of Generally Accepted Accounting Principles
News article (article concerning lawsuit
accepted accounting principles)
House of GAAP (The
GAAP has been demolished!)
- Appendix A, APB Opinion No.
- "Generally accepted accounting
those principles which have substantial
- Opinions of the Accounting Principles
constitute "Substantial authoritative support."
support can exist for principles that differ from Opinion of the
Accounting Principles Board.
- No distinction should be made between
and APB Opinions
- If an accounting principle that
in its effect from one accepted in an Opinion of the APB is applied in
financial statements, the reporting member must decide whether the
has substantial authoritative support and
is applicable in the circumstances.
(a) If not, the accountant would
either qualify his opinion, disclaim an opinion or give an adverse
(b) If it does have substantial
authoritative support, he would give an unqualified opinion and
the fact of departure from the Opinion.
in Searching for Substantial Authoritative Support*
- Define the Problem
- Survey the Relevant Literature
- Survey Present Practice of
- Evaluate the Information Developed
- Reach a Conclusion
- *source: "Some
Thoughts on Substantial
Authoritative Support." by Marshall S. Armstrong, Journal of
APB Statement No.
- Financial statements are the product
of a process
in which a large volume of data about aspects of the economic
of an enterprise are accumulated, analyzed, and reported. This process
should be carried out in accordance with generally accepted accounting
principles. Generally accepted accounting principles incorporate the
at a particular time as to which economic resources and obligations
be recorded as assets and liabilities by financial accounting, which
in assets and liabilities should be recorded, when these changes should
be recorded, how the assets and liabilities and changes in them should
be measured, what information should be disclosed and how it should be
disclosed, and which financial statements should be prepared.
- Generally accepted accounting
is a technical term in accounting. Generally accepted accounting
encompass the conventions, rules and procedures necessary to define
accounting practice at a particular time. The standard of "generally
accounting principles" includes not only broad guidelines of general
but also detailed rules and procedures.
- Generally accepted accounting
conventional--that is, they become generally accepted by
than formal derivation from a set of postulates or basic concepts. The
principles have developed on the basis of experience, reason, custom,
and to a significant extent, practical necessity.
Andersen's confrontation with the SEC
Accounting Series Release No. 150
Accounting Series Release No. 150, (
150), issued by the SEC in 1973 reaffirmed a previous rule issued in
that financial statements prepared in accordance with accounting
for which there is on "substantial authoritative
support" are presumed to be misleading.
- ASR 150 states as a new rule that
standards, principles and practices promulgated by Statements and
of the Financial Accounting Standards Board (FASB), the Opinions of the
Accounting Principles Board (APB), and the Accounting Research
of the Committee on Accounting Procedure that are still in effect will
be considered by the Commission as having "substantial
- Whatever meaning the undefined term "substantial
authoritative support" may have had originally when used by the
Commission in 1938, such meaning would be vastly different today. The
on Accounting Procedure ... issued its first pronouncement in 1939, and
many developments concerning accounting principles have occurred since
- A subcommittee of the Accounting
Board worked diligently on a definition of that term. However, the
was abandoned more than three years prior to the time that ASR 150 was
issued because the conclusion was reached that the term could not be
in a meaningful manner. Since the Commission and its staff continue to
use that term to mean whatever they want it to mean, it is now
urgent that the term be defined or abandoned.
- While registrants and their auditors
the 700 pages of designated professional pronouncements and be
confident that they will satisfy the "authoritative support test," ASR
150 also states that any standards, principles, and practices contrary
to such pronouncements are considered misleading under the Securities
Any departures in unusual circumstances are to be handled on an ad hoc
basis which would not have the status or protection of a rule. This
represents the most significant and sweeping rule relating to
principles ever issued by the Commission.
- There is a vast difference between (a)
auditors voluntarily following professional pronouncements, and (b)
auditors being required to follow such pronouncements by a rule of the
Commission. The Commission in issuing ASR 150 not only failed to follow
the rule-making procedure (including public exposure for comment)
by the Administrative Procedure Act, but also followed the highly
practice of adopting as part of a current rule, all future
of the FASB. As a result, ASR 150 appears to have been adopted contrary
and van Breda:
- "...the term generally accepted
(GAAP), despite its appearance in every auditor's report, is as empty
meaning today as it was when it was first coined. There is still
no consensus on what constitutes a principle, how principles relate to
postulates, nor how either can be used to derive accounting
- "In practice, ... the term GAAP
more than accounting practices with substantial authority."
and van Breda, Accounting Theory, 5th Edition, Richard D.
Rule 203 of the AICPA concerning
the meaning of Generally Accepted Accounting Principles
The AICPA's code of professional
conduct requires that members prepare financial statements in
accordance with generally
principles (GAAP). Rule
203 of this code specifically prohibits a
member from expressing an opinion that financial statements conform
with GAAP if those statements contain a material departure from GAAP,
unless the member can demonstrate that because of usual circumstances
the financial statements would otherwise have been misleading. Failure
to follow rule 203 can lead to loss of a CPA's license to practice.
The meaning of GAAP was at
one time defined by Statement
NO.69, "The meaning of 'present fairly
in conformity with generally accepted accounting principles' in the
independent auditor's report." The FASB, however, believed that
the GAAP hierarchy should be directed to entities (as opposed to
auditors) because it is the entity (not its auditor) that is
responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP. Accordingly, the
Board concluded that the GAAP hierarchy should reside in the accounting
literature established by the FASB and issued Statement of Financial
Standards No. 162 to
achieve that result.
Under this standard, GAAP
covered by rule 203 are construed to be FASB standards and
interpretations, APB opinions, and AICPA accounting research bulletins.
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