When and why were GAAP first established?

Modified on Tue, 19 Jun 2018 at 03:42 PM

Following the stock market crash of 1929, the U.S. government sought ways to regulate the practices of publicly traded companies and other major market participants. Authority to set standards on accounting practices was granted to the Securities and Exchange Commission (SEC). The SEC decided to delegate this responsibility to the private sector auditing community, and in 1939, the American Institute of Accountants (precursor to the American Institute of Certified Public Accountants) created the Committee on Accounting Procedure (CAP).

CAP was replaced by the Accounting Principles Board (APB) 20 years later. The APB began issuing opinions about major accounting topics to be adopted by business accountants, which could then be imposed on publicly traded companies by the SEC. In 1973, the APB gave way to the Financial Accounting Standards Board (FASB).

The FASB has been the major policymaking body about acceptable accounting practices ever since. Other governmental and non-governmental organizations influence FASB decisions, but the FASB is responsible for issuing opinions and rendering judgments. The collective decisions passed down from the APB and FASB form the generally accepted accounting principles (GAAP).

GAAP represent objectives and guidelines for financial statements and reporting calculations. There are three major sets of rules covered in GAAP: basic accounting principles and guidelines, detailed standards of the FASB and APB, and generally accepted industry practices.

Within the confines established by GAAP, auditors attempt to establish uniformity among the financial reports of publicly traded companies, although private companies often use GAAP as well. Through GAAP, investors can more easily compare and understand the financial health of different businesses. This uniformity also has ancillary benefits for regulators, lenders, corporate managers and the accounting community.

Source : Investopedia

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