Accountants' Handbook Volume One: Financial Accounting and General Topics, Eleventh Edition

Chapter 1. FINANCIAL ACCOUNTING REGULATIONS AND ORGANIZATIONS

Joseph V. Carcello, PhD, CPA, CIA, CMA

University of Tennessee

THE SOCIAL ROLE OF FINANCIAL ACCOUNTING

This chapter provides background on the environment in which financial accountants carry on their activities, including the specific organizations that regulate or otherwise affect those activities. Although the accounting profession has historically largely been self-regulated, the collapse of Enron and WorldCom has led to the passage of the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board (PCAOB), which is charged with overseeing the accounting profession. No financial accountant can practice properly without understanding these organizations and how they not only constrain but also assist the performance of financial accounting and reporting services.

(a) THE OBJECTIVE OF FINANCIAL ACCOUNTING.

An important beginning point for understanding the social role and importance of financial accounting is identifying the objective that it should meet. Although there are many opinions as to what the objective should be, the most authoritative and influential is this definition provided by the Financial Accounting Standards Board (FASB) in its Conceptual Framework project, which was intended to develop a unified theory of accounting (see Subsection 1.3(a) (v)):

Financial reporting should provide information that is useful to present and potential investors and creditors and other ...