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 government agency enforces 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 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). GAAP sets out to standardize the classifications, assumptions and procedures used in accounting in industries across the US.
Who has to follow GAAP? ›
The generally accepted accounting principles (GAAP) are a set of accounting rules, standards, and procedures issued and frequently revised by the Financial Accounting Standards Board (FASB). Public companies in the U.S. must follow GAAP when their accountants compile their financial statements.
Who has primary responsibility to develop GAAP? ›
The primary role of FASB is to develop and improve generally accepted accounting principles (GAAP) in the United States. GAAP serves as the framework for how financial statements are prepared and presented, ensuring consistency, comparability, and transparency in financial reporting.
What happens if you violate the 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.
Does the federal government follow GAAP? ›
Since October 1999, the American Institute of Certified Public Accountants (AICPA) has recognized the Federal Accounting Standards Advisory Board (FASAB) as the standard-setting body for federal governmental entities; therefore, the pronouncements resulting from the FASAB process represent generally accepted accounting ...
Which organization oversees GAAP for governmental organizations? ›
Established in 1984, the Governmental Accounting Standards Board (GASB) is the independent, private- sector organization based in Norwalk, Connecticut, that establishes accounting and financial reporting standards for U.S. state and local governments that follow Generally Accepted Accounting Principles (GAAP).
Who is responsible for accounting standards? ›
The Accounting Professional & Ethical Standards Board (APESB) is an independent, national body that sets the code of ethics and professional standards with which accounting professionals who are members of CPA Australia, Chartered Accountants Australia and New Zealand or Institute of Public Accountants must comply.
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.
The Financial Accounting Standards Board (FASB) is an independent nonprofit organization responsible for establishing accounting and financial reporting standards for companies and nonprofit organizations in the United States, following generally accepted accounting principles (GAAP).
What are the four 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 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 ...
What happens if a company doesn't follow GAAP? ›
Answer: While there may not be any legal consequences for not following GAAP, there are potential drawbacks. Businesses that do not adhere to GAAP may face challenges in obtaining financing or attracting investors, as GAAP provides a standardized framework for evaluating a company's financial health.
Who ultimately is responsible for properly applying GAAP in a company? ›
Ultimately, the responsibility for proper application of GAAP lies with the company's management team, but external auditors can provide assurance and guidance to help ensure compliance. Management ensures that financial statements adhere to GAAP by creating and implementing internal controls and procedures.
What is the difference between FASB and AICPA? ›
"AICPA" means the American Institute of Certified Public Accountants. The AICPA issues authoritative standards, especially through its Auditing Standards Board. "FASB" means the Financial Accounting Standards Board.
