The Environment of Financial

Accounting and Reporting

Chapter 1
LEARNING OBJECTIVES

 After studying this chapter, you should be able to...

1. Explain the impact of accounting on the decisions of the various users of
financial information at all levels of the economy.
2. Understand the basic objective of financial reporting.
3. Distinguish between external and internal users of accounting information.
4. Explain the need to develop accounting standards.
5. Explain the development and sources of financial reporting standards.
6. Appreciate the need to harmonize global accounting standards.
7. Identify sources of accounting standards and other organizations that
influences PFRS.
8. Familiarize yourself with the Philippine Financial Reporting Standards (PFRS)
applicable to annual period up until January 1, 2018 and beyond.
9. Describe the major challenges in financial reporting environment.
10. Know the measures to enhance the existing system of financial reporting.
11. Explain the issues related to ethics.
12. Describe the role that external auditors play in the financial reporting
environment.
INTRODUCTION

 Accounting is an information system, designed to identify, collect, measure, and

communicate economic information about a business entity (firm) to those having
interest in the financial affairs of the entity.
 Accounting is a social science, developed in a world of scarce resources. It is influenced
by, and interacts with economic, social and political environments. Business is
conducted by investor-owned enterprises, managed and controlled by professional
managers, who are held responsible for providing reports to absentee owners,
creditors and other external interested parties. The process of developing general-
purpose financial statements and reporting general-purpose accounting information to
various external users is called financial accounting. In this environment, financial
accounting and reporting communicate information about the economic effects of
accounting transactions and other events on a business entity to these external user
groups.
 Accountants are communicators; Accountancy is the art of communicating financial
information about a business entity to users such as shareholders, creditors and
managers. The communication is generally in the form of financial statements that
show in money terms the economic resources under the control of the management.
The art lies in selecting the information that is relevant to the users and is reliable.
 Financial statements are prepared and presented for external users by many entities
around the world. Although such financial statements may appear similar from
country to country, there are differences which have probably been caused by a
variety of social, economic and legal circumstances and by different countries having
in mind the needs of different users of financial statements when setting national
requirements.
 Most accounting systems are designed to generate information for both internal and
external reporting. The external information is much more highly summarized than
the information reported internally. Understandably, a company does not want to
disclose every detail of its internal financial dealings to outsiders. For this reason,
external financial reporting is governed by an established body of standards or
principles that are designed to carefully define what information a firm must disclose
to outsiders. Financial accounting standards also establish a uniform method of
presenting information so that financial reports for different companies can be more
easily compared.
 The International Standard Setting body committed to narrowing these difference by
seeking to harmonize regulations, accounting standards and relating to the
preparation and presentation of financial statements. It believes that further
harmonization can best be pursued by focusing on financial statements that are
prepared for the purpose of providing information that is useful in making economic
decisions.
 Financial statements are most commonly prepared in accordance with an accounting
model based on recoverable historical cost and the nominal financial capital
maintenance concept. Other models and concepts may be more appropriate in order
to meet the objective of providing information that is useful for making economic
decisions although there is at present no consensus for change.
OBJECTIVE OF FINANCIAL REPORTING

 The objective of general purpose financial reporting is to provide financial

information that is useful to users in making decisions relating to providing resources
to the entity.
 Users’ decisions involve decisions about
 Buying, selling or holding equity or debt instruments
 Providing or settling loans and other forms of credit
 Voting, or otherwise influencing management’s actions
 To make these decisions, users assess
 Prospects for future net cash to the entity
 Management’s stewardship of the entity’s economic resources
 To make both these assessments, users need information about both
 The entity’s economic resources, claims against the entity and changes in those
resources and claims
 How efficiently and effectively management has discharged its responsibilities to
use the entity’s economic resources
ACCOUNTING INFORMATION USERS AND
THEIR NEEDS
 The basic role of accountants is to provide useful economic information to external
and internal decision makers (users):
a. External decision makers
1. Investors
2. Employees
3. Lenders
4. Suppliers and other trade creditors
5. Customers
6. Governments and their agencies
7. Public
b. Internal decision makers
A. EXTERNAL DECISION MAKERS

