FINANCIAL ACCOUNTING AND REPORTING IN NORTH AMERICA Presented at  School of Management, UESTC By George Lan, PhD Associate Professor of Accounting University Of Windsor Windsor, Ontario, Canada March 19, 2003 Outline of Presentation -1 Roles of standard setting bodies (FASB, CICA), Managers, Auditors and  Suppliers of Capital (Investors and Creditors or lenders) [See Diagram] Information Economics Approach and Efficiency of capital markets WorldCom, Enron and Arthur Andersen Incentives of Management to Manage Earnings Outline of Presentation -2 Steps to prevent scandals from occurring  in the future? Some Ethical Principles An Ethical Case Questions regarding presentation or any other (accounting) questions. Information Economics Approach Information Asymmetry exists between the parties in business transactions. The managers ( agents) have more information than the investors (principals). Managers may attempt to select policies or to release biased information that benefit themselves to the expense of the owners . Role of  Accounting: to provide information useful for rational decision-making. Decision Usefulness Approach Section 1000 of CICA Handbook (par. 1000.15): The objective of financial statements is to communicate information that is useful to investors, members, contributors, creditors and other users…in making their resource allocation decisions and/or assessing  management stewardship. Objectives of Financial Statements Statements of Financial Accounting Concepts (1978) (SFAC 1): To provide information that is useful to present and potential investors  and creditors  and other users in making  rational investment, credit, and similar decisions. To provide information to help  present and potential investors  and creditors  in assessing the amounts , timing and uncertainty of prospective cash receipts from dividends or interest.   Relevance and Reliability To be useful, accounting information should provide an informative information system that links current financial statements with future state realizations  and payoffs. Accounting information should be relevant I.e. has the capacity to affect  investors’ beliefs about future returns. Accounting information  should be reliable i.e. should faithfully represents what it purports to measure. It should be precise and free from bias. Elements of Financial Statements Assets: Probable future economic benefits  obtained or controlled  as a result of past transactions. Liabilities: Probable future sacrifices of economic benefits Owner’s Equity: residual Interest  in assets after deducting liabilities i.e. A= L + O.E. or O.E = A – L. Revenues: inflows of assets (or settlement of liabilities) arising from the entity’s major or ongoing activities. Accounting Principles -1 Historical Cost Principle i.e. recognise (record and report) assets and liabilities initially at the cash-equivalent cost. Revenue Recognition Principle i.e. recognise  revenues when earned (earning process is complete  and an exchange has taken place ). All necessary costs have been incurred and collection is assured – usually at point at sale. Accounting Principles -2 Matching Principle i.e. recognise all expenses incurred in producing revenues in the same period as the revenues. Full Disclosure Principle i.e. disclose all relevant information. ......