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The U.S. Government, primarily Congress, has created various agencies to counteract unethical behavior, including unethical business practices. The various agencies work to ensure financial accounting is honest and reliable. Although all are separate entities, they often work cooperatively to maximize areas of coverage.

I. SEC

The United States Securities and Exchange Commission (SEC) is a five-member body appointed by the President of the United States and approved by the U.S. Senate. It was created by the Securities Exchange Act of 1934 as a consequence of the Stock Market Crash of 1929. It enforces the federal securities laws and regulations dealing with the securities industry and stock market. Primarily created to prevent corporate abuses relating to the sale of securities and corporate reporting, the SEC now administers six major laws ^[5] :

• Securities Act of 1933
• Securities Exchange Act of 1934
• Trust Indenture Act of 1939
• Investment Company Act of 1940
• Investment Advisers Act of 1940
• Sarbanes-Oxley Act of 2002

The SEC is composed of 4 main divisions ^[6]:
1. Corporation Finance Division

The Corporation Finance Division primarily oversees public disclosures made by public companies as well as the registration of company transactions. In order to achieve these goals, the SEC requires quarterly and annual reports to be submitted, as well as a statement of the year’s operations and success. To allow all individuals access to these reports, the SEC maintains an online database called EDGAR (Electronic Data Gathering, Analysis, and Retrieval System). EDGAR contains these forms and papers, as well as all other information filed with the SEC. This vital company information allows individuals to better evaluate companies and potential securities.

2. Trading and Markets Division

The Trading and Markets Division oversees self-regulatory organizations like NYSE, FINRA, MSRB, broker-dealer firms, and investment houses.

3. Investment Management Division

The Investment Management Division oversees investment companies and investment advisers, and also administers federal securities laws. They also assist in interpreting laws and regulations, as well as adapting SEC rules to new circumstances.

4. Enforcement Division

The Enforcement Division investigates violations of securities laws/regulations and brings actions against these violators.

II. PCAOB

The PCAOB was created by the Sarbanes-Oxley Act of 2002 as a non-profit corporation to oversee auditors of public companies. The PCAOB actually replaced the Public Oversight Board, which was dissolved in 2002, to act as a non-partisan oversight body. Allegations that auditors’ allegiance to clients had compromised their independence because of fees the firms were receiving led to a long list of powers, most importantly the ability to set standards relating to auditing, ethics, quality control and preparation of audit reports for the auditing industry. The PCAOB also has the power to inspect any registered public accounting firms at any time to review the firm’s adherence to policies. If the PCAOB uncovers anything it believes is unethical or illegal, it can investigate and impose sanctions upon either the firm as a whole or the individuals involved. Firms registered with the PCAOB are bound to abide by PCAOB’s Ethics & Independence Standards which are composed of

• AICPA Code of Professional Conduct Rule 101, and interpretations and rulings
• Independence Standards Board]] (ISB) Standards numbers 1, 2, and 3, and ISB Interpretations 99.1, 00.1, and 00.2.
• SEC Rules on Auditor Independence

On April 19th 2006, the PCAOB’s Ethics and Independence Rules Concerning Independence, Tax Services and Contingent Fees were approved by the SEC. The seven approved rules primarily focus on tax and audit issues, but also discuss ethical responsibilities. Rule 3502, “Responsibility Not to Knowingly or Recklessly Contribute to Violations” allows the PCAOB to take legal actions against an individual that violates the professional standards and laws pertaining to the Sarbanes-Oxley Act and PCAOB Rules. ^[7]

Public trust has grown and auditing firms have enhanced the quality of audits performed under the strict guidelines set forth by the PCAOB.

III. FASB

The Financial Accounting Standards Boards (FASB) is a non-profit organization created in 1973 (replacing the Accounting Principles Boards]] and the Committee on Accounting Procedures) for the purpose of generating Generally Accepted Accounting Principles (GAAP). Their goal is to establish and improve financial accounting standards and methods of reporting. The FASB is a seven-member board of accounting professionals, and though independent from the SEC, is a critical component of the SEC and its mission. Currently, the FASB is working closely with the International Accounting Standards Board to simplify the financial reporting process and require only one set of financial statements from companies that operate in both domestic and international markets. ^[8]

IV. AICPA

The American Institute of Certified Public Accountants (AICPA) (formerly known as the American Association of Public Accountants) was established in 1887. ^[9] It adopted the AICPA Code of Professional Conduct for its membership bodies that range from those within public accounting to the government sector and in education. ^[10] The Code consists of the rules and the principles that provide the framework for the rules. Together, they guide their members in performing professional responsibilities. To assist its members with understanding and meeting the ethical responsibilities set within the Code, the AICPA has established a Professional Ethics Executive Committee (PEEC). ^[11] PEEC holds quarterly meetings to discuss the standard-setting activities and ethical cases involving disciplinary actions against members that fail to comply with the rules. Ethical issues are also discussed within the Journal of Accountancy, which is a periodic publication of the AICPA. The Five Principles of Professional Conduct are: carrying out professional responsibilities; serving the public interest; acting with integrity, objectivity, and independence; and due care.

