Accounting Standards Non-Compliance and the Effects

Introduction 

Accounting standards are concepts that guide and regulate accounting disciplines. They are guidelines for financial accounting and are relevant to a range of businesses or industries (Levit, 1998) . Example applications are when a business prepares and presents its assets, liabilities, expenses, and income. Accounting standards describe how and when economic events should be identified, measured, and presented. External bodies such as regulatory agencies, investors, and banks depend on the standards to ascertain that accurate and relevant information about the entity is provided (Levit, 1998) . Distinct examples include asset classification, revenue recognition, (outstanding) share measurement, depreciation methods, and lease classifications. 

Accounting standards were first developed in the 1930s and were meant for public entities and, following the Great Depression, were included in several securities acts. In the Securities Acts of 1933 as well as the Securities Exchange Act of 1934, initial regulations that had been established were included (Levit, 1998) . Several amendments to accounting standards have been made over time to ensure that financial statement from multiple firms can be compared following the same rules. Without these, there is no consistency when it comes to reporting financial information. They add credibility to financial statements and allow accurate and incisive information regarding economic decisions, setting boundaries for reporting measures (Levit, 1998) . 

This paper focuses on accounting standards, non-compliance and the consequences of this on the development of an organization. It seeks to highlight how violating these standards in a given firm likely leads to the undoing of the particular company. 

Accounting Terms, FASB, and Applications to Nonprofits 

There are some key terms used in accounting and characterize standards. A balance sheet is a company’s quantitative summary of its financial position at a specific time and includes the net worth, assets, and liabilities. It has two parts, one showing all productive assets of the company and the other showing the financing methods. An asset is anything owned by a firm or an individual, that has economic value which can especially be converted to money. Shareholder equity is a possession interest in an organization that takes the form of preferred stock or common stock. It is also known as book value or net worth. An income statement is an accounting of expenses, sales and net profit for a specific point in time. It accounts for events happening in a month, quarter or year and demonstrates whether equity is improving or declining. Cash flow Statements summarize forecasted or actual income and usage of cash in a company in an accounting period. It indicates the source of money and where it is spent. In accounting methods, terms include cash basis accounting and accrual basis accounting. Other concepts include accounts payable and accounts receivable. 

The Financial Accounting Standards Board (FASB) is a private, non-profit organization that was established in 1973 to institute the private sector’s accepted accounting principles. It is officially recognized by the American Institute of Public Accountants (AIPA) as well as the Security Exchange Commission (SEC). FASB has a distinct role in the process offinancial reporting where the key objective is providing guidance for public companies in identifying and enhancing processes used in the foundation of financial statements (Barth, Landsman & Lang, 2008) . It has the mandate to set accounting standards but not enforcing, as that is the mandate of AIPA and SEC. FASB receives recommendations from the two bodies, as well as from businesses when formulating and improving standards but it is not required to. 

Because nonprofits exist to achieve a given goal or objective as opposed to making a profit, standards are set to demonstrate the success of the activity or program, rather than having an emphasis on net income. For donors to comprehend how a given entity accomplishes a goal, the set standards need financial information presented in a specific format. According to the manner in which accounting standards are designed, the main purpose of financial statements for nonprofits is provision of necessary information for achieving the donors’ common interest as well as creditors, members who provide resources to the organizations (Barth, Landsman & Lang, 2008) . 

Accounting standards impact financial statements readers by altering the presentation of nonprofit organizations’ statements. Resultantly, their statements differ from those of for-profit entities, such as corporations. For example, the fundamental financial statements of an entity in income generation are cash flow, statements of income, and the balance sheet. For nonprofits, the latter is substituted with a net assets changes statement and the statement of income substituted by a statement of tasks or activities. 

