With the rising concerns about the proper implementation of accounting standards, more and more professionals are being asked to obtain the basic knowledge regarding this area. And rightly so. After all, understanding the said principles will allow everyone from low-level supply chain directors to seasoned financial managers to maintain important ethical criteria. Fortunately, although there are a lot of different standards that exist, most of them can be interpreted similarly.
Related Resource: 20 Most Affordable Online Bachelor’s in Accounting
Reaction-Based Guidelines
The first way to define accounting concepts and standards is to view them as reaction-based guidelines. What does this mean? Well, the “reaction” part refers to the fact that most of them were created out of necessity following a major disaster. Actually, the vast majority of accounting rules came as a consequence of some historic violation and not as a pro-active action implemented for preventative measures. So, individuals trying to learn the ins and outs should remember that there is a valid reason for the existence of the standards as seen by a repetitive trend of financial breaches in the past.
Rules That Convey Comparability
Furthermore, the accounting set of standards is usually seen as a great way to ensure that the comparability between markets exists. For those unfamiliar, comparability refers to investors being able to analyze various reports from a diverse group of companies. Well, if all of those entities are held to the same accounting standards and have to meet equivalent reporting objectives, the readers of their statements should have no issues comprehending and comparing the numbers and risks.
Primary Source of Insight
While all industry rules are primarily used to point people in the right direction and punish any misbehavior, they can also be seen as a source of insight. How so? Well, accounting standards go beyond the basic definition and legal demands. Instead, they further include common scenarios in which companies, auditors, or independent CPAs may find themselves. Based on those situations, they offer insight into how complex situations should be approached and handled professionally. Therefore, businesses who require employees to learn about the standards may simply want them to utilize another resource that showcases the right courses of action.
Legally Mandated Requirements
According to The Balance Small Business, everyone should always be reminded that accounting standards are generally a legal, international requirement that is mandatory. In translation, the government has decided that certain issues should be approached in a specific matter. Consequently, everyone in the practice is absolutely bound by those rules. For instance, if an auditor fails to adhere to the standards during an independent audit, they are risking hefty penalties from the Public Company Accounting Oversight Board. Likewise, if some companies are perpetrating major fraud, the Securities and Exchange Commission is very likely to come down on them until they are completely destroyed. A great example here would be the Enron scandal in which a multi-billion-dollar organization from Houston, Enron, was shut down in 2007 because they violated the government’s laws pertaining to financial reporting.
As long as for-profit companies continue to rely on investors, which is likely to last forever, it is safe to say that accounting rules will be followed. It is important to note, however, that most of those rules are bare minimums and most practicians go above and beyond them. Nonetheless, staying consistent and in compliance with the accounting standards is the easiest way to avoid potent, long-term problems.
