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Accounting Cops: Do They Exist?
Who created accounting principles? Who sets and changes standards of accounting? If you don’t follow all the rules, do you go to jail? Is there an accounting police force that checks on and arrests those who violate the rules? It would seem that there must be some regulatory force to make sure that providers of financial statements obey the rules. There is, up to a level, and here is how it is done:
Mainly, it’s all voluntary and it works fairly well. First, double-entry accounting first started in Italy in the 1400’s, so its been present for awhile. Accounting principles have changed over the years just as have accounting standards. The reason why the system works is that the business wold could not operate if there was not commonality as well as consistency in financial reporting. It would be totally confusing, much like if there were no rule of the road for driving.
Therefore, in the United States, a body of experts known as the Financial Accounting Standards Board (FASB pronounced Fasbee) was established in 1973, which superseded another board called the Accounting Principles Board (APB). The FASB members preform a lengthy process of analyzing and checking problems in the accounting field that are brought to them. After much thought, they will make a pronouncement as to what they think the new or revised way of approaching the treatment of an accounting issue should be.
They are a non-governmental organization that has private financing. A sizeable supporter of FASB is the American Institute of Certified Public Accountants (AICPA). Many Certified Public Accountants (CPAs) belong to this respected and prestigious organization and are obligated to abide by its guidelines and principles. Other countries do have similar organizations that require high levels of accounting professional conduct.
FASB established an accounting code called “Generally Accepted Accounting Principles” or (GAAP). The assumption is that if a company's financial statement is done according to GAAP, then the user of this statement could rely on or trust the information more readily than if not prepared according to GAAP. Those businesses that deviate from GAAP, and many smaller businesses do, cannot say that their statements are prepared under GAAP; in fact, they should tell the reader that they are not. However, buyer beware.
One governmental body that has a policing authority is the Securities Exchange Commission (SEC). It is primarily concerned with public firms because their job is to protect investors from unscrupulous acts. Recently, the SEC has gotten into the act of establishing accounting standards. It has its hands full today. Since most businesses use their financial statements to prepare their required income tax returns, the Internal Revenue Service (I.R.S.) may check those tax returns and review the financial statements upon which the tax returns are based. Breaking rules can get you into difficulty with this governmental body.
You can see that in many ways compliance to the principles and standards is a mixture of voluntary and regulatory behavior. Currently, there is an effort underway to set international accounting standards due to the globalization of the world's economies. This is a massive undertaking that will take many years, but it is certainly necessary and inevitable.