Generally Accepted Accounting Principles

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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 ?
This article is neither a treatise on generally accepted accounting practices (GAAP) nor a survey of how various entities execute the budgeting process.
Generally accepted accounting practices require banks that intend to swap or sell a claim on a developing country (or any other credit) to value that credit at current market value and to estblish sufficient reserves to cover any anticipated losses associated with that transaction.
SAO PAULO, March 21, 2011 /PRNewswire/ --PINE (BM&FBovespa: PINE4), a publicly-held multiple bank specialized in corporate banking, announces today its consolidated results for 4Q10 and 2010, in accordance to the generally accepted accounting practices in Brazil, BR GAAP, and to the International Financial Reporting Standards, IFRS.
Firms in this industry are certified to audit the accounting records of public and private organizations and to attest to compliance with generally accepted accounting practices.
The International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) today announced the completion of the first phase of their joint project to develop an improved conceptual framework for International Financial Reporting Standards (IFRSs) and US generally accepted accounting practices (GAAP).
In addition, the Complaint alleges that defendants violated Generally Accepted Accounting Practices ("GAAP") by, among other things: (a) recognizing revenue where payment for the shipment of ArthroCare's products was contingent upon the decision of third-party payers to pay for the product or the successful resolution of personal injury lawsuits; and (b) recognizing revenue from bill-and-hold transactions between the Company and its "sales agent" involving certain products that were to be paid for pursuant to the contingent payment arrangement.
During that time, according to the complaint, the Company materially overstated its income (or understated its losses), overstated its revenues, lacked adequate internal controls, and failed to follow generally accepted accounting practices.
Non-GAAP financial measures are not in accordance with, or an alternative for, generally accepted accounting practices in the United States.
The Complaint alleges that these statements were materially false and misleading because they failed to disclose and misrepresented the following adverse facts, among others: (a) that Administaff had inadequate and deficient pricing and billing systems and was incorrectly calibrating pricing for clients that experienced declines in average payroll cost per worksite employee; (b) that Administaff was incorrectly matching the price and cost for health insurance on new and renewing client contracts; and (c) that, in violation of Generally Accepted Accounting Practices and in order to retain its coveted place on the Fortune 500 listing, Administaff was improperly recognizing revenue by failing to net Administaff's worksite employee payroll costs against revenues.
This resulted in the improper reporting of executive compensation and expenses and violated generally accepted accounting practices ("GAAP").
In accordance with generally accepted accounting practices, Fluor currently discloses what the impact of expensing stock options would be on company earnings in the notes to its financial statements.
While we may secure a sale, including a signed customer agreement, on a particular date, we must adhere to the Generally Accepted Accounting Practices (GAAP) and the Security and Exchange Commission (SEC) requirements for booking the revenue from that sale.

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