A second concern is that the income statement will reflect increased volatility due to fair market writeups or writedowns. The third concern is the inconsistency in valuing some assets and liabilities at the current exit price. The fourth concern is whether price reflects the intrinsic value of the asset. It is suspected that price and value will differ, particularly in a downward trending market (Seay & Ford, 2010).
These concerns will affect the acceptance of fair value accounting and its ability to restore trust in the transparency and accuracy of accounting statements. According to Seay & Ford, many blamed fair value accounting for the collapse of the banking industry. However, they remind readers that the accountant only reports the information and that they were not to blame in the banking industry collapse.
As one can see, legislative actions such as the establishment of the PCAOB and fair value accounting are limited in their ability to restore public trust in the accounting profession. This research suggests that the public does not have confidence in the ability of the legislation to provide the transparency for which they ask. They also do not feel that the proposed actions will result in consistency in the accounting statements. These measures are not being viewed as the answer to the dilemma.
Self-Policing Efforts by Accountants
Accountants realize the importance of their need to restore the confidence of the public in their profession. They also realize that the public is not entirely trusting of the methods being proposed to help restore their confidence by the government. Therefore, the accounting profession has developed several methods to help increase accountability, transparency and the faith of the public in their profession. These methods are being developed out of a feeling that that the government efforts will not be enough. The first of these methods is the establishment of audit committees. The second to be discussed is third=party audits and rotating auditing methods.
The concept of audit committees is not new. Audit committees have been around for nearly 40 years. However, recently recommendations and regulations propose extending their use and their responsibilities. The proposed measures are intended to strengthen their ability to restore public confidence (Bedard & Gendron, 2010).
The effectiveness of the audit committee is determined by their composition, authority and the resources that they are granted. These three elements have the greatest impact on investor's perceptions of their capabilities and ability to effectively police the accounting profession (Bedard & Gendron, 2010). Another factor the significantly influences confidence in the audit committee is independence. The committee must be free of any relationship that could be construed as having any association with the business that is being audited. Bedard and Gendron state that even if the relationship is not important to the committee member, it can still result in mistrust among the public.
Another characteristic that is important in the effectiveness of the audit committee to establish public trust is member competency. They must be familiar with best practices and regulations. They must have demonstrated ability in performing their job. Audit committees are not always composed of accountants. Having at least one or more committee members who is a financial expert can go a long way in building the trust of the public (Bedard & Gendron, 2010). The final recommendation for the audit committee is that it must have a minimum of three members. This number is considered important in discouraging unscrupulous decision making. The chance for misconduct is decreased as committee members police themselves (Bedard & Gendron, 2010).
Bedard & Gendron's review of various characteristics of audit committees and their perceived effectiveness found that all committees are not viewed with the same degree of trust by the public. In order to accomplish their monitoring jobs effectively and in a manner that encourages public confidence, they must be independent, experienced, competent in financial accounting and must be large enough to be considered self-policing.
Bedard & Gendron's study made an important point about the ability to restore public confidence in the accounting sector. It is not enough to simply establish measures and policies. These measures and policies must have certain characteristics in order to secure the confidence of the public. It is not enough that they exist, they must prove their competence in order to generate confidence. It can be concluded that the effectiveness of oversight committees is only as good as the individual committees themselves.
Audit firm rotation is another method that has been suggested to help restore confidence in the...
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