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Accounting Cops: Do They Exist?
Who created accounting principles? Who sets and changes standards of accounting? What if you don’t follow all the rules, do you go to jail? Is there an accounting police force that investigates and arrests violators? It would seem that there must be some regulatory force to make sure that providers of financial reports conform to the rules. There is, up to a certain point, and here is how it is done:
Mainly, it’s all done voluntary and it works pretty well. First, double-entry accounting first started in Italy around 1400’s, so its 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 wold could not function if there was not commonality and consistency in financial reporting. It would be totally confusing, much like if there were no driving rules of the road.
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of experts known as the Financial Accounting Standards Board (FASB pronounced Fasbee) was established in 1973, which superseded another board called the Accounting Principles Board (APB).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 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 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 sizeable 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 of behavior. 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 belief is that if a business financial statement is done according to GAAP, then the user of that financial 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 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 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 check 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 many ways following the principles and standards is a mixture of voluntary and regulatory behavior. Presently, there is an effort underway to set international accounting standards due to the globalization of the world's economies. This is a massive chore that will take years, but it is certainly and obviously necessary and inevitable.