Reasons Why Accounting Firms Exist
Accounting firms exist for the purpose of providing accounting services to businesses. This can mean payroll, financial statements, taxes or financial planning. Financial statements highlight information about company operations – profit and loss, net earnings and revenue. Bankruptcy is never the end goal of a business. Finance is complicated. There are many loopholes, windows of opportunity and ways to make mistakes. As a business owner, it is important to manage financials efficiently and accurately in order to prevent accusations of fraud, financial mismanagement and jail visits.
History of Regulations
The accounting firm profession was pressured to establish uniform accounting standards after the stock market crash of 1929. Some groups feel that insufficient and misleading information was a crucial factor that led to inflated stock prices and eventually to the stock market crash and subsequent depression. The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor confidence. The 1934 Act also created the Securities and Exchange Commission (SEC).
The U.S. Securities and Exchange Commission (SEC) holds primary responsibility for enforcing the federal securities laws, proposing securities rules and regulating the securities industry, stock and options exchanges and other activities and organizations, including the electronic securities markets in the U.S. The SEC has delegated responsibility to set U.S. accounting and financial reporting standards for public companies and accounting firms to, among others, the Financial Accounting Standards Board (FASB).
There have been quite a few financial scandals, which serves to illustrate the importance of accounting firms, financial investors and a strong system of checks and balances. One well-known incident is the Bernie Madoff scandal of 2008. The Bernard L. Madoff Investment Securities LLC, a Wall Street investment firm founded by Madoff tricked investors out of $64.8 billion through the largest Ponzi scheme ever. Instead of profits, investors were paid returns out of their own money or another investor’s cash. Fortunately in this case, Madoff bragged to his sons who reported him to the SEC. He was arrested the next day, sentenced to 150 years in prison and made to pay $170 billion in restitution. This fraud came to light just months after the 2008 U.S. financial collapse.
Day to Day
Businesses don’t run themselves. A business is not passive. It does not respond to market activities and record its own financial activities. A business is dynamic and creative. Owners must make plans, set goals and adapt when situations change. If running a business and managing its financial statements seems daunting, it may be worth it to hire an accounting firm to set up the core business functions.
Taxes are a reality that all business owners must face – city, state and federal agencies will all expect their cut of the cash, including revenue, income and payroll taxes. Additional penalties and interest will apply if these areas are neglected. Accounting firms help keep track of information on tax reporting and will ensure that your tax is remitted on time and accurately. Details seem daunting, but doing everything correctly will pay dividends in the long-term.