Updated January 8, 2019
Introduction to Financial Services: Accounting and Auditing
Regulatory Structure, U.S. and International
This In Focus provides an overview of how accounting and
Sarbanes-Oxley Act of 2002 (P.L. 107-204). The PCAOB
auditing standards are created and regulated in the private
also oversees the audits of brokers and dealers, including
sector, the federal government, and state and local
compliance reports. The SEC has oversight authority over
governments. Different accounting and auditing standards
the PCAOB and must approve the board’s rules, standards,
evolved in the private and public sector to address the
and budget.
specific needs of their respective stakeholders. This In
Focus also discusses two policy issues that might be of
interest to Congress and investors.
Material misstatement in financial reporting can be
defined as information on a financial statement that
Private Sector
could potentially affect the investment decision or the
The private sector includes public and private companies as
conclusions drawn by a reader about the financial
well as not-for-profit organizations. The accounting and
status of the firm.
auditing standards created for publicly traded firms are
subject to the Securities and Exchange Commission’s

(SEC’s) oversight. Congress created the SEC in 1934 to
protect investors; to maintain fair, orderly, and efficient
Federal Government
markets; and to facilitate capital formation. Congress has
The financial statements of the U.S. government and its
oversight over the SEC and annually appropriates its
agencies provide taxpayers and Congress a comprehensive
funding.
view of how the government manages tax revenue and how
effective the federal government is at providing services.
Federal securities laws require public companies, both
The Financial Report of the United States Government
domestic and foreign, to share critical information about
serves the same basic purpose as the annual report issued by
their performance on an ongoing basis with investors,
a publicly traded company to its investors.
regulators, and other stakeholders. They are required to
submit annual reports providing a comprehensive overview
Accounting. The accounting standards established by the
of the firm’s performance; this includes the audited
Federal Accounting Standards Advisory Board (FASAB)
financial statements of the firm.
are considered Generally Accepted Accounting Principles
for federal financial reporting entities. FASAB was created
Accounting. Throughout its history, the SEC has relied on
by the Government Accountability Office (GAO),
the private sector to establish and develop Generally
Department of the Treasury, and the Office of Management
Accepted Accounting Principles (GAAP) in the United
and Budget.
States. GAAP is a common set of principles and practices
to measure and report the economic activities of an
Auditing. The financial statements of federal agencies and
organization. Currently, the SEC recognizes the Financial
the U.S. government are audited by inspectors general,
Accounting Standards Board (FASB) as the designated
independent accounting firms, or GAO. GAO is an
organization for establishing GAAP for the private sector.
independent, nonpartisan agency of Congress. GAO’s
mission is to support Congress in meeting its constitutional
Auditing. Private- or public-sector stakeholders need to
responsibilities and to help improve the performance and
have reasonable assurance that the financial statements of
ensure the accountability of the federal government for the
an entity are free of material misstatement whether caused
benefit of taxpayers.
by error or fraud. In the private sector, independent
assurance to shareholders and other stakeholders is
GAO issues the Generally Accepted Government Auditing
provided by a qualified external party—an auditor. The
Standards (GAGAS), also commonly known as the “Yellow
auditor is engaged to give an unbiased professional opinion
Book,” which provides a framework for conducting audits.
on whether the financial statements and related disclosures
Some audit organizations within the federal government use
are fairly stated in all material respects for a given period of
a hybrid method of external and internal auditors.
time in accordance with GAAP. Generally Accepted
Auditing Standards (GAAS) provides standards of practice
State and Local Governments
on how an audit should be conducted.
The Comprehensive Annual Financial Report (CAFR)
issued by a state or local jurisdiction serves the same
Congress created the Public Company Accounting
purpose as the annual report issued by a publicly traded
Oversight Board (PCAOB) to provide independent
company to its investors. States and territories have the
oversight of audits of public companies when it passed the
https://crsreports.congress.gov

