HOME

TheInfoList



OR:

Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as
business Business is the practice of making one's living or making money by producing or buying and selling products (such as goods and services). It is also "any activity or enterprise entered into for profit." Having a business name does not separa ...
es and corporations. Accounting, which has been called the "language of business", measures the results of an organization's economic activities and conveys this information to a variety of stakeholders, including
investor An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Typ ...
s, creditors, management, and
regulators Regulator may refer to: Technology * Regulator (automatic control), a device that maintains a designated characteristic, as in: ** Battery regulator ** Pressure regulator ** Diving regulator ** Voltage regulator * Regulator (sewer), a control dev ...
. Practitioners of accounting are known as
accountant An accountant is a practitioner of accounting or accountancy. Accountants who have demonstrated competency through their professional associations' certification exams are certified to use titles such as Chartered Accountant, Chartered Certif ...
s. The terms "accounting" and " financial reporting" are often used as synonyms. Accounting can be divided into several fields including financial accounting, management accounting, tax accounting and
cost accounting Cost accounting is defined as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing, classifying, al ...
. Financial accounting focuses on the reporting of an organization's financial information, including the preparation of financial statements, to the external users of the information, such as investors, regulators and suppliers; and management accounting focuses on the measurement, analysis and reporting of information for internal use by management. The recording of financial transactions, so that summaries of the financials may be presented in financial reports, is known as
bookkeeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organizations. It involves preparing source documents for all transactions, operations, and other events of a business. T ...
, of which double-entry bookkeeping is the most common system.
Accounting information system An accounting as an information system (AIS) is a system of collecting, storing and processing financial and accounting data that are used by decision makers. An accounting information system is generally a computer-based method for tracking acco ...
s are designed to support accounting functions and related activities. Accounting has existed in various forms and levels of sophistication throughout human history. The double-entry accounting system in use today was developed in medieval Europe, particularly in Venice, and is usually attributed to the Italian mathematician and Franciscan friar Luca Pacioli. Today, accounting is facilitated by
accounting organizations Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "language ...
such as standard-setters, accounting firms and
professional bodies A professional is a member of a profession or any person who works in a specified professional activity. The term also describes the standards of education and training that prepare members of the profession with the particular knowledge and skil ...
. Financial statements are usually audited by accounting firms, and are prepared in accordance with generally accepted accounting principles (GAAP). GAAP is set by various standard-setting organizations such as the
Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securi ...
(FASB) in the United States and the Financial Reporting Council in the United Kingdom. As of 2012, "all major economies" have plans to converge towards or adopt the International Financial Reporting Standards (IFRS).


