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Standards, Reporting and Enforcement
International Financial Reporting Standards
IFRS are standards used in accounting. They are set by the International Accounting Standards Board. The standards are slowly becoming the international standard for making financial statements in public companies. The United States is soon to adopt IFRS. This will be through the Security and Exchange Commission. SEC encouraged processes geared towards the formation of a global standard. These standards will serve as a framework for financial reporting. SEC went further to issue a Concept Release seeking to have IFRS adopted by public companies in the US. Many companies are being asked to prepare for the integration of IFRS into their systems. SEC is even setting clear strategies on the how this integration will be undertaken. It should be noted that IFRS already has a major influence in the US.
Rules Based and Principle Based Standards
Many differences exist between the rules based and principle based accounting systems. In the rules based system, when making financial statements, a company is required to adhere to a list of rules. These rules increase accuracy and reduce ambiguity. This system is advantageous because it provides accountants with a guideline that keeps them from breaking the law. However, the rules based standard tends to be complex. This complexity is heavily felt when preparing financial statements. This is because the set of rules has to be followed strictly. A good example of a rules based standard is International Financial Reporting Standards.
Principle based standards of accounting are a set of objectives that ensure proper financial reporting. The rules are however not applicable in all situations. They are broad guidelines that can be applied in different situations. This is the main difference between principle and rules based standards. In the principle-based standards, there are no precise requirements that may cause accountants to manipulate the system. This system provides the accountants with guiding examples. The examples also explain the objectives of the system. An example is the Generally Accepted Accounting Standards.
The Sarbanes-Oxley Act
The SOX legislation was introduced to restore investor confidence in the corporate world. One of the requirements of the legislation is that every public company ensures that their internal controls are effective. Every year the management of these companies should assert the efficiency of their systems. For credibility, the companies are then to hire an external auditor to verify this efficiency. The auditor is to give a statement verifying the excellence of the company’s internal controls. The adaptation of SOX by US companies also costs them close to six billion dollars. It has also had various implications on the employees. Many equate SOX with endless paper work. The legislation has also required companies to work on the security of their data. SOX is also keen to ensure that data is backed up, and that there are adequate power supplies for the computers. The public companies are facing a number of challenges while trying to implement the SOX legislation. One of them is some companies have had to deal with lack of adequate space to store the paper files. Another challenge is that of comprehensively documenting activities of the company.
Global Resource Initiative
The main pouf GRI is to develop and distribute relevant reporting guidelines that assist companies to report on their various activities. The reporting may be on economic, social or environmental dimensions of companies. GRI employs four key elements in its framework: indicator protocols, technical protocols, sustainability reporting guidelines, sector supplements and technical protocols. It also encourages flexibility that allows companies to reflect on context of their operations. GRI can be used in both the informal and informal capacities of the different companies.
Reference List
Financial Accounting Standards Board. (2008). The hierarchy of generally accepted accounting principles. Norwalk, Conn: Financial Accounting Standards Board of the Financial Accounting Foundation.
Garner, D. E., McKee, D. L., & McKee, Y. A. A. (2008). Accounting and the global economy after Sarbanes-Oxley. Armonk, N.Y: M.E. Sharpe.
Greuning, H. ., & World Bank. (2006). International financial reporting standards: A practical guide. Washington, D.C: World Bank.
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