chapter 17-5

Accounting Disciplines

Overview of Accounting Professions

• The accounting profession encompasses five key working areas:

  • Financial Accounting

  • Managerial Accounting

  • Auditing

  • Tax Accounting

  • Governmental and Not-for-Profit Accounting

• Each area provides unique career opportunities and is vital to the accounting profession.

Financial Accounting

• Purpose: Generates financial information and analysis primarily for external users of an organization.

• Key Users of Financial Information:

  • Company owners

  • Managers

  • Employees

  • Creditors and lenders

  • Employee unions

  • Customers

  • Suppliers

  • Government agencies

  • General public

• Typical Questions External Users Ask:

  • Is the organization profitable?

  • Can it pay its bills?

  • How much debt does it owe?

• Annual Report: A yearly statement detailing the financial condition, progress, and expectations of an organization.

• Importance of Accurate Information: Organizations must maintain precise financial records.

• Types of Accountants:

  • Private Accountants: Work for a single firm, government agency, or nonprofit organization.

  • Public Accountants: Provide services to various individuals and businesses, such as:

  • Designing accounting systems

  • Selecting appropriate software

  • Analyzing financial performance

• CPAs (Certified Public Accountants):

  • Recognition achieved by passing exams from AICPA and meeting educational and experience requirements.

  • As of now, there are over 665,000 CPAs in the U.S., with 400,000 members of AICPA.

Historical Context and Regulation

• Accounting Scandals (Early 2000s):

  • Scandals involving WorldCom, Enron, and Tyco led to public distrust in the accounting profession.

  • Arthur Andersen was convicted of obstruction of justice for shredding Enron documents (conviction later overturned).

• Regulatory Response:

  • Passage of the Sarbanes-Oxley Act (Sarbox) by U.S. Congress to enforce stricter government reporting standards for publicly traded companies:

  • Established the Public Company Accounting Oversight Board (PCAOB) to oversee AICPA.

  • Shifted from self-regulation to government oversight.

  • Critics raise concerns about PCAOB's power over small and medium-sized businesses.

Sarbanes-Oxley Act Key Provisions:

• Prohibits accounting firms from providing non-auditing work to companies they audit.

• Strengthens whistleblower protections.

• Requires CEOs and CFOs to certify financial report accuracy with strict penalties for violations.

• Prohibits corporate loans to company directors and executives.

• Creates PCAOB under SEC to regulate the accounting industry.

• Imposes felony charges for altering or destroying key audit documents.

Dodd-Frank Wall Street Reform and Consumer Protection Act (2008)

• Enacted in response to the financial crisis.

• Increases PCAOB's power related to auditors of securities market brokers and dealers.

• Regulatory provisions were relaxed in 2018.

Importance of Professionalism in Accounting

• Accountants are perceived as professionals comparable to doctors and lawyers.

• CPA Requirements:

  • Completion of 150 college coursework hours.

  • Passing a rigorous examination.

  • Ongoing education: 20-40 hours per year, recertification, ethics training, and ethics exam.

Managerial Accounting

• Purpose: Provides internal analysis and information to assist managers in decision-making within an organization.

• Focus Areas:

  • Measuring and reporting production and marketing costs

  • Budget preparation (planning)

  • Budget performance checking (controlling)

  • Designing tax minimization strategies

Auditing

• Definition: The review and evaluation of the information used to prepare financial statements.

• Types of Audits:

  • Internal Audits: Conducted by private accountants to ensure adherence to accounting procedures and financial reporting.

  • Independent Audits: Performed by public accountants to provide unbiased opinions on financial statement accuracy.

• Historical Scrutiny Post-Enron: Following scandals, the Sarbanes-Oxley Act instituted new auditing regulations, which were again scrutinized after the Lehman Brothers' collapse in 2008.

• Auditor Responsibilities: Examining financial health and operational efficiencies of organizations.

• Forensic Accountants: Specialized auditors trained to detect financial fraud.

Tax Accounting

• Purpose: Focused on enabling governments to fund infrastructure and services through taxes.

• Role of Tax Accountants:

  • Prepare tax returns

  • Develop tax strategies according to constantly changing tax laws

• Economic Impact: The burden of taxes increases the importance of the tax accountant's role for individuals and organizations.

Government and Not-for-Profit Accounting

• Goals: Support organizations focused on serving without generating profit, such as government agencies and not-for-profit organizations.

• Key Characteristics:

  • Requirement for an accounting system that satisfies taxpayers, legislative bodies, and creditors.

  • Standards are set by the Governmental Accounting Standards Board.

• Career Opportunities: Available in agencies like the FBI, IRS, and various state departments, as well as charities (e.g., Salvation Army, Red Cross) that require accountability in financial management.

Conclusion on Accounting Disciplines

• Each accounting discipline requires specialized training and skills.

• The accounting profession faces challenges from the global market, prompting an ongoing movement towards globalizing accounting practices.

• Accounting is fundamental as the language of business, making it a critical language to learn.

Test Preparation Questions

• What is the key difference between managerial and financial accounting?

• How does the job of a private accountant differ from that of a public accountant?

• What is the job of an auditor? What constitutes an independent audit?