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What is Accounting? The language of business - an information / communication system FASB #117 Quote: knowledge is gained by the orderly loss of information;

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Presentation on theme: "What is Accounting? The language of business - an information / communication system FASB #117 Quote: knowledge is gained by the orderly loss of information;"— Presentation transcript:

1 What is Accounting? The language of business - an information / communication system FASB #117 Quote: knowledge is gained by the orderly loss of information; that is by taking the great buzzing confusion of numbers and putting it into a form which can be understood and appreciated One of the world’s richest men, Warren Buffet attributes his success to being fluent in the accounting, which he calls “the language of business.” When asked by the daughter of a business associate what she should study in college, Buffet replied: “Accounting.” This is because accounting skills help you understand financial information. If you can’t read the scorecard, you can’t tell the winners from the losers, which means you can’t score. Says Buffet: “Financial reporting for Berkshire Hathaway, and for me personally, is the beginning of every decision that we make around here... I’m punching out 10- Ks and 10-Qs every single day...” [10-Ks and 10-Q are annual and quarterly financial statements, resp.] Buffet: “Unlike God, the stock market does not forgive those who do not know what they do.”

2 Importance of Providing Accurate Financial Info 2 Ivar Kreuger INFORMATION RISK

3 Why Accounting is a Popular Career Choice 3 1. Challenging Work 2. On-the-Job Exposure 3. Interesting People 4. Transferrable Skills 5. In Demand See VideoSee Video on Jennifer de Leon The stereotype

4 4 This chart is taken from the 2014 NACE Survey and shows that accounting majors and their close cousins (finance majors ) are doing very well indeed well. Having public accounting experience is invaluable in terms of position and advancement

5 5 Did You Know that...  In 2013 (and prior years as well), accounting was the top undergraduate degree in demand by employers?  In 2014, the average entry level salary for accounting graduates ranged $50,000-$60,000, higher than in any other field except engineering and computer science.  Women constitute 57% of those receiving bachelor degrees in accounting?  Accountants are one of the FBI’s top choice when hiring special agents. Nearly 2000 FBI agents, or about one in eight, have a background in accounting, especially forensic accounting.  The CEOs of nearly half of the largest public companies in the UK have accounting backgrounds. The percentage in the US is unknown but could be equally as high.  Arthur Blank (founder of Home Depot), Phil Knight (founder of Nike), along with many other executives, got their start as accountants?

6 CPA Certification The CPA is a highly-valued designation bringing instant credibility, marketability and superior earnings You must have bachelor degree PLUS enough college credits to total of 225 qtr credits (150 sem cr), including 36 qtr cr (24 sem cr) of accounting and another 36 of other business classes (economics, finance, business law). The CPA Exam is one of the hardest professional exams. Four parts, 14 hrs long. Pass rates are about 1-in-5 for all parts in one testing window. To get license, must have one year of experience under a CPA Must also take an ethics exam. Continuing Professional Education (CPE) of 40 hours per year (average) is required. Check out WWU grad’s webpage 6

7 7 CPA Exam has four parts (which can be taken separately): 1. Auditing and Attestation (AUD) 4 hours; 60% MC, 40% Simulation; Courses: Auditing, Acct Info Systems; Cum. pass rate at one sitting is 46%. 2. Financial Accounting and Reporting (FAR) 4 hours; 60% MC, 40% Simulation; Courses: Intermediate, Advanced, Cost & Managerial, Gov’t & Nonprofit; Cum. pass rate at one sitting is 48%. 3. Regulation (REG) 3 hours; 60% MC, 40% Simulation; Courses: Personal & Advanced Tax, B-Law, Prof Ethics (Auditing); Cum. pass rate at one sitting is 48%. 4. Business Environment and Concepts (BEC) 3 hours; 85% MC, 15% Writing: Courses: Econ, Finance, CIS, Mgmt, Acct Info Systems; Cum. pass rate at one sitting is 56%. Total: 14 hours EXAMPLE OF PASS RATES PER WINDOW For more info, go to PA.aspx PA.aspx or for state information: exam/requirements The first two months of each quarter constitute a testing window. Candidates can take 1-4 parts in a testing window and have 18 months to pass all parts.

