Introduction to Accounting & Finance

Ethics in Accounting—Discussion Guide

Slide #13 THINK ABOUT IT

Ethics are especially important to those who provide critical services and handle sensitive and/or private information. Not unlike a doctor’s patients, an accountant’s clients must be able to trust that their personal information is being handled with the care that they need.

KEY CONCEPTS

Slide #14 Ethics are the basic principles that govern behavior. They help people know how to do what is right in their personal and professional lives.

• Ethical accounting practices help ensure that financial information is handled in the best way for all involved.
• All types of accountants deal with important financial data, which increases the need for ethics.
• Ethical guidelines ensure that accountants are providing the effective, high-quality services that clients require, and help them avoid creating serious problems for clients, employers, and themselves.

Discussion #1: Ask students to discuss why they think it is so important for accountants to remain ethical. What could happen if accountants behave unethically? How could negative consequences affect even people and organizations outside the company they work for?

Slide #15 Businesses benefit greatly from ethical accounting practices.

• Accounting can have a substantial impact on a business’s bottom line and improve operations in many ways, including:
  • Improved efficiency
  • Reduced legal liability
  • More organization and accuracy
  • Increased customer loyalty

Slide #16 Ethical behavior includes more than just following the rules or laws.

• Situations are sometimes quite complicated, and it can be difficult to figure out the appropriate action or response.
  • In cases like these, a code of ethics can supplement the rules and act as a framework for ethical decision-making.

• All accountants must adhere to a wide variety of codes and principles.
• Each state accounting board, for example, has a set of ethical standards with which accountants must comply.
• Financial accountants also often follow a set of standards such as the Generally Accepted Accounting Principles (GAAP) or the International Financial Reporting Standards (IFRS).
• Several professional accounting boards, including the Institute of Management Accountants and the American Institute of Certified Public Accountants, also have their own separate ethical standards that members must follow.

Discussion #2: Ask students why they think there are so many different sets of ethical standards for accountants. Can they think of any problems this could lead to? Would it be better if there were only one single set of standards? What potential problems could having just one set lead to?

Slide #17 While organizational, professional, and governmental ethics criteria can vary greatly in their specifics, several common principles can help guide all accountants to ethical behavior.

• Responsibility
  • Accountants have a responsibility to uphold the values of the profession.
  • They should use their best judgment in all cases and cooperate with one another to make sure that the traditions of accounting remain intact.
  • Those who work in the accounting profession need to take ownership of their roles and be accountable for the importance of the job.
• Integrity
  • Integrity means adhering to an established set of personal ethics and sound moral principles.
  • It includes acting with honesty in all situations and consistently doing the right thing, even when it is difficult.
  • Accountants may face pressure from upper management to tweak numbers or provide inaccurate information that helps their clients.
  • However, accountants must be honest and continuously focused on being ethical.
  • Even a small unethical action can have significant and damaging effects on both the client and the accountant.

• The public interest
  • Accountants perform a service for clients, whether those clients are individuals or businesses, but they also provide information that can drastically affect the economy as a whole.
  • Let’s say an accountant produces financial statements showing that a company is struggling.
    • That company might make business decisions that affect a wide range of people.
    • Therefore, accountants have a responsibility to look out for the greater good of the public as a whole.
• Due care
  • The principle of due care means performing the role of accountant as well as possible.
  • Because of the nature of the profession, accountants need to be competent in all aspects of the job.
  • They must strive for continuous improvement and excellence.
  • Accountants can pursue the principle of due care by engaging in professional development and dedicating themselves to deepening their accounting knowledge and skills.
• Objectivity and independence
  • Objectivity is impartiality or lack of bias. It means making decisions and actions without favoritism or prejudice.
    • Accountants must be independent entities that provide information that is as unbiased as possible.
  • To be fair and objective and act with independence, an accountant must be free of conflicts of interest.
    • Conflicts of interest occur when circumstances make it impossible to act with true impartiality.
  • Accountants face many potential conflicts of interest, and they have a duty to make sure that the services they provide are not in conflict with one another.
  • They must try to maintain independence by constantly checking in with themselves and honestly examining their own objectivity.
  • Accountants have an obligation to report any potential conflicts of interest before they occur.

