W2. FASB and Standard Setting Results

Question 1

In reference to proposed accounting standards, the term “negative economic consequences” includes a)
the inability to raise capital, or b) the cost of complying with GAAP?

Answer 1

a) the inability to raise capital

When firms say that a proposed accounting standard could have “negative economic consequences,” they’re referring to reduced ability to raise capital or higher capital costs. All GAAP compliance involves some added cost.

Question 2

The best protection against fraudulent financial reporting by corporations is a) independent audits, or b) the integrity of management?

Answer 2

a) independent audits

Independent auditors assess the risk of fraud as part of their procedures. Management’s integrity is not enough to assure against fraud because management is not independent.