The Creation of an Independent Standards-Setting Board for the Private Business Sector
In seeking for answers as to how GAAP rules are determined, we will have to refer to the Financial Accounting Standards Board (FASB) as source of information. The FASB was created in1973 to represent the private business sector in assisting the federal government, in its process of developing and formulating the GAAP accounting rules. It may be worth mentioning that the groundwork of the Generally Accepted Accounting Principles briefly called as GAAP were laid out by the American Institute of Certified Public Accountants (AICPA). Thus, GAAP’s basic rules are also founded on academically prescribed accounting principles and procedures.
Adherence to GAAP accounting rules were initially developed as an essential requirement of the Securities and Exchange Commission (SEC) among public companies, as standard guidelines for financial accounting and reporting. However, the effectiveness of GAAP’s imposition became widespread; hence, the importance of GAAP, extended not only to investors but to a host of different financial statement users in the business community.
In view of this, the federal government deemed it necessary to engage the private sector in contributing to the standard rules imposed as GAAP, by creating the Financial Accounting Foundation (FAF). The foundation is an independent structure composed mainly of leaders with different established professions, as business or financial executives coming from capital markets, as certified public accountants, securities lawyers, state and local government officials as well as accounting educators. These professionals are collectively known as the FAF Board of Trustees, tasked to oversee not only the operations of the FAF but also that of the Financial Accounting Standards Board (FASB) and the Government Accounting Standards Board (GASB). These two units were established to set the standards for financial accounting and reporting. The FASB is in charge of the rules and policies that will be set forth as GAAP in the private business sector, while the GASB acts as FASB’s counterpart for government-owned organizations.