• Confidentiality
  • Confidentiality is the practice of keeping information secret or private. It is one of the most important ethical principles for accountants.
  • In most cases, the laws require accountants to keep client information confidential.
    • The existence of these legal guidelines allows clients to speak freely with their accountants and provide undisclosed information that accountants might need to know.
    • The accountant cannot share this information with competitors or the public.
  • However, honesty is also an important aspect of accounting ethics.
  • An accountant must use her/his judgment in difficult situations to know when to breach confidentiality for the sake of ethics or the public good.

Discussion #3: Ask students to think of examples of when an accountant may need to choose between honesty and confidentiality of their clients. What could result from their choosing to maintain confidentiality? What if they chose to behave honestly instead?

• Transparency
  • Transparency means maintaining honest and open communication.
  • Accountants must speak freely and openly about their processes and activities both with clients and the public.
  • Financial information should not be designed to conceal information, but rather should provide as much quality information as possible.
• Full disclosure
  • Full disclosure means that financial statements or documents should include all information that is necessary for the documents to be understood.
    • Accountants must disclose information that can affect financial results.
  • Accounting information can be complex and difficult to comprehend, so any information that can help with understanding it should be included.

Technology in Accounting—Discussion Guide

Slide 18# THINK ABOUT IT

Although there are still some accountants who prefer the pen-and-paper approach, most modern accounting takes place on a computer. Technology has led to some significant improvements in an accountant’s ability to perform many tasks quickly and easily. However, each improvement to accounting technology brings new challenges to professional, ethical, and security concerns.

KEY CONCEPTS

Slide #19 The field of accounting has been completely revolutionized by the use of computers.

• Paper-based, manual-entry accounting is labor- and time-intensive.
  • Just the process of locating and correcting errors in a paper ledger can take hours (or even days) of searching and recalculating.
• Most modern accountants prefer one of a number of options for computerized accounting systems, with tools ranging from:
  • Digital versions of paper ledgers and manual spreadsheets (e.g., Microsoft Excel) to
  • Customizable accounting software (e.g., QuickBooks) that can be adjusted for the unique needs of each business
• Technologies for accounting systems are continually being improved for efficiency and usability.
  • The move from computer-based to cloud-based systems is currently revolutionizing labor, time, storage, and cost requirements in accounting.
• Technological advancements will continue to shape the future of accounting—and still-developing technologies are already beginning to influence accounting practices in significant ways.
  • Some people predict that the development of artificial intelligence (AI) and blockchain will have a transformative impact on accounting that will compare to the impact in the 1980s by computerized accounting.
  • Many predict that the accountant’s role will soon shift due to advancements.

Discussion #1: Ask students to discuss what they predict might change about accounting with the addition of AI and blockchain. Is it possible that there will be no need for accountants anymore? What would a shifted role for accountants look like?

Slide #20 Generally, computerized accounting systems aid in performing the following accounting functions:

• Tracking/Recording financial transactions
• Processing information
• Creating financial reports
• Performing automatic closing
• Automatic updating
• Automating data-entry
• Calculating payroll

Slide #21 While the basic functions of accounting tend to remain the same whether using paper ledgers or cloud-based software, technology continues to offer many benefits to the industry, such as:

• Increased functionality
• Improved accuracy/Fewer errors
• Ease of making changes/corrections
• Faster processing
• Improved external reporting
• Added forms of security

Discussion #2: Ask students if they can think of any possible downsides to moving from a paper-based system to a computer-based system. There are many benefits, so why might some people prefer the older technology?

Slide #22 While there is added security in computerized and cloud-based accounting systems, these technologies can lead to new risks and security issues.

• The shift from paper documents to digital formats has allowed for the security enhancements of password protection, restricted access, and digital storage.
  • However, the addition of the Internet also introduced the possibility of hacking and viruses.
• One drawback to computer-based accounting and security software is that they typically need to be regularly purchased or updated.
  • Because the cost of routinely purchasing new software can be quite high, some companies choose to go years between updates. This can put a company’s data at risk.
  • Additionally, the ease of computer-based data storage leads some companies to take it for granted and not perform regular backups.
  • Cloud-based and SaaS (software-as-a-service) systems typically offer automatic updates and backup processes to help lessen these dangers.
  • However, with cloud-based data storage, disruptions in Internet connectivity or other external issues can interfere with access to company files if they are not also stored internally.
• The use of computers in accounting can also create increased opportunities for fraud, embezzlement, or sabotage from internal sources.
  • Because some accounting software does not track the changes made to entries, these programs often make detection of fraud more difficult as well.
  • Studies have shown that the ease of changing or deleting entries and the ability to quickly and easily complete transactions have led to significantly higher financial losses from computer-based fraud than cases that do not involve the use of a computer.

