The responsibility of enforcing and shaping generally accepted accounting principles (GAAP) falls on two organizations: the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC). The FASB is an independent non-governmental body tasked by the SEC and can only set standards through the Accounting Standards Codification. The SEC has the authority under securities law to both set and enforce accounting standards.

What Is GAAP?

Generally accepted accounting principles are a set of accounting procedures, rules, and standards that must be followed by public companies in the Unitedไ States. GAAP ensures that financial statement reporting by these companies is consistent, accurate, and transparent. This allows investors to be able to compare financial statements of similar com🌌panies and make important decisions about their investments.

The core principles of GAAP include:

• Principle of regularity: Companies promise to adhere to GAAP standards.
• Principle of consistency: Financial statements are consistent from one period to the next.
• Principle of sincerity: Accounting is accurate and correct.
• Principle of permanence of methods: Accounting standards are consistent between reporting periods.
• Principle of non-compensation: Financial performance is fully reported with no debt compensation.
• Principle of prudence: Timely and realistic accounting entries.
• Principle of continuity: Asset valuation is based on the assumption that the organization will continue to operate in the future.
• Principle of periodicity: Regular, routine, and consistent accounting periods.
• Principle of materiality: The value of assets reported at cost and financial statements are based on truthful information.
• Principle of utmost good faith: Every person involved in financial statement reporting acts honestly.

Understanding GAAP Enforcement

GAAP is not law, though violating GAAP can have costly ramifications. Errors and omissions can impact a company's credibility with lenders, investors, and other parties who rely on financial statements for an accurate picture of a company's finances. The SEC does not take a kind view of companies that fail to conform to GAAP.

澳洲幸运5官方开奖结果体彩网: For instance,:

• It fined Hertz (HTZ) $16 million in 2019 for reporting items that were not consistent with GAAP.
• The SEC hit Monsanto with an $80 million penalty in 2016 for failing to accurately reflect the cost of rebates according to GAAP rules.
• It has also punished companies who put a shine on their earnings statements by highlighting non-GAAP financial measures "without giving equal or greater prominence" to comparable GAAP financial measures.

The FASB was tasked with establishing financial and reporting standards with its establishment in 1973. Between 1959 and 1973, the job belonged to the 澳洲幸运5官方开奖结果体彩网:Accounting Principles Board under the American Institute of Certified♈ Public Acc𓂃ountants (AICPA), but that role was relinquished as the SEC took a more active part in setting accounting standards, particularly on controversial issues where it disagreed with the board. The Committee on Accounting Procedure, which was also established under AICPA, set accounting standards from 1939 to 1959.

GAAP and Private Companies

Although they are not required to 澳洲幸运5官方开奖结果体彩网:follow GAAP, private companies may choose to do so, eജspecially if they wish to obtain loans or other financing, and if they have long-term plans to seek funding from private equity firms and institutionalize the company to be ready for public listing. The belief is that GAAP financial statements are widely understood by lenders and investors.

Private firms have alternatives to GAAP. AICPA has designed an accounting framework for small and medium-sized businesses. In addition, the FASB has established the Private Company Council as an alternative framework within GAAP.

The Bottom Line

All public companies are required to follow generally accepted accounting principles. The goal is to provide the public with accurate, consistent, and transparent financial statements. Although GAAP isn't law, it can lead to problems for companies that don't follow it. They can experience regulatory issues and may face fines and penalties.