If you're an accountant, or studying accounting as a profession, you have probably heard of the GAAP (Generally Accepted Accounting Principles). This is the set of rules that all public accountants in the United States must live and work by. You may already know what these GAAP rules are, but where did they come from? Who established these rules that all CPAs are expected to follow?
The GAAP stands for the Generally Accepted Accounting Principles. These are the set of guidelines that accountants in the United States must follow. This set of principles include very specific rules regarding full disclosure of finances, periodicity, continuity of asset values, prudence, non-compensation of debts or costs with assets and revenues, permanence of a company's methods, sincerity, consistency, and regularity.
The GAAP was created to protect companies, investors, and other stakeholders, especially since the accounting practices of businesses can sometimes be questionable. These general accounting principles help hold companies responsible for their financial reporting activities.
But inquisitive minds will want to know more. What are the origins of these accounting principles; who came with the GAAP and why do we follow them?
American Institute of Certified Public Accountants
The American Institute of Certified Public Accountants (AICPA) is a group of CPAs that originally set out the guidelines by which all accountants must practice. Since accountants knew the field best, at the time it was natural for them to hold the monopoly on setting out these principles.
The authoritative committee that was originally responsible for defining accounting principles for the AICPA was the Committee on Accounting Procedure (1936-1959). They were soon replaced by the Accounting Principles Board of the AICPA, which was established in 1959. Until the 1970s, the Accounting Principles Board was responsible for establishing the principles that all American accountants should follow.
But in 1973, the AICPA and Accounting Principles Board had to transfer this responsibility to the Financial Accounting Standards Board, a non-profit company that was appointed by the Securities and Exchange Commission (SEC).
Financial Accounting Standards Board
The Financial Accounting Standards Board (FASB) was appointed by the SEC in 1973 to take over the development of GAAP rules in the United States. The FASB's purpose is to set accounting standards that will accurately inform, educate, and protect the public. The FASB is overseen by the Financial Accounting Foundation (FAF).
Why Did the FASB Replace the AICPA?
The SEC replaced the AICPA with the FASB in 1973 because it felt that this new, smaller non-profit board would be able to more efficiently develop accounting principles. The SEC believed that this new appointment would be a more successful alternative for public accountants, stakeholders, and the general public as a whole.
The original 31 statements created by the Accounting Principles Board were largely accepted by the new FASB. 19 statements remain in effect as a part of the FASB's Generally Accepted Accounting Principles (see FASB.org for the most current list of accounting principles).