[Conceptual Framework and Accounting Standards]1

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Module 02: The Environment for Financial

Accounting and Reporting Part 2

Course Learning Outcomes:

1. The Role of Accounting in International Business
2. Learn more about Accounting Standards
3. Overview of Financial Reporting Framework
4. Major Challenges in Financial Reporting Environment
5. Ethics in Accounting Environment
6. The Role of External Auditor

The Role of Accounting in International Business

The purpose of accounting is to communicate the organization’s financial position to
company managers, investors, banks, and the government. Accounting standards provide a
system of rules and principles that prescribe the format and content of financial statements.
Through this consistent reporting, a firm’s managers and investors can assess the financial
health of the firm.
Accounting standards cover topics such as how to account for inventories, depreciation,
research and development costs, income taxes, investments, intangible assets, and
employee benefits. Investors and banks use these financial statements to determine
whether to invest in or loan capital to the firm, while governments use the statements
to ensure that the companies are paying their fair share of taxes.
As countries developed different cultures, languages, and social and economic traditions,
they developed different accounting practices as well. In an increasingly globalized world,
however, these differences are not optimal for the smooth functioning of international
business.

Accounting Standards
Accounting Standards are authoritative statements of how particular types of transaction
and other events should be reflected in financial statements. Accordingly, compliance with
accounting standards will normally be necessary for the fair presentation of financial
statements.
DUE PROCESS
International Accounting Standard Committee (IASC) prepares International Financial
Reporting Standards (IFRS) in accordance with due process. For each standard, the Board
may publish Draft Statement of Principles of other discussion documents that set out the

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various possible requirements for the Standard and the arguments for and against each
other.
Subsequently, the Committee publishes an Exposure Draft for public comment, and it then
examines the arguments put forward in the comment process before deciding on the final
form of Standard. An Exposure Draft and final Standard can be issued only when nine out of
the fourteen IASC members have voted in favor of the release.
STANDARDS
IASC publishes its Standards in series of pronouncements called International Financial
Reporting Standards. It has also adopted the body of Standards issued by the Board of
International Accounting Standards Committee. Those pronouncements continue to be
designed “International Accounting Standards”.
THE NEED FOR INTERNATIONAL ACCOUNTING STANDARDS
At present, financial reports prepared for owners or shareholders and other users involve
principles and procedures that can vary widely from country to country, and sometimes
even within a country. Accounting reports, therefore, can lack comparability. From the
viewpoint of company management, this is highly unsatisfactory because:
 It can cause preparation costs for financial reports that are much higher than
necessary - a multinational company may have to prepare different reports on its
operations for use in different countries.
 Business will want to have a uniform system for assessing financial performance in
their operations in different countries. They will also want their external reports to
be consistent with internal assessments of performance.
International Accounting Standards are also great usefulness for developing countries or
other countries, which do not have a national standard-setting body or do not have
resources to undertake the full process of preparing accounting standards.
The preparation of accounting standards involves considerable cost and quite apart from
the advantages uniformly, it would no be economic for each country have a separate
process.

Financial Reporting Conceptual Framework

The Conceptual Framework (or “Concepts Statements”) is a body of interrelated objectives
and fundamentals. The objectives identify the goals and purposes of financial reporting and
the fundamentals are the underlying concepts that help achieve those objectives. Those
concepts provide guidance in selecting transactions, events and circumstances to be
accounted for, how they should be recognized and measured, and how they should be
summarized and reported.
The Conceptual Framework for Financial Reporting (Conceptual Framework) describes
the objective of, and the concepts for, general purpose financial reporting. The purpose
of the Conceptual Framework is to:

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 assist the International Accounting Standards Committee (Board) to develop IFRS

Standards (Standards) that are based on consistent concepts;
 assist preparers to develop consistent accounting policies when no Standard applies
to a particular transaction or other event, or when a Standard allows a choice of
accounting policy; and
 assist all parties to understand and interpret the Standards.
Note: The Conceptual Framework is not a Standard. Nothing in the Conceptual Framework
overrides any Standard or any requirement in a Standard.

Major Challenges in Financial Reporting Environment

 Non-financial measurements: Financial reports failed to provide some key
performance measures widely used by management, such as customer satisfaction
indexes, backlog information, reject rates on goods purchased, as well as the results
of companies' sustainability efforts.
 Forward-looking information: Financial reports failed to provide forward-looking
information needed by present and potential investors and creditors. One individual
noted that financial statements in 2017 should have started with the phrase, "Once
upon a time," to signify their use of historical cost and accumulation of past events.
 Soft assets: Financial reports focused on hard assets (inventory, plant assets) but
failed to provide much information about a company's soft assets (intangibles). The
best assets are often intangible.
 Timeliness: Companies only prepared financial statements quarterly and provided
audited financial annually. Little to no real-time financial statement information was
available.
 Understandability: Investors and market regulators were raising concerns about the
complexity and lack of understandability of financial reports .

Ethics in Accounting Environment

This Code of Ethics for Professional Accountants (Code) in the Philippines is based on the
International Code of Ethics for Professional Accountants developed by IFAC. Professional
accountants refer to persons who are Certified Public Accountants (CPA) and who hold a
valid certificate issued by the Board of Accountancy whether they be in public practice
(including a sole proprietorship or partnership), industry, commerce, the public sector or
education.
This Code of Ethics is mandatory for all CPAs and is applicable to professional
services performed in the Philippines on or after January 1, 2004 CODE OF ETHICS FOR
PHILIPPINE CPAs

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 A profession is distinguished by certain characteristics including: Mastery of a particular

intellectual skill, acquired by training and education;
 Adherence by its members to a common code of values and conduct established by its
administrating body, including maintaining an outlook which is essentially objective; and
 Acceptance of a duty to society as a whole (usually in return for restrictions in use of a
title or in the granting of a qualification).

