Accounting Police: Do They Exist?
Accounting Police: Do They Exist? Who created accounting principles? Who sets and revises accounting standards? 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 statements conform to the rules. There
is, up to a point, and here is how it works:
Mainly, it’s all voluntary and it works pretty well. First,
double-entry accounting originated in Italy in the 1400’s, so its been around
awhile. Accounting principles have evolved over the years just as have
accounting standards.
The reason why the system works is that the business
community could not function if there was not commonality and consistency in
financial statement reporting. It would be chaos, 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established in 1973, which superseded another board called the Accounting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).
Read also: Accounting Principles & Standards: Avoid Them At Your Peril
Accounting Police: Do They Exist? Who?
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 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 obligated to abide by its guidelines and principles
of behavior. 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
prepared 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 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 function is the
Securities Exchange Commission (SEC). It is primarily concerned with public
companies because their job is to protect investors from unscrupulous acts.
Recently, the SEC has gotten into the act of 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 in trouble with this governmental body.
You can see that in many 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 inexorable globalization process.
This is a massive undertaking that will take years, but it
is obviously necessary and inevitable. (*)