14.2 The Accounting Profession
2 min read•june 18, 2024
Accounting plays a crucial role in business, with public and serving different functions. work for firms, providing services to various organizations, while private accountants focus on internal financial matters for a single company.
The Sarbanes-Oxley Act of 2002 brought significant changes to the accounting profession. It established new oversight measures, increased executive accountability, and enhanced financial reporting standards. These reforms have improved transparency but also increased compliance costs for businesses.
The Accounting Profession
Public vs Private Accountants
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- Public accountants work for accounting firms providing services to various organizations including audits, tax preparation, and consulting while maintaining independence and objectivity in their work, and are required to hold a ###certified_public_accountant_()_0### license
- Private accountants work within a single company or organization handling internal financial reporting, budgeting, and cost management without the same level of independence requirements as public accountants, and may or may not hold a CPA license depending on their role and employer
Sarbanes-Oxley Act (SOX)
- Enacted in 2002 in response to high-profile corporate scandals (Enron, WorldCom) to restore public confidence in financial reporting and corporate governance
- Established the () to oversee audits of public companies, required executive certification of and internal controls, mandated auditor independence and prohibited certain non-audit services, and imposed stricter penalties for financial fraud and misconduct
- Increased focus on internal control testing and documentation, enhanced auditor independence requirements and communication with audit committees, and more rigorous financial reporting and disclosure standards
Impact of Accounting Reforms
- Improved transparency and reliability through more detailed and accurate financial disclosures and increased executive accountability for financial statements and internal controls
- Enhanced auditor independence via restrictions on non-audit services and mandatory audit partner rotation, and strengthened the role of audit committees in overseeing the financial reporting process
- Increased costs and compliance burdens, particularly for smaller public companies struggling with resources needed to meet reporting requirements
- Ongoing challenges in balancing costs and benefits of regulation while maintaining investor confidence and adapting to new technologies and evolving business models in financial reporting
Key Terms to Review (27)
Accrual Basis Accounting: Accrual basis accounting is an accounting method that records revenues and expenses when they are earned or incurred, rather than when cash is received or paid. This approach provides a more accurate representation of a company's financial position and performance by matching revenues and expenses to the appropriate accounting period.
AICPA Auditing Standards Board: The AICPA Auditing Standards Board (ASB) is the body authorized to issue official pronouncements on auditing matters for private companies in the United States. It develops, updates, and communicates comprehensive standards and guidance to enhance the quality of audit and attestation engagements.
American Institute of CPAs: The American Institute of CPAs is the national professional organization for Certified Public Accountants (CPAs) in the United States, setting ethical standards for the profession and U.S. auditing standards for private companies, nonprofit organizations, federal, state, and local governments. It also develops and grades the Uniform CPA Examination.
ASC 606: ASC 606, also known as the Revenue Recognition Standard, is an accounting standard that establishes principles for reporting useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity's contracts with customers. It aims to standardize revenue recognition practices across different industries and provide a more consistent and transparent reporting of a company's financial performance.
Auditing: Auditing is the systematic examination and evaluation of an organization's financial records, accounting practices, and internal controls to ensure accuracy, compliance, and the proper use of resources. It is a critical component of the accounting profession and plays a vital role in maintaining the integrity of financial information and decision-making processes.
Bookkeeping: Bookkeeping is the systematic recording, organizing, and maintaining of financial transactions and records within a business or organization. It is a fundamental component of the accounting process, providing the necessary data and information to prepare financial statements and reports.
Certified management accountant (CMA): A Certified Management Accountant (CMA) is a professional designation that signifies expertise in financial accounting and strategic management. This certification, awarded by the Institute of Management Accountants (IMA), focuses on budgeting, financial planning, cost management, and performance evaluation.
Certified public accountant (CPA): A Certified Public Accountant (CPA) is a professional who has passed the Uniform CPA Examination and met all other state requirements to be licensed to provide accounting services, including auditing, tax preparation, and financial consulting. CPAs play a crucial role in helping businesses adhere to financial regulations and make informed economic decisions.
CMA: CMA stands for Certified Management Accountant, which is a professional certification for accountants who work in the field of management accounting. The CMA certification demonstrates expertise in financial planning, analysis, control, and decision support, making it a valuable credential for those pursuing careers in corporate finance, strategic management, and business leadership.
