Released on: March 6, 2008, 8:06 am

Press Release Author: annaya rana

Industry: Education

Press Release Summary: 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:

Press Release Body: 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 it's 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Standards Board (FASB pronounced Fasbee) was established in 1973, which superseded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.


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