Discussion #3: Ask students to work together to come up with ideas about how to make computer-based systems less susceptible to fraud. How could the software be changed to make it harder to disguise fraud? Would there be any drawbacks to these changes?

Legal Considerations in Accounting—Discussion Guide

Slide #23 THINK ABOUT IT

No person can be an expert on every single subject. Eventually, everyone has to rely on another person to perform a service or give advice on a subject about which they know little. That reliance means having to trust someone else to do their job well. This is especially the case in specialized fields like accounting.

KEY CONCEPTS

Slide #24 In many cases, accountants must be trusted to perform their jobs well not only by the person or company hiring them, but also by the government and the general public.

• Mistakes or unethical behavior in accounting can have serious ramifications for entire countries of people, and sometimes even the global public.
  • For example, certain cases of fraud or money mismanagement can send entire economies into recession.
• Because of this, laws and regulations help ensure that accounting practices are handled responsibly and ethically.

Discussion #1: Ask students to think of other examples of how unethical accounting can have serious consequences beyond those for the company that participates in it.

Slide #25 In the United States, the federal agency that regulates financial markets and is charged with protecting the investing public from fraud or malpractice is the Securities and Exchange Commission (SEC).

• The SEC is a regulatory agency that has the authority to set accounting standards for all publicly traded companies in the United States.
  • It has authorized the Financial Accounting Standards Board (FASB) as the national, standards-setting body responsible for establishing and regularly updating the Generally Accepted Accounting Principles (GAAP).

Slide #26 In response to a number of financial scandals in the early 2000s, the federal government passed the Sarbanes-Oxley Act of 2002.

• This federal law, sometimes called the SOX Act, established new requirements for all public companies in the U.S., setting stricter rules for boards of directors, accountants, and auditors.

• The primary purpose of the SOX Act was to hold management accountable for the preparation and accuracy of a company’s financial statements.
  • Prior to this law, managers of companies caught up in fraudulent activities were able to pass the blame onto other employees, claiming to be ignorant of wrongdoing.
  • The SOX Act requires management to certify that financial statements are accurate.
  • Management must also personally review the internal control systems of their companies.
• The bill also set stricter rules requiring the storage and maintenance of certain business and financial records in addition to stricter penalties for misconduct, including the destruction or falsification of records.
  • Any willful attempt to alter, destroy, falsify, or conceal financial data is punishable by significant fines and possible jail time.
• The SOX Act also established the Public Company Accounting Oversight Board (PCAOB) to oversee the audits of public companies to protect investors and the public interest at large.
  • This marked the first time in the country’s history that auditors were subject to external and independent oversight.

Discussion #2: Ask students if they think managers and top-level executives should be held responsible for inaccurate or fraudulent activities that happen in their companies.

Slide #27 Just as the FASB maintains the GAAP within the boundaries of the U.S., the Governmental Accounting Standards Board (GASB) is responsible for managing GAAP as it is used by state and local governments.

• Whereas FASB standards apply to public companies, GASB standards apply to the actual state and local government entities.
  • In both cases, the end goal is to provide accurate and reliable information to the public.
• Every state in the U.S. follows the GAAP to some extent. However, some states only require certain counties, cities, or school districts to comply fully.

Slide #28 A fiduciary is a person or organization that acts on behalf of another person or persons and is legally required to act in their best interests. This means that a fiduciary cannot benefit personally from the decisions they make on another person’s behalf.