 Include present and potential stockholders, investors, creditors, suppliers, customers,

legislators, trade associations and others, who lack direct access to the information
generated by the internal operations of the business and must rely on general-
purpose financial statements to make their investment, credit and public policy
decisions.
1. INVESTORS

 The providers of risk capital and their advisers are concerned with the risk inherent
in, and return provided by their investments. Shareholders require periodic
information that the managers are accounting properly for the resources under their
control. This information helps the shareholders to evaluate the performance of the
managers. The performance measured by the accountant shows the extent to which
the economic resources of the business have grown or diminished during the year.
Shareholders are also interested in information such as the enterprise’s ability to
generate cash and the timing and certainly of its generation. They also need
information to help them control the business and make investment decisions.
2. EMPLOYEES

 Employees and their representative groups are interested in information about the
stability and profitability of their employers. They are also interested in information
which enables them to assess the ability of the enterprise to provide remuneration,
retirement benefits and employment opportunities.
3. LENDERS

 Lenders are interested in information that enables them to determine whether their
loans, and the interest attaching to them will be paid when due.
4. SUPPLIERS AND OTHER TRADE
CREDITORS
 Suppliers and other creditors are interested in information that enables them to
determine whether amounts owing to them will be paid when due. Trade creditors
are likely to be interested in an enterprise over a shorter period than lenders unless
they are dependent upon the continuation of the enterprise as a major customer.
5. CUSTOMERS

 Customers have an interest in information about the continuance of an enterprise,

especially when they have a long-term involvement with, or are dependent on, the
enterprise.
6. GOVERNMENTS AND THEIR AGENCIES

 Governments and their agencies are interested in the allocation of resources and,
therefore, the activities of enterprises. They also require information in order to
regulate the activities of enterprises, determine taxation policies and as the basis for
national income and similar statistics.
7. PUBLIC

 Enterprises affect members of the public in a variety of ways. For example, enterprises
may make a substantial contribution to the local economy in many ways, including the
number of people they employ and their patronage of local suppliers. Financial
statements may assist the public by providing information about the trends and
recent developments in the prosperity of the enterprise and the range of its activities.
B. INTERNAL DECISION MAKERS

 The managers of a business entity, responsible for managing efficiently and effectively,
and who have the power and authority to obtain whatever economic information they
need. The process of providing accounting information to internal decision makers is
called management accounting.
THE NEED TO DEVELOP STANDARDS

