Accounting Principles
Accounting Information

Accounting Principles: Who Makes the Rules?
Who Polices the Industry?

Who creates accounting principles? Who sets and revises accounting standards? What if you don’t  follow all the rules, do you go to jail? Is there an accounting police force that investigates and arrests violators? Surely there must be some regulatory force to make sure that providers of financial statements conform to the rules.

There is, up to a point, and here is how it works:

How have the ruling principles of accounting evolved to today? Who devised the standards? And who keeps them up to date and polices the industry to ensure all the rules and regulations are conformed to?

Too many questions? But you need to know these things! What happens to you if you break the rules, do the accounting police come knocking on your door early one cold morning and carry you off to jail? Is there a regulatory body that ensures your financial statements are accurate, true and are within accounting law?

In any civilized, capitalist and democratic community, there have to be rules and regulations and there must be an accounting ‘police force’ to enforce them. In reality, here’s what normally happens.

The industry is very much regulated by self-imposed voluntary accounting systems dating back to the 15th century. The principle of double entry accounting is believed to have been started in Italy and these principles have evolved to become the accounting standards of today.

Without the cohesion and consistency created by these rules there would be chaos in the business world. In fact, the system works very well yet, without the rules, international business could not exist.

In the United States, the Financial Accounting Standards Board (FASB) considers accounting problems being experienced by the accounting community. A non-governmental and privately financed organization, this body of experts is responsible for specific treatments being applied to accounting issues. The board’s scope ranges across the full spectrum of accounting regulations and, by analyzing and reviewing and resolving problems being experienced by the accounting industry, they are able to retain consistency for the industry

Members elected to the FASB are usually selected from Certified Public Accountants (CPA) belonging to the American Institute of Certified Public Accountants (AICPA). This ensures most companies abide by its guidelines and principles of behavior. This professional level of accounting conduct is no doubt reflected in similar organizations of other countries

In the US, ‘Generally Accepted Accounting Principles’ (GAAP) is the accepted accounting code developed and policed by the FASB. When presented in accordance with GAAP, users of financial accounts and statements are able to rely on and trust the information they contain. Without this assurance, the reader should beware!

In protecting investors from unscrupulous accounting activities and statements, the Securities Exchange Commission (SEC) polices public companies and, as a government body, it also establishes its own legal accounting principles and keeps them up to date.

Another very important government body that relies on FASB accounting rules and regulations is the Internal Revenue Service (IRS). The IRS reviews the financial statements of companies and correlates these with tax returns. In this sense, failing to follow accounting standards can result in serious repercussions.

Thus, one can arrive at the conclusion that in the US as in most western countries standards of accounting have evolved from a combination of both voluntary and formal regulations. On a global basis, and while being highly preferable, it may take years to achieve commonality of international accounting standards. As international trade increases, this becomes more and more a requirement

Accounting Principles

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