• Although simply being an accountant does not mean a person has fiduciary responsibilities, the American Institute of Certified Public Accountants (AICPA) Code of Conduct establishes standards that closely resemble those of a fiduciary, such as:
  • Objectivity
  • Integrity
  • No conflicts of interest
  • Honesty
• Courts have also decided that an accountant can be legally considered (subject to fines or loss of certifications) to have fiduciary responsibilities if:
  • The accountant positions her/himself as an expert
  • The client places a high degree of trust and confidence in the accountant
  • The client is heavily dependent on the accountant’s advice

Discussion #3: Ask students if they think that all accountants should be required to be fiduciaries. What possible problems might occur if accountants or financial professionals are not legally required to act in their clients’ best interests?

Standards-Setting Bodies—Discussion Guide

Slide # 29 THINK ABOUT IT

Both in the United States and around the world, a number of organizations contribute to the setting and updating of accounting standards. These organizations are important as they have significant impact on the practice of accounting and financial reporting. As the interconnectivity of global financial markets continually shifts and evolves, the similarities and differences between these standards can have important ramifications for the companies and fields for which they provide guidelines. It can become just as important to know about these standards-setting organizations as it is to know about the standards themselves.

KEY CONCEPTS

Slide #30 Accounting standards establish guidelines for the production of financial reports that allow comparisons between businesses and across industries.

• In today’s global economy, however, there is also the need for the comparison of companies internationally as well.
  • Formed in 2001, the International Accounting Standards Board (IASB) has the goal of making it easier to compare the financial information from businesses around the world.
  • According to the IASB, international accounting standards promote “transparency, accountability, and efficiency in financial markets around the world.”
  • These standards allow market participants to make informed decisions about investments and risks, which have a significant impact on the stability of financial markets.

Discussion #1: Ask students if they think it would be better to have each country establish its own set of accounting standards or if there should be one set that applies in all countries. Why?

Slide #31 The IASB is a private, nonprofit organization whose goal is to serve the public interest. It is responsible for the establishment and maintenance of the International Financial Reporting Standards (IFRS).

• The IFRS have been adopted by all major financial markets in the world except those in China, the U.S., and Japan.
  • China is currently working toward mandating the use of IFRS.
  • In both the U.S. and Japan, companies may voluntarily adopt these standards.

Slide #32 Much like the IASB, the Financial Accounting Standards Board (FASB), which maintains the Generally Accepted Accounting Principles (GAAP) standards used in the U.S., is a private, nonprofit organization.

• Although it was given its standards-setting authority by a governmental agency, the Securities and Exchange Commission (SEC), the FASB is not a public-sector organization.
  • This means it is not owned and operated by the government.
• Instead, the SEC determined that the standards set for accounting should be developed from within the field.
  • They authorized the FASB, a private-sector organization to establish and maintain those standards.

Discussion #2: Ask students why a government body would ask a private-sector company to set the standards for an industry for which the government has oversight responsibilities. What are some of the benefits of letting private sectors set their own standards? What are some of the benefits of the government setting the standards?

• The American Institute of Certified Public Accountants (AICPA) is also a private, nonprofit organization.
  • This national professional organization used to be responsible for accounting standards like those in the GAAP until the SEC decided to authorize the FASB to maintain these standards.
  • The AICPA continues to set standards for financial statement auditing, ethics in the accounting profession, and other CPA practices.
  • They, along with a number of other professional organizations, influence standards and serve as resources to the professionals in their fields.

Slide #33 The GAAP hierarchy is a four-level framework that classifies FASB and AICPA principles and pronouncements by their level of authority.

• If the resources listed at the top level of the chart are insufficient to answer an accountant or researcher’s question, then the materials in the second, third, and fourth levels should be consulted in order until the answer is found.
  • The top-level resources cover broad issues, while the lower levels cover more technical and/or specific matters.
  • For more information on the GAAP Hierarchy, click here: https://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1218220125621.

Discussion #3: Ask students to make their own hierarchy of the rules they have to follow in school. If they had a question about an activity in the classroom, would they first consult the teacher or the student handbook for the entire school? Why? Is this the opposite of the GAAP hierarchy system? Why would the classroom be different than the accounting industry in how the hierarchy is set?

• The FASB also put into place a GAAP codification system to give additional structure to the GAAP and simplify the process of researching topics.
  • A codification system arranges laws, rules, or standards into an organizational structure that assigns them numbers or letters by which they are sorted and classified for the purpose of easy searching.
  • For more information on the GAAP codification, click here: https://www.accountingtools.com/articles/what-is-the-gaap-codification.html?rq=fasb%20codification.