 Users of financial accounting statements have both coinciding and conflicting needs
for information of various types. To meet these needs, and to satisfy the stewardship
reporting responsibility of management, companies prepare a single set of general-
purpose financial statements. Users expect these statements to present fairly, clearly,
and completely the company’s financial operations.
 The accounting profession has attempted to develop a set of standards that are
generally accepted and universally practiced. Otherwise, each company would have to
develop its own standards. Further, readers of financial statements would have to
familiarize themselves with every company’s peculiar accounting and reporting
practices. It would be almost impossible to prepare statements that could be
compared.
 Accounting standards help accountants meet the information demands of users by
providing guidelines and limits for financial reporting. Accounting standards also
improve the comparability of financial reports among different companies.
 These are many different ways to account for the same underlying economic events,
and users are never satisfied with the amount of financial information they receive –
they always want to know more. By defining which methods to use and how much
information to disclose, accounting standards save time and money for accountants.
Users also benefit because they can learn one set of accounting rules to apply to all
companies.
DEVELOPMENT AND SOURCES OF
FINANCIAL REPORTING STANDARDS
 To a large extent, accounting is a product of its environment; that is, it is shaped by,
reflects, and reinforces particular characteristics unique to its national environment.
Like business in general, corporate accounting and information disclosure practices
are influenced by a variety of economic, social and even political factors. While there
are many differences in national environments, with corresponding varying effects on
accounting systems and reporting, there are also many similarities.
 Because business is increasingly conducted across national borders, companies must
be able to use their financial statements to communicate with external users all over
the world. As a result, divergent national accounting practices are now converging to
an overall global standard.
 As companies around the world compete for investors’ money, investors are requiring
information that is comparable across investment alternatives. For example, a
Japanese investor can invest in a Japanese company, a German company, or a U.S.
company. To make the best investment decision, financial information must be
comparable. Thus, investors and creditors are demanding that similar accounting
methods be used around the world so that investment options can be compared.
 The International Accounting Standards Board (IASB) was formed in 1973 to develop
worldwide accounting standards in an attempt to harmonize conflicting national
standards. The IASB now has a formal working relationship with the national
accounting standard setters from a number of countries, including the FASB in the
United States. For non-U.S. companies that have listed their shares on U.S. stock
exchanges, the SEC accepts financial statements prepared using IASB standards.
ACCOUNTING VARIATIONS AMONG
COUNTRIES
 One might infer that these historical developments had a uniform effect on accounting
systems throughout the world, yet nothing could be further from the truth. Despite
some similarities, there are at least as many accounting systems as there are
countries, and no two systems are exactly alike. The underlying reasons for these
differences are essentially environmental: accounting systems evolve from and reflect
the environments they serve, just as in Genoa, Florence, and Venice in the 1400s. The
reality of the world is that environments have not evolved uniformly or
simultaneously. Countries today are at stages of economic development ranging from
subsistence, barter economies to highly complex industrial societies.
 While accounting practices evolved, there were, for example, differences in the
amount of private ownership, the degree of industrialization, the rate of inflation, and
the level of economic growth. Given these differences in economic conditions,
differences in accounting practices should not be surprising. Just as the accounting
needs of a small proprietorship are different from those of a multinational
corporation, so are the accounting needs of an underdeveloped, agrarian country
different from those of a highly developed industrial country.
 Economic factors, however, are not the only influences. Educational systems, legal
systems, political systems, and sociocultural characteristics also influence the need for
accounting and the direction and speed of its development. For example, in some
Muslim countries where religious doctrine does not permit the charging of interest,
there are unlikely to be elaborate accounting procedures related to interest.
IMPLICATIONS OF DIFFERENCES IN
ACCOUNTING AMONG NATIONS
 There is some benefit to understanding how different nations do things. After all,
there is always something to be learned from the experiences of others. As a case in
point, consider inflation. Suppose a country has never experienced any significant
inflation and has therefore never developed accounting procedures related to
inflation. What would happen the first time the country experienced substantial and
persistent inflation?
 At the present time, the most important reason for understanding different national
accounting systems lies in the increasingly internationalized world of business in
which people buy and sell, invest and disinvest, from one country to another. For
example, if an enterprise is considering granting credit to or acquiring a company in
another country, it must be able to assess the financial position of that company – not
an easy thing to do.
 When the foreign company offers a balance sheet and income statement for analysis,
several things become immediately evident. First, the language and the currency are
different. Second, the terminology is different; certain terms (accounts) have no
counterparts in the other language or accounting system, or they mean different
things. Third, the types and amount of information disclosed are likely to be different.
In addition, there are a host of less obvious but perhaps more important differences.
For example, the procedures that were followed to arrive at the final figures are likely
to be different and less likely to be explained. Differences in procedures, such as rules
of valuation, recognition, or realization, render the financial statements meaningless
unless the analyst is familiar with the foreign country’s accounting system.
 National accounting standards made sense when companies raised money, and
investors and lenders looked for investment opportunities, in their home country. The
world’s capital markets began to globalize over 30 years ago, and the investment
community and the accounting profession quickly recognized the need for a
cooperative international effort in the development of accounting standards – and the
benefits of a common global accounting language.
CALLS FOR GLOBAL HARMONIZATION OF
ACCOUNTING STANDARDS
 As the world’s capital markets globalized in the last quarter of the 20 th century,
investors and creditors became increasingly frustrated when trying to compare the
financial statements of companies in different countries. They urged that accounting
standards around the world be harmonized. The International Accounting Standards
Committee was formed in 1973, and it developed a body of accounting standards
suitable for use around the world. By and large, however, the major developed
countries continued to develop and use their own national accounting principles. In
2001, the IASC was reorganized into the International Accounting Standards Board.
 The IASB’s objective is to raise the quality and consistency of financial reporting and
to have a platform of high quality and improved standards. It aims to bring about
greater transparency and a higher degree of comparability in financial reporting, both
of which will benefit the investors and are essential in achieving the goal of one
uniform and globally accepted financial reporting standards.
 In 2002, the European Union adopted an accounting regulation requiring all publicly
traded EU companies to use International Financial Reporting Standards (IFRSs)
developed by the IASB, rather than their home-country standards, starting in 2005.
Some non-European countries have also replaced their national standards with IFRSs,
while other countries such as the United States, Japan, Thailand, Taiwan and others
have adopted programs that retain their national standards but converge them as
closely as possible with IFRSs. As of 2006, there were already 102 countries including
the Philippines which have fully adopted the IFRSs. By 2011, the IASB has projected
that 150 countries would be IFRS compliant with the United States completing its full
convergence.
ACCOUNTING STANDARD-SETTING IN THE
PHILIPPINES
 Prior to 1981, the Philippine Institute of Certified Public Accountants (PICPA)
designated the Committee on Accounting Principles, to provide guidelines in the
adoption of generally accepted accounting principles (GAAP) in the Philippines. The
Philippine GAAP were principally US-GAAP based.
 In 1981, the Philippine Institute of Certified Public Accountants (PICPA) created the
Accounting Standards Council (ASC) to formalize the accounting standard-setting
function in the Philippines. Its main function was to establish and improve accounting
standards that would be generally accepted in the Philippines. The approved
statements of the ASC were called, “Statement of Financial Accounting Standards”
(SFAS) which were still principally based on accounting standards issued by the US-
based Financial Accounting Standards Board (FASB).
 Between 1997 and 2004, the Philippines started adopting the International Financial
Accounting and Reporting Standards promulgated by the International Accounting
Standards Committee (IASC). The IASC was reorganized in 2001 and is now known as
the International Accounting Standards Board (IASB). The decision to move totally to
International Accounting Standards was prompted by the
a) Support of the Philippine Regulatory Agencies such as the Board of
Accountancy, Securities and Exchange Commission, Bangko Sentral ng Pilipinas
and the Philippine Institute of CPAs (PICPA).
b) Increasing internationalization of business which heightened the interest in a
common language for financial reporting.
c) Increasing recognition of International Accounting Standards by the World
Bank, Asian Development Bank and World Trade Organization.
 In 2004, the Accounting Standards Council (ASC) was replaced by the Financial
Reporting Standards Council (FRSC). The FRSC is now the accounting standard setting
body in the Philippines created by the Professional Regulation Commission upon the
recommendation of the Board of Accountancy (BOA) to assist BOA in carrying out its
powers and functions provided under Republic Act No. 9298, known as the Philippine
Accountancy Act of 2004.
 In the same year, the FRSC approved the issuance of the new and revised Philippine
Accounting Standards (PAS) and the new Philippine Financial Reporting Standards
(PFRS) which directly correspond to IASB’s IAS and IFRS. All of the issued standards
took effect on January 1, 2005 which was the date set by FRSC for the Philippines’ full
adoption of the IFRSs.
SOURCES OF ACCOUNTING STANDARDS

