Category:Accounting Industry

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Accounting Industry

Accountancy Work of keeping accounts.

Accounting Methods of organizing, recording and interpreting all transactions that affect the financial condition of a given business enterprise. Basically, it is an information system conveying information about a specific entity. The American Institute of Certified Public Accountants (AICPA) defines accounting as a service activity whose “function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.”

  1. Financial accounting Accounting for assets, equities, revenues, and expenses of a business. Primarily concerned with the historical reporting of the financial position and operations of an entity to external users on a regular, periodic basis.
  2. Managerial accounting (Management accounting) Reporting designed to enhance the ability of management to do its job of decision making, planning and control. Formerly known as cost accounting.

Accounting Profession

Accountant Person who is responsible for preparing and keeping the accounts of an organization.

Chartered accountant Properly qualified accountant.

Certified public accountant (CPA) Person in the US who has satisfied the examiners of the Uniform CPA Examination, which is overseen by the AICPA. Each state, however, sets its own requirements for becoming a CPA in that state.

Treasurer Name sometimes given to the chief financial officer of a business.

Accounting Principles

Accounting principles Principles according to which accounts are prepared. This expression tends to be used when the method or procedure has been given authoritative sanction by such bodies as the APB, EITF, FASB, or SEC.

  1. Statements of Standard Accounting Practices
  2. Historical cost accounting
  3. Alternative accounting rules
  4. Eighth schedule
  5. Fourth schedule

Business entity concept Concept that a business has a life of its own, since it is a corporation and entirely separate from the lives of the individuals who own or work within it. Thus all accounts must refer only to the business and not to the personal finances of any individual.

Consistency concept Fundamental accounting concept calling for consistency of accounting treatment for like items within each period of accounting and from one period to the next.

Accounting procedures Methods for implementing accounting principles. They are used in accounting for events reported in the financial statement.

  1. Accounting conventions Methods or procedures used in accounting. This term tends to be used when the method or procedure has not been given official authoritative sanction by a pronouncement of a group such as the APB, EITF, FASB, or SEC.

GAAP Generally accepted accounting practice (or, principles). Not a finite concept, but one that can produce radically different results.

Accounting policies Accounting principles adopted by a specific entity.

Mark to market Recording financial assets and liabilities at their current market value rather than historical cost.

Fair-value rules Standards and rules of enforcement for fair value.

Accounting system Procedures for collecting and summarizing financial data in a firm.

  1. Branch accounting Accounting procedure that enables the financial position and operations of each branch to be reported separately but later combined for published statements.
  2. Pro forma accounting Offer alternative, usually more favorable, way of looking at results, that play down standard accounting figures. Many companies that make use of pro forma accounting offer a detailed road map connecting those figures to standard results. Others do not, making problems of understanding even for experts.
  1. Standard accounting Using standard accounting principles.

Double entry bookkeeping Accounting system based on the premise that for every debit entry, there is an equal, corresponding credit entry.

  1. Accounting equation Basic identity of double entry bookkeeping which reflects the relationship among assets, liabilities and equity. In its simplest form: 
       Assets = Liabilities + equity

Cash accounting Method of accounting in which changes in the condition of an organization are recognized only in response to the payment or receipt of cash.

Accrual accounting Method of accounting in which revenue is recognized when earned and expenses are recognized when incurred without regard to the timing of cash receipts and expenditures. It forces a person, business or government to take notice of future spending obligations and save money immediately to pay for them.

Liabilities Company's debts to a lender, a supplier of goods and services, a tax authority, a landlord, and others.

  1. Contingent liability

Accrued charges

  1. Accrued interest

Acceptance criterion Any minimum standard of performance in investment analysis.

Hurdle rate

Return on assets Net income plus after-tax interest charges plus minority interest in income divided by average total assets. Perhaps the single most useful ratio for assessing management’s overall operating performance.

Accounting rate of return Figure of investment merit, defined as average annual cash inflow divided by total cash outflow.

Internal rate of return

Wash (infl) Item of revenue that is exactly offset by an expense.

Accounting Standards

Accounting standards Rules to maintain accounting integrity. The process developed in the US, producing the best accounting anywhere and helped to make New York the financial capital of the world.

  1. American Institute of Certified Public Accountants (AICPA) Organization to which the Securities and Exchange Commission’s chief accountant, Carman C. Blough asked to set up accounting standards, 1938.
    1. Committee on Accounting Procedure Body set up by the institute to make rules, 1938.
    2. Accounting Principles Board (APB) Body set up to replace the Committee on Accounting Procedure, 1959.
    3. Exposure draft Proposed rule or rule change published for public comment.
    4. Final statement Form of proposed rule change published with date of its going into effect.
  2. Financial Accounting Standards Board (FASB) Association of accounting professionals that decides, maintains, and communicates generally accepted accounting principles (GAAP). It is the official rule-making body in the accounting profession gaining more power and independence, taking over from the Accounting Principles Board, 1973.
    1. Financial Accounting Standards Advisory Council Committee giving advice to the FASB on matters of strategy and emerging issues.
    2. Derivatives rule FASB rule to force users of derivatives to record the market value of those instruments in their financial reports, 1997.

