Every financial professional or aspiring accounting needs to learn exactly what GAAP is before they start their first day at an entry-level job in these fields. GAAP, which stands for Generally Accepted Accounting Practices, is essentially the rulebook for all accounting work and most financial transactions. The GAAP guidelines have been in place for over a century, and they have consistently evolved over that time to accommodate new technologies, new practices, new types of corporate structure, and entirely new professions. Today, GAAP is paired with a slew of other regulations to comprise the best practices and ethical procedures for conducting and recording almost every financial transaction.
The Origin and Maintenance of GAAP
Today, Generally Accepted Accounting Principles are a mainstay of the accounting and financial industries. It wasn’t always this way, however. In the early days of modern accounting and financial work, several different professional organizations crafted their own set of guidelines and best practices. These membership organizations required their own members to adhere to these practices, but variations between professional organizations made it hard for auditors to ensure all transactions were ethical and responsible. Over time, this led to collaboration between numerous professional organizations. This collaborative effort gave rise to the GAAP rules that exist today.
Thanks to a collaborative effort between major professional organizations, and the cooperation of business schools around the world, GAAP took hold as the only central rulebook for the financial industry. Today, these rules are taught as part of introductory accounting courses. They’re put into practice in finance and economics courses, and they’re tested throughout every course in most business programs. Though GAAP remains the standard for al accounting work, it has been joined in recent decades by further government scrutiny and a call for greater professional transparency.
Beyond GAAP: What Keeps Accountants Honest and Transparent?
GAAP guidelines have worked for most accountants for a very long time, but they proved insufficient to prevent the major, damaging accounting scandals of the late 1990s and early 2000s. To combat this unethical behavior, the federal government in 2002 passed the Sarbanes-Oxley Act. In the United States, this law governs all corporations based within US boundaries. It requires greater accountability for top executives when an accounting irregularity is discovered, mandates regular auditing and reporting on GAAP adherence in practice, and sets further guidelines for what constitutes ethical financial reporting in a variety of high-risk, high-reward scenarios. This legislation is often considered the most significant change to accounting ethics and accountability in the last 50 years.
Another key way that accounting work is regulated is through the IFRS, or International Financial Reporting Standards. This is essentially a competing body of regulations used in countries where GAAP has not been adopted and placed into law. Primarily, IFRS is used to govern accounting performed in countries throughout Asia and in some parts of Europe. In recent years, IFRS and GAAP have entered into an agreement to fully combine their ethical standards and mandates throughout the next several years.
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A Key Piece of Ethical Accounting Work Around the World
Generally Accepted Accounting Principles are absolutely essential in today’s business community, ensuring that all work is completed within the confines of state, federal, and professional bylaws. According to Investopedia, aspiring accountants or professionals wondering what GAAP is will likely receive at least a brief introduction in their first business courses, and they’ll learn even more about its applications as they proceed through the program.