Accountants' Handbook, Financial Accounting and General Topics

By D. R. Carmichael and Lynford Graham

This highly regarded reference is relied on by a considerable part of the accounting profession in their day-to-day work. This comprehensive resource is widely recognized and relied on as a single reference source that provides answers to all reasonable questions on accounting and financial reporting asked by accountants, auditors, bankers, lawyers, financial analysts, and other preparers and users of accounting information. The new edition reflects the new FASB Codification, and includes expanded coverage of fair value and guidance on developing fair value estimates, fraud risk and exposure, healthcare, and IFRS.

• Language: English
• Publisher: Wiley
• Release date: Apr 26, 2012
• ISBN: 9781118252871

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Copyright © 2012 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Preface

The twelfth edition of Accountants' Handbook continues the tradition established in the first edition nearly 90 years ago of providing a comprehensive single reference source for understanding current financial statement and reporting issues. It is directed to accountants, auditors, executives, bankers, lawyers, and other preparers and users of accounting information. Its presentation and format facilitates the quick comprehension of complex accounting-related subjects updated for today's rapidly changing business environment.

This edition of the Handbook continues the presentation of two soft-cover volumes; this edition contains a total of 43 chapters. To provide a resource with the encyclopedic coverage that has been the hallmark of this Handbook series, this edition again focuses on financial accounting and related topics, including those auditing standards and audit reports that are the common ground of interest for accounting and business professionals.

A few years make quite a difference in the modern accounting and auditing world. Sarbanes-Oxley is part of the fabric of today's business environment, but we wrestle with a codification of generally accepted accounting principles that has reoriented our approach to citing the accounting literature and day-to-day updates on U.S. and Securities and Exchange Commission progress toward adopting International Financial Reporting Standards in the United States. Auditors of public companies continue to follow the growing Standards of the Public Company Accounting Oversight Board, and such Standards continue to diverge from those set by the Auditing Standards Board of the American Institute of Certified Public Accountants and adopted by the Government Accountability Office in its Yellow Book Standards. In 2011, the AICPA implemented a new codification of its literature, more aligned with the presentation format of the International Federation of Accountant's International Audit and Attest Standards Board format. The clarity standards are designed to better highlight the requirements of the standards and significantly align AICPA and IAASB Standards. Chapter 3 in this edition (by Tom Jones) reviews the recent revolution in accounting standards and the contemporary issues in merging U.S and international GAAP. There are also new chapters on fair value (Mark Zyla) and private company valuation issues (Neil Beaton). A new and comprehensive chapter on financial institutions by Zabihollah Rezaee addresses contemporary industry issues including those raised in the Dodd-Frank Financial Reform Act of 2010. We are in the middle of a significant revolution in the health care industry, and there remain a myriad of uncertainties surrounding the future in this industry at the date of publication.

In addition, most chapters have incorporated some international accounting perspectives when possible. Fraud continues to be an important element in our business environment, as we continue to focus on fraud and fraud-related issues. These topics have become more prominent in the business literature and in practice, and management and auditors have, by law and regulation, assumed greater responsibility for preventing and detecting fraud.

References to the professional accounting literature in this edition include references to the new Financial Accounting Standards Board Codification (Accounting Standards Codification, or ASC) in each chapter. Sometimes the original literature is also cited, where it can be helpful in understanding the development of thought and can help orient us to the prior literature. We have retained the chapter by Reed Storey on the development of the conceptual framework and plan to carry it forward because of its unique insight and historical content. In this edition we have also eliminated a number of redundant and overlapping chapters and those that were very specific to historical issues.

This edition of the Handbook is divided into two convenient volumes. Volume One: Financial Accounting and General Topics includes:

A comprehensive review of the framework of accounting guidance today and the organizations involved in its development, including the development of international standards

A compendium of specific guidance on general aspects of financial statement presentation, disclosure, and analysis, including SEC filing regulations

Coverage of specific financial statement areas from cash through shareholders' equity, including coverage of financial instruments

Volume Two: Special Industries and Special Topics includes:

Comprehensive coverage of the specialized environmental and accounting considerations for key industries, including a chapter on the film industry

Coverage of accounting standards applying to pension plans, retirement plans, and employee stock compensation and other capital accumulation plans

Diverse topics, including reporting by partnerships, estates and trusts, and valuation, bankruptcy, and forensic accounting

The specialized expertise of the individual authors remains a critical element in this edition, as it has been in all prior editions. Although the editor worked with the authors, in the final analysis, each chapter is the work and presents the viewpoint of the individual author or authors.

Content of the chapters in this edition has been prepared and/or reviewed by professionals practicing in accounting firms, financial executives, university professors, and financial analysts and executives. Every major international accounting firm is represented among the authors. These professionals bring to bear their own and their firms' experiences in dealing with accounting practice problems. All of the authors and technical reviewers are recognized authorities in their fields and have made significant contributions to the twelfth edition of the Handbook.

Our greatest debt is to the authors and reviewers of this edition. We deeply appreciate the value and importance of their time and efforts. We also acknowledge our debt to the editors of and contributors to 11 earlier editions of the Handbook. This edition draws heavily on the accumulated knowledge of those earlier editions.

Finally, we wish to thank John DeRemigis and Brandon Dust at John Wiley & Sons, Inc., for handling the many details of organizing and coordinating this effort.

For convenience, the pronoun he is used in this book to refer nonspecifically to the accountant and the businessperson. We intend this pronoun to include women.

L. Graham

D. R. Carmichael

About the Editor

Lynford Graham, CPA, PhD, CFE, is a Certified Public Accountant with more than 30 years of public accounting experience in audit practice and national policy development groups. He is a visiting professor of accountancy and executive in residence at Bentley University in Waltham, Massachusetts. He was a partner and the director of audit policy for BDO Seidman, LLP, and was a national accounting and SEC consulting partner for Coopers & Lybrand, responsible for the technical issues research function and database, auditing research, audit automation and audit sampling techniques. Prior to joining BDO Seidman LLP, Dr. Graham was an associate professor of accounting and information systems and a graduate faculty fellow at Rutgers University in Newark, NJ, where he taught financial accounting courses. Dr. Graham is a member of the American Institute of Certified Public Accountants and a past member of the AICPA Auditing Standards Board. He is a Certified Fraud Examiner and a member of the Association of Certified Fraud Examiners. Throughout his career he has maintained an active profile in the academic as well as the business community. In 2002 he received the Distinguished Service Award of the Auditing Section of the AAA. His numerous academic and business publications span a variety of topical areas including information systems, internal controls, expert systems, audit risk, audit planning, fraud, sampling, analytical procedures, audit judgment, and international accounting and auditing. Dr. Graham holds an MBA in industrial management and PhD in business and applied economics from the University of Pennsylvania (Wharton School).