Note Derivatives rule enraged the banks who used their political lobbying power in an effort to abolish the FASB and transfer its duties to the SEC, 1997.

  1. Accounting Standards Executive Committee Senior technical committee of the AICPA in the areas of financial accounting and reporting on cost accounting as well.
  2. International Accounting Standards Committee Organization that promotes the establishment of international accounting standards.
  3. Independence Standards Board Group formed by the accounting industry and the Securities and Exchange Commission to safeguard auditors’ independence when they review a company’s financial statements.
    1. Auditor independence Rules that require accountants not have investments in companies they are auditing, established 1930s.
    2. Levitt proposals SEC Chairman Arthur Levitt proposed in 2000, with the strong support of Pres. Bill Clinton, a long overdue ban on accounting firms performing additional services for companies they are auditing, precisely the sort of dual relationship Arthur Andersen had with Enron. But his efforts were beaten back by a furious lobbying campaign mounted by the accounting industry's leading lobbyist, Harvey Pitt and Arthur Andersen.

International Accounting Standards Board Body set up by a committee headed by Paul A. Volcker, to produce coordinated accounting standards with 12 full-time and 2 part-time members led by Sir David Tweedie, who had directed the Accounting Standards Board of Britain, headquartered in London, announced 25 January 2001.

Public Oversight Board (POB) Agency created by US Congress to watch over auditors quality control and peer review of accounting firms. It also oversees a board that sets auditing industry standards, founded 1977.

  1. POB record POB was well meaning but largely ineffective effort, being funded and staffed by the industry’s cheerleader, the American Institute of Certified Public Accountants, and when Harvey Pitt announced he was going to set up a new organization to replace it without any consultations the board resigned en masse, 21 January 2002, shutting down operations 31 March 2002.

Sarbanes-Oxley Bill

Sarbanes-Oxley Bill Legislation on corporate governance and accounting reform setting up a full-time federal oversight board for the accounting industry, signed 30 July 2002.

Noisy withdrawal requirement Lawyers must report violations of securities laws to top executives at companies they advise and, if necessary, to corporate boards, put forward by the SEC 23 January 2003.

  1. Reporting in Issue as to whether lawyers should go to the firm’s executives and board when they discover a company is in violation of securities law.
  2. Reporting out Issue as to whether lawyers should go public, that is report to the SEC, when they discover a company is in violation of securities law. Lawyers vociferously opposed this potential rule and the SEC caved in and the revised rule gave lawyers a way out in the form of colorable defense.
  3. Evidence of a material violation Information that would lead an attorney reasonably to believe that a material violation has occurred, is occurring, or is about to occur.
  4. Colorable defense Low standard that is not wholly insubstantial or frivolous.

Accounting Firms

Big Eight (AmE) Eight largest accounting firms in the US, as assessed by total sales audited.

Big Six Reduction of the Big Eight by mergers into 6 firms.

Big Four (AmE) Reduction of the Big Six by mergers into 4 firms, but failed to take place because of the reduction of competition, 1997.

Big Five International Five most important accounting firms in the world: Arthur Andersen, PricewaterhouseCoopers, KPMG International, Ernst & Young and Deloitte Touche Tomatsu, 1989.

Accounting Hall of Fame At Ohio State University.

Arthur Andersen

Andersen (formerly, Arthur Andersen; Andersen Worldwide) Private partnership founded by Arthur Andersen (1886-1947), son of Norwegian immigrants, a Chicago university professor, growing to more than 85,000 people in 84 countries. Only one of the original Big Eight untouched by major merger. Andersen was known for its conservative, self-assured, some said arrogant, conservative corporate culture, an environment described as “hierarchical and orderly as the Marines.”

  1. Andersen, DeLay & Company Andersen’s original title when founded in 1913.

Andersen employment policy When employees reach a certain level at Andersen, “they would suggest you get hired by a lot of clients like Enron.”

Independent Oversight Board Former chairman of the Federal Reserve, Paul A. Volcker appointed chairman with a mandate to make changes at Arthur Andersen, 3 February 2002.

Andersen disintegrates Partners leave Andersen all round the world, as firms abandon Andersen, March-April 2002 as its malfeasance was revealed across the corporate world, and it ceased to exist by August 2002.

Arthur Andersen Malfeasance

Arthur Andersen ban Effectively banned from British government business following its role in auditing the John Z. DeLorean books 1978-82. After the Conservative government sued it for $300 million for negligence, Anderson settled with the Labour government in for $30 million (£20 million), late 1997.

Andersen/Colonial Realty Andersen pays $90 million to investors who lost $300 million in Connecticut’s biggest real estate firm. Shareholders claimed that faulty advice from Andersen cost them losses when Colonial collapsed amid accounting scandals, 1990.

Andersen/Waste Management Andersen named by the SEC in the Waste Management case, which led to the first fraud settlement by a major accounting firm in decades, paying $75 million to shareholders after Waste Management erased more than $1 billion from earning for the years 1992-96.

