Making Accounting Policy: The Quest for Credibility in Financial Reporting

Making Accounting Policy: The Quest for Credibility in Financial Reporting

Making Accounting Policy: The Quest for Credibility in Financial Reporting

Making Accounting Policy: The Quest for Credibility in Financial Reporting

Synopsis

The accounting policies that companies follow in preparing their financial statements have assumed critical importance in recent years. The way that expenditures and income are treated can make an enormous difference in the way a firm's performance is judged by stockholders, the financial community, regulatory agencies, and other interested parties. One set of policies can make a company's performance seem better or worse than another set of policies. This book offers a clear and practical guide to understanding the crucial significance of accounting policy. It discusses the basic objectives of financial reporting, what is reported and when it is reported, how profits are measured, the way policies are regulated, and how accounting practices differ in the international arena. Explaining the process by which accounting standards are set and how they have evolved, it also recommends directions that should be taken in setting those standards during the years ahead. About the Author: David Solomons, Arthur Young Professor of Accounting Emeritus at the Wharton School, was a member of the committee that brought the Financial Accounting Standards Board into existence and has been involved with the Board's activities for several years.

Excerpt

Ever since a spring morning in 1971 I have had a continuing interest in the process of setting accounting standards. On that day, Marshall Armstrong, then president of the American Institute of Certified Public Accountants, charged me and the six other members of the Study on Establishment of Accounting Principles (better known as the Wheat Committee after its chairman, Francis Wheat) with the task of examining the way that accounting policy was formulated, and to see whether the Accounting Principles Board was the best instrument for that purpose. The immediate result was the establishment of the Financial Accounting Standards Board (FASB) in 1973. This book really began to take shape at that time.

Business executives have good reason to be concerned about accounting policy. The failure or near failure of important financial institutions has cast doubt on the integrity of financial reporting and on the accounting policies that underlie accounting statements. While a recent opinion survey conducted for the Financial Accounting Foundation showed considerable awareness about the FASB and its work on the part of the financial community, and a generally positive attitude to it, there were enough reservations on important points to make it dangerous to view the future with complacency.

Accounting is not a glamorous discipline, like law or medicine or science, but not being glamorous is not at all the same as not being important. As an American Accounting Associa-

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