About the Contributors

Michael A. Antonetti, CPA, CMA, is a partner with Crowe Horwath LLP. Mr. Antonetti has over 20 years of experience providing assurance and business advisory services to clients in many industries including manufacturing, distribution, banking, professional services, transportation and hospitality. Mr. Antonetti's experience also includes assisting clients with merger, acquisition, and divestiture transactions and application of related accounting standards. Mr. Antonetti also serves clients with international operations in Europe, Asia, and North and South America.

Yogesh Bahl, CPA, MBA, has more than 18 years of experience in leading global forensic investigations, delivering dispute consulting services, and helping companies manage enterprise risks. He leads the National Life Sciences Practice and the Northeast Antifraud practice. Yogesh specializes in assisting companies manage issues involving accounting, third parties, strategic alliances, and intellectual property. He has helped companies address and resolve multimillion-dollar issues involving accounting and finance, business partner reporting, unclear contract terms, and supply chain infiltration. In addition, Yogesh's experience includes strengthening the financial and audit-related provisions in various types of agreements including licensing, collaboration, distribution, and co-promotion agreements. By leveraging his advisory experience with corporations, Yogesh is effective when testifying on industry practice, breach of contract, accounting, and intellectual property matters.

Noah P. Barsky, PhD, CPA, CMA, is an associate professor at the Villanova School of Business. He earned his BS and MS in accounting from The Pennsylvania State University and his PhD from the University of Connecticut. His professional experience includes practice in the fields of accounting and finance as an analyst, auditor, and business consultant as well as instructional design and delivery for global professional services firms. He has been recognized with multiple national and international awards and grants for his scholarly writing and curriculum innovation.

Neil Beaton, CPA, ABV, CFAI, ASA, MBA is a managing director with Alvarez & Marsal Valuation Services in Seattle, Washington. He specializes in the valuation of public and privately held businesses and intangible assets for purposes of litigation support (marriage dissolutions, lost profits claims and others), acquisitions, sales, buy-sell agreements, ESOPs, incentive stock options, and estate planning and taxation. He also performs economic analysis for personal injury claims and for wrongful termination and wrongful death actions. His primary areas of concentration are valuations of early-stage, venture-backed company and litigation support across a broad spectrum of financial and economic matters. With more than 23 years of valuation and litigation support experience, Mr. Beaton has been involved in valuing companies in all major industries and has provided expert testimony in a number of domestic and international venues. Prior to joining A&M, Mr. Beaton spent nine years with Grant Thornton, where he most recently served as the Global Lead of Complex Valuation. He is a co-chair of the AICPA's Valuation of Private Equity Securities Task Force and a member of the AICPA's Mergers & Acquisitions Disputes Task Force. He is a member of the Business Valuation Update Editorial Advisory Board and on the Board of Experts, Financial Valuation and Litigation Expert.

Benedetto Bongiorno, CPA, CRE, has more than 40 years of public accounting experience providing auditing, accounting, and consulting services to both public and private real estate companies. He has served as national director of real estate for Deloitte & Touche and BDO and has many years of experience in research and practical application of specially developed substantive analytical audit procedures and technologically based tools. He has made major contributions in public accounting, both in real estate and financial audits and in the field of continuous audit. As a cofounder and head of audit and accounting consulting services at Natural Decision Systems, Inc., he was awarded U.S. patents in both continuous assurance and internal control. Mr. Bongiorno continues to apply his extensive expertise in improving real evaluation techniques, transparency, and cost-effective auditing strategies through consulting for public accounting firms as well as both public and privately held companies.

Brad A. Davidson, CPA, is partner in charge of the Securities and Exchange Commission competency center of the national office of Crowe Horwath LLP. The Assurance Professional Practice group (or national office) has responsibility for technical consultations, quality control, and communications of current SEC and accounting developments. Brad specializes in the financial institutions industry. He serves as Crowe's representative to the Center for Audit Quality's SEC Regulations Committee, which meets quarterly with SEC staff to discuss emerging financial reporting issues. In December 2010, Brad served as steering committee chair of the American Institute of Certified Public Accountants annual national conference on current Securities and Exchange Commission and Public Company Accounting Oversight Board developments. Earlier in his career, he completed a two-year professional fellowship with the AICPA in Washington, DC.

Jason Flynn, FSA, MAAA, is a principal in the Human Capital Total Rewards practice at Deloitte Consulting LLP, where he provides broad technical guidance and advisory consulting with regard to pension and retiree medical benefit plans to a wide spectrum of clients including multinational clients. Jason serves as a national leader for Deloitte Consulting's retirement practice.

Sydney Garmong, CPA, is partner in the audit practice with Crowe Horwath LLP and located in Washington, DC. Her primary responsibility is to address accounting and regulatory issues affecting financial institutions. She is a member of the American Institute of Certified Public Accountants Depository Institutions Expert Panel, which maintains an ongoing liaison with various regulatory and standard-setting agencies that impact financial institutions, including the federal bank regulators, the Securities and Exchange Commission, and the Financial Accounting Standards Board. In addition to addressing technical issues, Sydney is a frequent speaker at industry and regulatory conferences. Prior to joining Crowe Horwath, she was a senior manager at the AICPA in Washington, DC. During her time with the AICPA, she addressed financial institution and financial instrument accounting, auditing, and regulatory matters.

Martha Garner, CPA, is a managing director in PricewaterhouseCoopers' national office specializing in health care, not-for-profit, and governmental accounting and financial reporting matters. She currently chairs the American Institute of Certified Public Accountants' Health Care Expert Panel and has served on numerous Financial Accounting Standards Board, Government Accounting Standards Board, and AICPA task forces and committees. She is a contributing author for Montgomery's Auditing (John Wiley & Sons, 1998) and the Financial and Accounting Guide for Not-for-Profit Organizations (John Wiley & Sons, 2012), and has authored articles and publications on a variety of accounting topics.

