Question

How do accounting policies and practices affect financial accounting information used for "external" decision making purposes?

What governing and oversight bodies exist to help ensure timely and accurate reporting of financial information by publicly traded companies?

How to internal controls help ensure that financial results are accurately and fairly presented for use by external users?

Answer 1

Accounting Policy & Accounting Practices:

Accounting policies are specific principles, bases, conventions, rules, and practices adopted in preparing and presenting the financial statements of an organization.

Accounting practices refer to the methods of implementing accounting policies by the organization to record the day to day financial activities.

Few examples of Accounting Policies:

• Valuation of Inventories
• Valuation of Investments
• Computation of Government Grants
• Consolidation of Financial Statements

Effect of Accounting Policies & Practices in external decision making:

Management is responsible to disclose the accounting policies adopted to improve the reliability and transparency in the preparation and presentation of financial statements. Therefore accounting policies improve the interpretations of various users of financial statements. Accounting policies also require to be used consistently unless otherwise require by the governing board. It leaves no option to the management to manipulate the financial statements.

Governing and Oversight Body for Public Companies:

In the United States of America, financial reporting of publicly traded companies is governed and regulated by the major statutory bodies as listed below:

• Public Company Accounting Oversight Board - PCAOB (If the company is listed in the USA)
• Financial Accounting Standards Board (If reporting as per US GAAP)
• Securities Exchange Commission
• International Accounting Standards Board (If reporting as per IFRS)

Internal Controls:

Internal Controls refer to the preventive and detective measures implemented by the management to prevent and detect fraud or misrepresentation and also enables the management to run the business activities in a more efficient manner. Internal controls assure the accuracy of the financial reports and disclosure.

Role of Internal Controls in ensuring the accuracy of Financial Results:

• Internal Controls effectively manage its affairs and to fulfill its obligation to its investors.
• Strong internal controls also provide better opportunities to detect and deter fraud.
• Internal Controls provide reasonable assurance about the reliability of a company's financial reporting process.
• Internal Controls provides reliance to the auditor on the company’s business processes and helps in forming an opinion.
• Thus, Management has to ensure the existence and sufficiency of Internal Control System in accordance with Generally Accepted Accounting Principles.