Introduction to Financial Accounting and GAAP

Accounting, a.k.a. “The Language of Business”, is a large and diverse topic. Subtopics include financial accounting, cost accounting, management accounting, internal auditing external auditing, international accounting, governmental and not-for-profit accounting and taxes. The subtopic that comprises the largest portion of an accountants academic program of study is financial accounting.

The purpose of financial accounting is basically to provide useful information to users who will use that information to make a decision, most commonly either an investment or a credit decision. To be useful information needs to be relevant and reliable. The most common means of conveying information to users is through the preparation of financial statements: 1. the income statement, 2. the balance sheet, 3. the statement of cash flows, and 4. the statement of shareholders’ equity.

The income statement presents the profitability of company over a period of time. The balance sheet presents the assets, liabilities, and owners’ equity at the end of the period of time used for the income statement. The statement of cash flows classifies all cash inflows and outflows during the time period into one of three categories: operating, investing, and financing. The statement of shareholders’ equity shows how the shareholders’ equity changed over the period.

Generally accepted accounting principles (GAAP) are a set of standards, methods, procedures, and guidelines companies follow in measuring and reporting financial information in the financial statements. GAAP comes from written sources as well as practices that have been used for a ling time that have become generally accepted. Although the Securities and Exchange Commission (SEC) has the legal authority to set accounting standards for companies, it has always delegated the majority of this responsibility to the accounting profession itself. The current accounting professional body that sets standards is known as the Financial Accounting Standards Board (FASB). The FASB issues standards called Statements of Financial Accounting Standards (SFAS). They can be found on the FASB web-site, As of May 2007 the FASB has issued 159 such statements.

All publicly traded companies listing their stocks on U.S. stock exchanges must have their financial statement audited by an external CPA firm that expresses an opinion as to whether the financial statements have been prepared in conformity with GAAP. The idea is to lend credibility to the financial statements by providing a third-party’s verification that the statements are presented fairly in conformity with high quality standards, GAAP!

Recent accounting scandals (WorldCom, Enron, etc), however, have given the accounting profession somewhat of a black eye and have rekindled the debate over whether principles-based, or more recently termed, objectives-oriented, standards should be set forth as opposed to rules-based accounting standards. A principles-based approach to standard setting stresses professional judgment, as opposed to following a specific list of rules.

Achieving SOX Compliance Through Security Information Management

Introduction: Brief Overview of SOX The Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act of 2002, and commonly referred to as SOX, is a federal law designed to improve disclosures and closely supervise accounting practices for publicly traded companies and public accounting firms. The legislation, spawned from high profile fraud and scandal dating back to the late 1990s, represents one of the largest reform measures in the history of US business.

The regulation mandates strict operating and reporting practices for all publicly traded U.S. companies, foreign filers in US markets, and public accounting firms. The sections of SOX that impact the public company’s IT department include:

  • Section 302 — Corporate Responsibility for Financial Reports. Public company officers must confirm the reliability of quarterly and annual financial statements.
  • Section 404 — Management Assessment of Internal Controls. All publicly traded companies must submit an annual report to the SEC on the effectiveness of their internal accounting controls. The independent company auditor must also attest to the accuracy of the report. (While not explicitly defined, IT general controls are included in the scope of Section 404 compliance).
  • Section 409 — Real-Time Issuer Disclosures. Public companies must stay abreast of and declare material changes in their financial condition or operations within 48 hours. (While not specifically defined, a major breach in information security has the potential to cause a significant deficiency or material weakness in the internal control structure.)

The primary focus for SOX compliance has been Section 404. Management must consider the extent to which threats and vulnerabilities in the corporate computing environment can represent a significant deficiency or material weakness in the internal control structure. They must ensure that the systems, services, devices, and data involved in the production of corporate financial records and financial reporting are appropriately isolated, that physical and logical access is appropriately restricted, and that all controls are thoroughly tested and documented on a routine basis.

The SOX Challenge: Improving the Accuracy and Reliability of Financial Reporting Though SOX can positively affect corporate governance by improving the internal control structure, compliance presents significant challenges, particularly for IT organizations. The IT general controls are very closely scrutinized during the annual audit, because virtually all of the company’s financial data resides on network servers. IT departments must provide detailed information to internal and external auditors about the IT general controls protecting financial reporting data and processes. Network administrators need the ability to use existing technology to manage and report on access controls related to the target environment, and provide documented evidence of the reliability of those controls.

SOX mandates accountability and requires each organization to examine the effectiveness of their approach to information security. To be effective, an information security solution must demonstrate that IT general controls are managed and monitored over time. The solution should also ensure that all systems, services, devices, data, and every personnel that touches financial data and reporting processes are secured.

Financial information security is a complex task requiring a broad security strategy. Organizations must not only achieve SOX compliance — but also maintain it continuously.

Publicly traded companies must to do the following in support of Section 404:

  • Ensure that the IT security administration monitors and logs security activity and identified security violations.
  • Review a sample of problems or incident reports, to consider if the issues were addressed in a timely manner.
  • Determine if the organization’s procedures include audit trail facilities for incident tracking.
  • Review a sample of problems recorded on the problem-management system to consider if a proper audit trail exists and is used.
  • Ensure that system-event data are sufficiently retained to provide chronological information and logs to enable the review, examination, and reconstruction of system and data processing.

Identify all systems, services, devices, data, and personnel that participate in the production of financial data and financial reporting

  • Isolate this target environment from the rest of the corporate computing network
  • Restrict physical and logical access to the target
  • Monitor physical and logical access to the target
  • Monitor the target for unusual and/or anomalous activity
  • Create an incident response plan specific to the target
  • Test and review the incident response plan
  • Routinely test controls in place and prepare summary reporting for the internal audit team

Though no single software product can enable full Section 404 compliance, the right SIM technology can help public companies efficiently manage the IT general controls. An effective security management solution provides public companies the tools to implement, maintain, and report on information security controls with minimal utilization of resources.