Timothy Geddes, FSA, MAAA, is a senior manager in the Human Capital Total Rewards practice at Deloitte Consulting LLP, where he provides broad technical guidance and advisory consulting with regard to pension and retiree medical benefit plans to a wide spectrum of domestic and multinational clients. Timothy serves on the American Academy of Actuaries Pension Committee and has spoken at numerous national actuarial meetings.

Frederick Gill, CPA, is senior technical manager on the Accounting Standards Team at the American Institute of Certified Public Accountants, where he provides broad technical support to the Accounting Standards Executive Committee. During his over 20 years with the AICPA, he participated in the development of numerous AICPA Statements of Position, Audit and Accounting Guides, Practice Bulletins, issues papers, journal articles, and practice aids. He was a member of the U.S. delegation to the International Accounting Standards Committee, represented the U.S. accounting profession on the United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting, and was a member of the National Accounting Curriculum Task Force. Previously he held several accounting faculty positions.

Alan S. Glazer, PhD, CPA (inactive), is the Henry P. and Mary B. Stager Professor of Business at Franklin & Marshall College, Lancaster, Pennsylvania. He was associate director of the Independence Standards Board's conceptual framework project and has been a consultant to several AICPA committees. His articles on auditor independence, not-for-profit organizations, and other issues have been published in the Journal of Accountancy, CPA Journal, Issues in Accounting Education, Accounting Horizons, and other academic and professional journals. He is also coauthor of a three-volume series of portfolios on financial statement analysis published by Bloomberg BNA.

Lynne M. Glennon, CPA, MST, is a full-time instructor for DePaul University's Master of Science in Taxation program. She currently teaches accounting for income taxes, transactions in property, and taxation of corporations and shareholders on campus as well as online for a national CPA firm. Prior to teaching full time, she worked in both industry and public accounting for 20 years as a tax director and tax consultant. As director of tax planning for Global Hyatt Corporation, she was primarily responsible for tax planning support on large-scale restructurings and mergers, acquisitions and dispositions, and management and control of the federal audit process, including communications with the Internal Revenue Service. As senior manager in Deloitte & Touche's lead tax services group, she focused on corporate and partnership taxation and served a number of multinational clients in the manufacturing, distribution, and service industries. Ms. Glennon is a Certified Public Accountant in the State of Illinois and a member of the American Institute of Certified Public Accountants. She is a graduate of the University of Notre Dame with a BA in economics; her MST degree is from DePaul University.

Bill Godshall, CPA. Since joining Coopers & Lybrand in 1990, Bill has had extensive experience in the energy and mining sector of assurance practices at two international accounting firms. He has worked on oil and gas audit and attestation engagements; utility audits, controls projects, and attestation engagements; and mining joint venture costs reviews. Bill also assisted his energy and mining clients with special accounting and auditing projects in the areas of derivatives, asset retirement obligations, leasing, and other complex topics. Bill spent two years at the Public Company Accounting Oversight Board, where he authored the inspection guidance for derivative accounting and auditing areas that is still in place today. In addition, Bill led the inspection of the audits of several energy and natural resource Securities and Exchange Commission issuers. Bill joined Frazier & Deeter's assurance practice in 2005 and serves as the lead partner for the assurance group's quality control function.

Richard A. Green, CPA, has over 25 years of auditing, accounting, and consulting experience, including all phases of external and internal auditing. Mr. Green leads the Sacramento public sector assurance practice of Macias Gini & O'Connell LLP. He served on the Governmental Accounting Standards Board Task Force on Pension Accounting Research and was recently appointed to the American Institute of Certified Public Accountants' State and Local Government Expert Panel Pension Comment Letter Task Force. Mr. Green is the engagement partner on the largest pension plan in the nation, the State of California Public Employees' Retirement System.

Frank J. Grippo, MBA, CPA, CFE, is an associate professor of accounting at William Paterson University in Wayne, NJ. He earned his BS in accounting from Seton Hall University and his MBA from Fairleigh Dickinson University. Prior to teaching, he was an auditor with Arthur Andersen & Co. His firm performs financial and accounting consulting for various nonprofit organizations, specializing in internal control structures, auditing, and fraud detection. Clients include well-known health and welfare, religious, and educational organizations.

Wendy Hambleton, CPA, is an audit partner working in the National SEC Department in BDO Seidman LLP's Chicago office. Prior to joining the SEC Department, Ms. Hambleton worked in the firm's Washington, DC, practice office. She works extensively with clients and engagement teams to prepare SEC filings and resolve related accounting and reporting issues. Ms. Hambleton coauthors a number of internal and external publications, including the AICPA's Guide to SEC Reporting and Warren Gorham & Lamont's Controller's Handbook chapter on public offering requirements.

Philip M. Herr, JD, CPA, PFS, is a senior case design analyst in the advance markets unit of AXA Equitable Life Insurance Company located in New York City. He is a former adjunct professor at Fairleigh Dickinson University, School of Continuing Education, and New Jersey City University. Phil specializes in the areas of: tax; estate and trusts; business succession and planning; personal financial planning; Employee Retirement Income Security Act issues and transactions; retirement, employee benefit, and executive compensation planning; and the use of life insurance, annuities, and insurance products. Phil is admitted to the New York and U.S. Tax Court Bars and is a member of the New York State Bar Association, American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants, and Association for Advanced Life Underwriting. Phil holds life, health, and variable insurance licenses in New Jersey and New York and Financial Industry Regulatory Authority 7, 24, 55, 63 and 65 securities licenses.

Frank Hydoski, PhD, is a director in the New York Forensics & Dispute Services practice of Deloitte Financial Advisory Services LLP. He is responsible for developing new products and approaches in forensic accounting and investigations for clients in both the private and public sector. Mr. Hydoski is internationally recognized for his work in complex investigations, especially those requiring information technologies to facilitate forensic analysis. He was the chief investigator examining the United Nations Oil-for-Food Programme and led a crucial part of the massive forensic effort in the investigation of Holocaust-era accounts held by Swiss banks.

Henry R. Jaenicke, PhD, CPA, was the C. D. Clarkson Professor of Accounting at Drexel University. He is the author of Survey of Present Practices in Recognizing Revenues, Expenses, Gains, and Losses (FASB, 1981) and is the coauthor of the twelfth edition of Montgomery's Auditing (John Wiley & Sons, 1998). He has served as a consultant to several American Institute of Certified Public Accountants committees, the Independence Standards Board, and the Public Oversight Board.