 Setting financial reporting standards is a complex, process occurring within a political

environment that influences both what reporting is required and when. Businesses,
trade and consumer associations, courts, public accounting firms, individual users,
and government can and do influence reporting practice. The following provides the
authoritative support for these accounting standards:
A. INTERNATIONAL ACCOUNTING
STANDARDS BOARD (IASB)
 In an attempt to harmonize conflicting standards, the International Accounting
Standards Council was formed in 1973 to develop worldwide accounting standards.
The original IASC was founded by representatives of professional bodies in Australia,
Canada, France, Germany, Japan, Mexico, the Netherlands, the United Kingdom,
Ireland, and the United States. By 2012, out of 196 countries, over 120 countries have
either fully or partially adopted and permitted the use of International Financial
Reporting Standards.
 The accounting standards produced by the IASB are referred to as International
Financial Reporting Standards (IFRSs) and International Accounting Standards (IAS).
The difference between these two sets of standards is merely one of timing; the IASB
standards issued before 2001 are called IAS and those issued since 2001 are called
IFRS. In practice, the entire body of IASB standards is referred to simply as IFRS. The
International Financial Reporting Interpretations Committee (IFRIC) which was called
the Standing Interpretations Committee (SIC) before 2002 provides technical
assistance and support to the IASB in the implementation of the standards.
RATIONALE FOR THE ADOPTION OF
INTERNATIONAL FINANCIAL REPORTING
STANDARDS (IFRSs)
 In view of the greatly magnified emphasis on International commerce and capital
flows over the past thirty years, the need for global accounting standards has been
increasingly recognized. Multinational companies have grown dramatically in both
size and importance over this period, assuming very important and dominant roles in
many market segments and affecting almost every country, every government, and
every person.
 From a financial reporting perspective, both individual accountants and the
professional bodies that establish accounting and auditing standards, face a daunting
challenge and difficulty because of the complexity of conducting international
business operations across borders each with a different set of business regulations
and often different accounting methods.
 Differences in applicable accounting, auditing and tax standards and regulations may
negatively impact the ability of the enterprise to prepare reliable financial information
and for the evaluation of investment opportunities vital to their further expansion or
growth.
 Hence, it was envisioned that IFRSs which should be capable of worldwide acceptance
can contribute to a significant improvement in the quantity and comparability of
corporate financial reports. They are the set of standards that can be used by all
companies regardless of where they are based. In fact, IFRSs may eventually
supplement or even replace standards set by national standard setters.
STANDARD-SETTING DUE PROCESS