Accounting Standards—Discussion Guide

Slide #34 THINK ABOUT IT

One important aspect of accounting is the development of financial statements. These are records that show a business’s financial activities. However, due to the existence of a wide variety of organizations and industries, there is a need to ensure that anyone viewing these statements can understand and interpret them. This is where accounting standards come in.

KEY CONCEPTS

Slide #35 Accounting information by itself is not very useful. Businesses need to summarize the information and put it in a form that can be easily read and understood.

• To ensure that these documents can be understood by everyone who needs to use them, accountants must follow certain rules called accounting standards.
  • As a result of accounting standards, the format used to prepare and present financial data is consistent across organizations.
  • If not for these standards, it would be extremely difficult, if not impossible, to compare the information reported by different organizations, even those within the same industry.

Slide #36 An accounting framework is a published set of rules used as guidelines to measure, recognize, present, and disclose the information in an organization’s financial statements.

• The decisions about which framework an organization will use is typically based on the type of business and where it is located.
  • Businesses located in the United States, for example, would use the Generally Accepted Accounting Principles (GAAP) when preparing financial documents.
  • Organizations in most other countries would likely refer to the International Financial Reporting Standards (IFRS).

Discussion #1: Ask students if they think that the United States should follow the IFRS instead of its own standards.

• Both the GAAP and the IFRS are general frameworks that cover a range of standard accounting practices, situations, and topics including:

  • Financial statement preparation

  • Assets

  • Liabilities

  • Equity

  • Business combinations/acquisitions

  • Industry-specific accounting

• The Financial Accounting Standards Board (FASB), the organization responsible for maintaining the GAAP, has established this framework on the foundation of four basic assumptions and four basic principles, which together are known as the Conceptual Framework for Financial Reporting.

Slide #37 There are four underlying assumptions on which the GAAP is built.

• Separate entity assumption
  • Under the separate entity assumption, businesses must keep their transactions separate from their owner’s transactions or those of other businesses.
• Going concern assumption
  • The going concern assumption states that the financial activities of a business are assumed to be in operation for an indefinite period of time.
  • Businesses are assumed to behave with long-term operation in mind, and there is no short-term end point in which all assets need to be sold and all debt paid off.
• Monetary unit assumption
  • The monetary unit assumption states that information in the financial statements of a company must be expressed in monetary units (e.g., the US dollar), and that these monetary units must be a stable unit of currency.
• Time period assumption
  • The time period assumption states that a business can divide its own operational activities into artificial time periods for reporting purposes.
  • This means that companies can record financial information on a daily, weekly, monthly, quarterly, or yearly basis during a time frame they deem relevant.

Discussion #2: Ask students why they think the going concern assumption is important for accounting practices. What would it mean if this assumption were not in place and businesses were required to sell all assets and pay off all debt at a certain point?

Slide #38 The four basic principles of the GAAP are:

• Historical cost principle
  • The historical cost principle states that a company must record the purchase of goods, services, or capital assets at their original cost.
  • Assets must then remain on the balance sheet at their historical price without adjusting for fluctuations in market value.
• Matching principle
  • The matching principle states that all expenses must be matched and recorded with their respective revenues in the period in which they were incurred—not when they are paid.
• Revenue recognition principle
  • The revenue recognition principle states that companies must record revenue when it is earned, and not when it is received.
  • The revenue recognition principle and the matching principle are based on the accrual method of accounting and gives a more accurate picture of financial data in a given period than cash accounting.
• Full disclosure principle
  • The full disclosure principle states that companies must disclose in a financial statement any knowledge that would materially affect the decisions of a financial statement user.
  • This prevents companies from hiding information about accounting practices

Discussion #3: Ask students if they think a company should be permitted to hide certain financial information if it is about the inner-workings of the company. Why or why not?

Types of Business Ownership—Discussion Guide

Slide #39 THINK ABOUT IT

Different types of businesses have different requirements for ownership, taxation, accounting, and financial reporting, among many other considerations. Depending on which type of business a person owns or works for, there could be significant differences in what is required of her/him.

KEY CONCEPTS

Slide #40 There are millions of businesses operating in the United States today.