Purpose of Ethics in Accounting

Accountants deal with the intimate financial details of individuals and organizations. Some
have the ability to execute million-dollar transactions, and others assist with safeguarding
retirement funds of cab drivers and social workers.
Ethics are moral guidelines that distinguishes right from wrong. Business ethics tells what
is right and wrong in a business situation, while professional ethics tells the same thing
regarding a profession. Ethical Dilemma, by definition, is a situation in which there is no
obvious right or wrong decision but rather a right or right answer.
Ethical codes are the fundamental principles that accounting professionals choose to abide
by to enhance their profession, maintain public trust, and demonstrate honesty and
fairness. People who join organizations and secure the credentials to present themselves to
the public as CPAs strive to protect the reputation of the profession.
Sadly, not everyone who works in the accounting field is trustworthy. Daily violations of
public and private trust occur, and resolving ethical dilemmas doesn’t always end
favorably. The following are five areas that deserve the attention of anyone considering
working in the accounting profession.
1. Independence and Objectivity
Ethics and independence go hand in hand in the accounting profession. A critical
component of trust is making unbiased decisions and recommendations that benefit the
client. Conflicts of interest, for example, demand exposure under independence guidelines.
Benefiting from the sale of one financial product over another could lead to a bias that
skews financial advice to a client.
To remain objective and independent, it is also necessary to ensure that recommendations
are not subject to outside influence. An accountant’s professional judgment is
compromised if they subordinate their judgment to someone else.
2. Integrity
Demonstrating integrity means being straightforward and honest in all business and
professional relationships. Upholding integrity requires that accountants do not associate
themselves with information that they suspect is materially false or misleading — or that
misleads by omission.
3. Confidentiality

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Disclosure of financial information or revealing the disposition of a potential merger by an

accounting professional without express permission violates the trust that is the
foundation of a professional relationship — unless there is a legal or professional reason
to do so.
4. Professional Competence
As technology, legislation and best practices change, a professional accountant must
remain up to date. To exercise sound judgment, an accountant must stay abreast of
developments that could affect a decision’s outcome.
Practicing due care means recognizing your skill level and not suggesting that you have
expertise in an area where you do not. Consulting with other professionals is a standard
practice that helps to bond a network of individuals and generate respect.
Similar guidelines also apply to accounting professionals who supervise others. These
accountants must ensure that the subordinates receive proper training and guidance as they
carry out their responsibilities.
5. Professional Behavior
Ethics require accounting professionals to comply with the laws and regulations that
govern their jurisdictions and their bodies of work. Avoiding actions that could negatively
affect the reputation of the profession is a reasonable commitment that business partners
and others should expect.

Auditing
Auditing is the most important branch of accountancy. Once accounts have been prepared,
they may have check in order to ensure that they do not present a distorted information.
The checking of accounts and the reporting on them is known as auditing. Business have
their accounts audited as a legal requirements.
Auditors are usually trained accountants who specialize in checking accounts rather
preparing them.
 External auditors come in from outside the organization to examine accounting and
financial records and provide an independent opinion on these records. Law
requires that all public companies have their financial statements externally audited.
 Internal auditors work for the organization as internal employees to examine
records and help improve internal processes such as operations, internal controls,
risk management, and governance.

THE ROLE OF EXTERNAL AUDITOR

For the shareholders and other stakeholders to believe in the financial statements, it is
imperative to appoint independent expert to audit the financial statements (Coyle, 2010),
hence the role of external auditors in corporate governance.

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The role of the external auditors in sustaining good corporate governance is widely
acknowledged. Cadbury (1992) declared that “the annual audit is one of the cornerstone of
corporate governance.
The audit provides an external and objective check on the way in which the financial
statements have been prepared and presented...”(p.36). Through the role of external
auditor, the shareholders monitor and control the management and this helps to enhance
transparency in a company (Solomon, 2011).
Basically, the statutory role of the external auditors is to issue audit report of his opinion
on financial statements.

References and Supplementary Materials

Online Supplementary Reading Materials

1. Conceptual Framework for Financial Reporting;

https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220340119&acc
eptedDisclaimer=true; June 14, 2020
2. International Accounting Standards;
https://saylordotorg.github.io/text_international-business/s19-01-
internationalaccounting-stand.html; June 15, 2020
3. THE CONCEPTUAL FRAMEWORK;
https://www.fasb.org/jsp/FASB/Page/BridgePage&cid=1176168367774&pf=true; June
15, 2020
4. THE IMPORTANCE OF ETHICS IN ACCOUNTING;
https://getonline.uwf.edu/articles/business/ethics-in-accounting.aspx; June 15, 2020
5. What is Auditing?; https://www.accountingedu.org/what-is-auditing.html; June 15,
2020
6. CODE OF ETHICS;
https://www.academia.edu/6252769/CODE_OF_ETHICS_FOR_PROFESSIONAL_ACCOUN
TANTS_IN_THE_PHILIPPINES; June 15, 2020

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