V. GAO

The U.S. Government Accountability Office, as the name suggests, works closely with the US Congress to ensure the proper accountability of federal public funds. The US Government Accountability Office has extensive literature on the ethical responsibility of corporations as well. From the GAO’s perspective, the recent accountability failures discussed earlier reflect poorly on US corporations and the accounting ethics they have in place. This can translate into reduced investment in US markets by foreign companies and individuals alike. According to the GAO, improvements have been seen in the two years since the S.O.X. Act was passed in 2002. ^[12]

VI. IESBA

International Ethics Standards Board for Accountants (IESBA) develops high-quality ethical standards to be used by its member bodies and accountants all over the world. IESBA works independently under the International Federation of Accountants (IFAC) and together they have developed a code of conduct, called the IFAC Code of Ethics for Professional Accountants. ^[13] Firms that prepare financial reports using the International Auditing and Assurance Standards have to adhere to these standards. Within the Code are five fundamental principles:

• Integrity and honesty in all work
• Maintaining objectivity in decision making
• Staying professionally competent and acting with due care
• Respecting client confidentiality
• Maintaining a professional behavior

VII. Others

Various other organizations and agencies have set ethical standards in place. The Institute of Internal Auditors (IIA) has developed an Institute of Internal Auditors Code of Ethics for its members and other certified internal auditors. Likewise, the Institute of Management Accountants (IMA) has a standard for ethical conduct for professionals in the management accounting field.

Ethics in the business world is not a new phenomenon. However, recent publicity, mostly negative, has brought accounting to the front lines of business ethics. Due to the magnitude of impact on investors and the market, accountants and auditors are questioned whenever fraudulent activities occur within corporations. Major corporate scandals at Enron, WorldCom and Tyco International have only deepened the public’s lack of trust.

To ensure ethics, and therefore financial stability, professional accountants must make morally sound decisions. Ethics cannot be restricted to merely financial statements and records, but also to the decisions that companies may make and enforce.

For example, lack of ethics fueled abuses at WorldCom, Enron, and Adelphia Communications at the highest levels. Senior level management engaged in unethical accounting practices, allowing financial misrepresentations at each of these corporations, almost always under the influence of top management. During these times, Enron was being audited by Arthur Anderson, which approved the financial statements. In fact, when Arthur Anderson learned that Enron had falsified their data and numbers, and was being probed by the Securities and Exchange Commission (SEC), they began to shred all documents relating to their audit of Enron. In December 2001, Enron, a once-leading energy company, filed for bankruptcy, the largest in U.S. history. It used tactics such as off-the-books partnerships to hide their debt (~$1 billion) and inflate profits to raise their stock prices. Top Enron officers cashed out their own stock options while thousands of workers were left with empty retirement accounts. ^[1]

Worldcom follows a similar story. At the time, the external auditors for Worldcom were again Arthur Andersen. Under the direction of the company’s top executives, Worldcom used fraudulent accounting methods to artificially inflate their revenues during 1999 - 2002. The company’s stock went up and these top officials enjoyed hefty bonuses. However, in 2002, during an internal audit review, more than $3.8 billion of the fraud was uncovered. Following an SEC inquiry, it was discovered that the company’s assets had been inflated by $11 billion. ^[2]

In the case of Tyco, two top executives succeeded in stealing close to $600 million in company assets, claiming that this amount was approved by the company’s board of directors. They were eventually convicted on all but one of 30 counts in 2005 and are now in prison. ^[3]

Adelphia was a victim of internal corruption. Family members that held top positions in various divisions of Adelphia were charged with securities violations after it was disclosed that $100 million had been stolen and $2.3 billion worth of debt had been concealed via complicated cash-management systems.

Managerial or corporate finance is the task of providing the funds for a corporation’s activities. For small business, this is referred to as SME finance. It generally involves balancing risk and profitability, while attempting to maximize an entity’s wealth and the value of its stock.

Long term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balance between these forms the company’s capital structure. Short-term funding or working capital is mostly provided by banks extending a line of credit.

Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hope that it will maintain or increase its value. In investment management — in choosing a portfolio — one has to decide what, how much and when to invest. To do this, a company must:

• Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations;
• Identify the appropriate strategy: active v. passive — hedging strategy
• Measure the portfolio performance

Financial management is duplicate with the financial function of the Accounting profession. However, financial accounting is more concerned with the reporting of historical financial information, while the financial decision is directed toward the future of the firm.

Personal Accounting

Mainly for home users that use accounts payable type accounting transactions, managing budgets and simple account reconciliation at the inexpensive end of the market suppliers include:

Low End

At the low end of the business markets, inexpensive applications software allows most general business accounting functions to be performed. Suppliers frequently serve a single national market, while larger suppliers offer separate solutions in each national market.

Many of the low end products are characterized by being “single-entry” products, as opposed to double-entry systems seen in many businesses. Some products have considerable functionality but are not considered GAAP or FASB compliant. Some low-end systems do not have adequate security nor audit trails.

