• Explain the difference between principles-based and rules-based accounting standards.
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United States
• Overview
– Financial Accounting Standards Board (FASB)
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Learning Objectives
• Understand how financial reporting is regulated and enforced in five countries of the Americas and Asia: the U.S., Mexico, Japan, China, and India.
– Financial Accounting Standards Board
• Conceptual Framework is a significant feature of accounting standard setting • Standard setting in the U.S. is both political and technical • Generally accepted accounting principles (GAAP) are voluminous and detailed • Committed to converging U.S. GAAP with IFRS
from th Public Accountants (AICPA)
– Financial statements “present fairly”
• Compliance with GAAP is the test for fair presentation
• Rules-based
– More specific requirements – More detailed implementation guidance – May result in more comparability – May foster “check-the-box” mentality
– Sets standards for auditors – Oversees and inspects audit firms – Sanctions auditors for defective work
• CEO and CFO must certify financial statements • Management must assess internal controls • Auditors express an opinion on internal controls
• Principles-based
– Sets forth broad objectives and fundamentals – Requires professional judgment for implementation – More flexible – May result in more divergence in practice
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United States (contin)
• Accounting regulation and enforcement
– Securities and Exchange Commission
• Has jurisdiction over listed companies • Relies on private sector (FASB) to set accounting standards • Pressures FASB on the direction of accounting standards
• Private-sector organization that determines accounting standards • The Securities and Exchange Commission (SEC) – a governmental
agency – underpins FASB’s authority
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United States (contin)
• Unusual features of U.S. financial reporting – No federal law for preparing financial statements or having them audited, except for listed companies – LIFO – Rules-based GAAP versus principles-based GAAP
– Sarbanes-Oxley Act (2019)
• Expanded requirements on corporate governance, disclosure and reporting, and the regulation of the audit profession
• Established PCAOB
– Public Company Accounting Oversight Board (PCAOB)
• Private organization overseen by the SEC • Regulates audits and auditors of public companies • In 2019, took over the responsibility for setting auditing standards
• Describe the key similarities and differences among the accounting systems of these five countries.
• Describe the auditor-oversight mechanisms in these five countries.