GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records.
Generally accepted accounting principles
(GAAP) provide companies and accountants
with a consistent set of guidelines that cover
both broad accounting principles and specific
practices. For example, accountants use GAAP
standards to prepare financial statements.
In response to the STOCK MARKET crash of
1929 and the ensuing Great Depression, Con-
gress passed the Securities Act in 1933 and the
Securities Exchange Act in 1934. Among other
things, these acts established a methodology for
standardizing accounting practices among publicly held companies. The task of creating and maintaining accounting standards was handled
by the American Institute of Certified Public
Accountants (AICPA) from 1936 until 1973. In
1973, the responsibility was taken over by the
Financial Accounting Standards Board (FASB),
which was established the same year.
The Financial Accounting Standards Advi-
sory Council (FASAC), which is composed of 33
members from both the public and private sec-
tors, advises the FASB on matters that may affect
or influence GAAP rules. These 33 individuals
meet quarterly to discuss accounting issues and
gather information, which they then present to
FASB. Essentially, FASAC serves as FASB’s
sounding board. FASAC is overseen by the
Financial Accounting Foundation, an independ-
ent organization whose 16-member board of
trustees chooses FASAC’s 33 members. The
FASB is also monitored by the Corporation
Finance division of the SECURITIES AND
EXCHANGE COMMISSION (SEC). Among the
organizations that influence GAAP rules are the
AICPA and the INTERNAL REVENUE SERVICE (IRS).
Other countries have their own GAAP rules,
which are set by their versions of the FASB. For
example, the Canadian Institute of Chartered
Accountants (CICA) sets GAAP standards in
Canada.
Publicly held companies are required to con-
form to GAAP standards. Specifically, the Secu-
rities Act and the Securities Exchange Act
established a requirement that publicly held
companies must undergo an external audit by
an independent accountant once a year. In the
2000s, companies faced increased scrutiny in
light of the widely publicized cases involving
such major corporations as Enron and World-
Com, along with the firm of Arthur Andersen,
one of the world’s largest accountancy firms. In
the case of Enron, for example, the company
manipulated its financial information to give the
appearance that revenues were much higher
than they actually were. After the company
declared BANKRUPTCY in 2001,Arthur Andersen
came under attack because its auditors had
signed off on Enron’s financials despite numer-
ous misgivings. Andersen was found guilty of
OBSTRUCTION OF JUSTICE by a jury in Houston,
Texas, in June 2002.
In July 2002, President GEORGE W. BUSH
signed the SARBANES-OXLEY Act, which estab-
lished new regulations for accounting reform
and investor protection. Among the provisions
of Sarbanes-Oxley was the creation of the five-
member Public Company Accounting Oversight
Board, overseen by the SEC. Accounting firms
that audit publicly held companies are required
to register with the board, which has the author-
ity to inspect audits. Sarbanes-Oxley also
requires chief executive officers and chief finan-
cial officers of publicly held companies to pro-
vide a statement attesting to the veracity of their
