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Accounting Police: Do They Exist?
Who was responsible for creating accounting principles? Who sets and revises standards of accounting? What if you do not follow all the rules, do you go to jail? Is there an accounting cop force that investigates and arrests those who violate the rules? It would seem that there must be some ruling force assure that providers of financial statements obey the rules. There is, up to a certain point, and here is how it works:
Mostly, it’s all voluntary and it works pretty well. First, double-entry accounting first started in Italy around 1400’s, so it has been present for awhile. Accounting principles have evolved over the years and so have accounting standards. The reason why the system works is that the business community could not work if there was not commonality and consistency in financial reporting. It would be totally confusing, much like if there were no rule of the road for driving.
Therefore, in the USA, 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of experts known as the Financial Accounting Standards Board (FASB pronounced Fasbee) was established in 1973, which superseded another board called the Accounting Principles Board (APB).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 time consuming process of analyzing and checking problems in the accounting field that are brought to them. After much thought, they will make a declaration 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 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 abide by its guidelines and principles. 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 deviate from GAAP, and many smaller businesses do, cannot say that their statements are prepared under GAAP; in fact, they should inform the reader that they are not. However, let the buyer beware.
One governmental body that has a policing authority is the Securities Exchange Commission (SEC). It is mainly concerned with public companies 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 (I.R.S.) may check those tax returns and review the financial statements upon which the tax returns are based. Not following the 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 many years, but it is certainly and obviously necessary and inevitable.