Question

What is Legal compliance accounting and explain what its' characteristics are?

Answer 1

Legal Compliance Accounting :

In terms of accounting, compliance simply means making sure that a company’s financial matters are being handled in accordance with federal laws and regulations. At any point in time, a corporation should be able to provide accurate information about its accounts to its shareholders or to regulating authorities, such as the Securities and Exchange Commission (SEC). To ensure compliance, it’s necessary to have processes in place for recording, verifying, and reporting the value of a company’s assets, liabilities, debts, and expenses.

In the wake of several corporate accounting scandals, the Sarbanes-Oxley Act was enacted in 2002. This act created a new set of standards in the accounting and internal auditing practices of publicly-traded companies. The Sarbanes-Oxley act consisted of 11 titles that specified the requirements and mandates for compliance in accounting and financial reporting.

Title I: Public Company Accounting Oversight Board (PCAOB)

Title II: Auditor Independence

Title III: Corporate Responsibility

Title IV: Enhanced Financial Disclosure

Title V: Analyst Conflicts of Interest

Title VI: Commission Resources and Authority

Title VII: Studies and Reports

Title VIII: Corporate and Criminal Fraud Accountability

Title IX: White Collar Crime Penalty Enhancement

Title X: Corporate Tax Returns

Title XI: Corporate Fraud Accountability

Characteristics:

1) Monetary Transactions: In financial accounting only transactions in monetary terms are considered. Transactions not expressed in monetary terms do not find any place in financial accounting, howsoever important they may be from business point of view.

2) Historical Nature: Financial accounting considers only those transactions which are of historical nature i.e. the transaction which have already taken place. No futuristic transactions find any place in financial accounting, howsoever important they may be from business point of view.

3) Legal Requirement: Financial accounting is a legal requirement. It is necessary to maintain the financial accounting and prepare financial statements there from. It is also obligatory to get these financial statements audited.

4) External Use: Financial accounting is for those people who are not part of decision-making process regarding the organization like investors, customers, suppliers, financial institutions etc. Thus, it is for external use.

5) Disclosure of Financial Status: It discloses the financial status and financial performance of the business as a whole.

6) Interim Reports: Financial statements which are based on financial accounting are interim reports and cannot be the final ones.

7) Financial Accounting Process: The process of financial accounting gets affected due to the different accounting policies followed by the accountants. These accounting policies differ mainly in two areas: Valuation of inventory and Calculation of depreciation.