Richard R. Jones, CPA, is a senior partner in the National Accounting Standards Professional Practice Group of Ernst & Young LLP, where he is responsible for assisting the firm's clients in understanding and implementing today's complex accounting requirements. Mr. Jones's fields of expertise are in the areas of impairments, equity accounting, real estate, leasing, and various financing arrangements.

Tom Jones was the vice chairman of the International Accounting Standards Board from its founding in 2001 until 2009. Prior to this he was a trustee and vice chairman of the Financial Accounting Foundation, which oversees the Financial Accounting Standards Board. He was a member of the ITF and was chairman of the American Bankers Association CFO Committee. He has been elected to the Financial Executives International Accounting Hall of Fame. Mr. Jones's corporate experience includes 20 years with Citibank/Citicorp as executive vice president and principal financial officer. He previously served for 15 years with IT&T in Italy, Belgium, and New York.

Ira G. Kawaller is the founder and principal of Kawaller & Co., a boutique consulting firm that specializes in assisting commercial enterprises with their use of derivative contracts. He is also the managing partner of the Kawaller Fund. He can be reached at [e-mail]; additional biographical information about Dr. Kawaller can be accessed at www.kawaller.com/Ira_Kawaller_vita.pdf.

Darin W. Kempke, CPA, is a partner at KPMG LLP in its Philadelphia office. He is the national audit sector leader for KPMG's power and utility practice. He has been working with power and utility clients (regulated and nonregulated) all over the world in his 21-plus years in the industry both with Arthur Andersen LLP and currently with KPMG LLP. He specializes in business and accounting services to regulated and nonregulated energy companies, provides energy thought leadership for publications and the KPMG Global Energy Institute, is a frequent speaker on the power and utility conference and webinar circuit. He spent time in the KPMG LLP Department of Professional Practice working on energy issues including derivatives, leases, emissions, and variable interest entities. He is a Certified Public Accountant licensed in Missouri, Kansas, New York, New Jersey, Pennsylvania, and the District of Columbia. He is a graduate of the University of Kansas with a BS in accounting and a BS in business administration.

Cynthia L. Krom, PhD, CPA, CFE, is assistant professor of accounting and organizations at Franklin & Marshall College, Lancaster, Pennsylvania. She is active in the New York State Society of Certified Public Accountants as well as the American Accounting Association. She has published articles on the Bank Secrecy Act and terrorism financing in professional journals, and her research interests include strategic bankruptcy and accounting history.

Richard F. Larkin, CPA, is technical director of not-for-profit accounting and auditing for BDO USA, LLP, in Bethesda, MD. Previously he was the technical director of the Not-for-Profit Industry Services Group in the national office of PricewaterhouseCoopers. He is a Certified Public Accountant with over 40 years of experience serving not-for-profit organizations as independent accountant, board member, treasurer, and consultant. He teaches, speaks, and writes extensively on not-for-profit industry matters and is active in many professional and industry organizations. He has been a member of the Financial Accounting Standards Board Not-for-Profit Advisory Task Force and the American Institute of Certified Public Accountants Not-for-Profit Organizations Committee and chaired the AICPA Not-for-Profit Audit Guide Task Force. He participated in writing both the third and fourth editions of Standards of Accounting and Financial Reporting for Voluntary Health and Welfare Organizations, and the AICPA Practice Aid Financial Statement Presentation and Disclosure Practices for Not-for-Profit Organizations (1999). He graduated from Harvard College and has an MBA from Harvard Business School. He is a coauthor of the fourth, fifth, and sixth editions of Financial and Accounting Guide for Not-for-Profit Organizations (John Wiley & Sons).

Elizabeth Lindsay-Ochoa, JD, LLM (Taxation), joined AXA Equitable in July 2002. Her primary focus is in estate and charitable planning. She has presented to Certified Public Accountants, attorneys, and financial professionals on charitable and estate-planning topics. Speaking engagements have included the Association of Fundraising Professionals International Conference on Fundraising; the American Bar Association Real Property, Trust and Estate; and the ABA Tax Section and the Association for Advanced Life Underwriting. Liz has written articles for the Tax News Quarterly, Probate and Property, and National Underwriter. She also has submitted comments to Congress, the Federal Deposit Insurance Company, and the Internal Revenue Service as part of her committee work for the ABA. Liz graduated from Michigan State University with a BA in telecommunications. In 2001, she received her JD from Thomas M. Cooley Law School and, in 2005, her LLM (taxation) from the University of Denver. Previously, Liz was a fellow with the Charitable Planning and Organizations Committee with the ABA's RPTE section (2005–2007). She is the chair of the Non-Tax Issues Affecting the Planning and Administration of Estates and Trust and an acquisitions editor for ABA RPTE publications. Liz is admitted to practice law in Michigan, Colorado (inactive), New York, and Connecticut. She is a member of the Colorado and Michigan Bar Associations and the National Committee on Planned Giving. She also holds Financial Industry Regulatory Authority Series 7, 66 and 24 securities registrations.

James Mraz, CPA, MBA, is a professor of accounting and business at the University of Maryland University College. Mr. Mraz has taught accounting and business for over 30 years in several colleges. Mr. Mraz has also conducted accounting accuracy reviews for John Wiley & Sons since 2005 and completed the instructor's manual for Prentice Hall's Accounting Information System's textbook. Mr. Mraz was a government auditor for 33 years while serving in the Marine Corps, Department of Health & Human Services, and the Department of Defense. Mr. Mraz served as chief financial officer for a resale and recreation government organization.

Grant W. Newton, PhD, CPA, CIRA, is a professor of accounting at Pepperdine University. He is the author of the two-volume set Bankruptcy and Insolvency Accounting: Practice and Procedures: Forms and Exhibits, Sixth Edition (John Wiley & Sons, 2006) and coauthor of Bankruptcy and Insolvency Taxation, Second Edition (John Wiley & Sons, 1994). He is a frequent contributor to professional journals and has lectured widely to professional organizations on bankruptcy-related topics.

Don M. Pallais, CPA, has his own practice in Richmond, VA. He is a former member of the American Institute of Certified Public Accountants Auditing Standards Board and the AICPA Accounting and Review Services Committee. He has written a host of books, articles, and continuing professional education courses on accounting topics.

