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Accounting Cops: Are They Around?

Who invented accounting principles? Who sets and changes accounting standards? What if you don’t follow every rules, do you go to jail? Is there an accounting cop force that investigates and arrests violators? It would seem that there must be some regulatory force assure that those who provide financial reports obey the rules. There is, up to a point, and here is how it is done:

Mainly, it’s all done voluntary and it works fairly well. First, double-entry accounting began in Italy in the 1400’s, so it has been around awhile. Accounting principles have evolved over the years and so have accounting standards. The reason why the system works is that the business wold could not function if there was not commonality and consistency in financial statement reporting. It would be totally confusing, much like if there were no driving rules of the road.

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of experts known as the Financial Accounting Standards Board (FASB pronounced Fasbee) was established in 1973, which superseded another board called the Accounting Principles Board (APB).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 go through a lengthy process of analyzing and reviewing problems in the accounting field that are brought to them. After much thought, they will make a declaration as to what they believe 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 required to obey by its guidelines and principles. Other countries no doubt 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 business financial statement is completed 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 firms and businesses do, cannot say that their statements are prepared under GAAP; in fact, they should inform the reader that they are not. However, buyer beware.

One governmental body that has a policing function is the Securities Exchange Commission (S.E.C.). It is primarily concerned with public firms because their responsibility is to protect investors from improper and illegal acts. Recently, the SEC has gotten into the act of establishing accounting standards. Its hands are 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 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 numerous ways compliance to the principles and standards is a mixture of voluntary and regulatory behavior. Presently, there is an effort underway to establish international accounting standards due to the globalization of the world's economies. This is a huge chore that will take years, but it is obviously necessary and inevitable.


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