3.2 Anglo-American accounting model
5 min read•august 19, 2024
The Anglo-American accounting model, developed in the US and UK, emphasizes providing decision-useful information to investors and creditors. It relies on principles-based standards, allowing for professional judgment in financial reporting, and is shaped by common law systems.
This model focuses on fair presentation and true and fair view, with independent standard-setting bodies like and . It has influenced global accounting practices and convergence efforts with , though criticisms include complexity and potential subjectivity in application.
Origins of Anglo-American model
- Developed in the United States and United Kingdom in the early 20th century
- Emerged in response to the growth of capital markets and the need for reliable financial information
- Shaped by the common law legal systems and the emphasis on protecting investors' interests
Key characteristics of model
- Focuses on providing decision-useful information to investors and creditors
- Emphasizes the importance of fair presentation and true and fair view
- Relies on a principles-based approach, allowing for professional judgment in the application of accounting standards
Principles vs rules
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- Principles-based standards provide a conceptual framework for accountants to follow
- Allows for flexibility in applying standards to unique situations
- Requires professional judgment and may lead to some subjectivity in financial reporting
- Contrasts with the rules-based approach, which provides detailed guidance and bright-line tests
Investor-oriented financial reporting
- Primary objective is to provide relevant and reliable information to investors and creditors
- Focuses on the information needs of capital market participants
- Emphasizes the importance of , comparability, and timeliness in financial reporting
Independent standard-setting bodies
- Accounting standards are developed by independent, private-sector organizations (FASB in the US, FRC in the UK)
- Ensures that standards are set in the public interest and are free from undue influence
- Allows for a more responsive and flexible standard-setting process compared to government-led initiatives
Regulatory framework in US
- Financial reporting in the US is regulated by a combination of public and private-sector entities
- The Securities and Exchange Commission () has the ultimate authority over financial reporting for public companies
- The Financial Accounting Standards Board (FASB) is responsible for developing and issuing accounting standards ()
Role of SEC
- Oversees the financial reporting of public companies in the US
- Enforces compliance with securities laws and regulations, including financial reporting requirements
- Has the authority to establish accounting standards, but has delegated this responsibility to the FASB
US GAAP
- Generally Accepted Accounting Principles (GAAP) are the accounting standards used in the US
- Developed and issued by the FASB, with oversight from the SEC
- Provides a comprehensive set of principles and guidelines for financial reporting
- Continuously evolving to address new issues and maintain relevance in a changing business environment
Regulatory framework in UK
- Financial reporting in the UK is regulated by a combination of public and private-sector entities
- The Financial Reporting Council (FRC) is the independent regulator responsible for promoting high-quality corporate governance and reporting
Role of FRC
- Sets the UK's Corporate Governance and Stewardship Codes
- Monitors and enforces accounting and auditing standards
- Oversees the regulatory activities of the professional accountancy bodies in the UK
UK GAAP
- UK Generally Accepted Accounting Practice (UK GAAP) are the accounting standards used in the UK
- Developed and issued by the Financial Reporting Council (FRC)
- Consists of Financial Reporting Standards (FRSs) and Statements of Standard Accounting Practice (SSAPs)
- Largely converged with IFRS, with some differences for certain types of entities (e.g., small companies)
Convergence with IFRS
- The International Financial Reporting Standards (IFRS) are a set of global accounting standards developed by the International Accounting Standards Board (IASB)
- Aims to promote consistency and comparability in financial reporting across countries
Adoption of IFRS in UK
- The UK adopted IFRS for the consolidated financial statements of listed companies in 2005
- Other entities may choose to adopt IFRS or continue using UK GAAP
- Convergence with IFRS has helped improve the comparability and transparency of UK financial reporting
Convergence efforts in US
- The FASB and IASB have been working towards convergence of US GAAP and IFRS
- Convergence projects have aimed to reduce differences and improve comparability between the two sets of standards
- While significant progress has been made, full convergence has not yet been achieved, and the US continues to use US GAAP
Influence on other countries
- The Anglo-American model has significantly influenced financial reporting practices in many countries around the world
- The principles-based approach and focus on investor protection have been adopted by numerous jurisdictions
Commonwealth nations
- Many Commonwealth countries, such as Australia, Canada, and New Zealand, have adopted financial reporting systems based on the Anglo-American model
- These countries have similar legal systems and share a common history, facilitating the adoption of similar accounting practices
