After reading this chapter, you should be able to: • Understand the historical background and development of accounting standard setting in the United States. • Understand how the Financial Accounting Standards Board (FASB) differs from its two predecessors. • Understand the institutional problems facing the FASB. • Appreciate the complexity of the standard-setting process. • Understand how the liability crisis in public accounting is being modified. • Grasp the significance of the Sarbanes-Oxley bill and other current developments in accounting. I n the United States prior to 1930, accounting was largely unregulated. The accounting practices and procedures used by a firm were generally considered confidential. Thus, one firm had little knowledge about the procedures followed by other companies. Obviously, the result was a considerable lack of uniformity in accounting practices among companies, both from year to year and within the same industry. Bankers and other creditors, who were the primary users of financial reports, provided D r a f t P r o o f-D o n o t c o p y , p o s t , o r d i s t r i b u t e

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ccounting is frequently viewed as a dry, cold, and highly analytical discipline with very precise answers that are either correct or incorrect. Nothing could be further from the truth. To take a simple example, assume two enterprises that are otherwise similar are valuing their inventory and cost of goods sold using different accounting methods. Firm A selects LIFO (last-in, first-out) and Firm B selects FIFO (first-in, first-out), giving totally different but equally correct answers. However, one might say that a choice among inventory methods is merely an "accounting construct": the kinds of "games" accountants play that are solely of interest to them but have nothing to do with the "real world." Once again this is totally incorrect. The LIFO versus FIFO argument has important income tax ramifications in the United States, resultingunder LIFO-in a more rapid write-off of current inventory costs against Accounting Theory Political Factors Accounting Policy Making Audit Function: Compliance of practice with accounting rules (control function) Accounting Practice Users of Accounting Data and Reports Main flow Secondary flow Economic Conditions

Academic studies investigating the financial management of companies routinely segment data by broad industry groups to facilitate an "apples to apples" comparison and remove possible industry effects. One common segmentation method is to group all information technology (IT) companies into a single category. However, not all IT companies are created equal and their financial management differs greatly due to differences in cost structure, growth potential, products delivered, and general business model. In this study we address the differences between mature publicly-traded digital product and service (DPS) firms and information technology product (ITP) firms using equity market data from 1991-2011. We compare the characteristics of the two firm types and find that DPS firms are significantly less risky, less reliant on physical assets, and outperform the ITP firms. We also find that the market returns for ITP firms are more reactive to costs than DPS firms, yet the reaction to revenue changes appear to be similar. The overall conclusion is that DPS and ITP firms are different and should not be combined into a general information technology category when analyzing their financing needs or strategic decision making. Ignoring these differences will lead to inappropriate or misleading conclusions.