Who created the concepts of accounting? Who develops and updates accounting standards? If you break the rules, do you wind up in jail? Does an accounting police department investigate and catch violations? It seems that a regulating agency of some kind is needed to make sure that financial statement providers adhere to the rules. To a certain degree, there is, and here is how it works:
It works pretty well and is largely voluntary. initially, double-entry accounting has been around for a while; in the 1400s, it was initially applied in Italy. Accounting concepts have evolved throughout time, much like accounting regulations.
The system works because the business community could not function without consistency and uniformity in financial statement reporting. There would be chaos, much like what would occur if there were no traffic restrictions.
Consequently, a body of experts known as the Financial Accounting Standards Board (FASB, pronounced Fasbee) took the role of the Accounting Principles Board (APB) in the United States in 1973. The members of the FASB go through a lengthy process of analysis and evaluation when faced with accounting-related concerns. After giving it some thought, they will announce what they think is the most recent or improved approach to dealing with an accounting problem.
They are a non-governmental organization with private funding. FASB is strongly supported by the American Institute of Certified Public Accountants (AICPA). This prestigious association has many Certified Public Accountants (CPAs) as members, and they must abide by its ethical norms and regulations. Similar organizations that require a high level of professional behavior in accounting are surely present in other countries.
The FASB developed the accounting code known as “Generally Accepted Accounting Principles” (GAAP). The user is presumed to be able to trust or depend on the information more readily if a business financial statement is prepared in compliance with GAAP than if it is not. Businesses that don’t use GAAP, which includes a lot of smaller businesses, are not permitted to say that their financial statements are prepared using GAAP; in fact, they should tell the reader so. But let the buyer beware.
One government organization with a police function is the Securities Exchange Commission (SEC). It mostly impacts publicly traded companies since it is their duty to protect investors from unethical actions. The SEC has only recently begun to establish accounting rules. It has a lot on its plate right now.
The Internal Revenue Service (IRS) has the power to audit those tax returns and look at the financial statements that form the basis of the tax returns because most businesses use their financial statements to compile their required income tax filings. If you disregard the rules, you run the danger of running afoul of this federal agency.
As you can see, both compulsory and voluntary action are involved in adhering to the norms and values. The relentless globalization movement is currently leading to the establishment of international accounting standards. This massive project will take years to finish, but it is obviously required and cannot be avoided.