Chapter 19
Accounting Regulation
Legal Requirements
Production and the audit of financial statements are subject to national law. Company law may differ to some extent between countries.
Company law in most jurisdictions includes these principles:
Company law generally requires all companies to prepare and maintain adequate accounting records to prepare annual financial statements.
There is usually a minimum amount of time records should be kept.
Company law generally requires the directors of a company to prepare annual financial reports that include a profit or loss statement and a statement of financial position, together with supplementary notes to these statements.
The financial statements must be sufficient to present a true and fair view of the company’s financial performance and financial position at the end of the period. Legal requirements may be less demanding for small companies.
Company law generally requires companies to file their annual financial statements, along with some other statutory information, with an official national body, such as a Companies Registry.
Company law will require companies above a specified size to arrange for an independent audit of their financial statements by qualified external auditors.
These external auditors must prepare a statement for the company’s shareholders, including their opinion on whether the financial statements give a true and fair view.
In addition to company law requirements, financial statements should comply with generally accepted accounting principles (GAAP).Accounting Standards
In addition to company law requirements, financial statements should comply with generally accepted accounting principles (GAAP).
Companies are usually required by law to comply with a set of accounting standards produced by a recognised standards-setting body.
Each accounting standard covers a different accounting topic. The accounting standards should cover all the necessary aspects of preparing financial statements.
National And International Accounting Standards
Each country may have its own national standard-setting body, producing national accounting standards.
There is an international body, the International Accounting Standards Board (IASB), which produces international standards. Some countries have national standards that entirely adopt international standards, while others have some localised differences.
The International Accounting Standards Board (IASB), which produces international accounting standards, has no power to enforce the use of its standards. The IASB relies on national governments to introduce laws requiring companies to use the IASB’s international standards.
Consequences of Non-Compliance
It is the directors’ responsibility to comply with these requirements. Failure to comply may result in fines, disciplinary action, and potential criminal prosecution.
The consequences of failure to comply will depend to a large extent on national law.
Most countries and professional accountancy bodies have arrangements to monitor compliance with the law and accounting standards and take disciplinary measures against companies or even individuals who fail to comply.
Examples of non-compliance include:
Failure to maintain accounting records
Suppose a company fails to keep and maintain proper financial records. In that case, the auditors cannot provide an audit report stating that the financial statements give a true and fair view. They will be unable to provide an opinion.
In addition, failure by a company to maintain proper financial records is likely to be a breach of the law; and the tax authorities will investigate any failure by companies to prepare adequate financial statements for tax purposes.
A company’s failure to file annual financial statements and other statutory information with the national Companies Registry will be recognised, and appropriate disciplinary action will be taken.
For example, late filing of financial statements may result in fines or other penalties for non-compliance with the law.
Suppose a company fails to comply with the relevant accounting standards without appropriate justification. In that case, the auditors will have to state this in their audit report, which may hurt the company’s reputation. The company may be required to prepare amended financial statements that are compliant.
National Enforcement
In the UK, for example, the Monitoring Committee of the Financial Reporting Council is responsible for monitoring compliance by companies with company law and accounting standards.
Other bodies which serve a similar purpose in other countries are the Ministry of Corporate Affairs in India and the Financial Reporting Council of Nigeria.
International Financial Reporting Standards
Historically, accounting standards were first developed at the national level; there has been a substantial move to apply the same set of accounting standards worldwide.
The need for accounting standards
The accountancy profession initially developed accounting standards to introduce consistency to the methods and rules of preparing financial statements.
Generally accepted accounting principles allowed scope for variation in methods. Standards were introduced to reduce or overcome this problem and to allow comparability between different countries’ financial statements.
National accounting standards
Originally countries produced their national accounting standards. However, differences in national standards meant that international investors could not easily compare the financial statements of companies based in one country with those in other countries.
International Accounting Standards Board (IASB)
The International Accounting Standards Board (IASB) was founded to address these comparability concerns. The IASB produces international accounting standards, initially called International Accounting Standards (IASs) but now called International Financial Reporting Standards (IFRSs).
The primary purpose of the IASB is to ensure consistency in financial reporting between companies, regardless of the country in which they report. The work of the IASB is continuing, producing new and amended accounting standards from time to time.
Adoption of international standards
Many countries have adopted international accounting standards at their national level, at least for large companies.
Other countries have kept their national standards but made these consistent with international standards as far as possible.
Work is also progressing to create one set of consistent accounting standards for use worldwide.
Legal status of international accounting standards
International accounting standards have been accepted by national regulatory authorities in many countries and are considered part of the country’s legally-binding framework for financial reporting.
The international accounting standards are not legally binding, and the IASB has no effective enforcement powers. It relies on the acceptance of IASBs by national regulators and incorporation into the legally-binding framework of the companies that adopt them.
Key Points
International financial reporting standards are not legally binding.
Enforcement by national regulators is for compliance with national accounting standards as prescribed by the recognised national standard-setting body.
Auditors will report non-compliance with national accounting standards to the shareholders in their audit report.
Activity
Determine if the statement is true or false.
Statement
True or false
The IASB is responsible for developing and issuing International Financial Reporting Standards.
The IASB is responsible for developing and issuing international auditing standards.
Companies must keep and maintain proper accounting records as a national legal requirement.
Auditors are mainly responsible for preparing financial statements that comply with the relevant accounting standards.
External auditors have a legal obligation to provide reasonable assurance that a company’s financial statements present a true and fair view of its financial performance and financial position or to give an alternative opinion that they do not.
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