To comply with accounting rules and regulations, a company has to prepare financial statements. These statements have to follow certain standards to prevent businesses from manipulating the numbers to make their finances appear differently from the true circumstances. Generally accepted accounting principles (GAAP) and generally accepted auditing standards (GAAS) serve as the standards businesses should follow.
GAAP contains accounting standards that businesses have to follow to prepare financial statements. A business' accountants have to use GAAP in reporting the business' everyday financial dealings, maintaining the accounting system and developing accounting policies. GAAS provides standards by which the prepared financial statements are checked for compliance with the existing accounting rules and regulations. GAAS helps review the financial statements for accuracy and completeness. It also helps identify errors or fraud.
The Financial Accounting Standards Board (FASB) designs GAAP so it consists of Statements of Financial Accounting Standards (SFAS). It contains general rules, standards and conventions of preparing financial statements. To an extent, GAAP allows for different interpretations, so businesses may legally prepare their financial statements in various ways. GAAS consists of three groups of 10 standards that govern how to review financial statements. These three categories help evaluate the business' general accounting standards, fieldwork standards and reporting standards.
In the process of preparing financial statements, GAAP comes into play before GAAS does. This is because the company’s accountants have to first prepare the financial statements based on GAAP before the company’s auditors have financial statements to review based on GAAS. Additionally, a business usually uses GAAP continuously through the accounting cycle. GAAS, on the other hand, only becomes useful at the end of the cycle, when the company has to get auditors to review the statements.
A business's accountant uses GAAP to prepare financial statements and carry out other accounting-related tasks. On the other hand, GAAS is used by the auditor. After the auditor reviews the financial statements, the auditor may ask for clarifications from the accountant. For example, the auditor may gather evidence that the recorded transactions actually took place. After the auditor gives his stamp of approval on the financial statements, they may become available to third parties, such as investors, shareholders and lenders.
- Practising Law Institute; The Basics of GAAP, GAAS and Financial Reporting; Rashell Young
- American Institute of Certified Public Accountants. "IFRS FAQs." Accessed Sep. 3, 2020.
- Securities and Exchange Commission. "Regulation S-K." Accessed Sept. 3, 2020.
- Financial Accounting Standards Board. "Statement of Financial Accounting Standards No. 162." Accessed Sept. 3, 2020.
- U.S. Securities and Exchange Commission. "GAAP (Generally Accepted Accounting Principles)." Accessed Sept. 3, 2020.
- International Financial Reporting Standards. "Who We Are." Accessed Aug. 4, 2020.
- Financial Accounting Standards Board. "Comparability in International Accounting Standards: A Brief History." Accessed Aug. 4, 2020.
- U.S. Securities and Exchange Commission. "Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP," Page 7. Accessed Sept. 3, 2020.
- Harvard Law School Forum on Corporate Governance. "SEC Scrutiny of Non-GAAP Financial Measures." Accessed Sept. 3, 2020.
- Veritas Research. "Accounting Alert: The Non-GAAP Link to Compensation," Page 3. Accessed Sept. 3, 2020.
Edriaan Koening began writing professionally in 2005, while studying toward her Bachelor of Arts in media and communications at the University of Melbourne. She has since written for several magazines and websites. Koening also holds a Master of Commerce in funds management and accounting from the University of New South Wales.