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Accounting Cops: Are They Around?
Who invented accounting principles? Who sets and changes standards of accounting? What if you do not follow every rules, do you go to jail? Is there an accounting cop force that checks on and arrests those who violate the rules? It would seem that there must be some ruling force assure that those who provide financial statements conform to the rules. There is, up to a certain point, and here is how it works:
Mostly, it’s all voluntary and it works fairly well. First, double-entry accounting originated in Italy around 1400’s, so it has 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 and consistency in financial statement 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of experts known as the Financial Accounting Standards Board (FASB pronounced Fasbee) was established in 1973, which superseded another board called the Accounting Principles Board (APB).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 time consuming process of analyzing and reviewing 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 funding. A big supporter of FASB is the American Institute of Certified Public Accountants (AICPA). Many Certified Public Accountants (CPAs) belong to this prestigious organization and are obligated to obey by its guidelines and principles of behavior. Other countries do have like 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 differ from GAAP, and many smaller businesses do, cannot state 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 function is the Securities Exchange Commission (SEC). It is primarily concerned with public companies because their responsibility is to protect investors from unscrupulous acts. Recently, the SEC has gotten into the act of creating 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 (IRS) may audit those tax returns and check the financial statements upon which the tax returns are based. Breaking rules can get you in trouble with this governmental body.
You can see that in numerous ways following the principles and standards is a mixture of voluntary and regulatory behavior. Currently, there is an effort underway to establish international accounting standards due to the globalization of the world's economies. This is a massive chore that will take many years, but it is certainly necessary and inevitable.