Accounting Police: Do

They Exist?

 by:

John Day

Who created accounting principles? Who sets and revises accounting

standards? What if you don't follow all the rules, do you go to jail? Is

there an accounting 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 accounting originated in Italy in the 1400's, so its been

around awhile. Accounting principles have evolved over the years just as

have accounting 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 Accounting Standards Board (FASB pronounced Fasbee) was

established in 1973, which superseded another board called the Accounting

Principles Board (APB). The FASB members go through a lengthy process of

analyzing and reviewing problems in the accounting 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

accounting 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 accounting professional conduct.

FASB established an accounting code called "Generally Accepted

Accounting 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 accounting

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 accounting standards due

to the inexorable globalization process. This is a massive undertaking

that will take years, but it is obviously necessary and inevitable.