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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 every rules, are you put in jail? Is there an accounting cop force that investigates and arrests those who violate the rules? It would seem that there must be some regulatory force assure that providers of financial statements conform to the rules. There is, up to a level, and here is how it is done:
Mostly, it’s all voluntary and it works fairly well. First, double-entry accounting began in Italy around 1400’s, so it has been around 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 function 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of experts known as the Financial Accounting Standards Board (FASB pronounced Fasbee) was established in 1973, which superseded another board called the Accounting Principles Board (APB).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 go through 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 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 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 belief is that if a company's financial statement is completed 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 deviate 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 (SEC). It is primarily concerned with public firms because their job is to protect investors from unscrupulous acts. Recently, the SEC has started 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 (IRS) may audit 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. Currently, there is an effort underway to set international accounting standards due to the globalization of the world's economies. This is a huge undertaking that will take years, but it is certainly necessary and inevitable.