Financial statements in the corporate world can either be the bloodline or the death of many companies. These statements show the world a wide array of information. This information is the key to decision making – both internally and externally. When information is promising, it can lead to bigger and better things like more sales of stock, better rates of interest on loans, and even a positive view in the minds of consumers. Conversely, when this information is less desirable, it can lead to stock prices plummeting, creditors denying loans, and even drive away customers (Kieso, Weygandt, & Warfield, 2007).
Generally Accepted Accounting Principles (GAAP)
Without any common set of standards, companies would be free to report information in any way it chooses. But, how is the lack of standards fair to the consumer, creditors, and stockholders? After the 1929 Stock Market crash and the looming Great Depression, the United States government established the Securities and Exchange Commission (SEC) to create a set of standards, later to be called GAAP (Generally Accepted Accounting Principles) by which all publically traded companies would adhere. While the SEC is charged with ensuring that companies follow the GAAP, it relies on the Federal Accounting Standards Board (FASB) to maintain the principles, and make adjustments as needed (Kieso, Weygandt, & Warfield, 2007).
The GAAP are designed to create a uniform manner of distributing a company’s financial information. This enables the reader to compare businesses side-by-side to evaluate performance. If these principles were not uniform, comparing companies would be nearly impossible, as the content would not be reflect the same types of information.
When companies report their information, they are expected to adhere to the GAAP. As a result of the Sarbanes-Oxley Act (Kieso, Weygandt, & Warfield, 2007), high level company officials are required to approve financial statements prior to the documents...