CHARACTERISTICS OF MANAGEMENT
ACCOUNTING INFORMATION :》
The accounting information created and used by management is intended primarily for planning and control decisions. Because the goal of creating and using management accounting information differs from the reasons for producing externally reported financial information, its characteristics are different.
Both the processes used to create financial accounting reports and the structure of those reports significantly impact management strategy. For example, because external financial
reporting standards require companies to include pension-related obligations on their financial statements, management monitors those obligations closely. These pension-related obligations impact labor negotiations and labor-related corporate strategies.
Another example is that the processes necessary to create required external financial reports have historically determined the type of accounting information available inside of companies for internal decision on making Most plants within companies are organized as profit centers
where plant-related financial statements mirror those necessary for external reporting purposes. As you read the chapters of this book, we will remind you about how financial reporting has an impact on and is impacted by management strategies. The following paragraphs identify internal accounting information characteristics.
Importance of Timeliness:
In order to plan for and control ongoing business processes, accounting information needs to be timely. The competitive environment faced by many enterprises demands immediate access to information. Enterprises are responding to this demand by create computerized databases that link to external forecasts of industry 5 Procter & Gamble, 2012 Annual Report, Letter to Shareholders. associations, to their suppliers and buyers, and to their constituents. Time lines for the development and launch of new products and services are becoming shorter and shorter, making quick access to information a priority. In addition to needing timely information for planning purposes, enterprises are constant monitoring and controlling ongoing activities. If a process or activity goes out of control, the enterprise can incur significant costs.
For example, recalls of products can be very expensive for a company. If the company can monitor processes and prevent low-quality or defective products from reaching its customers, it can experience significant savings.
Information that is produced to monitor.
identity of Decision Maker:
controls processes needs to be provided to those who have decision-making authority to correct problems. Reporting scrap and re-work information to fine workers without providing them the responsibility for fixing the process is counter productive. However, a self-directed work team that has been assigned decision-making responsibility over equipment and work-related activities can have a significant impact on rework and scrap if team members control the process causing the problems.
Oriented toward the Future:
Although some accounting information, like financial accounting information, is historical in nature, the purpose in creating and generating it is
to affect the future. The objective is to motivate management to make future decisions that are in the best interest of the enterprise, consistent with its goals, objectives, and mission. Measures of Efficiency.
Effectiveness Accounting information measures:
the efficiency and effectiveness of resource usage. By comparing the enterprise resource inputs and outputs with measures to competitors effusiveness and efficiency, an assessment can be made of how effective management is in achieving the organization's mission. The accounting system uses money as a common unit to achieve these types of comparisons. Management Accounting Information-A Means As with financial accounting information, management accounting information is a means to an end, not an end in and of itself. The ultimate objective is to design and use an accounting system that helps management achieve the goals and objectives of the enterprise.
Integrity of Accounting Information:
Q :-Discuss elements of the system of external and internal financial reporting that creates integrity in the reporting information?
What enables investors and creditors to rely on financial accounting information without fear that the management of the reporting enterprise has altered the information to make the company's performance look better than it actuality was ? How can management be sure that internally generated information is free from bias that might favor one outcome over another? The word integrity refers to the following qualities: complete, unbroken, unimpaired, sound, honest, and sincere.
features include standards for the preparation of accounting information, an internal control Structure, and audits of financial statements Second, several professional accounting organizations play unique roles in adding to tee maternity of accounting information. Finally, and perhaps most important, is the personal competence, judgment, and ethical behavior of professional accountants. These three elements of the accounting profession .
Institutional Features:
Standard for the accounting information that information, We call these standards generally accepted accounting principles, often shortened to GAAP These principles provide the general framework for determining what information is included in financial statements and how this information is to be prepared and presented. GAAP includes broad principles of measurement and presentation, as well as detailed rules that are used by professional accountants in preparing account nation and reports.
