What Does SOP Stand for in Accounting?
Since SOP stands for "standard operating procedure" in many different fields, it's reasonable to assume that the SOP meaning in finance and accounting is "standard operating procedure" too. In finance, however, SOP can also mean "stock ownership plan," and in accounting, SOP is actually an acronym for "statement of position". The American Institute of Certified Public Accountants may post a statement of position when it wants to recommend how accountants should handle a specific issue.
In accounting, SOP usually stands for "statement of position", which is issued by the American Institute of Certified Public Accountants.
Although the accounting field certainly has many standard operating procedures, they generally aren't referred to as such. The field has generally accepted accounting principles that form the body of standard operating procedures in the field. These are really rules for accounting procedures. Accountants are expected to follow GAAP when performing accounting functions.
When the AICPA wants to clarify a confusing point or suggest an amended way of operating in a specific instance, the group issues a statement of position. The SOP goes to the Financial Accounting Standards Board, which may adopt it or use some of it in its next accounting-standards guide.
Until 1970, the AICPA set the generally accepted professional and technical standards for the accounting profession. At that point, setting GAAP was moved to the FASB, while the AICPA continued to set professional standards for certified public accountants. The AICPA also produces and offers the exams that accountants must pass to be named CPAs.
The group is responsible for setting the standards for financial planning, financial statement auditing, business valuation, professional ethics, private practice and quality control in CPA firms. The AICPA also reviews accusations of misconduct against members and assigns disciplinary actions when it decides they are warranted.
When the AICPA's auditing standards board issues an SOP, it replaces related sections or adds to the AICPA's audit and accounting guide and is also sent to the FASB. If an AICPA SOP is reviewed by the FASB and is used as a basis in whole or in part in an auditing report, the FASB's determination affects all accountants and financial professionals, not just CPAs.
SOPs are very detailed statements about highly specific accounting points. They often involve new types or categories of accounting that weren't addressed in previous years. Since they are new, there are often differing ways of interpreting the new rules, or there is confusion over what the rules mean in practice.
For example, in the early and mid 2000s, several SOPs involved reporting on expenditures related to greenhouse gases. The subject began to be discussed by scientists in the 1890s but didn't affect financial reporting until more recent years. Companies may have held symposiums on the subject, committed researchers to it or took action to reduce their emissions, perhaps. Any actions that created expenses or required grants were the basis for loans, or otherwise, used company funds would need to be accounted for in financial reports.
In October 2017, the AICPA issued SOP 17-1 (denoting the first SOP of 2017) in response to the Securities and Exchange Commission releasing revisions (to be effective in 2015) to reporting on asset-backed securities. The SEC's updated rules were complicated and affected numerous aspects of financial reporting. The AICPA's 36-page SOP 17-1 explained when and how to apply the new rules and what to do if a client didn't provide the necessary written materials to back up the data.