The accounting industry is subject to different levels of authority. These authorities govern the industry by setting rules and standards for the accounting provisions and the actual profession. Public companies must also adhere to a number of accounting-related regulations. States consider accounting a profession, similar to architects and lawyers. Therefore, accountants who conduct audits of publicly traded and private companies must be licensed as certified public accountants.
In the United States, the Financial Accounting Standards Board, or FASB, is the primary governing body and the first level of authority. According to FASB’s website, FASB “has been the designated organization in the private sector for establishing standards of financial accounting” since 1973. These standards set the rules for and make changes to generally accepted accounting principles, or GAAP, which accountants use to prepare the financial statements of businesses in the private sector.
The Securities and Exchange Commission defers to FASB in setting accounting standards. However, the SEC is the primary authority that ensures compliance by each publicly-held company with FASB-related reporting standards. The Securities Act of 1934 requires public companies to file audited financial statements on a quarterly and annual basis. Companies must also file interim reports for special situations. CPA firms confirm proper usage and adherence to GAAP standards during an audit.
The International Accounting Standards Board, or IASB, is the independent entity that governs international financial reporting standards. International financial reporting standards, or IFRS, are the guiding accounting principles used by publicly traded companies in over 100 countries around the world. The IASB establishes and publishes IFRSs and also publishes interpretations of IFRSs, both of which it opens up to public input. IASB’s role outside of the U.S. is similar to FASB and AICPA’s combined role within the U.S. in that it addresses issues encountered by both publicly traded companies and small to medium enterprises.
In the U.S. theAmerican Institute of Certified Public Accountants (AICPA) provides significant input into GAAP rules and guidelines. The AICPA’s involvement primarily stems from the smaller, private company perspective. It focuses on addressing accounting issues that small businesses encounter which rarely impact larger companies. The AICPA also acts to make GAAP standards more user-friendly for small companies. FASB and the AICPA have been working with the IASB to converge to one set of standards that meets the higher reporting standards of the SEC while providing the ease of understanding that international companies are accustomed to with the IFRS.
In the U.S. an additional level of accounting authority exists to provide oversight, the Public Company Accounting Oversight Board, or PCAOB. The Sarbanes-Oxley Act of 2002 created the PCOAB to oversee accountants involved in auditing private and publicly-held companies. Previously, for nearly 100 years the audit profession had been self-regulated. Now PCOAB has oversight for the individuals and companies who oversee the adherence to GAAP.