Accounting standards are the regulations or rules (often including laws and statutes) that govern the preparation of financial statements. Standard setting is the process by which accounting standards are formulated. Thus, accounting standards are the outcome of standard setting. However, actual practice may deviate from what the standards require. There are at least three reasons for this. First, in many countries the penalties for noncompliance with official accounting pronouncements are weak or ineffective.
Companies don’t always follow standards when they are not enforced. Second, companies may voluntarily report more information than required. Third, some countries allow companies to depart from accounting standards if doing so will better represent a company’s results of operations and financial position. To gain a complete picture of how accounting works in a country, we must pay attention to the accounting standardsetting process, the resulting accounting standards, and actual practice. Auditing adds credibility to financial reports. Thus, we also discuss the role and purpose of auditing in the countries we examine.
Accounting standard setting normally involves a combination of private- and public-sector groups. The private sector includes the accounting profession and other groups affected by the financial reporting process, such as users and preparers of financial statements and employees. The public sector includes such agencies as tax authorities, government agencies responsible for commercial law, and securities commissions. Stock exchanges may influence the process and may be in either the private or public sector, depending on the country. The roles and influence of these groups in setting accounting standards differ from country to country. These differences help explain why standards vary around the world.
The relationship between accounting standards and accounting practice is complex, and does not always move in a one-way direction. In some cases, practice derives from standards; in others, standards are derived from practice. Practice can be influenced by market forces, such as those related to the competition for funds in capital markets. Companies competing for funds may voluntarily provide information beyond what is required in response to the demand for information by investors and others. If the demand for such information is strong enough, standards may be changed to mandate disclosures that formerly were voluntary.Distinguished the fair presentation and legal compliance orientations of accounting. Fair presentation accounting is usually associated with common law countries, whereas legal compliance accounting is typically found in code law countries.
This distinction applies in standard setting, in that the private sector is relatively more influential in fair presentation, common law countries, while the public sector is relatively more influential in legal compliance, code law countries. Auditing parallels the type of legal system and the role and purpose of financial reporting. The auditing profession tends to be more self-regulated in fair presentation countries, especially those influenced by the United Kingdom. Auditors also exercise more judgment when the purpose of an audit is to attest to the fair presentation of financial reports. By contrast, in code law countries the accounting profession tends to be more state regulated. In such countries, the main purpose of an audit is to ensure that the company’s records and financial statements conform to legal requirements.