Cynthia Pon, CPA, has over 20 years of professional experience providing auditing, accounting, and consulting services to the private and public sectors. Ms. Pon leads the San Francisco Bay Area public sector assurance practice of Macias Gini & O'Connell LLP, bringing extensive experience in federal, state, and local financial and compliance auditing. She is experienced in the application of generally accepted accounting principles and has been recognized by the Governmental Accounting Standards Board for her leadership in assisting California governments with early implementation of its standards. Ms. Pon also serves on the Government Finance Officers Association Special Review Committee for Comprehensive Annual Financial Report awards and has instructed numerous governmental clients on a variety of accounting and audit issues and challenges.

Zabihollah Rezaee, PhD, CPA, is the Thompson-Hill Chair of Excellence and Professor of Accountancy at the University of Memphis and has served a two-year term on the Standing Advisory Group of the Public Company Accounting Oversight Board. He received his BS degree from the Iranian Institute of Advanced Accounting, his MBA from Tarleton State University in Texas, and his PhD from the University of Mississippi. Professor Rezaee holds a number of certifications, including Certified Public Accountant, Certified Fraud Examiner, Certified Management Accountant, Certified Internal Auditor, Certified Government Financial Manager, Certified Sarbanes-Oxley Professional, Certified Corporate Governance Professional, and Certified Governance Risk Compliance Professional. He has also been a finalist for the SOX Institute's SOX MVP 2007, 2009, and 2010 Award. Professor Rezaee has published over 180 articles in a variety of accounting and business journals and made more than 200 presentations at national and international conferences. He has also published seven books: Financial Institutions, Valuations, Mergers, and Acquisitions: The Fair Value Approach (John Wiley & Sons, 2007); Financial Statement Fraud: Prevention and Detection (John Wiley & Sons, 2002); U.S. Master Auditing Guide, Third Edition (Commerce Clearing House, 2004); Audit Committee Oversight Effectiveness Post-Sarbanes-Oxley Act; Corporate Governance Post-Sarbanes-Oxley: Regulations, Requirements, and Integrated Processes (John Wiley & Sons, 2007); Corporate Governance and Business Ethics (John Wiley & Sons, 2008); and Financial Services Firms: Governance, Regulations, Valuations, Mergers and Acquisitions (John Wiley & Sons, 2011).

Francis E. Scheuerell, Jr., CPA, is a managing director at Navigant Consulting and is a Certified Public Accountant and certified management accountant. Frank has almost 30 years of diverse business experience in all areas of financial management and technical accounting, including accounting for business combinations, restatements, corporate restructurings, spin-offs, inventory, leases, revenue recognition, income taxes, equity method investments, segments, and consolidations, including variable interest entities. He has extensive experience addressing accounting and reporting issues for the real estate, construction, health care, hospitality, software, entertainment, retail, and manufacturing industries. Frank has served as an interim executive and/or consultant for numerous billion-dollar companies facing complex and extensive financial reporting issues. He has managed teams restating financial results and rebuilding financial reporting infrastructures while helping to restore regulator and investor confidence in those organizations. Frank has represented and testified on behalf of clients at Securities and Exchange Commission and NASDAQ hearings. Additionally, he has served as an expert witness in a securities litigation case. He has assisted numerous clients with their initial public offering or private place memorandums. He is an accomplished public speaker and author of numerous articles, publications, and continuing professional education seminars. Frank was a Project Manager—Research and Technical Activities for the Financial Accounting Standards Board and is a graduate of Illinois State University.

Jae K. Shim, PhD, is a professor of accounting and finance at California State University, Long Beach, and chief executive officer of Delta Consulting Company, a financial consulting and training firm. Dr. Shim received his MBA and PhD degrees from the University of California at Berkeley (Haas School of Business). He has been a consultant to commercial and nonprofit organizations for over 30 years. Dr. Shim has also published numerous articles in professional and academic journals and has over 50 college and professional books to his credit.

Reed K. Storey, PhD, CPA, had more than 30 years of experience on the framework of financial accounting concepts, standards, and principles, working with both the Accounting Principles Board, as director of Accounting Research of the American Institute of Certified Public Accountants, and the Financial Accounting Standards Board, as senior technical advisor. He was also a member of the accounting faculties of the University of California, Berkeley, the University of Washington, Seattle, and Bernard M. Baruch College, CUNY, and a consultant in the executive offices of Coopers & Lybrand (now PricewaterhouseCoopers LLP) and Haskins & Sells (now Deloitte & Touche, LLP).

B. Scott Teeter, MBA, CMA, is the vice president of land acquisition and development for the Austin/San Antonio, TX, division of Ryland Homes. He earned his BS in finance from The Pennsylvania State University and his MBA from the Wharton School of the University of Pennsylvania.

Daniel Thomas, EA, MAAA, is a specialist leader in the Human Capital Total Rewards practice at Deloitte Consulting LLP, where he serves as an actuarial specialist for the Deloitte audit teams and as a technical resource and reviewer within Deloitte's pension actuarial practice.

George I. Victor, CPA, is a partner in Giambalvo, Stalzer & Company, CPAs, P.C., and is the firm's director of quality control, where he is responsible for formulating the firm's accounting and auditing policy standards, including monitoring, consulting, technical research, staff training, and review of completed engagements. Mr. Victor has extensive experience in providing accounting and advisory services to both privately held and Securities and Exchange Commission–reporting companies. He also provides consulting services in areas of quality control, U.S. generally accepted accounting principles, and International Financial Reporting Standards matters to other certified public accounting firms in the United States and abroad. He is a member of the American Institute of Certified Public Accountants as well as the New York State Society of CPAs, where he serves as a member of its board of directors, chaired various committees, and serves as a member of the Editorial Board of the CPA Journal. He is an adjunct professor at the City University of New York. Mr. Victor has been published or quoted in various professional journals and books and frequently lectures on accounting and auditing related topics.

Jan R. Williams, PhD, CPA, is the Ernst & Young Professor and Dean, College of Business Administration, at the University of Tennessee. He is past president of the American Accounting Association and a frequent contributor to academic and professional literature on financial reporting and accounting education. Most recently he has been involved in the redesign of the CPA Examination and is a frequent speaker on this and other topics of professional significance.

Caroline H. Walsh, CPA, has over 33 years of specialized experience in auditing and consulting for local government agencies, nonprofit, and corporate enterprises. Ms. Walsh serves as the Quality Control Partner at Macias Gini & O'Connell LLP and leads the firm's Professional Standards Group. From October 2006 through 2009, Ms. Walsh served on the American Institute of Certified Public Accountants American Institute of Certified Public Accountants State and Local Government Expert Panel, where her role was to provide review and technical support services for the public accounting profession, including drafting and updating the AICPA guides for Audits of State and Local Governments and Government Auditing Standards and Circular A-133 Audits. Since 2009, Ms. Walsh has participated on the Expert Panel Task Force, which reviews and comments on the recent Governmental Accounting Standards Board due process documents related to accounting and reporting for pension benefits. In 2009, she was appointed for a three-year term to the GASB Advisory Committee, a standing committee whose members review the GASB staff's annual proposed changes and additions to the GASB's Comprehensive Implementation Guide.

