GAAP Codification and Standards Enforcement

GAAP Codification and Standards Enforcement

Historical Perspective: The GAAP Hierarchy

  • Prior to the current codification, GAAP existed as a hierarchy.

  • This hierarchy was informally known as the "house of GAAP."

  • It ranked sources of GAAP from most to least authoritative.

  • Major sources included:

    • FASB standards, interpretations, and staff positions.

    • APB opinions.

    • AICPA research bulletins.

  • This system required navigating various sources to determine proper accounting treatment.

  • The old GAAP hierarchy was considered an inefficient way to determine compliance for a specific accounting issue.

FASB Codification Project

  • The FASB undertook a project to consolidate GAAP into a single source.

  • The result was the Accounting Standards Codification (ASC).

  • The ASC became the source of GAAP on June 30, 2009.

  • On June 3, 2009, the FASB approved the codification as the authoritative source for U.S. accounting and reporting standards for nongovernmental entities, in addition to SEC guidance.

  • The FASB issued a final Statement of Financial Accounting Standards (SFAS) No. 168 on June 30, 2009.

  • SFAS No. 168 reduced the GAAP hierarchy to two levels:

    • Authoritative: the codification.

    • Non-authoritative: anything outside the codification.

Accounting Standards Codification Details

  • The codification organized thousands of GAAP pronouncements into a single online research tool.

  • After the codification, there were no more FASB statement numbers, FASB interpretation numbers, accounting statements of positions, etc.

  • The codification did not change existing GAAP.

  • It only reorganized and made GAAP more accessible.

  • The FASB now issues accounting pronouncements through Accounting Standards Updates (ASUs).

Standard Enforcement

  • The SEC requires publicly traded companies to submit GAAP-compliant financial statements quarterly and annually.

  • These statements and disclosures must be accompanied by an audit opinion stating conformity with GAAP.

  • Failure to comply can result in a deficiency letter, which is public record.

  • If non-compliance persists, the SEC may issue a stop order, preventing the company's shares from trading.

  • These actions signal significant problems to the market and investors.

  • The Department of Justice may investigate and bring charges against companies for non-compliance, especially in cases of financial statement fraud.

  • Criminal and civil litigation can result from non-compliance, particularly in cases of fraud.

  • The AICPA's code of ethics requires members to ensure GAAP compliance when involved with financial statements.

  • Stock exchanges require listed companies to provide GAAP-compliant financial statements.

  • Even non-public companies may need to comply with GAAP due to financial institution requirements for financing and loans.