Accounting activities and the accounting profession are supported by different types of organisations. These organisations play an important role in professional development, education, training, auditing, financial reporting, and the setting of accounting standards. Major accounting organisations can broadly be understood under three categories: professional accounting bodies, accounting firms, and accounting standard-setters.
Professional Accounting Bodies
A professional accounting body is an organisation associated with the development and regulation of the accounting profession. Professional accounting bodies support accountants by providing professional education, training, qualifications, and administration of various accounting designations.
One important professional accounting organisation is the American Institute of Certified Public Accountants (AICPA). The International Federation of Accountants (IFAC) is an international organisation supported by a large number of professional accounting bodies. The given information refers to AICPA and the other 179 members of IFAC.
Important professional accounting bodies include the Institute of Chartered Accountants of Scotland (ICAS), Institute of Chartered Accountants of Pakistan (ICAP), CPA Australia, Institute of Chartered Accountants of India (ICAI), Association of Chartered Certified Accountants (ACCA), and the Institute of Chartered Accountants in England and Wales (ICAEW).
The structure of professional accounting bodies may differ from one country to another. Some countries have a single professional accounting body representing the accounting profession. In other countries, separate professional bodies may exist for different subfields or specialised areas of accounting.
For example, the Chartered Institute of Management Accountants (CIMA) in the United Kingdom focuses on the area of management accounting. Similarly, the Institute of Management Accountants (IMA) in the United States is associated with the management accounting profession. Thus, specialised accounting fields may have their own professional organisations.
Many professional accounting bodies provide education and professional training to individuals seeking careers in accounting. They may also conduct or administer qualification programmes and manage professional accounting designations.
For example, the professional designation of Certified Public Accountant (CPA) is associated with AICPA, while the designation of Chartered Accountant (CA) is administered through relevant professional accounting bodies. Therefore, professional bodies play an important role in developing professional accountants and maintaining the organised structure of the accounting profession.
Accounting Firms
Accounting firms are organisations that provide professional accounting and related services. One of their major functions is conducting audits of financial statements.
Depending on the size of a company and applicable legal requirements, a company may be legally required to have its financial statements audited by a qualified auditor. Such financial statement audits are generally conducted by accounting firms.
Accounting firms expanded significantly in the United States and Europe during the late nineteenth and early twentieth centuries. As the accounting profession and business activities developed, accounting firms also increased in size and scope.
Through a series of mergers, large international accounting firms had emerged by the middle of the twentieth century. Further major mergers during the late twentieth century resulted in the auditing market being dominated by five major international accounting firms. These firms became known as the “Big Five” accounting firms.
The Big Five consisted of Arthur Andersen, Deloitte, Ernst & Young (EY), KPMG, and PricewaterhouseCoopers (PwC).
However, Arthur Andersen ceased to remain one of the major accounting firms following the Enron scandal. As a result, the Big Five were reduced to the Big Four accounting firms. The Big Four consist of Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers.
Thus, the development of accounting firms reflects the expansion and internationalisation of the accounting profession, particularly in the field of auditing.
Accounting Standard-Setters
Accounting standard-setters are organisations responsible for developing and issuing accounting standards. These standards provide principles and requirements for the preparation and presentation of accounting and financial information.
Generally Accepted Accounting Principles (GAAP) are accounting standards issued by national regulatory or standard-setting bodies. Since national organisations may issue accounting standards, the accounting requirements applicable in one country may differ from those applicable in another country.
At the international level, the International Accounting Standards Board (IASB) issues the International Financial Reporting Standards (IFRS). According to the given information, IFRS has been implemented by 147 countries.
International standards are not limited only to financial reporting. Standards relating to audit and assurance, professional ethics, accounting education, and public sector accounting are also developed by independent standard-setting boards supported by IFAC.
International Auditing and Assurance Standards Board
The International Auditing and Assurance Standards Board (IAASB) develops international standards for auditing, assurance, and quality control. These standards provide an international framework for important areas of audit and assurance activities.
Thus, the IAASB primarily deals with the standard-setting requirements of the auditing and assurance profession.
International Ethics Standards Board for Accountants
The International Ethics Standards Board for Accountants (IESBA) develops internationally appropriate ethical requirements for professional accountants.
IESBA sets a principles-based Code of Ethics for Professional Accountants. The code provides ethical principles applicable to the professional conduct of accountants. Therefore, IESBA is mainly associated with the development of international ethical standards for the accounting profession.
International Accounting Education Standards Board
The International Accounting Education Standards Board (IAESB) is responsible for setting professional accounting education standards. Its role is connected with the educational requirements and professional development of individuals entering or working in the accounting profession.
Professional accounting education standards contribute to the development of knowledge and professional capabilities required in accounting.
International Public Sector Accounting Standards Board
The International Public Sector Accounting Standards Board (IPSASB) develops international accounting standards for the public sector.
IPSASB sets accrual-based international public sector accounting standards. These standards are specifically concerned with accounting and financial reporting in public sector organisations.
Therefore, while IASB primarily issues international financial reporting standards, IPSASB focuses on international public sector accounting standards.
National Accounting Standard-Setting Bodies
Individual countries may have their own organisations responsible for issuing accounting standards that are specific to their national requirements. These national organisations may develop domestic accounting standards or align their accounting requirements with international standards.
In Australia, the Australian Accounting Standards Board (AASB) manages the issuance of accounting standards. Australian accounting standards are issued in alignment with IFRS.
In the United States, the Financial Accounting Standards Board (FASB) issues Statements of Financial Accounting Standards. These standards form the basis of U.S. GAAP. Therefore, FASB has an important role in the development of accounting standards applicable to financial reporting in the United States.
In the United Kingdom, the Financial Reporting Council (FRC) is responsible for setting accounting standards. Thus, different countries may have separate national standard-setting organisations responsible for their accounting and financial reporting frameworks.
Convergence Towards IFRS
Although individual countries may have their own accounting standards and standard-setting bodies, there has been a growing movement towards the use of International Financial Reporting Standards (IFRS).
As of 2012, all major economies had plans to converge their accounting standards with IFRS or adopt IFRS. Convergence means moving national accounting standards towards greater alignment with international financial reporting standards.
The movement towards IFRS reflects the increasing importance of internationally recognised financial reporting standards. Countries may either directly adopt IFRS or modify their accounting frameworks to achieve greater convergence with IFRS.
Exam Focus
Professional accounting bodies provide education, training, qualifications, and administration of professional accounting designations. IFAC has a large international membership of professional accounting bodies. Important professional bodies include AICPA, ICAI, ACCA, ICAEW, ICAS, ICAP, and CPA Australia.
The auditing market was earlier dominated by the Big Five accounting firms: Arthur Andersen, Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers. After the demise of Arthur Andersen following the Enron scandal, the Big Five became the Big Four.
The IASB issues IFRS, while IAASB sets international standards for auditing, assurance, and quality control. IESBA develops the principles-based Code of Ethics for Professional Accountants, IAESB sets professional accounting education standards, and IPSASB sets accrual-based international public sector accounting standards.
At the national level, AASB issues accounting standards in Australia in line with IFRS, FASB forms the basis of U.S. GAAP, and FRC sets accounting standards in the United Kingdom. Major economies have moved towards either convergence with or adoption of IFRS.