8 The Accounting Profession PUBLIC ACCOUNTING Size:  local firm (Bruce J. Toews, CPA) (Girard Pisauro)  Regional firm (Moss Adams)  National (McGladrey & Pullen)  International or Big 4 FirmRevenuesEmployees Revenue Per Employee Fiscal YearHeadquarters Deloitte$34.2bn210,400$162,5472014United States (150+ countries) PwC$32.1bn184,000$174,4562013United Kingdom (150+ countries) EY$27.4bn190,000$144,2112014United Kingdom KPMG$23.4bn155,000$150,9682013Netherlands

9 The Accounting Profession Services: Auditing of Financial Statements Assurance Services (e.g. Grammies, Oscars, Florida vote count) Environmental Accounting Forensic Accounting See Video Rachel Buse Information Technology International Advisory Management Consulting Personal Financial Planning Tax Advisory Services PUBLIC ACCOUNTING For a complete 2014 report on CPA firms, see Cooperman-Ranked-25th-Largest-Firm-in-U-S-F/Accounting-Today- Top100Firms2014.aspx Cooperman-Ranked-25th-Largest-Firm-in-U-S-F/Accounting-Today- Top100Firms2014.aspx

10 10 The Accounting Profession PUBLIC ACCOUNTING Professional Staff: Partners or shareholders (owners), managers (supervise 2 or more engagements), seniors (in-charge on one engagement), staff assistants. Here is how it works at E&Y: June, 2014: Erin Sleeth will be admitted as a tax partner based in PwC’s Portland office. She brings over 16 years of experience working with clients in the utilities, manufacturing, forest, paper and packaging, industrial products and retail and consumer sectors. Notably, she has significant experience working with clients on alternative and renewable energy incentives. Her experience includes deep technical knowledge in areas such as accounting for income taxes, public and private companies, partnerships, and federal tax issues. Sleeth earned a bachelor of science degree in accounting from Walla Walla College and a master’s degree in taxation from Golden Gate University. She is a licensed CPA in the states of Oregon and California and a regular speaker at local events, including TEI and PwC roundtables. Ben Ellingson Partner

11 The Accounting Profession BUSINESS AND INDUSTRY Size :  small (e.g. local construction firm)  medium (e.g. Key Technology)  large (e.g. CostCo) Services: Financial Management Financial Reporting Internal Auditing Management Accounting Tax Planning

12 The Accounting Profession GOVERNMENT Federal:  FBI, IRS, GAO, Treasury Dept. (Lynette Williams, FBI agent) State, County, City, School Districts, etc. State Treasury Bond Financing State & Local Utilities Counties and cities Universities, Community Colleges, local K-12 school districts WHAT DO THEY DO?  Analyzing a school district's ability to remain viable  The propriety of expenditures for constructing prisons  The effectiveness of the workers' compensation system  The regulatory compliance of hazardous waste programs

13 The Accounting Profession NONPROFITS Types of Organizations: Charities (Goodwill, Gates Fdn, Seattle Symphony, etc.) Education (Whitman’s Controller; WWCC VP of Finance, WWU) Healthcare (lots of connections here) Churches, political parties, cemeteries, museums... See Video Debra Lockwood Prof: To Know True Wisdom... EDUCATION Become a professor and torment hopelessly befuddled groups of students with reams of useless data. Accounting professors are in high demand and paid top faculty salaries The three best reasons for teaching? June, July and August But the non-physical rewards are what really makes it worthwhile – helping students realize their dreams. See Video Kem Washsington See Video Kem Washsington

14 14 WHAT IS FINANCIAL ACCOUNTING? Involves preparation/interpretation of financial statements (covered in 1 st two qtrs of Principles, & in Intermediate & Advanced Acctg) On the other hand, managerial accounting focuses on decision-support (covered in the last quarter or Principles and Cost & Mngrl Acctg). WHAT IS FINANCIAL REPORTING? Financial Statements and Auditors' Report PLUS Management Discussion & Analysis (MD&A) PLUS Other Info (pretty pictures, investor info, list of board members, other fluff & stuff, etc.) WHAT QUALITIES SHOULD FINANCIAL REPORTS HAVE? Comparable Accurate and Reliable Fully-Disclosed Timely Relevant & User Friendly Objective

