Looking for Acceptance

GAAP stands for "Generally Accepted Accounting Principles." The loose, easy sound of this belies the fact that GAAP is mandatory. The Code of Conduct of the American Institute of Certified Public Accountants forbids accountants from departing from "principles promulgated by a body designated by the AICPA Council to establish such principles." The AICPA's promulgator of principles is the Financial Accounting Standards Board (FASB) an accounting think tank organized in 1973. FASB, based in Norwalk, Connecticut, is controlled by a trust called the Financial Accounting Foundation.

GAAP isn't one document - it is a dizzying array of more than 2000 accounting "pronouncements" issued by a variety of authorities. The pronouncements are arranged in a strict hierarchy laid out in FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. At the top of the heap are FASB's Statements of Financial Accounting Standards (SFAS).

The securities laws (e.g. '33 Act sections 7 & 19(a)) give the SEC control over accounting standards for public companies, but the SEC has always delegated this power to private organizations. Upon FASB's organization the SEC transferred to it power to set accounting standards. Before the organization of FASB, the AICPA had SEC approval to set standards (thus, AICPA "Accounting Principles Board Opinions" from before 1973 carry the same weight as SFAS). The SEC also describes FASB pronouncements as "generally accepted," but to the SEC the phrase has a very different meaning - the SEC is indicating that it has provisionally agreed to use FASB standards, but reserves the right to set them aside. In the words of the SEC, they are "recognized as authoritative in absence of any contrary determination by the Commission."

The SEC's control over public company accounting standards was recently reinforced by the Sarbanes-Oxley Act which required reaffirmation that FASB was sufficiently independent to act as the financial accounting designee of choice (release no 33-8221).