants its financial statements prepared. You can’t be worried that business management is going to be mad at you or fire you if you disagree with them.
Objectivity and independence: When you are objective, you are neutral and unbiased in all decision-making processes. You base your opinions only on facts and not on any preconceived notions you may have. You interpret rules and policies, such as generally accepted accounting principles (GAAP), in a truthful and sincere manner — staying true to both the form and spirit of the particular principle or regulatory issue.Financial accountants who provide auditing and other attestation services must be independent in both fact and appearance. Being independent means you have no special relationship to or financial interest with the company that would cause you to disregard evidence and facts when evaluating them. For example, preparing the financial statements for a business owned by a close relative can justifiably cause those viewing your report to doubt its veracity or your objectivity.
Taking due care: In a nutshell, this principle means you have the education and experience to perform the work at hand. You must be both competent diligent. In addition, due care means you plan and supervise adequately any professional activity for which you are responsible.
Scope and nature of services: All the above principles lead up to this final one. Financial accountants consider all the preceding principles when determining whether they can provide specific services in individual circumstances.
Following Regulatory Issues
In addition to the AICPA, other organizations give financial accountants official guidance on how to prepare financial statements. Public and nonpublic corporations have different agencies monitoring them and keeping them on the right course.
In this section, I discuss the U.S. Securities and Exchange Commission (SEC), which was created during the Great Depression that followed the stock market crash of 1929. It was charged with regulating the stock market and preventing corporate abuses relating to the offering and sale of securities and corporate reporting. Also in this section, I explain the Sarbanes-Oxley Act of 2002 (SOX), which was enacted in response to corporate abuses that took place in the 1990s and early 2000s. Finally, you find out about the enforcement arm of SOX, the Public Company Accounting Oversight Board (PCAOB).
The U.S. Securities and Exchange Commission (SEC)
In response to the stock market crash of 1929 and the ensuing Great Depression, the Securities Exchange Act of 1934 created the SEC. The SEC’s mission is to make sure publicly traded companies tell the truth about their businesses and treat investors in a fair fashion by putting the needs of the investor before the needs of the company.
The SEC is run by five commissioners who are appointed to five-year terms by the president of the United States. Their terms are staggered, and no more than three commissioners can be from the same political party at the same time. These commissioners ride herd over the SEC’s power to license and regulate stock exchanges, the companies whose securities are traded on them, and the brokers and dealers who conduct the trading.
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