Accounting
Police: Do They Exist?
This article decribes
how adherance to accounting
principles is regulated 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Fasbee) was established in 1973, which superseded another board called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.
John W. Day, MBA is
the author of Real
Life Accounting for Non-Accountants, an online course in accounting
basics.
He has written 3 e-Books pertaining to small business accounting and
writes
a monthly newsletter on accounting issues.
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