Question

Write three arguments in favor of the SEC setting Accounting Standards in the US, and present three arguments in favor of the FASB setting Accounting Standards in the US.

Answer 1

U.S. ACCOUNTING STANDARD-SETTING PROCESS

THE ROLE OF SEC AND FASB IN THE SETTING OF ACCOUNTING

The SEC's Role in Financial Reporting

Standards: Security exchange commission (SEC)

• The SEC is on the front line of financial reporting and often is among the first to identify emerging issues and areas of accounting that need attention.
• The Securities and Exchange Commission (SEC) was created by congress with the 1934 Securities Exchange Act.
• The statutes administered by SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities market.
• The 1933 Securities act set forth accounting and disclosure requirements for initial offerings of securities.
• The 1934 Act applies to secondary market transactions and mandates reporting requirements for companies whose securities are publicly traded on either organized stock exchanges or in over-the-counter markets.
• The 1934 Act also created the Securities and Exchange Commission.
• Some of the issues the SEC staff encounters do not require a fundamental change to existing accounting or completion of a major project by the FASB. In these situations, they may refer an issue to the Emerging Issues Task Force, or EITF, for interpretation.
• In this manner, timely and appropriate guidance can be provided to preparers and auditors before inappropriate practices become ingrained.
• In light of the SEC's unique role, it is critical that the SEC works closely with the FASB, particularly as it relates to the FASB's agenda. In addition, the SEC has the ultimate responsibility to ensure that the FASB deals with issues referred to it by the SEC.

Financial Accounting Standards Board (FASB)

• The Securities Act of 1933 and the Securities Exchange Act of 1934 each clearly state the authority of the Commission to prescribe the methods to be followed in the preparation of accounts and the form and content of financial statements to be filed under the Acts.
• In meeting this statutory responsibility effectively, in recognition of the expertise, energy, and resources of the accounting profession, and without abdicating its responsibilities, the Commission, for over years, has looked to the private sector for leadership in establishing and improving accounting standards.
• The quality of accounting standards and capital markets can be attributed in large part to the private sector standard-setting process, as overseen by the SEC.
• The Securities and Exchange Commission (SEC) designed the FASB as the organization responsible for setting accounting standards for public companies in the US.
• The primary private sector standard setter is the FASB, which was established in 1972. An oversight body appoints the members of the FASB.
• FASB was created by replacing the Committee on Accounting Procedures (CAP) and the Accounting Principles Board (APB) of the American Institute of Certified Public Accountants (AICPA).
• This oversight body, the Financial Accounting Foundation, or FAF, is comprised of investors, business people, and accountants.
• The Financial Accounting Standards Board (FASB) is a private, non-profit organization whose primary purpose is to develop generally accepted accounting principles (GAAP) with in the United States in the public's interest.
• The FASB's standards set forth recognition, measurement, and disclosure principles to be used in preparing financial statements.

The cooperative effort between the public and private sectors has given the United States the best financial reporting system in the world, and the Commission is intent on making it even better.