Mid Market

The mid-market covers a wide range of business software that may be capable of serving the needs of multiple national accountancy standards and allow accounting in multiple currencies.

In addition to general accounting functions, the software may include integrated or add-on management information systems, and may be oriented towards one or more markets, for example with integrated or add-on project accounting modules.

Software applications in this market typically include the following features:

• Industry-standard robust databases (eg PostgreSQL, MySQL, Microsoft SQL, Oracle, Pervasive)
• Industry-standard reporting tools (eg Cognos, Crystal)
• Tools for configuring or extending the application (eg an SDK, access to program code, the ability to be controlled via Visual Basic for Applications (VBA))

High End

The most complex and expensive business accounting software is frequently part of an extensive suite of software often known as Enterprise resource planning or ERP software.

These applications typically have a very long implementation period, often greater than six months. In many cases, these applications are simply a set of functions which require significant integration, configuration and customisation to even begin to resemble an accounting system.

The advantage of a high-end solution is that these systems are designed to support individual company specific processes, as they are highly customisable and can be tailored to exact business requirements. This usually comes at a significant cost in terms of money and implementation time.

Vertical Market

Some business accounting software is designed for specific business types. It will include features that are specific to that industry.

The choice of whether to purchase an industry-specific application or a general-purpose application is often very difficult. Concerns over a custom-build application or one designed for a specific industry include:

• Smaller development team
• Increased risk of vendor business failing
• Reduced availability of support

This can be weighed up against:

• Less requirement for customisation
• Reduced implementation costs
• Reduced end-user training time and costs

Some important types of vertical accounting software are:

• Banking
• Construction
• Medical
• Nonprofit
• Point of Sale (Retail)

Hybrid Solutions

As technology improves, software vendors have been able to offer increasingly advanced software at lower prices. This software is suitable for companies at multiple stages of growth. Many of the features of Mid Market and High End software (including advanced customization and extremely scalable databases) are required even by small businesses as they open multiple locations or grow in size. Additionally, with more and more companies expanding overseas or allowing workers to home office, many smaller clients have a need to connect multiple locations. Their options are to employ software-as-a-service or another application that offers them similar accessibility from multiple locations over the internet.

Accounting software is typically composed of various modules, different sections dealing with particular areas of accounting. Among the most common are:

Core Modules

• Accounts receivable—where the company enters money received
• Accounts payable—where the company enters its bills and pays money it owes
• General ledger—the company’s “books”
• Billing—where the company produces invoices to clients/customers
• Stock/Inventory—where the company keeps control of its inventory
• Purchase Order—where the company orders inventory
• Sales Order—where the company records customer order for the supply of inventory

Non Core Modules

• Debt Collection—where the company tracks attempts to collect overdue bills (sometimes part of accounts receivable)
• Expense—where employee business-related expenses are entered
• Inquiries—where the company looks up information on screen without any edits or additions
• Payroll—where the company tracks salary, wages, and related taxes
• Reports—where the company prints out data
• Timesheet—where professionals (such as attorneys and consultants) record time worked so that it can be billed to clients
• Purchase Requisition—where requests for purchase orders are made, approved and tracked

Accounting software is application software that records and processes accounting transactions within functional modules such as accounts payable, accounts receivable, payroll, and trial balance. It functions as an accounting information system. It may be developed in-house by the company or organization using it, may be purchased from a third party, or may be a combination of a third-party application software package with local modifications. It varies greatly in its complexity and cost.

The market has been undergoing considerable consolidation since the mid 1990s, with many suppliers ceasing to trade or being bought by larger groups.

Financial economics is the branch of economics studying the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. Financial economics concentrates on influences of real economic variables on financial ones, in contrast to pure finance.

It studies:

• Valuation - Determination of the fair value of an asset
  • How risky is the asset? (identification of the asset appropriate discount rate)
  • What cash flows will it produce? (discounting of relevant cash flows)
  • How does the market price compare to similar assets? (relative valuation)
  • Are the cash flows dependent on some other asset or event? (derivatives, contingent claim valuation)

• Financial markets and instruments
  • Commodities - topics
  • Stocks - topics
  • Bonds - topics
  • Money market instruments- topics
  • Derivatives - topics

• Financial institutions and regulation

Financial Econometrics is the branch of Financial Economics that uses econometric techniques to parameterise the relationships.

The primary operations of banks include:

• Keeping money safe while also allowing withdrawals when needed
• Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post
• Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business)
• Issuance of credit cards and processing of credit card transactions and billing
• Issuance of debit cards for use as a substitute for checks
• Allow financial transactions at branches or by using Automatic Teller Machines (ATMs)
• Provide wire transfers of funds and Electronic fund transfers between banks
• Facilitation of standing orders and direct debits, so payments for bills can be made automatically
• Provide overdraft agreements for the temporary advancement of the Bank’s own money to meet monthly spending commitments of a customer in their current account.
• Provide Charge card advances of the Bank’s own money for customers wishing to settle credit advances monthly.
• Provide a cheque guaranteed by the Bank itself and prepaid by the customer, such as a cashier’s check or certified check.
• Notary service for financial and other documents