How do Accounting Standards Impact Finance?

While most people would assume that accounting standards are limited to impacting accounting professionals, these types of generalizations are usually wrong. In fact, accounting standards are applicable to every sphere of business. When looking at the finance industry, however, what are some of the most important manners in which accounting guidelines affect it?

Objectivity and Good Faith

The first way in which some accounting rules depicted in rulebooks like the Generally Accepted Accounting Principles (GAAP) affect finance professionals pertains to objectivity and good faith. Before explaining the reasoning here, it is important to clarify what each of the previous two stand for. Objectivity is the principle of always relying on factual statements and non-biased reporting. Thus, finance professionals cannot be subjective when making decisions that impact their clients. Good faith, which originally became famous in the field of law, is another extremely common concept in accounting that pertains to always approaching projects in an honest and sincere manner. In terms of finance professionals, this is what makes it unethical for them to do things like misleading or falsely advertising.

As far as the reason why these two standards apply, it is simply due to the fact that all finance professionals have to carry a certain knowledge of accounting. Thus, while they will not be reprimanded by accounting agencies for not following the accounting codes of ethics, per se, they must still be aware of them. Failing to get informed and act in accordance with the aforementioned guidelines could cause them to lose clients and jobs, or even get sued.

Continous Education

According to the AICPA, accountants are required to attend continuing professional education courses to ensure that their competence and professional services are up-to-par. Similarly, finance professionals have to pursue learning opportunities throughout their career. While there may not be a governing body like the AICPA to hold them accountable, their involvement with accounting mandates constant improvement of proficiency. For instance, tax accounting just underwent a major change in 2017 with the passage of the “Tax Cuts and Jobs Act” that slashed rates, revamped brackets, and eliminated many provisions. Expectedly, financial planners had to seek education and learn about these changes in order to provide their clients with accurate advice.

Demand Extensive Technical Knowledge

A lot of financial investors who work with third-party clients have to possess a wide range of technical knowledge pertaining to financial reporting and annual statements. So, while these individuals are primarily focused on finance-based concepts that can be beneficial for their clients, accounting criteria practically force them to learn some intermediate accounting. Why? Well, accounting standards are the reason why companies have to report their operations and standing through deliverables like income, cash flow, and retained earnings statements accompanied by the balance sheet. Although someone who works in finance will seldom have to prepare any of those statements themselves, they have to comprehend a never-ending amount of rules governing their creation. That way, they will be able to properly read content and inform their clients.

Some other ways in which accounting and finance are intertwined revolve around principles of diversification, continuity, periodicity, materiality, and consistency. Nonetheless, understanding that finance practicians who do not know and adhere to the more prominent accounting standards would be unable to work in this field is a great starting point!