History

Accounting is thousands of years old and can be traced to
ancient Ancient history is a time period from the beginning of writing and recorded human history to as far as late antiquity. The span of recorded history is roughly 5,000 years, beginning with the Sumerian cuneiform script. Ancient history cove ...
civilization A civilization (or civilisation) is any complex society characterized by the development of a state, social stratification, urbanization, and symbolic systems of communication beyond natural spoken language (namely, a writing system). Ci ...
s.Robson, Keith. 1992. "Accounting Numbers as 'inscription': Action at a Distance and the Development of Accounting." ''Accounting, Organizations and Society'' 17 (7): 685–708. The early development of accounting dates back to ancient Mesopotamia, and is closely related to developments in writing,
counting Counting is the process of determining the number of elements of a finite set of objects, i.e., determining the size of a set. The traditional way of counting consists of continually increasing a (mental or spoken) counter by a unit for every elem ...
and money; there is also evidence of early forms of
bookkeeping Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business and other organizations. It involves preparing source documents for all transactions, operations, and other events of a business. T ...
in ancient Iran,Oldroyd, David & Dobie, Alisdair: ''Themes in the history of bookkeeping'', The Routledge Companion to Accounting History, London, July 2008, , Chapter 5, p. 96 and early
auditing An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
systems by the ancient Egyptians and
Babylonians Babylonia (; Akkadian: , ''māt Akkadī'') was an ancient Akkadian-speaking state and cultural area based in the city of Babylon in central-southern Mesopotamia (present-day Iraq and parts of Syria). It emerged as an Amorite-ruled state c. ...
. By the time of Emperor
Augustus Caesar Augustus (born Gaius Octavius; 23 September 63 BC – 19 August AD 14), also known as Octavian, was the first Roman emperor; he reigned from 27 BC until his death in AD 14. He is known for being the founder of the Roman Pri ...
, the Roman government had access to detailed financial information. Double-entry bookkeeping was pioneered in the Jewish community of the early-medieval Middle East and was further refined in medieval Europe. With the development of
joint-stock companies A joint-stock company is a business entity in which shares of the company's stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares (certificates of ownership). Shareholders are ...
, accounting split into financial accounting and management accounting. The first published work on a
double-entry bookkeeping system Double-entry bookkeeping, also known as double-entry accounting, is a method of bookkeeping that relies on a two-sided accounting entry to maintain financial information. Every entry to an account requires a corresponding and opposite entry to ...
was the ''
Summa de arithmetica ' (''Summary of arithmetic, geometry, proportions and proportionality'') is a book on mathematics written by Luca Pacioli and first published in 1494. It contains a comprehensive summary of Renaissance mathematics, including practical arithmeti ...
'', published in Italy in 1494 by Luca Pacioli (the "Father of Accounting"). Accounting began to transition into an organized profession in the nineteenth century, with local
professional bodies A professional is a member of a profession or any person who works in a specified professional activity. The term also describes the standards of education and training that prepare members of the profession with the particular knowledge and skil ...
in England merging to form the Institute of Chartered Accountants in England and Wales in 1880.


Etymology

Both the words accounting and accountancy were in use in Great Britain by the mid-1800s, and are derived from the words ''accompting'' and ''accountantship'' used in the 18th century.Labardin, Pierre, and Marc Nikitin. 2009. "Accounting and the Words to Tell It: An Historical Perspective." ''Accounting, Business & Financial History'' 19 (2): 149–166. In Middle English (used roughly between the 12th and the late 15th century) the verb "to account" had the form ''accounten'', which was derived from the Old French word ''aconter'',Baladouni, Vahé. 1984. "Etymological Observations on Some Accounting Terms." ''The Accounting Historians Journal'' 11 (2): 101–109. which is in turn related to the Vulgar Latin word ''computare'', meaning "to reckon". The base of ''computare'' is ''putare'', which "variously meant to prune, to purify, to correct an account, hence, to count or calculate, as well as to think". The word "
accountant An accountant is a practitioner of accounting or accountancy. Accountants who have demonstrated competency through their professional associations' certification exams are certified to use titles such as Chartered Accountant, Chartered Certif ...
" is derived from the French word , which is also derived from the Italian and Latin word . The word was formerly written in English as "accomptant", but in process of time the word, which was always pronounced by dropping the "p", became gradually changed both in pronunciation and in orthography to its present form.


Terminology

Accounting has variously been defined as the keeping or preparation of the financial records of transactions of the firm, the analysis, verification and reporting of such records and "the principles and procedures of accounting"; it also refers to the
job Work or labor (or labour in British English) is intentional activity people perform to support the needs and wants of themselves, others, or a wider community. In the context of economics, work can be viewed as the human activity that cont ...
of being an
accountant An accountant is a practitioner of accounting or accountancy. Accountants who have demonstrated competency through their professional associations' certification exams are certified to use titles such as Chartered Accountant, Chartered Certif ...
. Accountancy refers to the
occupation Occupation commonly refers to: *Occupation (human activity), or job, one's role in society, often a regular activity performed for payment *Occupation (protest), political demonstration by holding public or symbolic spaces *Military occupation, th ...
or
profession A profession is a field of work that has been successfully '' professionalized''. It can be defined as a disciplined group of individuals, ''professionals'', who adhere to ethical standards and who hold themselves out as, and are accepted by ...
of an accountant, particularly in
British English British English (BrE, en-GB, or BE) is, according to Oxford Dictionaries, "English as used in Great Britain, as distinct from that used elsewhere". More narrowly, it can refer specifically to the English language in England, or, more broadly ...
.


