Business Law in Accounting
Accounting is the system of recording, reporting and verifying financial information for individuals and businesses, including income, expenses, value of assets, and so on. However, Business Law I, takes what is normally known of accounting and moves into another arena, one which includes civil and criminal liabilities, contract law, ethics and the Sarbanes-Oxley Act of 2002. By establishing the basics in Business Law, accountants are able to understand the risks of their particular profession.
Accountants are faced with civil and criminal liabilities which are based on the accountant’s ability to do his or her job effectively and legally. Accountants face civil liabilities when they do not complete the work satisfactorially to what was agreed to. Even “Codes of Ethics” urge accountants to not agree to do work that they know they do not have the knowledge or time to complete. Competency is a key element to being a successful accountant, and not meeting competency goals can cause problems for young accountants entering the field.
By understanding the basics of contract law, it is easier for accountants to find the necessary information to allow them to do their jobs competently. If accountants know that it takes mutual consideration, or a “meeting of the minds,” to begin contract negotiations, then they can figure if they are reviewing a contract, some type of mutual consideration must have occurred, as well as a proposal and acceptance portion of the conversation. Also, if an accountant knows that the contract is for the sale of goods, then the accountant would know that the UCC Article 2 has to be used, instead of simple contract law.
Knowing this would help the accountant understand how the asset or products purchased needed to be accounted for, because without detailed information in the contract, UCC Article I gap filling procedures take place. These procedures are an attempt to take vagueness and give it some detail, but the gap filling detail is not much better than the original, thus the accountant can still be stuck, lost, not knowing how to account for a particular product, and not knowing at which time responsibility and risk for the product exchanges hands. The Sarbanes-Oxley Act was signed into law in 2002 by George W. Bush.
The original thought behind SOX was to regulate the accounting profession, due to the greed that had resulted in huge economic crashes amongst top corporations such as Enron and WorldCom. SOX assisted in setting up regulatory organizations for each facet of the accounting process. These organizations are designed to ensure that accounting practices and auditing practices are ethical, legal and professional for public U. S. companies. Unfortunately, SOX does not regulate private companies, but private companies cannot create financial hardships for outside investors, so private companies are not in need of these type of regulations.
Business Law I helped create an understanding amongst the students regarding what is actually expected of them once work as an accountant begins. A naive accountant would believe that all he or she needed to do was ensure that the data being entered in is correct and if not, fix it through a series of journal entries. However, after taking this class, it is apparent that this is an incorrect assumption. Understanding the civil and criminal liabilities that can be charged due to negligence or fraud, whether intentional or not, is incredibly important to accountants and CPA’s.
Without understanding these potential problems, an accountant would not be able to understand the level of the problem, or be able to assess the gravity of the situation, whatever that situation may be. Even though accounting is a financial profession that takes the value of income, expenses, assets, and other items, and reports, analyzes, records and verifies these amounts, Business Law allows for the review of the profession in general. Accountants have to understand what is legally expected of them when working with client’s records and reports, and how these legal expectations can be brought upon them, and what their rights are.
Without understanding the responsibility and risk that takes place for a company, an accountant would not understand why it is so important to establish ownership and when that particular ownership exchanges hands. Accountants also must understand what risks and responsibilities their particular profession run as well, and ensure that they are competently performing their jobs so that there is no question as to if an accountant was negligent, or was derilect in the performance of his or her duty.