Public and Corporate Accounting
Recording financial activity of an entity and turning it into a statement to present facts and figures to the stakeholders is accounting. Term accounting had been coined out from counting which means recording ins and outs or financial process of an entity. Therefore, by the passage of time and after day by day progress of business, trade and commerce. Accounting has had became chief activity to achieve targets, goals, and success.
History of financial reporting:
Ancient accounting practices were much personal than today’s large public companies accounting systems. Accounting practices were used to record the incomings and outgoings of trading activities. The financial information was then limited to the entrepreneur and record keeper. Therefore, the ancient business activity was very limited because there were then no partnerships, no ventures and no public entities (Salvary, 2005).
Now, not only corporate entities but the public entities also maintain their accounting systems on the specified standards. Hereinafter, there are two types of accounting systems in place, one is for public sector and the other one is for the corporate sector. Both are different scientifically but are the same artistically.
Science of accounting:
Science of accounting revolves around debit, credit and the five basic principles of accounting i.e. equity, liabilities, assets, income, and expenses. On the one hand, it can be simplified by defining the debit, credit as financial activity recording process equating. On the other hand, equity, liabilities, assets, income, and expenses can be simplified by defining them as the finalization of accounts to analyze and monitor the targets, goals and success of an entity (Paton, William and Stevenson, Russell, 17-34).
So, science of accounting revolves around the principles and the standards defined for the accounting process. However, there are some activities that can be defined as art of accounting.
Art of accounting:
Art of accounting revolves around scope and type of accounting activity. For instance, there are several types of accounting activities which have a different scope like accounting process for services concern, manufacturing concern, trading concern, non-for-profit organization, and for public entities. All of them demands completely separate accounting SOPs and accounting appropriations.
So, art of accounting revolves around scope and type of accounting activity. Moreover, the art of accounting defines initialization, activity or process and finalization of financial statements to reflect the true picture of an entity.
Accounting for public entities:
Public entity’s accounting normally follows the budgets and the selected targets. Therefore, there is only one dissimilar approach towards public and corporate sector accounting and that is following the set forth targets by the public entities and not zealous to enhance more and more profits. At the same time, public sector runs on cash based accounting practices. For instance, in public entities the revenue recognized when it has been received and the expenses have been recorded when they are incurred.
The reason behind the above said accounting procedures for public entities is governments have to show their actual progress in the stipulated period to the public. And, this is only possible with cash based accounting system.
Accounting for private companies:
An enterprise is formulated to grow, govern and earn profits. However, the growth of business demands an accurate financial reporting and adequate disclosure of enterprise endeavors. The financial practices have been pass-through a long time of transformation which created lenience in the financial reporting process and disclosure. On the other hand, various legal, as well as corporate rules and laws, have standardized the accounting process to have the disclosures accurate especially for public limited companies. Security and Exchange Commission (SEC) is the grantor to protect the interest of stakeholder (Camfferman & Zeff, 2007).
Expansion in private enterprises and legislation:
The expanded form of business also expanded the ventures and public investments. Public companies have been formed to congregate the finance from different sources like through shares in stock market, debentures and other investment options. The need of securing public interest arose to secure their investment and monitor the investor activity.
Security Exchange Commission (SEC) was incepted for the same reason to safeguard the public stakes and monitor and guarantee the investor activities. Though, SEC was ultimate but there was found many irregularities and corporate scandals till 2002 in presence of SEC reformed laws and regulation. The lacking have ultimately influence to formulate new laws for protecting the investor’s investment, therefore, Sarbanes-Oxley act came to existence.
Sarbanes-Oxley act was enacted in 2002 formatted by Senator Paul Sarbanes and U.S. Representative Michael G. Oxley and signed by President George W. Bush into law. The major reason behind formation of new law for security of public investment was mammoth irregularity and corporate accounting scandals like Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. The law has included eleven new sections to identify and rectify the corporate responsibilities and initiate criminal penalties.