David M. Zavada, CPA, MPA, is a partner with Kearney & Company in Alexandria, VA, where he specializes in providing accounting and audit services to the federal government. He is a former chief of the Financial Standards and Grants Branch within the Office of Federal Financial Management at the Office of Management and Budget and deputy to the Controller of the U.S. Government. He was director of the Office of Financial Management at the Department of Transportation, Federal Aviation Administration, and served as the Assistant Inspector General, Office of Audits at the Department of Homeland Security. In all of these positions David played a leadership role in developing and implementing government-wide financial management policies.

Mark L. Zyla, CPA/ABV, CFA, ASA, is managing director of Acuitas, Inc., an Atlanta, GA–based valuation and litigation consultancy firm. As a valuation specialist, Mark has provided consulting for numerous valuations in financial reporting and other types of engagements. He was the 2011 chair of the American Institute of Certified Public Accountants National Business Valuation Conference and presented AICPA's Fair Value Measurement Workshop. He is the author of Fair Value Measurements, Second Edition: Practical Guidance and Implementation (John Wiley & Sons).

Chapter 1

Financial Accounting and Auditing Organizations

¹ Editor's Note: This chapter aggregates some key contributions of Chapters 1, 5, 9, and 28 from the 11th edition, for reader convenience and to reduce redundancy.

Lynford Graham, CPA, PhD, CFE

Bentley University

1.1 Role of Financial Accounting and Auditing in the U.S. Economy

(a) Objective of Financial Accounting

(b) A Wider Economic Perspective

(i) Linking the Economy to Fair Financial Statements

(ii) Market Efficiency

(c) Participants in the Financial Reporting System

1.2 Accounting Standards in the United States

1.3 Role of the Securities and Exchange Commission

(a) Background of the Securities and Exchange Commission

(b) Structure of the Securities and Exchange Commission

(c) Division of Corporation Finance

(d) Office of the Chief Accountant

(e) Division of Enforcement

(f) Regulations and Publications

(g) Summary

1.4 Financial Accounting Standards Board

(a) Brief History

(b) Structure of the Financial Accounting Standards Board

(c) Board Publications

(d) Due Process Procedures

(e) Conceptual Framework

(f) Standards Overload

(g) Some Criticisms of the Standards

1.5 Governmental Accounting Standards Board

(a) Structure of the Governmental Accounting Standards Board

(b) Jurisdiction Issue

1.6 Federal Accounting Standards Advisory Board

1.7 American Institute of Certified Public Accountants

1.8 U.S. Auditing Standards

1.9 Public Company Accounting Oversight Board

(a) Background

(b) Authority

(c) Structure

(i) Board Members, Staff, and Advisory Groups

(d) Firm Registration

(e) Standards

(i) Sarbanes-Oxley Mandated Provisions

(ii) Standard-Setting Process

(f) Required Inspections

(i) Inspection Scope

(ii) Inspection Results

(g) Investigations

(h) White-Collar Crime Penalty Enhancements

1.10 American Institute of Certified Public Accountants

(a) Technical Auditing Standards

(i) Risk Assessment Standards

(ii) Clarity and Convergence

(iii) Technical Assistance

(b) Services Offered by Certified Public Accountants

(i) Auditing

(ii) Accounting Services

(iii) Tax Services

(iv) Consulting and Other Services

(c) CPA Examinations

1.11 State Boards and Other Organizations

(a) Role of the State Boards of Accountancy

(b) Role of Professional Societies

1.12 Government Accountability Office

(a) Financial Statement Audits

(b) Compliance Audits

(c) Operational Audits

1.13 Role of International Financial Accounting and Auditing Institutions

1.14 International Accounting Standards Board

(a) History of the IASB

(b) Structure of the International Accounting Standards Board

(c) International Accounting Standards Board Trustees

(d) International Accounting Standards Board

(e) Standards Advisory Council

(f) International Financial Reporting Interpretations Committee

(g) International Financial Reporting Standards

(i) Procedures for the Development of International Financial Reporting Standards

(ii) Acceptance of IFRS for SEC Purposes by Foreign Private Issuers

1.15 International Organization of Securities Commissions

1.16 European Union

(a) Council Directives

(b) European Union—Recent Developments

1.17 International Auditing—International Federation of Accountants

(a) Membership

(b) Governance of the International Federation of Accountants

(c) Council

(i) International Federation of Accountants Board

(ii) Standing Committees

(d) International Standards on Auditing

1.18 Summary and Commentary

1.19 Additional Reading

1.20 Selected Web Sites

1.1 Role of Financial Accounting and Auditing in the U.S. Economy

This chapter provides background on the environment in which financial accountants carry on their activities, including the specific organizations that regulate or otherwise affect those activities. Auditing is the attestation of independent certified public accountants (CPAs) to third parties that the financial accounting presentation is fairly presented and free of material misstatement. Although the accounting and auditing profession were for many years largely self-regulated, major events such as the stock market crash of 1929 and the more recent implosion of a number of megacompanies such as Enron and WorldCom have led to regulatory oversight of the accounting and auditing professions. No financial accountant or manager can practice properly without understanding these organizations and how they not only constrain but also assist the performance of financial accounting and reporting services.

The globalization of accounting and auditing is a major trend that will impact the practice of accounting in profound ways. While a point of discussion for decades, the current movement of U.S. accounting practice toward an international set of accounting standards and auditing practice is a reality today. The questions seem to be how far and how fast this transition will go, and what the consequences to preparers and users of financial statements will be.

(a) Objective of Financial Accounting

An important beginning point for understanding the social role and importance of financial accounting is identifying the objective that it should meet. Although there are many opinions, the most authoritative and influential is this definition provided by the Financial Accounting Standards Board (FASB) in its Conceptual Framework project, which was intended to develop a unified theory of accounting (see Section 1.3(a)(v)):

Financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.