15 15 WHY HAVE ACCOUNTING STANDARDS? Comparability and Efficiency – apples compared to apples Report True Economic Results (measure profits properly) Force Adequate Disclosure (warts and all) Provide Objective, Unbiased, Auditable Figures WHO SETS ACCOUNTING STANDARDS in US? --SEC has ultimate authority but usually lets profession self-regulate --1953-59: AICPA's Committee on Accounting Procedures (CAP) ARBs --1959-73: AICPA's Accounting Principles Board (APB) Opinions --1973-now a) Private Sector: Financial Accounting Standards Board (FASB) – SFASs, (7 members, full-time, well-paid, well-represented); FASB Codification ( b) Public Sector: Gov’t Accounting Standards Board (GASB) Future? IASB will establish IFRS or iGAAP.

16 FASBFASB Preparers (e.g., FEI) Financial Community Financial Community Government (SEC, IRS, other agencies) Industry Associations Industry Associations Business Entities CPAs and Accounting Firms CPAs and Accounting Firms AICPA (AcSEC) Academicians Investing Public Accounting standards, interpretations, and bulletins Standard Setting

17 Securities Act of 1933 Securities Act of 1934 Securities and Exchange Commission Established by federal government Accounting and reporting for public companies Encouraged private standard-setting body SEC requires public companies to adhere to GAAP SEC Oversight and Enforcement Authority Sarbanes-Oxley Act of 2002 (SarbOx or SOX) created the SEC’s Public Companies Accounting Oversight Board (PCAOB) which is charged with establishing auditing standards for public companies and monitoring the audit firms.

18 18 HOW IS A STANDARD SET? Need Identified Discussion Memorandum (DM) out for at least 60 days Public Response (much lobbying) Exposure Draft (ED) or rough draft out for at least 30 days (usually longer) Public Response (again much lobbying) FASB votes (majority of 4/7 needed)

19 Generally Accepted Accounting Principles GAAP Documents Most authoritative document start at the bottom

20 1-20  Goal in developing the Codification is to provide in one place all the authoritative literature related to a particular topic.  Creates one level of GAAP, which is considered authoritative.  All other accounting literature is considered non-authoritative. FASB Codification LO 6 Generally Accepted Accounting Principles FASB has developed the Financial Accounting Standards Board Codification Research System (CRS). CRS is an online real-time database that provides easy access to the Codification.

21 1-21 LO 6 Generally Accepted Accounting Principles Illustration 1-5 FASB Codification Framework

22 Challenges Facing Financial Accounting Nonfinancial Measurements: Ignores key performance measures used by managers, such as customer satisfaction, backorder info, product quality rates, etc. Forward-looking Information: Financial statements primarily contain historical info, which isn’t always relevant in a fast-moving world Soft Assets: The balance sheet ignores certain intangibles until they have been turned into cash, such as superior managers, strategic location, product domination, etc. (Which gets recorded by accountants: purchase of a paperclip or hire of a new CEO?) Timeliness: Little real-time data is provided. This is changing. Understandability: Complexity is overwhelming to many investors.

23 23 WHY ARE INTERNATIONAL STANDARDS IMPORTANT? Differences Between Countries Create Inefficiencies Globalization of Financial Markets Requires Cross-Border Investment IASB may eventually replace the FASB for public companies. Convergence is planned within the next decade but major hurdles remain International Financial Reporting Standards (IFRS or iGAAP) will eventually replace U.S. GAAP for public companies. Private companies will likely still follow “small GAAP” set by FASB. Principle-based Application (rules)- based

24 Illustration IFRS1-2 International Standard-Setting Structure

25 25 The world’s two big accounting bodies FASB (Norwalk, Connecticut) Page/SectionPage&cid=12182 20131802 Russell Golden Chair of FASB Hans Hoogervorst, Chair of IASB IASB (London,England) organisation/Members-of-the- IASB/Pages/Members-of-the- IASB.aspx

26 26 Big GAAP (public companies) vs. Little GAAP (for private companies)

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