Other countries adopting model
- Several non-Commonwealth countries have also been influenced by the Anglo-American model
- Examples include Hong Kong, Singapore, and South Africa
- The adoption of IFRS has further extended the influence of the Anglo-American approach to financial reporting
Criticisms of Anglo-American approach
- Despite its widespread adoption, the Anglo-American model has faced criticism for various reasons
- Some argue that the approach has limitations and may not always provide the most useful information for decision-making
Complexity of standards
- The principles-based approach can lead to complex and lengthy accounting standards
- The need for detailed guidance and interpretations can make the standards difficult to understand and apply consistently
- The complexity may pose challenges for smaller entities with limited resources
Subjectivity in application
- The reliance on professional judgment in applying principles-based standards can lead to subjectivity in financial reporting
- Different interpretations of the standards may result in inconsistencies and reduced comparability between entities
- The potential for management bias in the application of standards is a concern for some stakeholders
Comparison to Continental model
- The Continental model is another major approach to financial reporting, primarily used in continental European countries
- It differs from the Anglo-American model in several key aspects
Principles vs rules
- The Continental model tends to be more rules-based, with detailed accounting standards and less reliance on professional judgment
- This approach aims to reduce subjectivity and enhance comparability between entities
- However, it may lack the flexibility to address unique situations and can lead to a "form over substance" approach
Stakeholder vs investor focus
- The Continental model places greater emphasis on the information needs of a broader range of stakeholders, including creditors, employees, and the government
- Financial reporting under this model may prioritize prudence and creditor protection over the needs of investors
- In contrast, the Anglo-American model primarily focuses on providing decision-useful information to investors and creditors
Regulatory differences
- In the Continental model, accounting standards are often set by government bodies or professional organizations with close ties to the government
- The standard-setting process may be influenced by political considerations and the interests of various stakeholders
- The Anglo-American model relies on independent, private-sector standard-setting bodies, which aim to set standards in the public interest and maintain a degree of independence from government influence
Key Terms to Review (19)
Accounting Conservatism: Accounting conservatism is a principle that guides accountants to recognize expenses and liabilities as soon as possible, while revenues and assets should only be recognized when they are assured. This cautious approach aims to minimize the risk of overstating a company's financial health. In practice, this means that potential losses are acknowledged earlier than potential gains, which can lead to more reliable financial reporting and decision-making.
Arthur Andersen: Arthur Andersen was one of the five largest audit and accounting firms in the world, known for its role in the development of the Anglo-American accounting model. The firm became infamous due to its involvement in high-profile corporate scandals, particularly with Enron, leading to its collapse in 2002. This downfall highlighted significant issues in auditing practices and corporate governance within the framework of the Anglo-American accounting model.
Audit independence: Audit independence refers to the ability of auditors to perform their work objectively and without bias, ensuring that their opinions and findings are credible and trustworthy. This principle is crucial for maintaining the integrity of the financial reporting process, as it helps to ensure that auditors can evaluate an organization's financial statements without any conflicts of interest. A strong commitment to audit independence fosters public confidence in financial markets and supports the overall accountability of businesses.
Balance Sheet: A balance sheet is a financial statement that provides a snapshot of an entity's financial position at a specific point in time, detailing its assets, liabilities, and equity. It plays a crucial role in assessing the financial health of a business, guiding investment decisions and credit assessments while being influenced by various accounting frameworks and models.
David Tweedie: David Tweedie is a prominent figure in international accounting, known for his role as the chairman of the International Accounting Standards Board (IASB) from 2001 to 2011. His leadership at the IASB was crucial in developing and promoting International Financial Reporting Standards (IFRS), aiming to unify global accounting practices and improve financial reporting transparency. Tweedie's influence extends beyond the IASB, as he has been an advocate for high-quality accounting standards worldwide.
Disclosure Requirements: Disclosure requirements refer to the obligations of companies to provide specific information to stakeholders, including investors and regulators, about their financial performance and other relevant aspects of their operations. These requirements ensure transparency and help stakeholders make informed decisions, playing a crucial role in various accounting frameworks and international standards.
