Generally accepted accounting principles
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Introduction to Generally Accepted Accounting Principles
There have been many changes to the accounting standards over the past 50 years. These changes were necessary due to the failure of management and the unfairly stated financial statements. These financial statements rest heavily in the management’s compliance with the generally accepted accounting principles, more commonly known as the acronym GAAP. GAAP is simply used as guidelines, rules, and procedures, however there have been many issued with the compliance of GAAP because there is a lack of consistency from management.
Prior to the Sarbanes Oxley Act of 2002, GAAP was used loosely and auditors found many problems in the financial statements. The development of the Sarbanes Oxley Act narrowed in on companies falsifying their financial statements and recording higher profits and lower debt. This resulted in extremely high costs for companies to maintain fairly stated financial statements. Over the years, there have been many updates to the principles and there will continue to be to ensure that financial users are given reasonable assurance before making decisions in the marketplace.
GAAP Principles
GAAP is extremely general and vary significantly; however they are all simply based on four principles. These principles are consistent, relevant, reliable, and comparable. There is a strong need in the accounting profession to develop a foundation throughout the principles to encourage a more fluent use of them.
Consistency. This first principle lays the groundwork for general accounting throughout the entire industry. For example, a company cannot change their method of accounting for inventory. If the company begins their inventory method as first in first out (FIFO), then they are not able to change their method to last in first out (LIFO).
Relevance. This second principle states that the material in all the financial statements must be highly relevant. This is due to the use of financial statements by the public. The information must be significant and contain decision making facts to assist financial users to make educated decisions.
Reliability. This third principle is used to ensure the accuracy and reliability of the financial statements. For example, if an independent auditor were to review the financial statements, the reliability principle will verify that the results were reported with reasonable assurance and that there are no material misstatements.
Comparability. This is the last and most important principle because then financial users will know what information is dependable. The financial users must be able to compare financial statements with other financial statements in order to determine a lack of consistency between them.
Financial Accounting Standards Board
The Financial Accounting Standards Board (FASB) is an independent board that participated in the development of GAAP and plays a major part today in the restructuring of these principles. The FASB was developed in 1973 as a private, not-for-profit organization and took part in standardizing accounting practices in the United States in the public’s interest. The FASB are also responsible for researching recent accounting issues to find resolutions. The FASB replaced the Accounting Principles Board and the Committee on Accounting Procedure. The FASB’s mission is “to establish and improve standards of financial accounting and reporting for the guidance and education of the public.”
U.S. Securities and Exchange Commission
The SEC has a primary interest in protecting the investors and ensuring that the financial statements are established in accordance with GAAP. The SEC requires public companies to disclose any meaningful financial information to the public. They also oversee all key participants in securities, including securities exchange, securities brokers and dealers, investment advisors, and mutual finds. The SEC is concerned with the disclosure of important market related information to ensure fair trading and protecting against fraud. The SEC designated the FASB as the organization responsible for setting accounting standards for public companies in the U.S.
American Institute of Certified Public Accountants
The American Institute of Certified Public Accountants (AICPA) is the professional organization for all Certified Public Accountants (CPA). They are dedicated to providing members with the resources and information needed to provide valuable services in the highest professional to the public.
International Generally Accepted Accounting Principles
The International Accounting Standards Committee Foundation was formed in March 2001 as a not-for-profit organization which is incorporated in the State of Delaware. It is the parent company of the International Accounting Standards Board (IASC) which is an independent accounting standard based in London. The IASC has two main parties: the trustees and the IASB. The trustees elect the IASB members and oversee and raise the funds that are needed. The IASB is solely responsible for setting the accounting standards.
International Financial Accounting Standards Board
The objective of the FASB internationally is to increase the comparability and the quality of standards used in the United States, which is consistent with the objectives of the FASB in the United States. Ideally, the FASB would like to see worldwide use of a single set of exceeding quality accounting standards for both the U.S. and internationally, which do not currently exist.
http://www.fasab.gov/accepted.html
http://en.wikipedia.org/financial_accounting_standards_board
http://www.sec.gov/about/whatwedo.shtml