Thus, according to this definition, the goal is to provide information that allows users to reach better decisions than they would without it. For simplicity, the FASB uses the term financial reporting to encompass the activities of financial accounting and reporting, which includes presenting both financial statements and the additional financial information that accompanies them.

Usefulness may exist at the individual company level if management provides reports to investors and creditors when seeking financing or fulfilling various stewardship reporting responsibilities. Although this perspective undoubtedly explains why some aspects of accounting are regulated, it does not really provide an adequate basis for understanding the substantial governing structure. Instead, an economy-wide perspective is needed.

(b) A Wider Economic Perspective

Two key points help explain why financial accounting is important for the entire economy. The first point is the connection between the general benefit to society from the information that is presented in financial statements. The second point is that effective capital markets are central to an efficient and healthy economy and explains how effective capital markets are efficient processors of information.

(i) Linking the Economy to Fair Financial Statements

Exhibit 1.1 shows the links between economy and the benefit to society and the availability of useful financial statements. A sound economy is an important ingredient in providing for the benefit of society's members.

Exhibit 1.1 Role of Financial Accounting in Society

UnFigure

Although a variety of factors contribute to a sound economy, such as an abundance of natural resources, a stable political system, and an appropriate work ethic, one of the most critical is the availability of sufficient capital resources. Without adequate capital markets, manufactured goods and services cannot be produced or distributed to persons who want or need them at prices that are reasonable.

In turn, sufficient capital resources are made available through effective and efficient capital markets in which those who need capital can obtain it from those who are ready to provide it. If these market participants can conduct their activities in an environment based on fair financial reporting and correct data, they are able to establish fair prices for the capital in the form of expected returns. Consequently, fair reporting will encourage the flow of more capital into the markets.

In order for the markets to be effective, their participants must reach good decisions about where to invest or obtain capital under appropriate terms for the risks involved. If decisions are made haphazardly, capital will not be allocated in a reasonable fashion, and the economy will not perform as well because of the misallocation of resources.

Naturally, many different kinds of information are useful to decision makers. Some may relate to a particular company, an industry, or the national and world economies. Some types of information may be rooted in past events, whereas others are predictions of future events and conditions. Of particular importance to the capital markets is company financial information.

A significant source of financial information is the financial statements (and accompanying information) that are published for market participants. Although this information by itself is insufficient for making the capital markets work well, the absence of reliable financial information makes the allocation of resources and capital into guesswork.

The important economic role of financial statements causes society to be concerned about the activities of financial accountants and justifies setting up controls and other regulatory devices to help ensure the availability and usefulness of the information. As should be expected, these controls are aimed at preventing irregularities in the financial reporting system. Every significant study of business and audit failures of the past half century has concluded that lapses in internal controls were a major contributor to the calamity. Chapter 7 in this Handbook is devoted to the reporting on internal controls that was made mandatory for public companies by the Sarbanes-Oxley Act of 2002.

(ii) Market Efficiency

The word efficiency is used in two different ways to describe markets. In economic theory, an efficient market is capable of allocating resources quickly and without friction. These allocations are efficient because equilibrium prices (where supply and demand curves cross) are reached quickly and uniformly across the entire market. In order to be efficient in allocating resources, a market must have a number of characteristics, including competition among a large number of buyers and sellers. Perhaps most important, it must have large amounts of useful information about the resources that are being traded. As described, a role for financial accounting is to provide this information to the capital markets.

A second meaning of efficiency refers to a market's ability to gather and process this information. In this sense, an efficient market is able to respond quickly and appropriately to new relevant and reliable information, without regard to its source. This concept has been developed and advanced over the last 30 years in finance and accounting research into the functioning of U.S. capital markets, especially the New York Stock Exchange (NYSE).

On one level, this proposition that capital markets are efficient processors of information makes a great deal of sense because there are large incentives for market participants to gather and analyze useful information and then react to it quickly before others learn about it. These incentives also encourage participants to seek out information wherever it can be found, even (perhaps especially) if it is not in published financial statements. In fact, the most useful information is that which no one else knows.

This point does not mean that financial statements are not useful to the capital markets; however, it does suggest that financial statements play a different role from the one that has traditionally been attributed to them. While criticized as not being timely for making some investment decisions, financial statements still serve a role in confirming, with an independent auditor's opinion, the financial position and performance of the company. The knowledge that such confirmation is forthcoming is a deterrent to exaggerated press releases and unreasonably optimistic forecasts.

This point means that sophisticated market participants must clearly understand accounting principles and the impact of management's choices among the available alternative principles. Because of this understanding, the market is able to react appropriately to the signals that it receives. As a result of this sophistication, the market does not react naively to accounting choices that present differing results. For example, a decision by management of one company to use last-in, first out (LIFO) inventory costing and a similar-size company to use the first-in, first-out (FIFO) method in a period of rising prices will lead to higher reported earnings for the FIFO entity. An efficient market should be able to see through this difference, and because the tax bill for the higher-income entity would be higher, the market might even penalize the FIFO company for its choice of accounting principle. An efficient capital market should not be misled by accounting policy choices. In addition, an efficient market would be able to understand and act on the effects of unreported revenues and expenses. For example, a major controversy was created by a 1993 proposal (eventually leading to Statement of Financial Accounting Standards [SFAS] No. 123 Accounting for Stock-Based Compensation) that would cause companies to report compensation expense equal to the value of stock options granted to their employees. A naive view of the market would argue that recognizing this expense would produce lower stock prices because it would cause reported income to be lower. This view assumes that the market is either unaware of or oblivious to the effects of the compensation because such effects are not currently included in the earnings calculation. Some opponents of the proposal argued that this expense should not be reported because it is not a real cost. If they are right in the sense that the expense does not really exist, then the act of reporting it would not affect stock prices because the efficient capital market would simply ignore the reported amount and establish appropriate stock prices despite the noise in the financial statements.

In addition to the logical arguments in favor of the proposition that U.S. capital markets are efficient, a great deal of academic research has generated evidence that suggests that they are generally quite efficient. While markets are not perfectly efficient, there is abundant support for the broad notion that they are savvy in considering differences generated solely by choosing different accounting methods.

(c) Participants in the Financial Reporting System

Financial accounting does not take place in a sterile arena; rather, the people who conduct it have very real but quite different interests in the process and its outcome.

