Accounting
Police: Do They Exist?
by:
John Day
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which superseded another board called the Accounting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). 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. |
