AUDIT AND FINANCIAL REPORTING

Audit and Financial Reporting

Audit and Financial Reporting

Question 1

A)

The Financial Accounting Standard Board's (FASB) Conceptual Framework (CF) of Accounting project was completed in 1986 at a substantial cost after ten years of effort. Subsequent to the publication of the FASB's CF, the Australian Accounting Research Foundation, the International Accounting Standards Committee, the Canadian Institute of Chartered Accountants, the Accounting Standards Board (U.K) and the New Zealand Society of Accountants began work on their own conceptual frameworks. There are several hypothesized benefits from a CF of Accounting. Horngren (1981) and Dopuch and Sunder (1980) argue that a CF should increase standard-setters' ability to enact standards they feel are consistent with accounting theory. Solomons (1986) argues that a CF should be directed towards the establishment of sound principles for standard-setters to use in shaping accounting practice, and Milburn (1991), DePree (1989), and Chambers (1996) argue that a CF should provide a basis for standard-setters to deduce logical accounting recommendations. Kentouris (2005)argues that a CF is useful for organizing and formulating normative accounting research and for defining the terms of debate with respect to various standard-setting proposals.

The FASB and IASB have just begun a new joint agenda project, to revisit their conceptual frameworks for financial accounting and reporting. Each Board bases its accounting standards decisions in large part on the foundation of objectives, characteristics, definitions, and criteria set forth in their existing conceptual frameworks. The goals of the new project are to build on the two Boards' existing frameworks by refining, updating, completing, and converging them into a common framework that both Boards can use in developing new and revised accounting standards. (Teixeira Pickens 2005)

A common goal of the FASB and IASB, shared by their constituents, is for their standards to be 'principles-based'. To be principles-based, standards cannot be a collection of conventions but rather must be rooted in fundamental concepts. For standards on various issues to result in coherent financial accounting and reporting, the fundamental concepts need to constitute a framework that is sound, comprehensive, and internally consistent.

Without the guidance provided by an agreed-upon framework, standard setting ends up being based on the individual concepts developed by each member of the standard setting body...Standard setting that is based on the personal conceptual frameworks of individual standard setters can produce agreement on specific standard-setting issues only when enough of those personal frameworks happen to intersect on that issue. However, even those agreements may prove transitory because, as the membership of the standard-setting body changes over time, the mix of personal conceptual frameworks changes as well. As a result, that standard-setting body may reach significantly different conclusions about similar (or even identical) issues than it did previously, with standards not being consistent with one another and past decisions not being indicative of future ones. That concern is not merely hypothetical: substantial difficulties in reaching agreement in its first standards projects was a major reason that the original FASB members decided to devote substantial effort to develop a conceptual ...