Accounting_Principles_and_Ethics

Accounting Principles and Ethics Generally Accepted Accounting Principles (GAAP) “guides both the nature of bookkeeping entries made and their interpretation.” (McLean, 2003) There are several agencies that ensure that organizations are in compliance with GAAP. “The Sarbanes-Oxley Act of 2002 required the Security Exchange Commission (SEC) to designate an organization(s) as having the authority to promulgate accounting standards for public companies in the United States, which it did in April 2003 when it reaffirmed the Financial Accounting Standards Board (FASB) as the designated private-sector standard setter for public companies. We have established a working protocol with the SEC for its staff to first refer issues it identifies that may have accounting standard setting implications to the FASB for consideration, with the understanding that the SEC staff reserves the right to exercise its legislative authority to deal with any issues it identifies.” (Smith, 2005) Now that we know the purpose of the GAAP we will examine of what it consist. When following the GAAP an organization needs to list assets, liabilities and owner equity. All assets and liabilities are tallied and then their difference is the owner/organization’s equity. This is the company “worth.” Assets are recorded in terms of their monetary value at their original costs and not at the projected value. The reports need to reveal all relevant information, which includes the good and the bad. This helps the investors, lenders, regulators, and internal management know the true value of the organization. Current financial reporting standards require three basic financial statements, the balance sheet, income statement and the cash flow statement. The balance sheet shows the balance between assets and liabilities plus organization’s equity. The income statement shows the revenues, expenses, and net income of the organization over the course of the reporting period. The cash flow statement shows the flow of cash into and out of the organization over the course of the reporting period. The three statements, interpreted properly, tell much about the performance and the health of the organization. The footnotes explain and elaborate such issues as the dollar value of uncompensated care, the method of calculating pension fund expense, and any pending legal actions that could generate liabilities in the future. A full analysis of the financial statements requires a careful reading of their footnotes. (McLean, 2003) Internal auditor has the responsibility of assuring that the organization is in compliance GAAP. The financial statements are then examined by external auditors. (McLean, 2003) Auditors may now render a negative assurance report on compliance with contractual agreements if they have audited the underlying financial statements and not issued an adverse opinion or a disclaimer of opinion. (Negative assurance means that an audit revealed nothing to suggest that the hospital failed to comply with its debt covenants and positive assurance means, in the auditors' opinion, the hospital complied with its debt covenants.) (Reinstein, 1992) Fraud and abuse in financial reporting can lead to investors, shareholders and lenders investing money in an organization that may be failing. This does not affect the “corporate world” but also the “little people.” People are always looking for ways to make money for their future. References: McLean, R.A. (2003). Financial Management in Health Care Organizations (2nd ed.). Albany, NY: Delmar. Smith, L.W. (2005). The FASB’s Efforts Toward Simplification. Article fromThe FASB Report, February 28, 2005 Reinstein, A. Budzinsky, A. J.. Healthcare Financial Management. Closing the GAAP with Special Reports. Westchester: Mar 1992.Vol.46, Iss. 3; pg. 82.