Topics

Accounting has several subfields or subject areas, including financial accounting, management accounting,
auditing An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
,
taxation A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or ...
and
accounting information system An accounting as an information system (AIS) is a system of collecting, storing and processing financial and accounting data that are used by decision makers. An accounting information system is generally a computer-based method for tracking acco ...
s.Weber, Richard P., and W. C. Stevenson. 1981. "Evaluations of Accounting Journal and Department Quality." The Accounting Review 56 (3): 596–612.


Financial accounting

Financial accounting focuses on the reporting of an organization's financial information to external users of the information, such as investors, potential investors and creditors. It calculates and records business transactions and prepares financial statements for the external users in accordance with generally accepted accounting principles (GAAP). GAAP, in turn, arises from the wide agreement between accounting theory and practice, and change over time to meet the needs of decision-makers. Financial accounting produces past-oriented reports—for example financial statements are often published six to ten months after the end of the accounting period—on an
annual Annual may refer to: *Annual publication, periodical publications appearing regularly once per year **Yearbook **Literary annual *Annual plant *Annual report *Annual giving *Annual, Morocco, a settlement in northeastern Morocco *Annuals (band), a ...
or quarterly basis, generally about the organization as a whole.


Management accounting

Management accounting focuses on the measurement, analysis and reporting of information that can help managers in making decisions to fulfill the goals of an organization. In management accounting, internal measures and reports are based on cost-benefit analysis, and are not required to follow the generally accepted accounting principle (GAAP). In 2014 CIMA created th
Global Management Accounting Principles (GMAPs)
The result of research from across 20 countries in five continents, the principles aim to guide best practice in the discipline. Management accounting produces past-oriented reports with time spans that vary widely, but it also encompasses future-oriented reports such as
budgets A budget is a calculation play, usually but not always financial, for a defined period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including time, costs and expenses, environmenta ...
. Management accounting reports often include financial and non financial information, and may, for example, focus on specific products and departments.


Auditing

Auditing is the verification of assertions made by others regarding a payoff,Baiman, Stanley. 1979. "Discussion of Auditing: Incentives and Truthful Reporting." Journal of Accounting Research 17: 25–29. and in the context of accounting it is the "
unbiased Bias is a disproportionate weight ''in favor of'' or ''against'' an idea or thing, usually in a way that is closed-minded, prejudicial, or unfair. Biases can be innate or learned. People may develop biases for or against an individual, a group, ...
examination and evaluation of the financial statements of an organization". Audit is a professional service that is systematic and conventional. An audit of financial statements aims to express or disclaim an independent opinion on the financial statements. The auditor expresses an independent opinion on the fairness with which the financial statements presents the financial position, results of operations, and cash flows of an entity, in accordance with the generally accepted accounting principles (GAAP) and "in all material respects". An auditor is also required to identify circumstances in which the generally accepted accounting principles (GAAP) have not been consistently observed.


Information systems

An accounting information system is a part of an organization's information system used for processing accounting data. Many corporations use artificial intelligence-based information systems. The banking and finance industry uses AI in fraud detection. The retail industry uses AI for customer services. AI is also used in the cybersecurity industry. It involves computer hardware and software systems using statistics and modeling. Many accounting practices have been simplified with the help of accounting computer-based software. An enterprise resource planning (ERP) system is commonly used for a large organisation and it provides a comprehensive, centralized, integrated source of information that companies can use to manage all major business processes, from purchasing to manufacturing to human resources. These systems can be cloud based and available on demand via application or browser, or available as software installed on specific computers or local servers, often referred to as on-premise.


