With many businesses all across America, how does something such as the accounting department stay generally consistent from firm to firm? With guidance and enforcement set forward by the Financial Accounting Standards Board, or FASB. The Securities and Exchange Commission delegated the responsibilities of developing general guidelines for accounting for firms to follow to the FASB. These guidelines are known as “generally accepted accounting principles,” or GAAP for short. The GAAP is a set of accounting standards that are used in the preparation of financial statements (Kelly & McGowen, 2013). The Financial Accounting Standards Board’s goal is to ensure that financial statements are relevant, reliable, consistent, and comparable through the use of the Generally Accepted Accounting Principles. The FASB looks to ensure relevance in financial statements in that the documents must contain information that will help the user understand the company’s financial position and the financial condition of the firm, and the FASB also looks to ensure that the information provided is reliable thus verifiable. The FASB also requires financial statements to be consistent, that they must be based on the same core assumptions and procedures over a period of time and if a company were to alter its methods, it would have to clearly outline what changes they made and how it affects their financial reporting (Kelly & McGowen, 2013). The financial statements should also be similar to that of other companies so that financial performance can be tracked and compared against each other.
Even with the GAAP, there are still ethics that must still be taken into account in accounting. If accountants are not ethical in their practices, scandals can erupt and cause a multitude of problems. One of the most well-known accounting is that of Enron. Enron was able to hide billions of dollars of debt through using special purpose entities that are not required to be reported on balance sheets. Although if the FASB and the SEC seek to improve the GAAP, “[the] rules [can] enhance verifiability, causing a decrease in differences of measurement and making non-compliance more evident,” (Armour, 2006, p. 283)
References
Armour, J. (2006). After Enron: Improving Corporate Law and Modernising Securities Regulation in Europe and the US. Portland, OR: Bloomsbury Publishing.
Kelly, M., & McGowen, J. (2013). BUSN 6 6th Edition. Cengage Learning.