The new law created provision to formulate quasi–public agency the Public Company Accounting Oversight Board (PCAOB). The agency is a nonprofit organization which has its primary responsibility to oversee the activities of auditors of public limited companies and to protect the interest of investor. The power to inspect the public accounting and auditing firms gives it edge to protect the investor’s interest properly. Therefore, the new Sarbanes-Oxley act 2002 eleven sections have clear-cut definitions to discourage and dilute the trend of corporate manipulation and corporate scandal (“Securities lawyer’s deskbook, N.d”).
Eleven sections for eliminating the manipulations:
Before 2002 there was a long sequence of corporate scandal. The one after one scandal influence the government to format a new law to confront with the stock market manipulations. Then, the Sarbanes–Oxley act enhanced the powers of SEC to protect investor’s interest properly.
The impact of eleven sections of Sarbanes-Oxley act is discussed below:
- The public company accounting oversight board (PCAOB)
As discussed above PCAOB is the right action to monitor the investor activity and to check the associated accounting and auditing firms and their procedures. This has applied double check to minutely oversight not only the business activities but also to check the persons and procedures of company’s accounting and auditing firms. This has given the edge to minutely monitor the activities.
- Auditor independence:
Auditor’s independence is the most critical issue in accounting manipulation. Moreover, rotation of auditor and an additional check of inspection on the auditing firms by the PCAOB made it possible to work transparently.
- Corporate responsibility:
Corporate responsibility applies on the relative accounting officers and respective management representatives. The integrity of company financial is completely applied to the principle accounting officer and or chief executive of the company. They are deemed to be responsible for any inappropriateness.
- Enhanced financial disclosures:
The addition of enhanced financial disclosures is much helpful to have timely information about the stock status to its investors. The specific reviews of accounting, auditing and internal control by the agents of SEC provides the actual guarantee to the investors and other stake holders.
- Analyst conflicts of interest:
Title V for analyst conflicts of interest has only one section which addresses the conflict of interest. The conflict of interest should be measured with the restore of investor confidence in the reporting of security analysis.
- Commission resources and authority:
This title deals with the brokerage activities and the powers to censure or bar the security professional, agents and brokerage houses. This is helpful to restore the investor confidence.
- Studies and reports:
Studies and reports is very comprehensive activity by the SEC to collect various findings about public accounting firms, auditing firms, analysis of credit rating agencies and operation of security markets. It will eventually grant enough information to take actions.
- Corporate and criminal fraud accountability:
The basic aim to incorporate the new law into the SEC regulations is to identify and accountability of corporate criminal frauds. It has granted the power to investigate the criminal activities in the organization and impose penalties for manipulation and or ambiguous accounting records.
- White collar crime penalty enhancement:
The criminal activities performed as the white collar personal are dealt by the while collar crime penalty enhancement. This section also well-knows as “White collar crime penalty enhancement act of 2002”.
- Corporate Tax Returns:
The new law made it mandatory to sign the corporate tax returns by the chief executive of the company. It will eventually make the top management responsible of everything happen in the company accounts.
- Corporate fraud accountability:
This section reflects the true spirit of new law. The corporate fraud accountability was the ultimate aim to formulate the additional rules and regulation into the SEC regulations. This section identifies the corporate offences their penalties, sentences and punishment.
The Sarbanes-Oxley act has comprehensively covered all the lacking in the corporate guarantees. It gives the ultimate guarantee to the investors for the protection of their investments. Now after the implementation of Sarbanes-Oxley act the scandals and irregularities in accounting and auditing practices has been wiped-out.
At the end of treatise, it is better to restate the thesis recording financial activity of an entity and turning it into a statement to present facts and figures to the stakeholders is accounting. Importance of accounting practices especially for public Company can be realized after critical review of public and private accounting. Moreover, time has had transformed the systems and upgraded the conventions.
Therefore, transformation of conventional accounting to double entry system and manual accounting to computerized has been leniently resolved the enhanced business activities. At the same time, where the legal cover to the interest of investor by the Sarbanes-Oxley act has made it possible to expand the business. There plain and straightforward accounting system for public entities has made it possible to reflect the actual progress without accruals and provisions.