Tax accounting

Tax accounting in the United States concentrates on the preparation, analysis and presentation of tax payments and tax returns. The U.S. tax system requires the use of specialised accounting principles for tax purposes which can differ from the generally accepted accounting principles (GAAP) for financial reporting. U.S. tax law covers four basic forms of business ownership: sole proprietorship, partnership, corporation, and limited liability company.
Corporate A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and re ...
and personal income are taxed at different rates, both varying according to income levels and including varying marginal rates (taxed on each additional dollar of income) and average rates (set as a percentage of overall income).


Forensic accounting

Forensic accounting is a specialty practice area of accounting that describes engagements that result from actual or anticipated disputes or
litigation - A lawsuit is a proceeding by a party or parties against another in the civil court of law. The archaic term "suit in law" is found in only a small number of laws still in effect today. The term "lawsuit" is used in reference to a civil act ...
. " Forensic" means "suitable for use in a court of law", and it is to that standard and potential outcome that forensic accountants generally have to work.


Political campaign accounting

Political campaign accounting deals with the development and implementation of financial systems and the accounting of financial transactions in compliance with laws governing political campaign operations. This branch of accounting was first formally introduced in the March 1976 issue of ''The Journal of Accountancy''.


Organizations


Professional bodies

Professional accounting bodies A professional accounting body is an organization or association of accountants in a particular jurisdiction. Usually a person needs to be a member of such professional body to hold out to the public of the jurisdiction as an accountant. The desi ...
include the American Institute of Certified Public Accountants (AICPA) and the other 179 members of the International Federation of Accountants (IFAC), including Institute of Chartered Accountants of Scotland (ICAS), Institute of Chartered Accountants of Pakistan (ICAP),
CPA Australia CPA Australia ("Certified Practising Accountant") is a professional accounting body in Australia founded in 1886. As of 31 December 2020, it has 168,736 members working in 150 countries and regions around the world. CPA Australia currently has ...
, Institute of Chartered Accountants of India,
Association of Chartered Certified Accountants Founded in 1904, the Association of Chartered Certified Accountants (ACCA) is the global professional accounting body offering the Chartered Certified Accountant qualification (ACCA). It has 240,952 members and 541,930 future members worldwi ...
(ACCA) and Institute of Chartered Accountants in England and Wales (ICAEW). Some countries have a single professional accounting body (e.g. Brazil) and, in some other countries, professional bodies for subfields of the accounting professions also exist, for example the
Chartered Institute of Management Accountants The Chartered Institute of Management Accountants (CIMA) is the global professional management accounting body based out of the UK. CIMA offers training and qualification in management accountancy and related subjects. It is focused on accountan ...
(CIMA) in the UK and
Institute of management accountants The Institute of Management Accountants (IMA), formerly known as the National Association of Cost Accountants (NACA), is a professional organization of accountants. History IMA was founded in 1919 in Buffalo, New York as the National Associ ...
in the United States. Many of these professional bodies offer education and training including qualification and administration for various accounting designations, such as certified public accountant ( AICPA) and chartered accountant.


Firms

Depending on its size, a company may be legally required to have their financial statements
audited An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
by a qualified auditor, and audits are usually carried out by accounting firms. Accounting firms grew in the United States and Europe in the late nineteenth and early twentieth century, and through several mergers there were large international accounting firms by the mid-twentieth century. Further large mergers in the late twentieth century led to the dominance of the auditing market by the "Big Five" accounting firms:
Arthur Andersen Arthur Andersen was an American accounting firm based in Chicago that provided auditing, tax advising, consulting and other professional services to large corporations. By 2001, it had become one of the world's largest multinational corpor ...
, Deloitte, Ernst & Young,
KPMG KPMG International Limited (or simply KPMG) is a multinational corporation, multinational professional services network, and one of the Big Four accounting firms, Big Four accounting organizations. Headquartered in Amstelveen, Netherlands, alth ...
and PricewaterhouseCoopers. The demise of Arthur Andersen following the Enron scandal reduced the Big Five to the Big Four.


