Accounting Police Do They Exist
Below is a MRR and PLR article in category Business -> subcategory Management.
Accounting Police: Do They Exist?
Introduction
Who created accounting principles? Who sets and revises accounting standards? What happens if you don't follow these rules? Is there an accounting police force that investigates and arrests violators? It may seem like there should be a regulatory force ensuring compliance. There is, to some extent, and here's how it works:
A Voluntary System
Primarily, adherence to accounting standards is voluntary, and it works effectively. The practice of double-entry accounting originated in Italy in the 1400s, so it has a long-standing history. Over time, accounting principles and standards have evolved. The system functions well because businesses need consistency and commonality in financial reporting, similar to the necessity of traffic rules.
Establishing Standards
In the United States, the Financial Accounting Standards Board (FASB) was established in 1973, replacing the earlier Accounting Principles Board (APB). FASB members carefully analyze and review issues within the accounting field. After thorough consideration, they announce new or revised approaches to handling accounting issues. FASB operates as a non-governmental entity with private funding and is strongly supported by the American Institute of Certified Public Accountants (AICPA). Many Certified Public Accountants (CPAs) belong to this reputable organization and follow its guidelines. Other countries have similar organizations to ensure professionalism in accounting.
Generally Accepted Accounting Principles (GAAP)
FASB established the Generally Accepted Accounting Principles (GAAP). If a financial statement is prepared according to GAAP, users can trust the information more confidently. Businesses not following GAAP, especially smaller ones, should disclose this to their readers. However, it's crucial for users to be cautious.
Regulatory Oversight
The Securities and Exchange Commission (SEC) has a policing role, primarily focusing on public companies to protect investors. Recently, the SEC has also become involved in setting accounting standards due to its responsibilities.
Moreover, since financial statements are used to prepare income tax returns, the Internal Revenue Service (IRS) may audit these returns and review the associated financial statements. Non-compliance can lead to issues with the IRS.
International Efforts
Compliance with principles and standards is a mix of voluntary and regulatory actions. Currently, there is an effort to establish international accounting standards due to globalization. This massive undertaking is necessary and inevitable, but will take years to complete.
In summary, while there isn’t an "accounting police" in the traditional sense, both voluntary and regulatory measures ensure the integrity and reliability of financial reporting.
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