Generally Accepted Accounting Principles

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Accounting calls for the use of estimates in the preparation of the required financial statements. Estimates in this case relate to the use of precise amounts in financial statement elements that cannot be precisely determined. Therefore the amounts are subjective and lack precision because they are plagued by the use of subjective management foresight to determine the values utilized in the financial reports. Where the use of estimates is encouraged there is definitely a lack of accuracy and reliability of the financial information provided (Lev 2016). Some of the typical examples (Table I) of accounting estimates include valuation of securities, obsolete inventory, impairment costs attributed to noncurrent assets and the useful lives …show more content…
Table II graphically depicts the shift to fair value (accounting estimates) over time as the representational percentage of FASB members from the financial services industry increased. Accounting estimates are more pervasive in the conceptual framework due to the changes implemented in SFAC 8. The FASB’s objective in issuing any accounting regulation is to increase relevance of the financial reporting of a company for the benefit of its investors, creditors, and any other user in the commercial market. FASB achieves this goal by setting the Generally Accepted Accounting Principles (GAAP) which all publicly traded companies must adapt to their financial systems. GAAP are high quality accounting standards that demand that financial statement users are provided relevant, clear, and useful information that is sufficient for their needs and also cost effective to the organization itself. While developing the standards, the FASB focuses on ensuring that they are integrative so as to reduce the accounting differences related to comparability. Additionally, as described in SFAC 8, relevance is an essential qualitative characteristic that also increases the decision usefulness of the accounting information. Although relevance in financial reporting is a primary decision specific quality, it is very elusive and complex. Apparently, financial statement users have an inability to …show more content…
The factors include the auditor’s certification role in the capital markets. Auditors certify the financial statements and reports issued by corporations when prepared according to GAAP and their industry specific statutory requirements. Auditors are required to maintain an attitude of skepticism in both the objective and subjective factors presented by the management in support of their formulation of accounting estimates. Surprisingly, even when the management team is composed of competent and reliable personnel, there is always a possibility of biases, in particular, for personal gain. As a result, the auditors ensure that they determine the reasonability and integrity of the management team during review of their assumptions and validation of accounting estimates. Alternatively, there are criminal and civil liabilities plus penalties for those corporations and their auditors who fail to act accordingly. The forms of punishments are economic, legal, and political costs. The second factor is the client’s preferences since the auditor’s wealth is dependent on their customers (Allen, Ramanna, and Roychowdhury 2014). The company’s executives make decisions to keep or fire the auditors, and therefore, the auditors firm may act in an unethical manner to maintain the client as a customer. For example, the

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