Accounting principles are not like physical laws; they do not exist in nature waiting to be discovered. Rather, they are developed by people, in light of what we consider to be the most important objectives of financial reporting. In many ways, accounting principles are similar to the rules established for an organized sport, such as baseball or basketball. or example, accounting principles, Like sports rules: Originate from a combination of tradition, experience, and official decree Require authoritative support and some means of enforcement. Are sometimes arbitrary. May change over time as shortcomings in the existing rules come to . Must be clearly understood and observed by all participants in the process. Accounting principles vary somewhat from country to country. The phrase generally accepted accounting principles (GAAP)" refers to the accounting concepts in use n
United States. The International Accounting Standards Board (LASB) is currently attempt to establish greater uniformity among the accounting principles in use around the world in
order to facilitate business activity that caringly is carried out in more than one country in the United States, three organize ions are particularly important in establishing account-
1ng principles -the Securities and Exchange Commission (SEC), the Financial Accounting
Standards Board (FASB), and the International Accounting Standards Board (LASB).
Securities and Exchange Commission The Securities and Exchange Commission is a governmental agency with the legal power to establish accounting principles and financial reporting requirements for publicly owned corporations. In the past, the SEC has generally adopted the recommendations of the FASB (discussed below), rather than develop own set of accounting principles. Thus, accounting principles continue to be developed in the private sector but are given the force of law since the SEC look's to the FASB to develop accounting standards in the United States. To ensure widespread acceptance of new accounting standards, the FASB needs the support of the SEC. Therefore, the two organizations work closely together in developing new accounting standards. The SEC also reviews the financial statements of publicly owned corporations to ensure compliance with its reporting requirements. In the event that a publicly owned corporation fails to comply with these requirements, the SEC may initiate legal action against the company and the responsible individuals. Thus the SEC enforces compliance with generally accepted accounting principles that are established primarily by the FASB.
Financial Accounting Standards Board Today:
The most authoritative source of generally accepted accounting principles is the Financial Accounting Standards Board.
The FASB is an independent rule-making body, consisting of seven members from the. Accounting profession, industry, financial statement users, and accounting education. Lending support to these members are an advisory council and a large research staff.
The FASB has compiled all of its standards, and those of its predecessors, in an Accounting Standards Codification. The FASB periodically is use updates to its codification. The codification represents official express on of generally accepted accounting principles. In addition to maintaining the Accounting Standards Codification, the FASB has completed a project describing a conceptual. framework for financial reporting. This conceptual
Framework sets forth the FASB's views as to the:
●Objectives of financial reporting.
●Desired characteristics of accounting information (such as relevance, verifiability, and understandability).
●Elements of financial statements.
●Criteria for deciding what information to include in financial statements.
Valuation concepts relating to financial statement amounts.
The primary purpose of the conceptual framework is to provide guidance to the FASB in developing new accounting standards, which are issued as updates to the codification. By making each new standard consistent with this framework, the FASB believes that the Accounting
Standards Codification resolves accounting problems in a logical and consistent manner.
The FASB is part of the private sector of the economy it is not a governmental agency. The development of accounting principles in the United States traditionally has been carried out in the private sector, although the government, acting through the SEC, exercises considerable influence.
International Accounting Standards Board
When an enterprise operates beyond the borders of its own country, differences in financial reporting practices between countries can pose significant problems.
For example, when a company buys or sells products in another country, the lack of comparability of accounting information can create uncertainties. Similarly, cross-border financing, where companies sell their securities in the capital markets of another country, is increasingly popular. Business activities that cross borders Creates the need for more comparable information between companies that reside in different countries.