Standard-setters

Generally accepted accounting principles (GAAP) are accounting standards issued by national regulatory bodies. In addition, the International Accounting Standards Board (IASB) issues the International Financial Reporting Standards (IFRS) implemented by 147 countries. Standards for international audit and assurance, ethics, education, and public sector accounting are all set by independent standard settings boards supported by IFAC. The International Auditing and Assurance Standards Board sets international standards for auditing, assurance, and quality control; the International Ethics Standards Board for Accountants (IESBA) sets the internationally appropriate principles-based ''Code of Ethics for Professional Accountants''; the
International Accounting Education Standards Board The International Accounting Education Standards Board (IAESB) is an independent organisation within the fold of the International Federation of Accountants (IFAC). The board develops guidance to improve standards of education in accountancy. The ...
(IAESB) sets professional accounting education standards; and International Public Sector Accounting Standards Board (IPSASB) sets accrual-based international public sector accounting standards. Organizations in individual countries may issue accounting standards unique to the countries. For example, in Australia, the Australian Accounting Standards Board manages the issuance of the accounting standards in line with IFRS. In the United States the
Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public's interest. The Securi ...
(FASB) issues the Statements of Financial Accounting Standards, which form the basis of US GAAP, and in the United Kingdom the Financial Reporting Council (FRC) sets accounting standards. However, as of 2012 "all major economies" have plans to converge towards or adopt the IFRS.


Education, training and qualifications


Degrees

At least a
bachelor's degree A bachelor's degree (from Middle Latin ''baccalaureus'') or baccalaureate (from Modern Latin ''baccalaureatus'') is an undergraduate academic degree awarded by colleges and universities upon completion of a course of study lasting three to six y ...
in accounting or a related field is required for most accountant and
auditor An auditor is a person or a firm appointed by a company to execute an audit.Practical Auditing, Kul Narsingh Shrestha, 2012, Nabin Prakashan, Nepal To act as an auditor, a person should be certified by the regulatory authority of accounting and a ...
job positions, and some employers prefer applicants with a master's degree. A degree in accounting may also be required for, or may be used to fulfill the requirements for, membership to professional accounting bodies. For example, the education during an accounting degree can be used to fulfill the American Institute of CPA's (AICPA) 150 semester hour requirement, and associate membership with the
Certified Public Accountants Association The Certified Public Accountants Association (CPAA) (formerly Association of Certified Public Accountants and CPA UK) was formed in 1989 to represent the interests of certain accountants in the United Kingdom. The association's National Administr ...
of the UK is available after gaining a degree in finance or accounting. A doctorate is required in order to pursue a career in accounting
academia An academy (Attic Greek: Ἀκαδήμεια; Koine Greek Ἀκαδημία) is an institution of secondary or tertiary higher learning (and generally also research or honorary membership). The name traces back to Plato's school of philosophy ...
, for example, to work as a university
professor Professor (commonly abbreviated as Prof.) is an Academy, academic rank at university, universities and other post-secondary education and research institutions in most countries. Literally, ''professor'' derives from Latin as a "person who pr ...
in accounting. The Doctor of Philosophy (PhD) and the Doctor of Business Administration (DBA) are the most popular degrees. The PhD is the most common degree for those wishing to pursue a career in academia, while DBA programs generally focus on equipping
business executives An executive officer is a person who is principally responsible for leading all or part of an organization, although the exact nature of the role varies depending on the organization. In many militaries and police forces, an executive officer, o ...
for business or public careers requiring research skills and qualifications.


