ACCOUNTING STANDARD

Approaches to Standard Setting in Accounting

Approaches to Standard Setting in Accounting

Introduction

The statement that is “accounting does not need any theory or methodology” is incorrect as the concept of accounting is base on the framework which is based on the theory or methodology. Accounting is a social science, which is responsible for studying, measuring and analyzing the assets of companies and individuals, to serve in the decision making and control, presenting the information previously recorded, so systematic and useful for different stakeholders. It also has a technique that produces systematic and structured and valuable quantitative information expressed in monetary units about transactions that affect the economic entities and certain identifiable and measurable economic events that affect it, for the purpose of providing it to the various audiences interested.

The purpose of accounting is to provide information on economic and financial situation of a company at a given time and the results obtained over a period of time, which is useful to the users of accounting in making their decisions, both for the past management control, as for estimates of future results, providing such decisions of rationality and efficiency.

The world of finance--from banking to stock trading to retirement plans--is fueled by the transmission of information. Investors make financial decisions based on their knowledge of relevant corporations and markets. Underlying those decisions is the accounting industry. Accountants organize and present a company's multifaceted financial dealings, conveying to investors the details of a company's performance. Since business often involves hugely complex financial arrangements, accounting is not a simple process that can be applied uniformly--it requires delicate reasoning, and can often be open to varied interpretations.

The ability of the accounting industry to function properly has profound implications for the decisions of investors and the health of the economy. In particular, all publicly traded companies--corporations that offer ownership shares on public exchanges--are subject to periodic auditing by outside accountants. Those audits are supposed to verify that the companies accurately represent themselves to the investing public. The presumption among investors that those audits are conducted rigorously and honestly is generally considered a crucial ingredient for a well-functioning economic system. Without it, investors would have no measure of a company's health, and therefore no way to decide whether to invest in it.

Recently, however, the integrity of the accounting industry has been called into question. The unprecedented collapse of Enron Corp., a Houston, Texas-based energy conglomerate, sparked rising skepticism of the accounting industry. In October and November 2001, Enron revealed that its previous success, which had been extraordinary, rested on an inflated representation of the company's health. Enron declared bankruptcy in December 2001, making it the largest U.S. company ever to do so (Watts, 2003b, 71-76).

Given the complexity of the situation, unraveling the reasons behind Enron's collapse has been complicated. As the details of Enron's tangled financial arrangements have come to light, many commentators have voiced shock that its practices had not been restrained by its accountants. Most industry analysts attribute Enron's demise to its opaque and misleading ...