accounting clerks guide  
 

Accounting Police: Do They Exist?
By John Day
Who created principles? Who sets and revises standards? What if you don’t follow all the rules, do you go to jail? Is there an 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 originated in Italy in the 1400’s, so its been around awhile. principles have evolved over the years just as have 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a body of experts known as the Financial Standards Board (FASB pronounced Fasbee) was established in 1973, which superseded another board called the Principles Board (APB). The FASB members go through a lengthy process of analyzing and reviewing problems in the 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 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 professional conduct.

FASB established an code called “Generally Accepted 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 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 standards due to the inexorable globalization process. This is a massive undertaking that will take years, but it is obviously necessary and inevitable.

Article Source: http://www.ArticleJoe.com

John W. Day, MBA is the author of two courses in basics: Real Life for Non-Accountants (20-hr online) and The HEART of (4-hr PDF). Visit his website at www.reallifeaccounting.com to download for FREE his 3 e-books pertaining to small business and his monthly newsletter on issues.


 
 
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