Wednesday, February 17, 2010

When Do You Cover the SEC?

When a person decides to write a textbook for an introductory course, determining the content of that book becomes a serious responsibility. For probably 90 percent of the students, this will be their one and only exposure to the subject matter. What you include and exclude will—to an extent—determine the knowledge all of those people will carry with them after college. If you leave out a topic, literally thousands of students may never gain any knowledge of its significance.

I have always believed that everyone who takes a financial accounting course should develop some general understanding of “the world of accounting” by the end of the semester. I believe that an educated person needs to understand the role of the U. S. Securities and Exchange Commission and the independent audit function. I don’t want to beat the topic to death but I feel that a financial accounting course has to be more than just the creation and analysis of financial statements.

Up until this year, I have used a best-selling financial accounting textbook that covers the SEC on page 19 of chapter one. How mystifying (and boring) the SEC and independent auditing must seem to a college sophomore on the first or second day of class. I'm surprised that they don't go running out of the room. At that point, when my students are having trouble comprehending the nature of an asset, I cannot even imagine trying to cover the SEC in some engaging fashion.

So, when C. J. Skender and I wrote our financial accounting textbook (for FlatworldKnowledge), the placement of “the world of accounting” was something that we puzzled about for a considerable period of time. Finally, the decision was made that we would introduce decision making, transactions, GAAP, financial statements, journal entries, and the like in the first five chapters. Then, before we started looking at the reporting of specific asset accounts such as accounts receivable and inventory, we would devote one chapter to the accounting world. That was chapter six.

Today was the day we started coverage of that material. I was extremely curious as to whether the students would start yawning or actually get interested. I knew that I could teach it to them (they can memorize virtually anything) but I wanted them to actually be interested in this world.

I started off with two questions: (1) how would the world be different without the SEC and independent auditors and (2) what exactly is the objective of the independent auditor and how does he or she achieve that objective? I posed a number of other questions but those were the core of our conversation.

I cannot tell you how pleased I was. Whereas, in the past, I have had to push these topics down the throats of my students, most of my class time today was taken up by the students asking me how things actually function. At one point, 7 of the 25 students had their hands raised to ask something about how “the world of accounting” works.

It is an introductory course. No one expects a 19 year old to be an expert on the SEC but, to my way of thinking, they need to understand the business world: what makes it tick. When the SEC is criticized in the news or when a CPA firm is sued, I want them to have some understanding of what is taking place. I had always found coverage in chapter one to simply be over their heads. But, clearly, as least for my 25 students today, coverage in chapter six, after seeing transactions, GAAP, financial statements, and the like, worked out great.

My wife used to teach first grade and she always said that you cannot teach a child to read until they are ready to learn to read. I feel the same way about the SEC and auditing; you cannot introduce those topics to students until they are ready to learn them.

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