5 Benefits of Following Standard Accounting Practices

Credibility and Reliability of Financial Statements
Managerial Accountability
Regulatory Compliance
Investor Protection
Auditor Assistance

Standard accounting practices are recommendations issued in a statement from prominent institutions in the accounting profession. The Financial Accounting Standards Board in the United States and the Accounting Standards Committee in Canada are examples of such institutions. These standards represent the agreed upon action to be taken in any given situation and the reasonable deviation under specific circumstances. Although there are more, here are five benefits of accounting standards.

1. Credibility and Reliability of Financial Statements

Maintaining standards in the account profession creates a universal structural framework. It can be used to generate credible financial statements. There are a number of ways to measure economic activities. So it’s important to choose the best method and apply that method consistently within an organization and across various organizations. Utilizing one common framework makes it easy to read statements from various entities. This familiarity instills confidence that the information being represented is accurate.

2. Managerial Accountability

Universal standards for accounting ensure managerial accountability in corporations. When corporations follow these standards, the transparency and consistency in record keeping allows accurate comparisons between organizations. The standards make it possible to assess key performance indicators such as:

annual profitability
financial solvency
future progress

Examining these key indicators and how they compare with the performance of similar corporations allows boards and stakeholders to hold managers accountable for the company’s performance.

3. Regulatory Compliance

Upholding standards across the accounting profession also helps ensure regulatory compliance. Utilizing the standard framework for accounting creates transparency in a corporation. This makes it possible to analyze the ethical accounting practices of a company and determine whether or not regulations are being followed. The combination of regulations and transparency help prevent corporate fraud.

4. Investor Protection

Standard accounting practices also protect investors. Since corporations are transparent and monitored for fraudulent activity, investors are protected from unscrupulous business dealings. In addition, the credibility and reliability of financial statements make it easier for investors to make decisions about how and when they invest their money. Stakeholders rely on these regulations to ensure credible financial statements are available when conducting business between entities. This helps minimize their investment risks.

5. Auditor Assistance

With the adherence to standard accounting practices, it becomes possible to conduct external audits. Since the same accounting practices are being used universally, it is easy for auditors to read and interpret the financial statements of any company they are hired to investigate. If individual corporations maintained records using unique systems, auditors would have to rely on internal accountants to explain the system. This would make the auditing process susceptible to internal interference.

Accounting standards are the key to corporate responsibility and the success of free markets. They protect investors from false information and protect companies from corporate fraud. Both of these could shake consumer confidence and destabilize the economy. Fortunately, experienced accountants are aware of the benefits of accounting standards and work to review and improve them on a regular basis.

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