accounting

2007-11-20T08:37:00.000-08:00

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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established in 1973, which superseded another board called the Accounting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.

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accounting