CPA: CPA stands for Certified Public Accountant, a professional designation earned by accountants who have met specific educational, examination, and experience requirements. CPAs are licensed to provide a wide range of accounting and financial services, and their expertise is highly sought after in various industries and organizations.
Double-Entry Accounting: Double-entry accounting is a fundamental accounting principle that requires every business transaction to be recorded in at least two accounts, with a debit entry in one account and a corresponding credit entry in another account. This system ensures that the accounting equation, Assets = Liabilities + Equity, is always balanced, providing a comprehensive and accurate representation of a company's financial position.
Ernst & Young: Ernst & Young is a global professional services firm that provides audit, tax, business risk, technology and security risk services, and advisory services. It is one of the largest accounting firms in the world, known for maintaining high standards of auditing and financial management practices.
Ethics in Accounting: Ethics in accounting refers to the moral principles and standards that guide the behavior and decision-making of accountants and finance professionals. It encompasses the ethical obligations and responsibilities that these individuals have towards their clients, employers, and the broader public.
Financial Statements: Financial statements are the primary means of communicating a company's financial information to both internal and external stakeholders. They provide a comprehensive overview of a business's financial health, performance, and cash flow over a specific period of time.
Generally Accepted Accounting Principles (GAAP): Generally Accepted Accounting Principles (GAAP) are the standard framework of guidelines, rules, and procedures that accountants must follow when preparing and presenting financial statements. GAAP ensures consistency, transparency, and comparability in financial reporting across organizations.
IMA: The Institute of Management Accountants (IMA) is a professional association for accountants and financial professionals who work in business. It is dedicated to advancing the management accounting profession and supporting the career development of its members.
KPMG International: KPMG International is a global network of professional firms providing Audit, Tax, and Advisory services. It is one of the Big Four accounting organizations, known for its extensive financial expertise and industry knowledge.
MD&A: MD&A, or Management's Discussion and Analysis, is a critical component of a company's financial reporting that provides investors and stakeholders with management's perspective on the company's financial condition, operating performance, and future prospects. It offers valuable insights into the factors influencing the company's results and the strategies being employed to navigate challenges and capitalize on opportunities.
PCAOB: The Public Company Accounting Oversight Board (PCAOB) is an independent, non-profit corporation that oversees the audits of public companies in the United States. It was created by the Sarbanes-Oxley Act of 2002 to help restore public confidence in the accounting and auditing professions after high-profile corporate scandals.
PricewaterhouseCoopers: PricewaterhouseCoopers is a global network of firms delivering assurance, tax, and consulting services for businesses across various industries. It stands as one of the "Big Four" accounting organizations, known for its extensive expertise in auditing and professional services that help companies maintain accuracy in financial reporting and comply with regulations.
Private accountants: Private accountants are professionals who manage and analyze the financial records of a single organization. They work internally within a company to ensure accurate financial reporting, budgeting, and compliance with laws and regulations.
Public accountants: Public accountants are certified professionals who provide accounting services, including auditing, tax advice, and financial planning, to businesses, individuals, and government entities. They must adhere to a strict code of ethics and maintain independence from the clients they audit.
Public Company Accounting Oversight Board: The PCAOB is a nonprofit organization established by Congress in 2002 to oversee the audits of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, accurate, and independent audit reports. It also oversees the audits of broker-dealers, including compliance reports filed under federal securities laws.
PwC: PwC is a multinational professional services network, one of the Big Four accounting firms, specializing in audit, assurance, tax, consulting, and advisory services to enhance financial accountability and efficiency. It provides support for businesses across various industries globally to navigate regulatory complexities and build strong financial management practices.
Section 404: Section 404 is a key provision of the Sarbanes-Oxley Act (SOX) that requires public companies to establish and maintain adequate internal control over financial reporting (ICFR). It aims to improve the accuracy and reliability of corporate disclosures and financial statements, thereby enhancing investor confidence in the capital markets.
SOX: SOX, also known as the Sarbanes-Oxley Act, is a federal law enacted in 2002 that aimed to improve corporate governance and financial reporting practices in the United States. It was a direct response to the high-profile corporate scandals and accounting failures that occurred in the early 2000s, such as the Enron and WorldCom scandals.
Uniform CPA Examination: The Uniform CPA Examination is a comprehensive test that aspiring certified public accountants (CPAs) must pass in order to become licensed and practice accounting in the United States. It is designed to ensure that all CPAs meet a consistent standard of knowledge and competence in the field of accounting.