 As part of its due process in developing new or revised Standards, the IASB
publishes an Exposure Draft of the proposed Standard for public comment in order
to obtain the views of all interested parties. It also publishes a “Basis for
Conclusions” to its Exposure Drafts and Standards to explain how it reached its
conclusions and to give background information. When one or more Board members
disagree with a Standard, the Board publishes those dissenting opinions with the
Standard. To obtain advice on major projects, the Board often forms advisory
committees or other specialist groups and may also hold public hearings and
conduct field tests on proposed Standards.
B. FINANCIAL REPORTING STANDARDS
COUNCIL (FRSC)
 The Professional Regulation Commission (PRC) of the Republic of the Philippines
upon the recommendation of the Board of Accountancy, created an accounting
standard setting body known as the Financial Reporting Standards Council (FRSC) to
assist the Board in carrying out its powers and functions provided for in Article II,
Section 9 (g) of the Philippine Accountancy Act of 2004 (R.A. 9298) and Section 9 (a)
of the Implementing Rules and Regulations of the said law.
 The FRSC is composed of fifteen members with a Chairman, who had been or
presently a senior accounting practitioner in any of the scope of accounting practice
and fourteen representatives from the following:
a) Board of Accountancy (1)
b) Securities and Exchange Commission (1)
c) Bangko Sentral ng Pilipinas (1)
d) Bureau of Internal Revenue (1)
e) A major organization composed of preparers and users of financial statements (1)
f) Commission on Audit (1)
g) Accredited National Professional Organization of CPAs
 Public Practice (2)
 Commerce and Industry (2)
 Academe/Education (2)
 Government (2)
 The FRSC actively participates in the evaluation and deliberation of proposed IFRSs
forwarded by the IASB to the country’s standard setting body and submits to the
Board of Accountancy its recommendations for the adoption of the proposed IFRS.
Once approved, the IFRS is designated as Philippine Financial Reporting Standard
(PRFS).
C. SECURITIES AND EXCHANGE
COMMISSION (SEC)
 The Securities and Exchange Commission has the legal authority to prescribe
accounting principles and practices for usually all companies issuing publicly traded
securities. To date, the SEC has participated in the formulation of accounting
principles. In addition, the SEC administers the extensive disclosure requirements of
the Securities Act.
D. PHILIPPINE INSTITUTE OF CERTIFIED
PUBLIC ACCOUNTANTS (PICPA)
 The Philippine Institute of Certified Public Accountants, the PRC accredited
professional organization is in the forefront in the standard setting activities in the
country. Representatives from the four sectors of the organization (public practice,
commerce and industry, education and government) are appointed to FRSC.
E. OTHER PROFESSIONAL ASSOCIATIONS

 The Financial Executives Institute (FINEX) is composed mainly of high-level financial

executives. The Institute of Management Accountants (IMA) emphasizes managerial
and cost accountancy. Each of these organizations provides input to the Philippine
Financial Reporting Standards (PFRS) through representation in the FRSC. Technical
papers and publications of accounting educators are also included as sources of
accounting standards.
F. BUREAU OF INTERNAL REVENUE (BIR)

