Generally Accepted Accounting Principles

(redirected from Accounting Practice)
Also found in: Dictionary, Thesaurus, Financial.

Generally Accepted Accounting Principles

The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records.

Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting principles and specific practices. For example, accountants use GAAP standards to prepare financial statements.

In response to the Stock Market crash of 1929 and the ensuing Great Depression, Congress passed the Securities Act in 1933 and the Securities Exchange Act in 1934. Among other things, these acts established a methodology for standardizing accounting practices among publicly held companies. The task of creating and maintaining accounting standards was handled by the American Institute of Certified Public Accountants (AICPA) from 1936 until 1973. In 1973, the responsibility was taken over by the Financial Accounting Standards Board (FASB), which was established the same year.

The Financial Accounting Standards Advisory Council (FASAC), which is composed of 33 members from both the public and private sectors, advises the FASB on matters that may affect or influence GAAP rules. These 33 individuals meet quarterly to discuss accounting issues and gather information, which they then present to FASB. Essentially, FASAC serves as FASB's sounding board. FASAC is overseen by the Financial Accounting Foundation, an independent organization whose 16-member board of trustees chooses FASAC's 33 members. The FASB is also monitored by the Corporation Finance division of the Securities and Exchange Commission (SEC). Among the organizations that influence GAAP rules are the AICPA and the Internal Revenue Service (IRS).

Other countries have their own GAAP rules, which are set by their versions of the FASB. For example, the Canadian Institute of Chartered Accountants (CICA) sets GAAP standards in Canada.

Publicly held companies are required to conform to GAAP standards. Specifically, the Securities Act and the Securities Exchange Act established a requirement that publicly held companies must undergo an external audit by an independent accountant once a year. In the 2000s, companies faced increased scrutiny in light of the widely publicized cases involving such major corporations as Enron and World-Com, along with the firm of Arthur Andersen, one of the world's largest accountancy firms. In the case of Enron, for example, the company manipulated its financial information to give the appearance that revenues were much higher than they actually were. After the company declared Bankruptcy in 2001, Arthur Andersen came under attack because its auditors had signed off on Enron's financials despite numerous misgivings. Andersen was found guilty of Obstruction of Justice by a jury in Houston, Texas, in June 2002.

In July 2002, President george w. bush signed the sarbanes-oxley Act, which established new regulations for accounting reform and investor protection. Among the provisions of Sarbanes-Oxley was the creation of the five-member Public Company Accounting Oversight Board, overseen by the SEC. Accounting firms that audit publicly held companies are required to register with the board, which has the authority to inspect audits. Sarbanes-Oxley also requires chief executive officers and chief financial officers of publicly held companies to provide a statement attesting to the veracity of their financial statements.

Further readings

Financial Accounting Standards Board Website. Available online at <> (accessed August 11, 2003).

Securities and Exchange Commission. Available online at <> (accessed August 11, 2003).

Schilit, Howard, 2002. Financial Shenanigans: How to Detect Accounting Gimmicks and Fraud on Financial Reports. New York: McGraw-Hill.

Squires, Susan E., et al. 2003. Inside Arthur Andersen: Shifting Values, Unexpected Consequences. Upper Saddle River, N.J.: Prentice-Hall.

References in periodicals archive ?
RQ4: Which is the most importance objective for each Management Accounting Practice (MAP)?
It also is useful for utilities to understand how their peers account for these obligations, because differences in current accounting practices mean the impact of any new standard will vary widely.
Insurance enterprises may request permission from the domiciliary state insurance department to use a specific accounting practice in the preparation of their statutory financial statements (1) when the enterprise wishes to depart from the prescribed statutory accounting practices or (2) when prescribed statutory accounting practices do not address the accounting for the transaction(s).
BOSTON -- American Tower Corporation (NYSE: AMT) announced today that following a review of its lease-related accounting practices, and in consultation with its independent registered public accounting firm, the Company has determined to restate its previously issued financial statements for periods ending on or prior to September 30, 2004.
Because the scope of accounting practices has expanded over the years, many agreements should be amended to encompass the resulting changes.
Consider a two-stage deal--primarily designed for the small accounting practice of one to three partners who want to reduce their time commitment over a one- to five-year period.
It follows, therefore, that inventory rules cannot be uniform but must give effect to trade customs which come within the scope of the best accounting practice in the particular trade or business.
There are numerous reasons why an accounting practice may be subject to valuation.
He is co-chair of the Management of an Accounting Practice Committee for CalCPA's Los Angeles Chapter and has served as vice president and board member of the chapter.
And finally, prior to closing on the sale of an accounting practice, seller and buyer must focus on what they need to do to make clients and staff comfortable, what roles they need to take and what message to send out to the public.
Bunting has been a member of several Institute committees: SEC Practice Section Executive Committee, Management of an Accounting Practice Committee, Special Committee on Standards of Professional Conduct for CPAs, Group B Advisory Committee, and the Assurance Services Special Committee.
If an accounting practice does not permanently change the amount of the taxpayer's lifetime income, but does or could change the tax year in which income is reported, it involves timing.