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Case Study Assignment

Essay by   •  November 12, 2012  •  Research Paper  •  1,197 Words (5 Pages)  •  1,285 Views

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Case Study Assignment

Case 1-3 Politicalization of Accounting Standards in Ch. 1

During the Great Depression of 1930, there were no set standards on how to report the financial information during the period of the Depression, and the SEC was exerting pressure on accounting professionals to come up with a system of uniformity in accounting practices and financial reporting. The American Institute of Certified Public Accountants, or AICPA, was formed in 1936 and served as an influential element in the development of accounting principles. The AICPA formed several committees to deal with pressing issues about accounting standards. The formation of the Committee on Accounting Procedure (CAP) was established to respond to the SEC Accounting Series Release No. 4 (ASR No. 4) that allowed accounting principles to be set in private sectors (Schroeder, 2011). In 1959, the Accounting Principles Board, or APB replaced the CAP because of CAP limitations and inconsistency in its method in formulating accounting standards. The APB was the precursor of the generally accepted accounting principles (GAAP) and was responsible for some controversial pronouncements, such as APB No. 2. This regarded the tax credit as a reduction amounting to a cost reduction, and the effect should be amortized over the useful life of the asset acquired (Deferred Method).

For Politicalization

When considering if politicalization of accounting boards is good a person has to consider an organization with complete authority to do what it wants with no control to stop it. The advantage is to allow the public the ability to determine if a standard is fair or practical. Many times the necessity of a board, such as SEC or Congress can view a standard from an outside perspective and offers compromise or restriction to a standard. The use of politicalization offers a resolve from conflict and to back the standard-setters in what the public may deem unnecessary or restrictive standards.

Against Politicalization

The board on several occasions was debating possible standards forced to choose one over the other by public pressure through SEC or Congress. The use of politicalization can compromise necessary standards by using public pressure against it through lobbying, thus creating a meaningless standards or allows a company to use creative accounting methods. People without accounting backgrounds should not determine what acceptable GAAP is that lack of knowledge can be foreseen as blocking acceptable and fair accounting practices with wants and needs of individuals. Another reason to forbid the use of politicalization is it creates a lack of independence. The standard-setters believe they have an obligation to set standards according to the wants of government, and not the needs of the public in creating comparable and fair financial statements.

Case 1-4 Generally Accepted Accounting Principles in Ch. 1

The word "principle" has several meanings, including from the Webster dictionary "a comprehensive and fundamental law (Merriam, 2012)". Under this definition, accounting principles can be interpreted as the fundamental basis in which the auditor reviews the information related to the company's financials in an audit process. The rules or method the accountant uses to assess whether or not the information presented conforms during the audit process is based on the accounting principles established by the various accounting industry governing bodies. Ideally accounting principles are the fundamental guidelines accountants' use that allows the users of financial information to have faith in or trust the said information.

Determining whether or not an accounting principle is generally accepted is not always an easy task. During this sometimes time-consuming task, the auditor uses his or her experience and current research avenues available through the Financial Accounting Standards Board

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