• Most of them operate within one of four types of business ownership:
  • Sole proprietorship
  • Partnership
  • Corporation
  • Hybrid structure

Slide #41 A sole proprietorship is owned by one person who assumes all the profits and risks from the business.

• By taking all the risks, a sole proprietor experiences unlimited liability, meaning any debts that the business owes can be collected from the owner’s personal assets.
• Over 70% of the businesses in the U.S. are sole proprietorships, and many have fewer than 50 employees.
• Many accountants who run a small or home-based business in which they do people’s taxes are operating sole proprietorships.

Discussion #1: Ask students if they know anyone who owns a sole proprietorship. Do they have any employees or is the owner the only person who works for the business?

Slide #42 A business that is owned by two or more people is called a partnership.

• Often, the purpose of forming a partnership is to combine capital, experience, and/or abilities.
• In a partnership, partners share both the profits and the risk of loss.
• Of the two basic types of partnerships, the most common is a general partnership, in which each partner has unlimited liability.
• A limited partnership, on the other hand, permits a partner to invest money in a business but have limited liability, meaning the amount of financial responsibility could be limited to, for example, the amount invested by that partner.

Slide #43 A corporation functions independently of its owners but is treated as a person with legal rights, duties, and powers.

• Because a corporation is considered separate from its owners, the owners are not liable for the company’s actions, and their personal property cannot be taken to pay outstanding debts.
  • Owners are only liable for the money they invested in a corporation.
• To own a corporation, a person purchases shares of stock and becomes a stockholder (or shareholder).
  • The more shares of a stock a person owns, the more control the person has over the business.
• Corporations are governed by a board or directors, consisting of people who make decisions about the activities of the business.
  • The company’s officers (president, CEO, CFO, etc.) execute these decisions and run the day-to-day aspects of the business.

• Corporations are generally established as one of four types. The type of corporation determines how the business is taxed by the government and which legal guidelines it must follow.

  • A private corporation does not offer shares for sale to the general public.
    • It might have just a few shareholders who oftentimes also operate and manage the business.
    • A private corporation is not usually required to make its financial activities public, but it must prepare reports for the states in which it operates for tax purposes.
    • Private corporations are taxed on the profits made by the companies themselves, and their shareholders are taxed on the dividends that they earn on their investments in the company. This is often called dual taxation.
  • A “C” corporation, also known as a public corporation, can sell unlimited shares of stock to the general public.
    • Federal law requires “C” corporations to provide financial information (e.g., earnings, assets, debts) to the public.
    • This information is outlined in a formal document called an annual report.
    • They are also subject to dual taxation.
  • An “S” corporation carries the same liability protection of a corporation, but is taxed as a partnership to help smaller businesses avoid dual taxation.
    • To qualify as an “S” corporation, a company must have 100 or fewer shareholders and meet a number of other government regulations.
  • A nonprofit (or not-for-profit) corporation operates to accomplish a specific mission other than making a profit.
    • That mission is typically charitable, educational, religious, or scientific in nature and intended to help society.
    • Income is used to fund programs and cover operational costs.

Slide #44 There are three ways that corporations can grow once they’ve been established:

• A merger occurs when two businesses combine to form one company.
  • This usually happens when a larger company purchases a small company (referred to as an acquisition).
• Consolidation is the act of acquiring many smaller companies.
• Expansion involves making significant additions to the corporation, such as adding a new product line or building a new facility.
  • To do so, the company will need to obtain more capital by selling more shares of its stock, reinvesting company profits, or obtaining a bank loan.

Slide #45 A hybrid structure enables owners to combine the advantages of a corporation with the benefits of either a sole proprietorship or a partnership.

• Depending on the number of owners, a hybrid business can be structured as a:
  • Limited liability partnership (LLP)
  • Limited liability company (LLC)
• Characteristics of hybrid business structures include:
  • Limited liability—Personal assets cannot be taken to pay company debts.
  • Limited life—Most states require that the company dissolve after a certain amount of time and/or upon the death, retirement, or resignation of an owner.
  • Limited taxation—Taxes are claimed only on individual members’ personal income tax returns.
  • Unlimited owners/partners—Hybrid structures can have as many members as desired.

Discussion #2: Ask students if they were going to open a business what type would they want to open. What factors will they consider before making this decision?