---

Introduction to Financial Services: Accounting and Auditing Regulatory Structure, U.S. and International
flexibility to choose the accounting and auditing standards
requiring or prohibiting the incorporation of IFRS but has
that suit their needs.
encouraged study of the issue.
Accounting. The voluntary standard-setting body for state
Auditing. Similar to the expectations that the financial
and local governments’ accounting standards is the
statements of domestic firms should be free of material
Governmental Accounting Standards Board (GASB). While
misstatement whether caused by error or fraud, investors
the SEC requires publicly traded companies to follow the
have a similar set of expectations for financial statements of
accounting standards created by FASB, state and municipal
foreign firms. The International Auditing and Assurance
governments are not required to follow accounting
Standards Board (IAASB) promulgates International
standards promulgated by GASB. States and municipalities
Standards on Auditing (ISA) that it encourages each
can voluntarily adopt GASB accounting standards without
country to adopt.
any changes, choose not to adopt a specific standard, or
modify a standard to meet their specific needs.
Sustainability Accounting Standards
The investing community and various stakeholders—
Auditing. State and municipal government audits are
institutional and individual investors, academics, and
conducted by either an elected or appointed auditor. Elected
advocacy groups—continue to have a long-running debate
auditors conduct their work at all levels of government,
about what should be disclosed by public firms. Issues
from states to cities and towns. Appointed auditors are often
related to sustainability accounting standards have been at
appointed by the legislature or by the chief executive of the
the forefront of that debate. Shareholder expectations for
respective municipal organization with the consent of the
corporations to address material Environmental, Social, and
legislature. State and municipal auditors, whether required
Governance (ESG) issues have continued to increase. In
by law or not, might follow the GAGAS issued by GAO,
alignment with these increasing shareholder expectations,
while making appropriate changes to suit their specific
firms with over $70 trillion in assets under management
needs, or might follow other audit standards that meet their
have indicated they will consider such ESG issues as
specific needs.
political spending, climate change, diversity, and human
rights, in the investment management decision-making
Policy Issues
process.
Two policy issues might be of particular interest to
Congress and investors. The first is the relationship
The Sustainability Accounting Standards Board (SASB), a
between accounting and auditing standards in the United
U.S.-based nonprofit, has created a set of standards to help
States and other countries—in particular, to what degree
corporations address increased shareholder interest in ESG
international accounting and auditing standards should
issues. Currently, corporate filers with the SEC are not
influence U.S. GAAP and PCAOB or GAAS auditing
required to follow standards as promulgated by SASB.
standards. The second is the newly emerging sustainability
Publicly traded firms are subject to certain other ESG-
accounting standards for businesses, which encompass
related disclosure requirements (e.g., GAAP disclosure
environmental, social, and governance (ESG) issues.
requirements), though these disclosure requirements might
not be as relevant for investors’ decisions as compared to
International Standards
those proposed by SASB.
Capital markets are global. Investors in the United States
invest in foreign firms, and investors from other parts of the
Proponents of sustainability accounting standards suggest
world invest in U.S. firms. Investors in the United States
that investments in material sustainability issues can
and elsewhere rely on financial statements to make
increase shareholder value by, among other things,
informed decisions. Similar to how each state or
differentiating among competitors within each industry,
municipality has discretion to either adopt or modify the
fostering investor confidence, increasing employee trust
accounting standards created by GASB, each country has
and loyalty, and increasing access to capital.
discretion to either adopt or modify international
accounting or auditing standards.
Critics argue that Congress has enacted regulations that
address many of the ESG issues. Additional disclosures and
Accounting. To establish a common set of accounting
reporting requirements, they say, could be an unnecessary
standards, many foreign countries, including those of the
regulatory burden for firms.
European Union (EU), either require or allow International
Financial Reporting Standards (IFRS) as their domestic
CRS Resources
GAAP for firms in their jurisdiction. The EU also accepts

U.S. GAAP as equivalent to IFRS. The SEC allows foreign
CRS Report R44894, Accounting and Auditing Regulatory
firms to file financial statements using IFRS.
Structure: U.S. and International, by Raj Gnanarajah.
Congressional interest in accounting convergence has
CRS Report R45339, Banking: Current Expected Credit
manifested itself in several ways, including hearings, letters
Loss (CECL), by Raj Gnanarajah.
to the SEC, and earlier enacted legislation (e.g., §108(d),
P.L. 107-204). The future evolution of accounting standards
Raj Gnanarajah, Analyst in Financial Economics
in the United States could be decided by Congress, the
SEC, or FASB. To date, Congress has not passed legislation
IF10701
https://crsreports.congress.gov

---

Introduction to Financial Services: Accounting and Auditing Regulatory Structure, U.S. and International


Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.

https://crsreports.congress.gov | IF10701 · VERSION 3 · UPDATED

---