Compare and contrast the Regulatory Frameworks for Financial Reporting in the UK and the USA Free essay! Download now
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Compare and contrast the Regulatory Frameworks for Financial Reporting in the UK and the USA
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DescriptionBusiness Studies and finance and regulation
Compare and contrast the Regulatory Frameworks for Financial Reporting in the UK and the USA.
1: Introduction: The reason for regulatory requirements
In the United Kingdom there has been a shift towards international standards. However, British regulatory requirements remain. “Mandatory requirements take the form of Statements of Standard Accounting Practice (SSAPs) and Financial Reporting standards (FRSs) issued by the Accounting Standards Board” (Elliot and Elliot 2006). Mandatory standards are needed because companies might want to make the accounts appear unrealistically favourable. If this were to happen then shareholders would not be obtaining an accurate view of the business. For example, if discretionary expenditure were deferred, such as spending on research and training, then earnings would be artificially improved.
There is a need to make it more difficult to manipulate accounts such as by deferring expenditure.
2: The background in the United Kingdom
In the 1960’s confidence was lost in accounting procedures. Shareholders were unaware of hidden problems which were only exposed after takeovers or when companies went into administration (Elliot and Elliot 2006)
The GEC takeover of AEI in 1967 exposed inconsistencies in accounting procedures. “The pre-takeover accounts prepared by the old AEI directors, differed materially from the post takeover accounts prepared by the new AEI directors” (Elliot and Elliot 2006). AEI produced a £10m profit forecast in 1967, which had the backing of the auditors. However, when GEC took over AEI it forecast a loss of £4.5 million. This was partly due to inconsistencies such as different views over the value of stock. Mandatory standards were needed to resolve this inconsistency and to make the accounts ‘objective’. That is, the profit should be the same regardless of who was preparing them. A similar problem occurred with Pergamon Press in 1968. Profits were overstated on the basis of an independent investigation, which highlighted a failure to reduce the valuation of stock to the lower of cost and net realisable value.
The problem, shown in these two cases, was that there was too much scope for companies to produce different “results based on the same transactions” (Elliot and Elliot 2006). The investing public cannot be sure of the profits because they depended upon who was responsible for their preparation and audit. Therefore, there was a need for common standards and ‘statements of standard accounting practice’. After the late 1960’s there was an Accounting Standards Steering Committee (in 1970), which aimed to reduce areas of difference in accounting practice and develop consensus. Also disclosure of accounting standards was encouraged so that the investing public were aware of policies such as those relating to depreciation. To ...
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