Andersen/McKesson Third largest drug wholesale company acquires HBO & Company, a Georgia medical software firm January 1999. After it was discovered that HBO improperly recorded sales, shareholder faced losses which led to a class-action suit, which Anderson reportedly offered $50 million to settle the case, 1999.

Andersen/Sunbeam Andersen agreed to a $110 million settlement with Sunbeam shareholders, April 2001. SEC filed a civil fraud complaint against an Andersen partner, Philip E. Harlow, who certified statements at Sunbeam, the bankrupt appliance maker.

Note The New York Times citing court records showed that Harlow had faced similar accusations c. 1976.

Andersen/BFA Seriously flawed investment program that led to the collapse of the non-profit organization which shareholders said was a giant Ponzi scheme. Andersen, BFA’s auditor for 14 years, made a settlement with Maricopa County (Phoenix, AZ) civil suit for $217 million, March 2002, but consequently rescinded the offer.

  1. Baptist Foundation of Arizona (BFA) Nonprofit organization that invested for members of the Baptist Church, filed for bankruptcy amid allegations it had been running a giant Ponzi scheme in which c. 11,000 investors lost $570 million, the largest failure of a nonprofit organization in US history.
  2. Anderson and Professional Services Insurance Co. Insurance company owned by Anderson’s worldwide partners, based in Hamilton, Bermuda, refused to pay the BFA settlement, saying it did not have the money. Facing the threat of being banned for doing business in Arizona, Andersen found the money to complete the settlement.

Ernst & Young

Ernst & Young Formed with the merger of Ernst & Whinney with Arthur Young, 1989.

  1. Arthur Young Accounting firm.
  2. Ernst & Whinney Accounting firm.

Ernst & Young/CUC International Record payment of $335 million to settle lawsuits arising from an audit, in its case of CUC International, which later merged with HFS Inc. to form Cendent.

Deloitte Touche Tomatsu

Deloitte Touche Tomatsu Accounting and consulting firm.

  1. Deloitte & Touche Formed with the merger of Deloitte, Haskins & Sells with Touche Ross, 1989.

Kroger Properties lawsuit Shareholder class-action lawsuit in which Deloitte Touche had to pay $81 million for malpractice in an audit of Kroger Properties which collapsed in 1994.

KPMG Peat Marwick

KPMG LLP Formed in 1987 with the merger of Peat Marwick International (PMI) and Klynveld Main Goerdeler (KMG) and their individual member firms. Spanning three centuries, the organization’s history can be traced through the names of its principal founding members, whose initials form the name “KPMG.” It was the accounting profession's first mega-merger.

  1. Klynveld (K) Piet Klynveld founded the accounting firm Klynveld Kraayenhof & Co. in Amsterdam 1917.
  2. Peat Marwick (PM) William Barclay Peat & Co. and Marwick Mitchell & Co. joined forces to form what would later be known as Peat Marwick International (PMI), 1911.
    1. Peat (P) William Barclay Peat founded the accounting firm William Barclay Peat & Co. in London 1870.
    2. Marwick (M) James Marwick founded the accounting firm Marwick, Mitchell & Co. with Roger Mitchell in New York City 1897.
  3. Goerdeler (G) Dr. Reinhard Goerdeler was for many years chairman of Deutsche Treuhand-Gesellschaft and later chairman of KPMG. He is credited with laying much of the groundwork for the KMG merger.
    1. Klynveld Main Goerdeler (KMG) Klynveld joined forces with Deutsche Treuhand-Gesellschaft and the international professional services firm McLintock Main Lafrentz to form KMG, 1979.

Business Measurement Process First multidisciplinary organization to globally deploy a comprehensive risk-based audit approach.

KPMG Consulting Inc. Spun off from the accounting firm in a $2 billion IPO, based in McLean, VA, February 2001.

  1. BearingPoint Renamed KPMG Consulting Inc., in order to emphasize it independence from the accounting firm, announced 3 October 2002.
    1. BearingPoint GmbH German, Swiss and Austrian businesses.

PricewaterhouseCoopers

PricewaterhouseCoopers (PwC) Formed with the merger of Price Waterhouse with Coopers & Lybrand, creating the world’s largest accounting firm, announced 18 September 1997, merged 1998.

  1. Price Waterhouse
  2. Coopers & Lybrand

PwC Consulting PwC’s consulting business.

  1. Monday Title taken by PwC Consulting to further distance itself from PricewaterhouseCoopers as it prepared for an IPO, June 2002.

PricewaterhouseCoopers/Microstrategy PwC paid $24 million to settle lawsuits arising from its audit of Microstrategy.

PricewaterhouseCoopers affair Accounting firm’s partners routinely violated independent auditing rules, 31 of the 43 partners in the firm’s top leadership at least one including and 6 or the 11 partners responsible for enforcing the rules. In all the SEC found 8,064 violations, inquiry started 1997, reported 7 January 2000.

PricewaterhouseCoopers fine Settlement of SEC charges of violating rules requiring auditors to remain independent of their clients, $5 million, 17 July 2002.

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