GAAP/Generally accepted accounting principles

The US Generally Accepted Accounting Principles form the framework upon which financial reporting and auditing is done. These are principles, rules and standards that guide the preparation and auditing of financial statements to ensure a certain degree of consistency and uniformity in various procedures such as recognition of revenue and in classifying balance sheet items. US GAAP is founded on four fundamental qualities namely relevance, reliability, comparability and consistency. These standards are not rigid but allow some room for interpretation by the users.

They are also subject to constant review to ensure that areas not covered are covered and to clear up any grey areas. Various organizations are responsible for the establishment of US GAAP. The American Institute of Certified Public Accountants (AICPA) has over the y ears been involved in laying down guidelines for accounting procedures. It first set up the committee on accounting procedure in 1939. However it was largely inadequate due to its problem specific nature and could not offer guidelines to the majority of the complex problems that arose in accounting procedures.

Accounting Principles Board (APB) replaced it in 1959 with the aim of providing a holistic guide to financial reporting. It too, failed in implementing and enforcing the opinions it had provided and was effectively disbanded in 1973. (Pakhare, Jayashree, 2007) The AICPA then established the Financial Accounting Standards Board and the Accounting Standards Executive Committee (AcSEC). The AcSEC provide detailed guidelines on accounting issues not covered by FASB and GASB in its practice bulletins.

It also issues Statements Of Position that offer guidance on upcoming issues prior to consideration by the FASB and GASB. The AcSEC also issues audit and accounting guidelines that coalesce different principles and rules that are relevant to a particular industry. They also reinforce existing guidelines under FASB and GASB to provide more industry specific guidelines. The AICPA employs the use of committees composed of professionals who deliberate on various issues and provide guidelines. (Craig, James L, 1993)