As a result of increasing cross-border activities, efforts are under way to harmonize accounting standards around the world. The International Accounting Standards Board
(LASB) is playing a leading role in the harmonization process, The London-based IASB is an elite panel of professionals with deep knowledge of accounting methods used in the most
vibrant capital markets. The IASB issues International Financial Reporting Standards (FRSS). European Union countries, Australia, and Canada, among over 100 other countries, require listed companies to follow IASB standards. Most important, the SEC accepts financial statements prepared using IASB standards from foreign companies that are cross-listed on a U.S. stock exchange. In addition, the AICPA, which essentially has jurisdiction over private company reporting, accepts either FASB standards or IA SB standards as authoritative sources of accounting principles. In early 2010, the SEC issued a Statement in Support of Convergence and Global Accounting Standards. This SEC statement reaffirms the SEC'% belief that a single set of high-quality, global accounting standards is in the best interests of investors, and also reaffirms the SEC's belief that IFRS as issued by the IASB is the set of standards best positioned to fill this role. However, in 2012 the SEC issued an extensive report on requiring U.S. public companies to use IFRS. Although the SEC report concluded that IASB standards are generally viewed as high quality, there remain significant obstacles to adopting IASB standards in the United States, including the IASB's dependence on funding from the major accounting firms, In addition, a number of U.S. companies indicated that adopting 1FRS could be among the largest accounting-related costs ever imposed on the private sector.
CASE POINT:
If the United States moves to IFRS, it likely would require significant changes to accounting systems, controls, and procedures. For example, IFRS requires that an entity account for similar transactions in an identical manner regardless of where the transaction occurs in the entity, a requirement that does not exist under U.S. GAAR. Therefore, if IFRS becomes mandatory for U.S. public companies, companies would
nave to develop a listing of all of their transactions and how they are accounted for throughout the entity.
●United States Securities and Exchange Commissions Office of the Chief Accountant, Fork Plan for the deration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers, July 2012.
Public Company Accounting Oversight Board:
The Public Company Accounting Oversight Board (PCAOB) is a quasi-governmental body charged with over-S1 the public accounting profession. The Board was created as a result of the Sarbanes- Oxley Act of 2002 and began operations in the spring of 2003. The PCAOB has extensive powers in overseeing the accounting profession. As stated
earlier in the chapter, any accounting firm wishing to audit a public company must register with the PCAOB. The PCAOB sets auditing standards for audits of publicly traded companies, an activity that previously was performed by the accounting profession. The Board also inspects the quality of audits performed by public accounting firms and conducts investigations and administers penalties when substandard audit work is alleged.
The PCAOB is headquartered in Washington, D.C., and has regional office's in major cities throughout the United States. The PCAOB has five members who serve a five-year term and are eligible to be reappointed once. No more than two members of the Board can be certified public accountants. The Board also maintains a large and well-qualified staff. The PCAOB is funded by a mandatory assessment on publicly traded companies. The assessment is a function of the company's market value relative to overall stock market value in the United States.
Audits of Financial Statements
What assurance do outsiders have that the financial. statements issued by management provide a complete and reliable picture of the company's financial position and operating results? In large part, this assurance is provided by an audit of the company's financial statements, performed by a firm of certified public accountants (CPAs). These auditors are experts in the field of financial reporting and are independent of the company issuing the financial statements. An audit is an investigation of a company s financial statements, designed to determine the fairness of these statements. Accountants and auditors use the term fair in describing
financial statements that are reliable and complete, conform to generally accepted accounting principles, and are not misleading In the auditing of financial statements, generally accepted accounting principles are the
standard by which those statements are judged. For the auditor to reach the conclusion that the financial statements are fair representations of a company's financial position, results of operations, and cash flows, the statements must comply in all important ways with generally
accepted accounting principles.
Legislation:-
As discussed previously, Congress passed the Sarbanes-Oxley Act in 2002. Among the more important provisions of Sarbanes-Oxley is the creation of the Public Company Accounting Oversight Roar described earlier in this chapter. Another important provision of the Act is to ban auditors from providing many nonaudio services for their audit clients on the assumption that those services interfere with the objectivity required of auditors in rendering opinions regarding financial statements upon which investors and creditors rely.
Sarbanes-Oxley also places additional responsibilities on corporate boards of directors and audit committees with regard to their oversight of external auditors, and it places responsible
its on chief executive officers and chief financial officers of companies to certify the fairness of the company s financial statements.
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