Overview of International Accounting Standards 

The International Accounting Standards (IAS) are issued by the international committee IASC, although it has no formal mandate to require compliance. However, many countries require publicly-traded companies’ financial statements to be assembled with respect to IAS to realize global uniformity, acceptance, and relevance in accounting matters. The IASC was formed following an agreement by accounting bodies in the US, UK, France, Germany, Canada, Australia, Japan, Mexico, Ireland, and Netherlands. The 16-member board is responsible for developing and approving IASs (Barth, Landsman & Lang, 2008) 

Ethical Issues 

The obligation of high-level success for public companies may result in unwarranted pressures and stress on accountants coming up with financial statements and balance sheets (Ashbaugh & Pincus, 2001) . Ethical issue here is maintaining factual reporting of the company’s profits, assets, and liabilities without succumbing to managerial pressure. Unethical accountants can easily alter this information leading to the downfall when the SEC discovers this. Accountants may be caught in the ethical dilemma of reporting accounting violations to the FASB, which could have serious ramifications. Besides a company’s decline, executives could face prosecution leading to hefty fines, prison time, or both. 

Greed can also cause accounts to defraud a company, which would have serious ramifications. Ethical accountants should focus more on the balance sheets and less on their bank accounts. Executives might also ask accountants to omit certain financial numbers that would reflect badly on the company or investors, from a balance sheet. This omission does not involve manipulating records and therefore may not appear to be direct manipulation, but is a serious breach of accounting ethics. 

As far as accounting is concerned, integrity and ethical standards are based on a commitment to integrity. The standards necessitate that information is presented most articulately and accurately by accountants apart from when the information is composed of a business’ independent report on the financial situation. Often, this not only requires observing professional rules but recognizing harm’s potential as well, using sound judgment and reasoning to resolve ethical matters. 

Advantages, Disadvantages, and Costs 

Companies using similar standards can accurately be compared to each other. This is most crucial when comparing companies from various countries as they might be having different methodologies and rules for preparing their statements. This increased comparability helps investors better determine where to invest. The US, as well as some other countries, is yet to adopt international financial reporting standards, making foreign-based accounting for companies conducting business there difficult (Levit, 1998) . 

Rather than rule-based, IFRS utilizes principles-based philosophy which implies that each standard’s goal is to meet a reasonable valuation in many ways. As a result, companies are at liberty to adopt IFRS as per the prevailing situation, leading to easier read and relevant statements. There is no disadvantage when it comes to IFRSs flexibility (Ashbaugh & Pincus, 2001). Firms can only use the methods they desire, thus allowing the financial statements to display only the necessary results. This factor may lead to the manipulation of profit or revenue, hiding the company’s financial problems and perhaps promote fraud. For instance, altering the inventory calculation method can result in more income for the current loss and profit statement for the year, and making the firm appear more profitable than is the case. More strict rules ensure all companies similarly value their statements. 

A small company would be affected by a country’s assumption of IFRS similarly to a large one. However, the small businesses lack many resources to implement the adjustments and train staff, resulting in outsourcing accountants to assist in the changeover. In this respect, the smaller companies bear a bigger financial burden than the larger ones. Another significant disadvantage of switching to IFRS leaves IASB monopolizing concerning setting standards, and this is solidified if US companies adopt IFRS. In case there is competition for instance between IFRS and GAAP, there is the extra possibility of having relevant information that can be released during the competition’s course. The main issue in converting to IFRS is the utilization of fair value as the key fundamental of measuring assets and liabilities (Ashbaugh & Pincus, 2001). 

Conclusion 

This paper focuses on accounting standard sand their relevance. FASB has been discussed its role highlighted. The paper has also explained how accounting standards are applied to nonprofit organizations and have given an overview of international standards. Focus has also been placed on ethics as well as the legal implications for violation and non-compliance. Advantages, disadvantages, and costs of adhering to the standards have been looked at as well as how country-specific standards can be adhered to and improved. 

As the business transactions complexities grow, so are more accounting standards expected to keep up with the changes. And ass highlighted in this paper, violating accounting standards can be detrimental to a company. 

References 

Ashbaugh, H., & Pincus, M. (2001). Domestic accounting standards, international accounting standards, and the predictability of earnings.  Journal of accounting research ,  39 (3), 417-434. 

Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International accounting standards and accounting quality.  Journal of accounting research ,  46 (3), 467-498. 

Levitt, A. (1998). The importance of high quality accounting standards.  Accounting horizons ,  12 (1), 79.