Who Enforces GAAP?
Responsibility for enforcement and shaping of generally accepted accounting principles (GAAP) falls to two organizations: The Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC).
The SEC has the authority under securities law to both set and enforce accounting standards, while the FASB, an independent non-governmental body tasked by the SEC, can only set standards. It does so via the Accounting Standards Codification.
Key Takeaways
- Responsibility for enforcement and shaping of generally accepted accounting principles (GAAP) falls to two organizations: The Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC).
- The SEC has the authority to both set and enforce accounting standards.
- The FASB can set standards, which it does via the Accounting Standards Codification.
- GAAP is not law, though violating GAAP can have costly ramifications.
- The SEC has issued many steep fines for GAAP violations, including several famous recent cases, like those of Hertz and Monsanto.
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. In 2019, it fined Hertz (HTZ) $16 million for reporting items that were not consistent with GAAP.
In 2016, the SEC hit Monsanto with an $80 million penalty 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 given the task of establishing financial and reporting standards with its establishment in 1973. Between 1959 and 1973, the job belonged to the Accounting Principles Board under the American Institute of Certified Public Accountants (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 follow GAAP, private companies may choose to do so, especially 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.
FAQs
Responsibility for enforcement and shaping of generally accepted accounting principles (GAAP) falls to two organizations: The Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC).
What is GAAP and who oversees it? ›
Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices.
Who governs GAAP? ›
Established in 1973, the Financial Accounting Standards Board (FASB) is the independent, private- sector, not-for-profit organization based in Norwalk, Connecticut, that establishes financial accounting and reporting standards for public and private companies and not-for-profit organizations that follow Generally ...
Who is the primary agency responsible for GAAP? ›
GAAP consists of a common set of accounting rules, requirements, and practices issued by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).
Who is the head of the GAAP? ›
Jones began his seven-year term as the eighth chair of the FASB on July 1, 2020. In this role, Mr. Jones heads up the seven-member board that establishes generally accepted accounting principles (GAAP) for public companies, private companies and nongovernmental not-for-profit organizations in the United States.
What happens if you violate GAAP? ›
In a business transaction, GAAP violations can damage credibility with lenders and lead to poor decisions. Violations can cause inaccurate reporting for internal and budgeting purposes, as well as a reduced reliance on prepared financial statements for third-party readers.
Do government agencies follow GAAP? ›
The Governmental Accounting Standards Board (GASB) sets financial accounting and reporting standards, known as Generally Accepted Accounting Principles (GAAP), for state and local government. The Financial Accounting Standards Board (FASB) sets standards for public and private companies and non-profit organizations.
What are the 4 basic principles of GAAP? ›
What Are The 4 GAAP Principles?
- The Cost Principle. The first principle of GAAP is 'cost'. ...
- The Revenues Principle. The second principle of GAAP is 'revenues'. ...
- The Matching Principle. The third principle of GAAP is 'matching'. ...
- The Disclosure Principle. ...
- Why are GAAP Principles important?
Established by the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB), GAAP is a set of standardized accounting rules, requirements, and practices to guide how financial statements are prepared and presented.
Who doesn t have to follow GAAP? ›
If your company releases its financial statements publicly or trades on the stock market, then you have to follow GAAP by law and get audits from independent auditors every year. But if your business doesn't have outside investors, following GAAP is optional.
The organizations that have helped with the establishment of GAAP are the American Institute of Certified Public Accountants, the Financial Accounting Standards Board, the Governmental Accounting Standards Board, the Securities and Exchange Commission, the American Accounting Association, the Financial Executives ...
What is the most important GAAP principle? ›
The objectivity principle is one of the most important constraints under generally accepted accounting principles. According to the objectivity principle, GAAP-compliant financial statements provided by your accountant must be based on objective evidence.
What is GAAP in simple terms? ›
GAAP (generally accepted accounting principles) is a collection of commonly followed accounting rules and standards for financial reporting. The acronym is pronounced gap.
What organization is responsible for developing GAAP for use by all US companies? ›
The Financial Accounting Standards Board (FASB) is responsible for establishing and updating the Generally Accepted Accounting Principles (GAAP) in the United States.
