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1 1 (January 13, 2022)

handle is hein.crs/govegra0001 and id is 1 raw text is: Congressional Research Service nforming the legislitive debate since 1914 Updated January 13, 2022 Introduction to Financial Services: Accounting and Auditing Regulatory Structure, U.S. and International This In Focus provides an overview of how accounting and auditing standards are created and regulated in the private sector, the federal government, and state and local governments. Different accounting and auditing standards evolved in the private and public sectors to address the specific needs of their respective stakeholders. Two policy issues that might be of interest to Congress and investors are also discussed. Private Sector The private sector includes publicly traded and private companies as well as nonprofit organizations. The accounting and auditing standards created for publicly traded firms are subject to Securities and Exchange Commission (SEC) oversight. Federal securities laws require public companies, both domestic and foreign, to share critical information about their performance on an ongoing basis with investors, regulators, and other stakeholders. The companies are required to submit annual reports providing a comprehensive overview of their performance, including their audited financial statements. Accounting. The SEC has relied on the private sector to establish and develop Generally Accepted Accounting Principles (GAAP) in the United States throughout its history. GAAP are a common set of principles and practices that measure and report an organization's economic activities. Currently, the SEC recognizes the Financial Accounting Standards Board (FASB) as the designated organization for establishing GAAP for the private sector. Auditing. Private- and public-sector stakeholders need reasonable assurance that an entity's financial statements are free of material misstatement, whether caused by error or fraud. In the private sector, independent assurance to shareholders and other stakeholders is provided by a qualified external party-an auditor. The auditor is engaged to give an unbiased professional opinion on whether the financial statements and related disclosures are fairly stated in all material respects for a given period of time in accordance with GAAP. Generally Accepted Auditing Standards (GAAS) provide standards of practice on how an audit should be conducted. The Sarbanes-Oxley Act of 2002 (P.L. 107-204) created the Public Company Accounting Oversight Board (PCAOB) as a self-regulatory organization to provide independent oversight of audits of public companies. The PCAOB also oversees the brokers' and dealers' audits, including compliance reports. The SEC has oversight authority over the PCAOB and approves the board's rules, standards, and budget. Material misstatement in financial reporting can be defined as misleading information on a financial statement that could potentially affect a reader's investment decisions or conclusions about the financial status of a firm. Federal Government The financial statements of the U.S. government and its agencies provide taxpayers and Congress a comprehensive view of how the government manages tax and other sources of revenue and how effective the federal government is at utilizing the resources. The Financial Report of the United States Government serves the same essential purpose as the annual report issued by a publicly traded company. Accounting. The accounting standards established by the Federal Accounting Standards Advisory Board (FASAB) are considered GAAP for federal financial reporting entities. FASAB was created by the Government Accountability Office (GAO), the Department of the Treasury, and the Office of Management and Budget. Auditing. The financial statements of federal agencies and the U.S. government are audited by agency inspectors general, GAO, or independent accounting firms. GAO issues the Generally Accepted Government Auditing Standards (GAGAS), also commonly known as the Yellow Book, which provide a framework for conducting audits. State and Local Governments The Annual Comprehensive Financial Report (ACFR) issued by a state or local jurisdiction serves the same purpose as the annual report issued by a publicly traded company to its investors. States and territories have the flexibility to choose the accounting and auditing standards that suit their needs. Accounting. The voluntary standard-setting body for state and local governments' accounting standards is the Governmental Accounting Standards Board (GASB). Although the SEC requires publicly traded companies to follow the accounting standards created by FASB, state and municipal governments are not required to follow accounting standards promulgated by GASB. States and municipalities can voluntarily adopt GASB accounting standards without any changes, choose not to adopt a specific standard, or modify a standard as needed. Auditing. State and municipal government audits are conducted by either an elected or appointed auditor. Elected auditors conduct their work at all levels of government from states to cities and towns. Appointed auditors are often

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