SOX mandates that corporate governance now include the appropriate management of information security. Senior management and even board-level directors now bear personal responsibility for oversight of compliance. Executive management needs to work closely with IT organizations on risk assessment and the implementation of security policies and operations. Overall, a security program that integrates people, policies, process, and technology is the best approach to managing Section 404 compliance.

Register now to read the full report outlining in detail how an effective Security Information Management solution can enable SOX compliance [].

Basics of Financial Planning – 5 Simple Steps to Success!

I have been asked by many people over the past few years this question, “What do I need to do first in order to get my personal finances together?”

When people first started asking me this question, I have to be honest I wasn’t sure what to tell them.

Now that some time has passed though, I feel as though the ANSWER to this question is quite simple.

What I mean to say is that the ANSWER is simple, but what trips people up isn’t the ANSWER but the

So what I am going to do for you today is answer the question: “What do I need to do first in order to get my personal finances together?” by supplying you with some basic ACTION steps to get you started in the right direction.

STEP 1 – Determine Your Values.

This step may seem a little out of place for financial planning. Most people ask me, “What do my values have to do with my finances?”

I say to them, “Stop for a minute and think about it, is there anything more important than your values?”

All your decisions are based on your own personal set of values. Where you live, what you drive, how much and where you spend your money, what you focus your time and energy on – are all affected by your values.

This is why once I understood Step 1; I could tell people with one hundred percent certainty that once you have a clear picture of what you value most in your life – you’ll be better able to figure out how to create your personal financial plan.

At this point you need to take an action step: I want you to take about 30 minutes and write down what your top 5 values are. Remember, we are talking about values not goals.

Values are security, happiness and freedom. Goals are pay off mortgage, be debt free, etc… Once you have figured out your top 5 goals you are well on your way to personal financial success.

STEP 2 – Determine Your Goals.

Now that you know what you value in life, it is time to base your goals on these values.
What I mean by that is if you chose, Security as one of your values, then one of your financial goals could be to start putting aside 10 % of your income for an emergency account.

Another example would be if you chose Excitement as one of your value, then one of your financial goals would be to start putting aside $50 a week aside to take your family on a monthly trip.

Whatever you want to do that is in line with your values needs to be considered.

To get you started, I would take your five Values and chose 3-5 quantifiable, goals that you would like to accomplish for each value.

STEP 3 – Get Organized

Now that you have a better understanding of yourself and what you want based on your values you can begin to focus on your financial situation.

The reason, Step 3 – Get Organized is after determine your values and goals is because, this is the hardest part of the whole process.

Being that this is the hardest part of the process, you can now look back at your values and goals and have some motivation to keep you on track.

Getting organized sounds harder that it is, especially when it comes to personal finances.

The best way to get a handle on your total financial situation is create a system for filing and keeping all your personal financial documents so you know where they are and can reference them fairly easy if needed.

I recommend using a hanging file folder system. All you need is a hanging file folder box/crate, about 15 hanging file folder, and about 100 manila folders.

The most important items that you will need to track are: Taxes (7 years back), Retirement Accounts, Social Security, Investment Accounts, Savings and Checking Accounts, Household accounts, Credit Card Debts, Other Liabilities (debts other than credit cards and mortgage), Insurance. These 9 accounts are the most important and will help you have a better understanding of your total financial picture.

So your action step at this time is to create a filing system so that you can store, access and understand your personal financial documents. Don’t skip this step, it is the most important of the five.

STEP 4 – Determine Your Plan/Budget – Retirement, Savings, Investments, and Tithing

Once you have a better picture of your current financial situation. It is time to be honest with yourself and decide whether you think you are on the right track or you need to overhaul your financial plan.

Most people at this point have decided that they need a complete overhaul. Again, don’t get discouraged, because this isn’t as hard as most people make it out to be.

Determining your Plan/Budget is really just decided what your priorities are and where you money needs to go!

The hard part about this is making sure you are paying the most important people first. I make my priorities Self, Bills, Cost of Living, Fun/Excitement.

When I say Self – I mean “Paying myself first!” Taking a percentage of my hard earned dollars out of my paycheck and dividing in up between saving, investing, and tithing. I pay myself first because I am the most important in my life.

When I say Bills – I mean fixed expenses that you pay month to month. Mortgage payment, gas, water, power, etc…. Things that very rarely change month to month.

When I say Cost of Living – I mean variable expenses that fluctuate month to month. Groceries, dining out, vehicle gas, etc… Things that change month to month.

When I say Fun/Excitement – I mean expenses for things that I want to buy like, golf clubs, cars, guns, etc. Stuff that you want.

Over time you can create a budget yourself or tell a CPA exactly what you want and they can develop a budgeting system that you can use to keep track of what you spend and then you can adjust it yearly as needed.

STEP 5 – Implement Your Plan

Now that you have taken the time to figure out what your values and goals are. You have developed a system for tracking all of your financial information and created a budget based on your values and goals, you have to take action steps to achieving them. This will seem like the hardest part of the whole process but just remember that all things that are worth doing and getting better at take time.

Make a commitment to yourself to take small actions daily to move closer to your ideal financial situation. This process may take up to 12 months.

The question you need to ask yourself though is, would you rather be in the same situation financially in 12 months or would you like to be 5 steps ahead.

It’s up to you to make that decision. I hope this has been helpful and look forward to your comments.