Professional qualifications

Professional accounting qualifications include the Chartered Accountant designations and other qualifications including certificates and diplomas. In Scotland, chartered accountants of ICAS undergo
Continuous Professional Development Professional development is learning to earn or maintain professional credentials such as academic degrees to formal coursework, attending conferences, and informal learning opportunities situated in practice. It has been described as intensive ...
and abide by the ICAS code of ethics. In England and Wales, chartered accountants of the
ICAEW The Institute of Chartered Accountants in England and Wales (ICAEW) is a professional membership organisation that promotes, develops and supports chartered accountants and students around the world. As of July 2022, it has over 198,000 members ...
undergo annual training, and are bound by the ICAEW's
code of ethics Ethical codes are adopted by organizations to assist members in understanding the difference between right and wrong and in applying that understanding to their decisions. An ethical code generally implies documents at three levels: codes of bus ...
and subject to its disciplinary procedures. In the United States, the requirements for joining the AICPA as a
Certified Public Accountant Certified Public Accountant (CPA) is the title of qualified accountants in numerous countries in the English-speaking world. It is generally equivalent to the title of chartered accountant in other English-speaking countries. In the United Sta ...
are set by the Board of Accountancy of each state, and members agree to abide by the AICPA's Code of Professional Conduct and Bylaws. The ACCA is the largest global accountancy body with over 320,000 members, and the organisation provides an 'IFRS stream' and a 'UK stream'. Students must pass a total of 14 exams, which are arranged across three levels.


Research

Accounting research is research in the effects of economic events on the process of accounting, the effects of reported information on economic events, and the roles of accounting in organizations and society. It encompasses a broad range of research areas including financial accounting, management accounting,
auditing An audit is an "independent examination of financial information of any entity, whether profit oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing ...
and
taxation A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or ...
.Oler, Derek K., Mitchell J. Oler, and Christopher J. Skousen. 2010. "Characterizing Accounting Research." ''Accounting Horizons'' 24 (4): 635–670. Accounting research is carried out both by academic researchers and practicing accountants. Methodologies in academic accounting research include archival research, which examines "objective data collected from repositories"; experimental research, which examines data "the researcher gathered by administering treatments to subjects"; analytical research, which is "based on the act of formally modeling theories or substantiating ideas in mathematical terms"; interpretive research, which emphasizes the role of language, interpretation and understanding in accounting practice, "highlighting the symbolic structures and taken-for-granted themes which pattern the world in distinct ways";
critical Critical or Critically may refer to: *Critical, or critical but stable, medical states **Critical, or intensive care medicine * Critical juncture, a discontinuous change studied in the social sciences. *Critical Software, a company specializing ...
research, which emphasizes the role of power and conflict in accounting practice;
case studies A case study is an in-depth, detailed examination of a particular case (or cases) within a real-world context. For example, case studies in medicine may focus on an individual patient or ailment; case studies in business might cover a particular fi ...
;
computer simulation Computer simulation is the process of mathematical modelling, performed on a computer, which is designed to predict the behaviour of, or the outcome of, a real-world or physical system. The reliability of some mathematical models can be deter ...
; and field research.Coyne, Joshua G., Scott L. Summers, Brady Williams, and David a. Wood. 2010. "Accounting Program Research Rankings by Topical Area and Methodology." ''Issues in Accounting Education'' 25 (4) (November): 631–654. Empirical studies document that leading
accounting journals Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...
publish in total fewer research articles than comparable journals in economics and other business disciplines, and consequently, accounting scholars are relatively less successful in
academic publishing Academic publishing is the subfield of publishing which distributes academic research and scholarship. Most academic work is published in academic journal articles, books or theses. The part of academic written output that is not formally publ ...
than their
business school A business school is a university-level institution that confers degrees in business administration or management. A business school may also be referred to as school of management, management school, school of business administration, or ...
peers. Due to different publication rates between accounting and other business disciplines, a recent study based on academic author rankings concludes that the competitive value of a single publication in a top-ranked journal is highest in accounting and lowest in marketing.