 The Bureau of Internal Revenue administers the provisions of the Internal Revenue
Code. These provisions do not always reflect the goals of financial accounting.
However, they do at times influence the choice of accounting methods and procedures.
FINANCIAL REPORTING FRAMEWORK

 A financial reporting framework is vital to financial governance of entities. This is a set

of accounting principles, standards, interpretations and pronouncements that must be
adopted in the preparation and submission of the annual financial statements of a
particular class of entities. It includes, but not limited to the Philippine Financial
Reporting Standards.
MAJOR CHALLENGES IN FINANCIAL
REPORTING ENVIRONMENT
 While our reporting model has worked well in capturing and organizing financial
information in a useful and reliable fashion, much still needs to be done. For example,
if we move to the year 2030 and look back at financial reporting today, we might read
the following:
A. IFRS/PFRS IN A POLITICAL
ENVIRONMENT
 The implementation of Financial Accounting and Reporting Standards affects the
interest of many user groups. User groups are possibly the most influential group in
the development of accounting standards. They consist of those most interested in or
affected by accounting rules and may want particular economic events accounted for
and reported in a particular way. They fight hard through participation in the
formulation of these accounting rules or try hard to influence or persuade the
formulation of such. User groups that may influence the formulation of accounting
standards include:
 1. Business entities
2. Financial community
3. Preparers
4. Government
5. Industry accounts
6. CPAs and Accounting firms
7. Professional organizations (e.g., PICPA, ACPAPP)
8. Industry public
9. Academicians
 The user groups often target the IASB to pressure it to influence changes in the
existing rules and the development of new ones.
B. THE EXPECTATION GAP

 The expectation gap – what the public think accountant should do and what
accountants think they can do, is difficult to eliminate. In spite of the Securities and
Exchange Commission’s increase in its policy efforts, approving new auditor
independence rules and materiality guidelines for financial reporting, accounting
scandals, poor reporting practices still occur.
 Due to the number of fraudulent reporting cases, some sectors question whether the
profession is doing enough. The profession on the other hand can argue rightfully that
accounting cannot be responsible for every financial catastrophe and it must continue
to meet the needs of the society.
 The downside however, of efforts to meet these needs through highly transparent
clear and reliable system is that considerable resources will be required and will
prove to be more costly to society.
C. FINANCIAL REPORTING ISSUES

 Nonfinancial measurements. Financial reports fail to provide some key performance

