Definition: The non-governmental organization that makes the rules for how American publicly-held corporations should account for their business activities and prepare their financial statements. The collective rules and regulations are known as Generally Accepted Accounting Principles (GAAP).
Example: The financial crisis that exploded in 2008 put the spotlight on the FASB and the accounting rules that companies follow. One problem was that mortgage lenders such as Countrywide Financial continued to report that everything was OK even though more and more of the people who had borrowed money from the company began to default (ie, stop making their monthly payments). Was the company hiding a problem or just following the rules as they’d be set out?
Investeach explains: It is interesting that such as an important function as setting financial accounting and reporting requirements would fall to an organization that doesn’t have anything to do with the government. The Securities & Exchange Commission (SEC), in Congress’ SEC Act of 1934, was given the statutory authority (ie, the power by Congress) to make these rules. However, it has always relied on the private sector to set these rules. From 1936 to 1973, the American Institute of Certified Public Accountants (AICPA) set the rules. From 1973 to the present, it has been the FASB’s job. The fact that these rules have always been set by non-governmental organizations does not mean that it has to continue this way. If the SEC becomes displeased with the work the FASB is doing, it can take the job away from it.
The international equivalent of the FASB is the International Accounting Standards Board (IASB). The ultimate goal of FASB and IASB is to have a common set of accounting and financial reporting rules. This would allow, for example, an investor to compare the performance of an American company with that of a German competitor.
Riddle me this:
1. What important role does the FASB fulfill?
2. What name do we give to the current set of accounting rules and regulations?
3. Identify a problem with financial reporting that was revealed by the 2008 crisis.
4. What government agency actually has statutory authority to set accounting rules?
5. What is the international equivalent of the FASB?