Divergence: Divergence refers to the differences in accounting practices and standards across various countries, leading to distinct financial reporting outcomes. These variations can arise from cultural, economic, and legal influences that shape how financial information is recorded and presented, ultimately impacting comparability and transparency in global markets.
Earnings Management: Earnings management refers to the intentional manipulation of financial statements to present a desired picture of a company's financial performance. This practice can involve the timing of revenue recognition, expenses, and other accounting entries to smooth out earnings over time, often creating a more favorable impression for investors and stakeholders. While it can be legal and considered part of standard accounting practices, excessive or deceptive earnings management can lead to ethical issues and financial misrepresentation.
External audit: An external audit is an independent examination of financial statements and records conducted by a qualified auditor who is not part of the organization being audited. This process aims to provide an unbiased opinion on whether the financial statements are presented fairly, in accordance with the applicable financial reporting framework, and to enhance the credibility of financial reporting. External audits also ensure compliance with regulatory requirements and provide assurance to stakeholders, thus playing a vital role in maintaining transparency and trust in the financial system.
Fair Value Accounting: Fair value accounting is a method of measuring assets and liabilities at their current market value rather than their historical cost. This approach reflects the true economic value of a company's resources and obligations, allowing for a more accurate assessment of financial performance and position. It emphasizes transparency and provides investors with relevant information about the financial health of a business.
FASB: The Financial Accounting Standards Board (FASB) is an independent, private-sector organization that establishes financial accounting and reporting standards for U.S. companies. It plays a crucial role in the development of generally accepted accounting principles (GAAP) and is essential in distinguishing the differences between U.S. GAAP and International Financial Reporting Standards (IFRS). FASB's influence extends to corporate governance, compliance requirements, and the reporting practices of controlled foreign corporations.
FRC: FRC stands for the Financial Reporting Council, which is an independent regulatory body in the UK that oversees corporate governance and financial reporting standards. It plays a crucial role in maintaining the integrity of financial information and ensuring that companies adhere to the principles of transparency and accountability. The FRC sets standards for accounting, auditing, and actuarial work, influencing the overall framework of the Anglo-American accounting model.
Harmonization: Harmonization refers to the process of aligning and standardizing accounting practices and regulations across different jurisdictions to enhance comparability and consistency in financial reporting. This is crucial in a globalized economy, as it helps ensure that financial statements are understandable and reliable for users worldwide, regardless of the country of origin.
IFRS: International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that provide a global framework for financial reporting. These standards aim to bring consistency, transparency, and comparability to financial statements across different countries and industries, making it easier for investors and stakeholders to understand and analyze financial information.
Income Statement: An income statement is a financial report that shows a company's revenues and expenses over a specific period, ultimately revealing its profit or loss. It serves as a key component of financial reporting, providing insights into the operational performance and profitability of a business, which is essential for stakeholders in assessing the company's financial health and making informed decisions.
Market Orientation: Market orientation is a business approach that prioritizes understanding and responding to customer needs and preferences in order to create value and gain a competitive advantage. This approach emphasizes gathering market intelligence, integrating it into decision-making, and aligning products and services with consumer demand, thereby fostering stronger customer relationships and enhancing overall business performance.
SEC: The SEC, or the Securities and Exchange Commission, is a U.S. government agency responsible for regulating the securities industry and protecting investors. It plays a vital role in ensuring fair and efficient markets, enforcing securities laws, and maintaining transparency in financial reporting by public companies. The SEC's regulations have a significant impact on how companies disclose their financial information, directly influencing the Anglo-American accounting model.
Transparency: Transparency refers to the clarity and openness with which organizations communicate their financial and operational information, allowing stakeholders to understand and evaluate their activities and decisions. This concept is essential in fostering trust, accountability, and informed decision-making among investors, regulators, and the public.
US GAAP: US GAAP, or Generally Accepted Accounting Principles in the United States, is a set of accounting standards, principles, and procedures that companies must follow when compiling their financial statements. These guidelines ensure consistency, transparency, and comparability in financial reporting across various industries in the US. Understanding US GAAP is crucial as it highlights key differences from other accounting frameworks like IFRS and plays a significant role in the Anglo-American accounting model, which influences how businesses operate within the American financial landscape.