Learning Materials
Features
Discover
Chapter 1: Question 1Q (page 22)
Differentiate broadly between financial accounting and managerial accounting.
The major difference is that financial accounting is performed for external users and management accounting is performed for internal users.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
In what way is the Securities and Exchange Commission concerned about and supportive of accounting principles and standards?
CA1-14 (Securities and Exchange Commission)
The U.S. Securities and Exchange Commission (SEC) was created in 1934 and consists of five commissioners and a large professional staff. The SEC professional staff is organised into five divisions and several principal offices. The primary objective of the SEC is to support fair securities markets. The SEC also strives to foster enlightened stockholder participation in corporate decisions of publicly traded companies. The SEC has a significant presence in financial markets, the development of accounting practices, and corporation-shareholder relations, and has the power to exert influence on entities whose actions lie within the scope of its authority.
Instructions
(a) Explain from where the Securities and Exchange Commission receives its authority
(b) Describe the official role of the Securities and Exchange Commission in the development of financial accounting theory and practices.
(c) Discuss the interrelationship between the Securities and Exchange Commission and the Financial Accounting Standards Board with respect to the development and establishment of financial accounting theory and practices.
Question: CA1-17 GROUPWORK (GAAP and Economic Consequences) The following letter was sent to the SEC and the FASB by the leaders of the business community.
Dear Sirs:
The FASB has been struggling with accounting for derivatives and hedging for many years. The FASB has now developed, over the last few weeks, a new approach that it proposes to adopt as a final standard. We understand that the
Board intends to adopt this new approach as a final standard without exposing it for public comment and debate, despite the evident complexity of new approach, the speed with which it has been developed and the significant changes to the exposure draft since it was released more than one year ago. Instead, the board plans to allow only a brief review by selected parties, limited to issues of operationality and clarity, and would exclude questions as to the merits of the proposed approach.
As the FASB itself has said throughout this process, its mission does not permit it to consider matters that go beyond accounting and reporting considerations. Accordingly, the FASB may not have adequately considered the wide range of concerns that have been expressed about the derivatives and hedging proposal, including concerns related to the potential impact on the capital markets, the weakening of companies` ability to manage risk, and the adverse control implications of implementing costly and complex new rules imposed at the same time as other major initiatives, including the year 2000 issues and a single European currency. We believe that these crucial issues must be considered, if not by the FASB, then by the Securities and Exchange Commission, other regulatory agencies, or Congress.
We believe it is essential that the FASB solicit all comments in order to identify and address all material issues that may exist before issuing a final standard. We understand the desire to bring this process to a prompt conclusion, but the underlying issues are so important to this nation`s businesses, the customers they serve and the economy as a whole that expediency cannot be the dominant consideration. As a result, we urge the FASB to expose its new proposal for public comment, following the established due process procedures that are essential to acceptance of its standards, and providing sufficient time to affected parties to understand and assess the new approach.
We also urge the SEC to study the comments received in order to assess the impact that these proposed rules may have on the capital markets, on companies` risk management practices, and on management and financial controls. These vital public policy matters deserve consideration as part of the Commission`s oversight responsibilities.
We believe that these steps are essential if the FASB is to produce the best possible accounting standard while minimizing adverse economic effects and maintaining the competitiveness of U.S businesses in the international market
place.
Very truly yours, (this letter was signed by the chairs of 22 of the largest U.S companies.)
Instructions
Answer the following questions.
(a) Explain the "due process" procedures followed by the FASB in developing a financial reporting standard.
(b) What is meant by the term "economic consequences" in accounting standard-setting?
(c) What economic consequences arguments are used in this letter?
(d) What do you believe is the main point of the letter?
(e) Why do you believe a copy of this letter was sent by the business community to influential members of the U.S. Congress?
Question: The authoritative status of The Conceptual Framework for Financial Reporting is as follows:
(a) It is used when there is no standard or interpretation related to the reporting issues under consideration.
(b) It is not as authoritative as a standard but takes precedence over any interpretation related to the reporting issue.
(c) It takes precedence over all other authoritative literature.
(d) It has no authoritative status.
ETHICS (Financial Reporting Pressures) Presented below is abbreviated testimony from Troy Normand in the
WorldCom case. He was a manager in the corporate reporting department and is one of five individuals who pleaded guilty. He is
testifying in hopes of receiving no prison time when he is ultimately sentenced.
Q. Mr. Normand, if you could just describe for the jury how the meeting started and what was said during the meeting?
A. I can’t recall exactly who initiated the discussion, but right away Scott Sullivan acknowledged that he was aware we had
problems with the entries, David Myers had informed him, and we were considering resigning.
He said that he respected our concerns but that we weren’t being asked to do anything that he believed was wrong.
He mentioned that he acknowledged that the company had lost focus quite a bit due to the preparations for the Sprint
merger, and that he was putting plans in place and projects in place to try to determine where the problems were, why the
costs were so high.
He did say he believed that the initial statements that we produced, that the line costs in those statements could not
have been as high as they were, that he believed something was wrong and there was no way that the costs were that
high.
I informed him that I didn’t believe the entry we were being asked to do was right, that I was scared, and I didn’t want
to put myself in a position of going to jail for him or the company. He responded that he didn’t believe anything was wrong,
nobody was going to be going to jail, but that if it later was found to be wrong, that he would be the person going to jail,
not me.
He asked that I stay, don’t jump off the plane, let him land it softly, that’s basically how he put it. And he mentioned that he
had a discussion with Bernie Ebbers, asking Bernie to reduce projections going forward and that Bernie had refused.
Q. Mr. Normand, you said that Mr. Sullivan said something about don’t jump out of the plane. What did you understand him
to mean when he said that?
A. Not to quit.
Q. During this meeting, did Mr. Sullivan say anything about whether you would be asked to make entries like this in the future?
A. Yes, he made a comment that from that point going forward we wouldn’t be asked to record any entries, high-level late
adjustments, that the numbers would be the numbers.
Q. What did you understand that to be mean, the numbers would be the numbers?
A. That after the preliminary statements were issued, with the exception of any normal transaction, valid transaction, we
wouldn’t be asked to be recording any more late entries.
Q. I believe you testified that Mr. Sullivan said something about the line cost numbers not being accurate. Did he ask you to
conduct any analysis to determine whether the line cost numbers were accurate?
A. No, he did not.
Q. Did anyone ever ask you to do that?
A. No.
Q. Did you ever conduct any such analysis?
A. No, I didn’t.
Q. During this meeting, did Mr. Sullivan ever provide any accounting justification for the entry you were asked to make?
A. No, he did not.
Concepts for Analysis 27
Q. Did anything else happen during the meeting?
A. I don’t recall anything else.
Q. How did you feel after this meeting?
A. Not much better actually. I left his office not convinced in any way that what we were asked to do was right. However, I did question myself to some degree after talking with him wondering whether I was making something more out of what was really there.
Instructions
Answer the following questions.
(a) What appears to be the ethical issue involved in this case?
(b) Is Troy Normand acting improperly or immorally?
(c) What would you do if you were Troy Normand?
(d) Who are the major stakeholders in this case
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Exams 
GCSE 
IGCSE 
AS 
A Level 
International A Level 
University Admissions Tests 
Flashcards 
Vaia AI 
Notes 
Study Plans 
Study Sets 
Find a job 
Find a degree 
Student Deals 
Magazine 
Mobile App