The primary communication channel is between financial statement preparers and financial statement users. Generally, preparers are accountants who work for corporations or other entities that need capital resources or that have stewardship reporting responsibilities. Users are investors, creditors, or advisors to those who want to commit resources to an entity or who have already done so. The self-interests of preparers and users clearly are in potential conflict. Management also has an interest in reliable financial information in managing the business. Indeed, an important component in the Internal Controls Framework of the Committee of Sponsoring Organizations (COSO) is Information and Communication, and that includes managerial and financial information. A weakness in this component alone would require that a company assert its internal control is ineffective.

Preparers want the reporting system to provide information that will help them get low-cost capital or that will cause them to appear to have lived up to their responsibilities. However, the efficiency of the capital markets suggests that preparers (and the stockholders of their companies) are likely to be better off if more information is reported. The size of many 10-K (Securities and Exchange Commission [SEC] filings) Annual reports attests to the volumes of information our regulators and standard setters consider important.

Users, in contrast, are looking for inexpensive, timely, and dependable information that will enable them to make new decisions or evaluate old ones. As described, they are not well served by information that misleads them through bias. If users receive unreliable information, the cost of capital will rise to compensate them for the added but unknown risks. If this mistrust is widespread, the economy will suffer because the capital markets will not be as efficient. Users also tend to want readily available, abundant information. This tendency is counterbalanced by the desire to have unique information or insight, which is important to earning higher returns (because no one else is privy to it).

To reduce the uncertainty about the dependability of the financial statements, the services of auditors provide independent assurance that the financial statements are fairly presented and a free of material misstatement of amounts or disclosures. In effect, auditors add credibility to the financial statements. However, like the other participants, auditors have self-interests. In particular, they prefer dealing with information that is objective and can be verified because they are concerned (and reasonably so) about the possibility of second guessing by users who suffer losses after using audited information that turns out to have been incorrect. The trend in financial accounting standards to make broader use of fair values in lieu of historical costs and to recognize gains and losses through income based on market valuations rather than objective transactions exacerbate their concerns. This work contains several chapters devoted to fair value and issues surrounding their use. Many chapters have expanded coverage of the use of fair values in specific accounts and industries. In summary, the three main participating groups have conflicting interests. In general, preparers want information that can be cheaply produced and will reflect their stewardship in the best light; users want timely, accurate, and (if possible) unique information or insight that no one else has; and auditors want information that can be audited and objectively supported. In contrast, society needs the capital market to have widely available and inexpensive decision-useful information. Because of these conflicts, financial accounting and auditing will continue to be subject to regulation and oversight.

1.2 Accounting Standards in the United States

Three primary bodies are involved in the development of U.S. accounting standards: the SEC, the FASB, and the Governmental Accounting Standards Board (GASB). Organizations such as the American Institute of Certified Public Accountants (AICPA) have influence over the standards but not standard-setting authority.

1.3 Role of the Securities and Exchange Commission

Although the SEC's jurisdiction is limited to publicly held corporations, its role as the primary regulator and protector of the country's capital markets has given it substantial influence over all financial accounting practice. A more thorough discussion of the role of the SEC can be found in Chapter 5 of this Handbook by Wendy Hambleton.

(a) Background of the Securities and Exchange Commission

The SEC was established by the Securities Exchange Act of 1934 and was charged with enforcing not only that statute but also the Securities Act of 1933. Previously, the 1933 Act had been administered by the Federal Trade Commission.

The SEC's prime mission is to achieve and maintain stable and effective capital markets for securities traded in interstate commerce. The nature of today's capital markets and communications networks makes it difficult to issue a security that is not traded across state borders. The SEC uses a variety of methods to accomplish its mission. The most basic is regulation of the activities of those corporations that have issued or would like to issue securities.

Under the 1933 Act, securities must be registered before they can be issued to the public. The purpose of registration is to establish a complete and widely available public record of information about the registrant and the securities. For example, registration creates a substantial amount of public information about the officers, directors, and other agents of the corporation, including promoters and underwriters. It also publicizes the company's plans for using the capital raised by issuing the securities. In the case of a company that has existed previously, registration also requires the presentation of financial statements and other financial data.

If the company meets the reporting requirements, the securities are allowed to go public, regardless of their inherent riskiness. Thus, the registration process is designed to accomplish disclosure about the securities rather than to evaluate their merits. Although some states conduct merit reviews for securities traded within their borders, this approach would be very difficult to accomplish on a national level. Furthermore, many individuals believe that the capital markets should be as free as possible, as long as fraud and other forms of deceit are prohibited.

The 1934 Act went beyond the initial registration to require substantial ongoing disclosures about the corporation, its officers and directors, and its financial condition and results of operations and other activities. Thus, companies that have securities registered under the 1933 Act must provide quarterly and annual reports to the SEC as well as ad hoc reports when crucial events occur. Again, the goal is to allow the capital markets to work effectively by getting information to market participants. The SEC Staff may review the filed information for its compliance with the disclosure requirements, but there is no review of the merits of the management's behavior as described in the reports. For example, nothing in the SEC's processes prevents managers from paying large salaries to themselves, as long as the amount is disclosed. The idea is that disclosure will allow the market itself to discipline those managers who abuse their fiduciary duties. Of course, the disclosure requirement may very well have been designed to deter inappropriate behavior, because management would expect to have to suffer the consequences of publishing information about their activities. Nevertheless, the excesses of top corporate executive compensation is a contemporary topic of debate in the media and has raised the interest of regulators.

The 1934 Act also gave authority to the SEC to regulate securities exchanges (such as the NYSE and the American Stock Exchange) and those brokers and dealers who belong to them or otherwise conduct business for buyers and sellers of securities. This authority was expanded through the Investment Advisers Act of 1940 to encompass all who offer investment counseling. The fundamental goal of this arena of regulation is to increase market participants' confidence by reducing the likelihood of incompetence, fraud, or deceit. The line of reasoning is that if these problems can be reduced, more people are likely to invest, and if more people invest, the competition will bring about a more efficient allocation of capital.

Other legislation has given the SEC additional authorities and jurisdiction in the capital markets, but their contents are generally beyond the scope of this discussion, which focuses on the effect of the SEC on financial accounting. Specific categories of regulations and publications affect financial accountants and their clients.

It is especially important to note that the 1934 Act gave the SEC specific authority to establish accounting principles to be used by registrants in filed financial statements. This authority led to the issuance of Accounting Series Release (ASR) No. 4, Administrative Policy on Financial Statements, in 1938, which stated that the principles used in the filings would have to enjoy substantial authoritative support. It also stated that disclosure of a departure from such supported principles would not be an acceptable substitute