Scandals

The year 2001 witnessed a series of financial information frauds involving Enron, auditing firm
Arthur Andersen Arthur Andersen was an American accounting firm based in Chicago that provided auditing, tax advising, consulting and other professional services to large corporations. By 2001, it had become one of the world's largest multinational corpor ...
, the telecommunications company WorldCom, Qwest and Sunbeam, among other well-known corporations. These problems highlighted the need to review the effectiveness of
accounting standards Publicly traded companies typically are subject to rigorous standards. Small and midsized businesses often follow more simplified standards, plus any specific disclosures required by their specific lenders and shareholders. Some firms operate on th ...
, auditing regulations and corporate governance principles. In some cases, management manipulated the figures shown in financial reports to indicate a better economic performance. In others, tax and regulatory incentives encouraged over-leveraging of companies and decisions to bear extraordinary and unjustified risk.Astrid Ayala and Giancarlo Ibárgüen Snr.: "A Market Proposal for Auditing the Financial Statements of Public Companies" (Journal of Management of Value, Universidad Francisco Marroquín, March 2006) p. 41
UFM.edu.gt
/ref> The Enron scandal deeply influenced the development of new regulations to improve the reliability of financial reporting, and increased public awareness about the importance of having accounting standards that show the financial reality of companies and the objectivity and independence of auditing firms. In addition to being the largest
bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debto ...
reorganization in American history, the Enron scandal undoubtedly is the biggest audit failure causing the dissolution of
Arthur Andersen Arthur Andersen was an American accounting firm based in Chicago that provided auditing, tax advising, consulting and other professional services to large corporations. By 2001, it had become one of the world's largest multinational corpor ...
, which at the time was one of the five largest accounting firms in the world. After a series of revelations involving irregular accounting procedures conducted throughout the 1990s, Enron filed for
Chapter 11 Chapter 11 of the United States Bankruptcy Code ( Title 11 of the United States Code) permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, whet ...
bankruptcy protection in December 2001. One consequence of these events was the passage of the
Sarbanes–Oxley Act The Sarbanes–Oxley Act of 2002 is a United States federal law that mandates certain practices in financial record keeping and reporting for corporations. The act, (), also known as the "Public Company Accounting Reform and Investor Protecti ...
in the United States in 2002, as a result of the first admissions of fraudulent behavior made by Enron. The act significantly raises criminal penalties for
securities fraud Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock or commodities markets that induces investors to make purchase or sale decisions on the basis of false information, frequently resulting in lo ...
, for destroying, altering or fabricating records in federal investigations or any scheme or attempt to defraud shareholders.Aiyesha Dey, and Thomas Z. Lys: "Trends in Earnings Management and Informativeness of Earnings Announcements in the Pre- and Post-Sarbanes Oxley Periods ( Kellogg School of Management, Evanston, Illinois, February, 2005) p. 5


Fraud and error

Accounting fraud is an intentional misstatement or omission in the accounting records by management or employees which involves the use of deception. It is a criminal act and a breach of civil tort. It may involve collusion with third parties. An accounting error is an unintentional misstatement or omission in the accounting records, for example misinterpretation of facts, mistakes in processing data, or oversights leading to incorrect estimates. Acts leading to accounting errors are not criminal but may breach civil law, for example, the tort of
negligence Negligence (Lat. ''negligentia'') is a failure to exercise appropriate and/or ethical ruled care expected to be exercised amongst specified circumstances. The area of tort law known as ''negligence'' involves harm caused by failing to act as a ...
. The primary responsibility for the prevention and detection of fraud and errors rests with the entity's management.


See also

*
Accounting information system An accounting as an information system (AIS) is a system of collecting, storing and processing financial and accounting data that are used by decision makers. An accounting information system is generally a computer-based method for tracking acco ...
*
Accounting records Accounting records are key sources of information and evidence used to prepare, verify and/or audit the financial statements. They also include documentation to prove asset ownership for creation of liabilities and proof of monetary and non monetar ...


References


External links

*
Operations Research in Accounting
on the Institute for Operations Research and the Management Sciences website {{Authority control fi:Laskentatoimi