How Accounting Standards Help the Market
- Fair Estimates and Valuations
- Accurate Reporting
- Appropriate Consideration
When companies’ financial statements are released, auditors often stress the fact that they reviewed everything in accordance with the appropriate financial accounting standards and framework. Although this almost seems like a filler statement, it is extremely important. Here are the key benefits associated with accounting standards.
Related Resource: Top 25 Most Affordable Online Bachelor’s Degrees in Accounting
One of the main advantages of relying on financial accounting standards is the fact that there will be an unparalleled level of consistency in the market. This is because all public companies that rely on investors will usually have to obey the exact same set of principles. For instance, United States corporations all have to adhere to the generally accepted accounting principles when preparing financial statements. That way, the investors will have a way to gauge the company’s performance by comparing it to a generalized set of benchmarks that are universally applicable.
2. Fair Estimates and Valuations
All standards in accounting touch on the topic of fair representation that has to be met through reasonable estimates and judgment-call valuations. Although the mere use of the word “reasonable” often gives some room for different interpretations, governing agencies tend to monitor subjective estimates closely. These pertain to things like inventory valuation methods and recording procedures that could give the company a comparative advantage. For instance, a company could value its inventory at an extremely low cost to make their cost of goods sold account lower. In turn, the net income would spike. Fortunately, accounting standards prevent such manipulations.
3. Accurate Reporting
To add to the previous, there is a never-ending set of standards under all principles in the world that mandates accurate reporting, according to Investopedia.com. This pertains to things like recording transactions at the actual dollar figures and proper timing. So, over-estimating revenues or waiting to record expenses until the next year is something that could benefit the company’s current-year financial statements. Doing so, however, is a shortcut to failing a routine audit and getting an adverse opinion issued. This almost instantly ruins the company’s reputation in the market.
Even parties that ensure how the financial statements are correct have to adhere to a specific set of standards related to their role. In other words, auditors must follow the so-called generally accepted auditing standards which include a lot of different rules on proper auditing procedures. One of the most important ones says that auditors have to be independent of the company that they are auditing. To understand why this is important, consider the alternative. If auditors were not independent, senior management could simply hire their friends or family members that have the right qualifications to issue clean opinions as needed.
5. Appropriate Consideration
In the end, accounting standards are crucial when it comes to ensuring that practicing CPAs possess the necessary skills, ethical values, and industry experience. For instance, the AICPA standards prevent people from becoming CPAs until they pass a slew of educational requirements and take an extremely difficult, four-section exam. Not to forget that they also mandate them to spend hundreds of hours gaining relevant experience under the supervision of an already practicing CPA. So, the odds of unqualified individuals operating in the field of accounting are minimized by the presence of the aforementioned standards.
Although there are more ways in which standards in accounting make a difference, these few examples are a great way to demonstrate how the industry would not be the same without them!