measures widely used by management, such as customer satisfaction indexes, backlog
information, rejection rates on goods purchased, as well as the result of companies’
sustainability efforts.
 Forward-looking information. Financial reports fail to provide forward-looking
information needed by present and potential investors and creditors. One individual
noted that financial statements in 2017 should have started with the phrase, “Once
upon a time,” to signify their use of historical cost and accumulation of past events.
 Soft assets. Financial reports focus on hard assets (inventory, plant assets) but fail to
provide much information about a company’s soft assets (intangibles). The best assets
are often intangible. Consider Jollibee’s know-how and market dominance, Puregold’s
expertise in supply chain management, and Rustans brand image.
 Timeliness. Companies only prepare financial statement quarterly and provide
audited financial annually. Little to no real-time financial statement information is
available.
D. THE CONSTRAINTS ON USEFUL
FINANCIAL REPORTING
 Economic decision makers must recognize that the information they receive from
accountants constitutes only a part of the information they need to make sound
economic decisions. The financial statements also have limitations and imperfections
which the users should keep in mind. Some of the constraints are:
 Cost-Benefit Balancing. The costs of providing financial information fall initially on
the preparer (the company) and then are passed on to consumers (external
users). These costs include the cost of collecting, processing, auditing, and
communicating the information as well as those associated with losing a
competitive advantage by disclosing the information. The benefits are enjoyed by
a diverse group of investors and creditors, by customers (because they are
assured a steady supply of goods and services), and by the preparer itself (for use
in internal decision making). To be reported, accounting information not only
must be relevant and reliable but it also must satisfy the benefit/cost constraint.
That is, the IASB must have reasonable assurance that the costs of implementing a
standard will not exceed the benefits.
 Balance between Qualitative Characteristics. In practice, a balancing, or trade-off,
between qualitative characteristics is often necessary. Generally, the aim is to
achieve an appropriate balance among the characteristics in order to meet the
objectives of financial statements. The relative importance of the characteristics in
different cases is a matter of professional judgment.
 True and Fair View Presentation. Financial statements are frequently described as
presenting fairly the financial position, performance and changes in financial
position of an enterprise. Although this framework does not deal directly with
such concepts, the application of the principal qualitative characteristics and of
appropriate accounting standards normally results in financial statements that
convey what is generally understood as presenting fairly such information.
ENHANCING THE EXISTING SYSTEM OF
FINANCIAL REPORTING
 Investors have expressed concerns that one-size-fits-all financial reports do not
meet the needs of the spectrum of investors who rely on those reports. While
many individual investors are more interested in summarized, plain English reports,
market analysts and other investment professionals may desire information at a far
more detailed level than is currently provided. Technology may help customized the
information that the different types of investors desire.
 Companies also express concerns with the complexity of the financial reporting
system. Companies assert that when preparing financial reports, it is difficult to
ensure compliance with the voluminous and complex requirements contained
in SEC reporting rules. This is a particularly heavy burden on smaller, non-public
companies, which may have fewer resources to comply with the wide range of rules.
 We also need to consider the broader array of information that investors need to
make informed decisions. As some have noted, the percentage of a company’s market
value that can be attributed to accounting book value has declined significantly from
the days of a bricks-and-mortar economy. Thus, we may want to consider a more
comprehensive business reporting model, including both financial and
nonfinancial key performance indicators.
 Finally, we must also consider how to deliver all of this information in a timelier
manner. In a world where messages can be sent across the world in a blink of an eye,
it is ironic that the analysis of financial information is still subject to many manual
processes, resulting in delays, increased costs and errors.
ETHICS IN THE ACCOUNTING
ENVIRONMENT
 Ethics is a term that refers to a code or moral system that provides criteria for
evaluating right and wrong. One of the elements that many believe distinguishes a
profession from other occupations is the acceptance by its members of a
responsibility for the interests of those it serves.
 Because of the important role of accounting in society, accountants must maintain
high ethical standards. Facing pressures and influence of numerous groups with
conflicting interests, the accountant should always be alert about ethical behavior. The
Code of Ethics promulgated by the Board of Accountancy provides guidelines for
practicing accountants. However, the code does not present a structured approach to
resolving ethical dilemmas and conflicts.
 In general, the accountant should be able to recognize and understand ethical issues
to identify and evaluate the possible consequences of each of the alternative solutions
and to select the best alternative which will ensure relevant, reliable, comparable and
consistent financial information to serve the best of the users’ interests as a whole.
 CPAs as well as other accountants are expected to make unswerving commitment to
honorable behavior, even at the sacrifice of personal advantage.
 The public accounting profession has worked hard to gain the public trust and it
benefits monetarily from that trust as the sole legally acceptable provider of
assurance services for companies and other organizations. For that trust and
economic advantage to be maintained, it is essential that professional integrity be
based on personal moral standards and reinforced by codes of conduct. Whenever a
“scandal” surfaces, the profession is diminished and CPAs are personally ruined.
 External auditors need to exhibit the highest standard of ethical principles in order to
function. It is not difficult to find oneself in ethically compromising situations without
realizing it. Accounting professionals are often faced with difficult types of ethical
dilemma. For example, if the public does not have confidence in the independence and
integrity of auditors, it will not subscribe any value of the auditor’s work. Professional
accountants in business (i.e., CPAs in commerce and industry, government and
education) oftentimes have to make judgments that involve ethically charged issues
and without an ethical framework, an ethical dilemma may not be resolved in a
thoughtful manner. Therefore, careless work or lack of integrity on the part of any CPA
may lead to a negative view toward the entire profession.
THE ROLE OF EXTERNAL AUDITORS

 An audit consists of examining enough of the company’s records to determine

whether the financial statements are prepared in the applicable financial reporting
standards.
 An external auditor, a CPA is an independent professional who conducts the audit in
accordance with the Standards on Auditing. When the audit is completed, the auditor
makes no claim as to the accuracy of the financial statements he has audited.
 What he tries to achieve is reasonable assurance that there are no material
misstatements in those financial statements. He issues a report containing the “audit
opinion” as to the company’s compliance with IFRS/PFRS.