Page 27 - Encyclopedia of Business and Finance

eobf_A 7/5/06 2:54 PM Page 4

Accounting

and standards for its members (who may be either inter- • Union, governmental, regulatory, taxing, environ-
nal or external accountants or auditors). mental, and other entities in evaluating whether the
If the entity is a state or local governmental unit, it is organization is conforming with applicable con-
subject to the reporting standards and requirements of the tracts, rules, laws, and public policies and/or
Government Accounting Standards Board. If the entity is whether changes are needed;
private and not a profit-seeking unit, it is subject to vari- • Existing and potential owners, lenders, employees,
ous reporting and other regulations, including those of customers, and suppliers in evaluating their current
the Internal Revenue Service, which approves its tax status and future commitments to the organization
and with which it must file reports.
• Accounting researchers, security analysts, security
Largely as a result of the governmental regulation of brokers and dealers, mutual-fund managers, and
private profit-seeking businesses that began in 1933, an
others in their analyses and evaluations of enter-
increasingly clear distinction has been made between
prises, capital markets, and/or investors
managerial or internal accounting and financial account-
ing that is largely for external users. One important excep- The services that accounting and the accountant can
tion to this trend, however, was the change adopted in the provide have been enhanced in many ways since the 1970s
1970s in the objectives of financial reporting such that by advances in computers and other information technol-
both managerial and financial accounting now have the ogy. The impact of these changes is revolutionizing
same objective: to provide information that is useful for accounting and the accounting profession. But the
making economic decisions. changes have yet to reach their ultimate potential. For
But it must be recognized that although the financial example, accounting in the 1990s began to provide
accounting information reported to stakeholders comes current-value information and estimates about the future
from the organization’s accounting system, its usefulness that an investor or other user would find useful for deci-
for decision making is limited. This is because it is largely sion making. The availability of computer software and
historical—it reflects events and activities that occurred in the Internet greatly enhanced the potential for data and
the past, not what is expected in the future. Even esti- information services. Such changes create opportunities
mated data such as budgets and standard costs must be for accounting and accountants and also will require sub-
examined regularly to determine whether these past esti- stantial modifications in the traditional financial account-
mates continue to be indicative of current conditions and ing and reporting model.
expectations and thus are useful for making decisions.
Thus historical accounting information must be exam- What is the profession of accounting? At the core of the
ined carefully, modified, and supplemented to make cer- profession of accounting is the certified public accountant
tain that what is used is relevant to expectations about the (CPA) who has passed the national CPA examination,
future. been licensed in at least one state or territory, and engages
But it also must be recognized that accounting can in the practice of public accounting/auditing in a public
and does provide information that is current and useful in accounting or CPA firm. The CPA firm provides some
making estimates about future events. For example, combination of two or more of four types of services:
accounting provides current-value information about accounting, auditing, income tax planning and reporting,
selected items, such as readily marketable investments in and management advising/consulting. Analysis of trends
debt and equity securities and inventories, and it provides indicates that the demand for auditing services has peaked
reports on what the organization plans to accomplish and and that most of the growth experienced by public
its expectations about the future in budgets and earnings accounting firms is in the consulting area.
forecasts. Accounting career paths, specializations, or subpro-
fessions for CPAs who join profit-seeking enterprises
Who uses accounting information for decision making? include being controllers, chief financial officers, or inter-
The information developed by the accountant’s informa- nal auditors. Other career paths include being controllers
tion system can be useful to: or chief financial officers in not-for-profit or government
organizations and teaching in colleges and universities.
• Managers in planning, controlling, and evaluating Students should note that non-CPAs also could enter
their organization’s activities
these subprofessions and that certificates, but not licenses,
• Owners, directors, and others in evaluating the per- could be earned by passing examinations in several areas,
formance of the organization and determining oper- including internal auditing, management accounting, and
ating, compensation, and other policies bank auditing.

4 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION