Generally Accepted Accounting Principles


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Related to Generally Accepted Accounting Principles: International Accounting Standards

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 <www.fasb.org> (accessed August 11, 2003).

Securities and Exchange Commission. Available online at <www.sec.gov> (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 ?
1) For self-sustaining operations, generally accepted accounting principles treat unrealized foreign exchange gains and losses alike as deferred items, reflected as a separate component of shareholders' equity.
The company added that it is "unaware of any changes to generally accepted accounting principles or the circumstances surrounding the equity contract notes which warrant a change in the application of accounting principles.
47, Audit Risk and Materiality in Conducting an Audit, says that auditors should consider "materiality both in (a) planning the audit and designing auditing procedures and (b) evaluating whether the financial statements taken as a whole are presented Fairly, in all material respects, in conformity with generally accepted accounting principles.
Mattei, president and chief executive officer, stated: "It is our belief that Checkers' financial statements have always been prepared in accordance with generally accepted accounting principles and that any claims to the contrary are unfounded and completely without merit.
That increases the inherent risk for certain assertions about the derivatives because in such circumstances continued application of hedge accounting would not be in conformity with generally accepted accounting principles.
generally accepted accounting principles with international standards published by the IASC.
The delay in the SEC acceptance and subsequent NASDAQ listing resulted from differences in accounting for the release of escrow shares under generally accepted accounting principles in Canada and the United States.
Approximately 22% of the distribution is from income related to differences between generally accepted accounting principles and the tax accounting methods utilized by the Fund.
They found that the Big Four often failed to find or didn't address misapplications of generally accepted accounting principles by audit clients.
Individual investment information is needed by plan administrators and auditors for the valuation of investment assets in the plan and for audit testing and disclosure purposes in accordance with generally accepted accounting principles and generally accepted auditing standards.
Instead of requiring specific accounting procedures, the new regulation directs banks to follow generally accepted accounting principles.
02 per share for the same period in 1991 as prepared in accordance with generally accepted accounting principles in Canada.

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