| Who created accounting principles? Who sets and | | | | countries no doubt have similar organizations that |
| revises accounting standards? What if you | | | | require high levels of accounting professional |
| don’t follow all the rules, do you go to jail? Is | | | | conduct. |
| there an accounting police force that investigates | | | | FASB established an accounting code called |
| and arrests violators? It would seem that there | | | | “Generally Accepted Accounting Principles” |
| must be some regulatory force to make sure | | | | or (GAAP). The assumption is that if a business |
| that providers of financial statements conform to | | | | financial statement is prepared according to |
| the rules. There is, up to a point, and here is how | | | | GAAP, then the user of that financial statement |
| it works: | | | | could rely on or trust the information more readily |
| Mainly, it’s all voluntary and it works pretty | | | | than if not prepared according to GAAP. Those |
| well. First, double-entry accounting originated in | | | | businesses that deviate from GAAP, and many |
| Italy in the 1400’s, so it’s been around | | | | smaller businesses do, cannot say that their |
| awhile. Accounting principles have evolved over | | | | statements are prepared under GAAP; in fact, |
| the years just as have accounting standards. The | | | | they should inform the reader that they are not. |
| reason why the system works is that the | | | | However, let the buyer beware. |
| business community could not function if there | | | | One governmental body that has a policing |
| was not commonality and consistency in financial | | | | function is the Securities Exchange Commission |
| statement reporting. It would be chaos, much like | | | | (SEC). It is primarily concerned with public |
| if there were no driving rules of the road. | | | | companies because their job is to protect |
| Therefore, in the United States, a body of | | | | investors from unscrupulous acts. Recently, the |
| experts known as the Financial Accounting | | | | SEC has gotten into the act of establishing |
| Standards Board (FASB pronounced Fasbee) was | | | | accounting standards. It has its hands full today. |
| established in 1973, which superseded another | | | | Since most businesses use their financial |
| board called the Accounting Principles Board (APB). | | | | statements to prepare their required income tax |
| The FASB members go through a lengthy | | | | returns, the Internal Revenue Service (IRS) may |
| process of analyzing and reviewing problems in | | | | audit those tax returns and review the financial |
| the accounting field that are brought to them. | | | | statements upon which the tax returns are based. |
| After much thought, they will make a | | | | Not following the rules can get you in trouble with |
| pronouncement as to what they think the new or | | | | this governmental body. |
| revised way of approaching the treatment of an | | | | You can see that in many ways compliance to |
| accounting issue should be. | | | | the principles and standards is a mixture of |
| They are a non-governmental organization that | | | | voluntary and regulatory behavior. Currently, there |
| has private financing. A big supporter of FASB is | | | | is an effort underway to set international |
| the American Institute of Certified Public | | | | accounting standards due to the inexorable |
| Accountants (AICPA). Many Certified Public | | | | globalization process. This is a massive undertaking |
| Accountants (CPAs) belong to this prestigious | | | | that will take years, but it is obviously necessary |
| organization and are obligated to abide by its | | | | and inevitable. |
| guidelines and principles of behavior. Other | | | | |