Choi/Meek, 6/e1 International Accounting, 6/e Frederick D.S. Choi Gary K. Meek Chapter 4: Comparative Accounting: The Americas and Asia

Choi/Meek, 6/e2 Learning Objectives Understand how financial reporting is regulated and enforced in five countries of the Americas and Asia: the U.S., Mexico, Japan, China, and India. Describe the key similarities and differences among the accounting systems of these five countries. Describe the auditor-oversight mechanisms in these five countries. Explain the difference between principles-based and rules-based accounting standards.

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4 United States Overview Financial Accounting Standards Board (FASB) Private-sector organization that determines accounting standards The Securities and Exchange Commission (SEC) – a governmental agency – underpins FASB’s authority Public Company Accounting Oversight Board (PCAOB) Private organization overseen by the SEC Regulates audits and auditors of public companies In 2002, took over the responsibility for setting auditing standards from the American Institute of Certified Public Accountants (AICPA) Financial statements “present fairly” Compliance with GAAP is the test for fair presentation

Choi/Meek, 6/e5 United States (contin) Accounting regulation and enforcement Securities and Exchange Commission Has jurisdiction over listed companies Relies on private sector (FASB) to set accounting standards Pressures FASB on the direction of accounting standards Financial Accounting Standards Board Conceptual Framework is a significant feature of accounting standard setting Standard setting in the U.S. is both political and technical Generally accepted accounting principles (GAAP) are voluminous and detailed Committed to converging U.S. GAAP with IFRS Sarbanes-Oxley Act (2002) Expanded requirements on corporate governance, disclosure and reporting, and the regulation of the audit profession Established PCAOB  Sets standards for auditors  Oversees and inspects audit firms  Sanctions auditors for defective work CEO and CFO must certify financial statements Management must assess internal controls Auditors express an opinion on internal controls

Choi/Meek, 6/e6 United States (contin) Unusual features of U.S. financial reporting No federal law for preparing financial statements or having them audited, except for listed companies LIFO Rules-based GAAP versus principles-based GAAP Rules-based  More specific requirements  More detailed implementation guidance  May result in more comparability  May foster “check-the-box” mentality Principles-based  Sets forth broad objectives and fundamentals  Requires professional judgment for implementation  More flexible  May result in more divergence in practice

Choi/Meek, 6/e7 Mexico Overview Accounting is oriented toward fair presentation despite code law legal system General price-level accounting (inflation-adjusted financial statements) are a fundamental feature Accounting profession is well-developed and influential in setting accounting and auditing standards Accounting regulation and enforcement Council for Research and Development of Financial Information Standards (CINIF) Independent public/private-sector partnership patterned after FASB and IASB Determines Mexican GAAP Aim – align Mexican GAAP with IFRS Mexican Institute of Public Accounting Issues auditing standards through its Auditing Standards and Procedures Commission Unusual features of Mexican financial reporting Financial statements are adjusted for inflation

Choi/Meek, 6/e8 Japan Overview Strong bureaucratic control over business, including accounting Structural reforms under way Keiretsu business model being transformed Accounting “big bang” to improve transparency

Choi/Meek, 6/e9 Japan Accounting regulation and enforcement Triangular legal system Company Law  Administered by Ministry of Justice  Creditor and shareholder protection the fundamental principle Securities and Exchange Law  For publicly owned companies  Providing information for investment decision-making the main objective Corporate Income Tax Law  Expenses must be booked to be claimed for tax purposes Accounting Standards Board of Japan Private-sector organization Responsible for developing accounting standards Modeled after FASB and IASB Convergence with IFRS a major goal Took over from the Business Accounting Council (a government agency) in 2001 Japanese Institute of Certified Public Accountants Provides guidance on conduct of audit Business Accounting Council Responsible for auditing standards Certified Public Accountant and Auditing Oversight Board Government agency Monitors and oversees the auditing profession

Choi/Meek, 6/e10 Japan (contin) Unusual features of Japanese financial reporting Forecasts of cash flows, capital investments, and production in statutory filings

Choi/Meek, 6/e11 China Overview Embracing IFRS as part of structural market reforms Ministry of Finance responsible for all aspects of accounting and auditing

Choi/Meek, 6/e12 China (contin) Accounting regulation and enforcement Chinese Accounting Standards Committee Under the Ministry of Finance Responsible for developing accounting standards Chinese Institute of Certified Public Accountants Under the Ministry of Finance Responsible for developing auditing standards and code of professional ethics China Securities Regulatory Commission Under Ministry of Finance Regulates China’s two stock exchanges Accounting Standards for Business Enterprises (ASBE) Comprehensive framework for accounting and financial reporting Includes detailed implementation guidance on accounting issues Largely in line with IFRS First introduced in 1992 by Ministry of Finance and revised several times since Unusual features of Chinese financial reporting Startling changes since original ASBE in 1992

Choi/Meek, 6/e13 India Overview British influence on accounting and auditing For example: True and fair view Independent accounting profession

Choi/Meek, 6/e14 India (contin) Accounting regulation and enforcement Companies Act Broad framework for accounting and auditing Institute of Chartered Accountants of India Supervised by Ministry of Company Affairs, a government agency Regulates profession of chartered accountancy Responsible for developing both accounting and auditing standards  Accounting Standards Board  Issues Indian Accounting Standards  Auditing and Assurance Standards Board  Issues Auditing and Assurance Standards Securities and Exchange Board of India Agency of the Ministry of Finance Oversees stock markets Unusual features of Indian financial reporting Some practices are “behind” developed world, but moving to adopt IFRS

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Choi/Meek, 6/e16 Other Chapter Exhibits

Choi/Meek, 6/e17 Other Chapter Exhibits (contin)