What Are Authoritative Pronouncements in Accounting?
Gain insight into the official guidelines underpinning reliable financial reporting and auditing, including who creates the standards and how they are organized.
Authoritative pronouncements are the official rules, standards, and guidelines that govern the practice of accounting and financial reporting. These directives ensure that the financial information produced by different organizations is consistent, comparable, and reliable. By establishing a common set of procedures for recording and reporting financial data, these pronouncements allow investors, creditors, regulators, and the public to make more informed decisions. They form the bedrock of financial reporting, creating a standardized language for an entity’s financial position and performance.
The Hierarchy of US GAAP
In the United States, the Securities and Exchange Commission (SEC) has the authority to establish accounting standards for public companies, a power granted by the Securities Exchange Act of 1934. This legislation was a response to the stock market crash of 1929, which highlighted the need for transparent financial reporting. The SEC, however, has historically delegated the responsibility of setting these standards, known as Generally Accepted Accounting Principles (GAAP), to the private sector.
The primary body tasked with this responsibility for public and private companies, as well as non-profit organizations, is the Financial Accounting Standards Board (FASB). Recognized by the SEC as the designated accounting standard-setter for public companies, the FASB’s mission is to establish and improve financial accounting and reporting standards. Its authority is also acknowledged by state boards of accountancy and the American Institute of Certified Public Accountants (AICPA). The FASB’s work ensures that financial statements are consistent and comparable across different entities.
For governmental entities, the Governmental Accounting Standards Board (GASB), established in 1984, sets accounting and financial reporting standards for U.S. state and local governments. The GASB is an independent, private-sector organization that operates under the oversight of the Financial Accounting Foundation. Its pronouncements guide how these governments report on their finances, promoting transparency and accountability to taxpayers and investors.
A separate body, the Federal Accounting Standards Advisory Board (FASAB), was established in 1990 to develop accounting standards for the United States federal government. Sponsored by the Department of the Treasury, the Office of Management and Budget, and the Government Accountability Office, FASAB’s mission is to improve federal financial reporting. The standards it issues, known as Statements of Federal Financial Accounting Standards (SFFAS), are for the public accountability of the federal government.
The FASB Accounting Standards Codification
Before 2009, U.S. GAAP for non-governmental entities was a complex patchwork of documents issued over several decades by different standard-setting bodies. This included Statements of Financial Accounting Standards (SFAS) from the FASB and other historical documents. This fragmented system made it difficult for financial professionals to research and apply the correct accounting treatment for transactions.
To resolve this complexity, the FASB created a single, authoritative source for all non-governmental U.S. GAAP. The result was the FASB Accounting Standards Codification (ASC), launched in July 2009. The Codification reorganizes the thousands of existing pronouncements into a single, logically structured online research tool. The ASC is now the sole source of authoritative U.S. GAAP for public and private companies and not-for-profit organizations.
The structure of the Codification is organized into a hierarchy of Topics, Subtopics, Sections, and Paragraphs. Topics represent broad accounting areas, such as “Revenue from Contracts with Customers” (Topic 606) or “Leases” (Topic 842). Each Topic is broken down into more specific Subtopics, which are further divided into Sections that address aspects like recognition, measurement, and disclosure. This organization allows users to efficiently find the rules relevant to their accounting questions, and it also includes relevant SEC guidance.
Authoritative Auditing Standards
Distinct from accounting standards that dictate how financial information is prepared, auditing standards govern the work of auditors. These standards, known as Generally Accepted Auditing Standards (GAAS), provide a framework for how an independent audit of financial statements should be conducted. They ensure that audits are performed with quality, objectivity, and professional skepticism, enhancing the credibility of the audited financial statements.
In the United States, the source of auditing standards depends on the entity being audited. The Sarbanes-Oxley Act of 2002 established the Public Company Accounting Oversight Board (PCAOB). The PCAOB has the authority to set and enforce auditing, quality control, and independence standards for the audits of public companies. These standards are designed to protect investors and the public interest in the preparation of accurate and independent audit reports.
For audits of non-public entities, including private companies and not-for-profit organizations, the authoritative standards are set by the AICPA’s Auditing Standards Board (ASB). The ASB issues Statements on Auditing Standards (SASs), which provide guidance for auditors of these private entities. This dual system means an auditor must follow PCAOB standards when auditing a publicly traded company and ASB standards when auditing a private one.
Accessing and Applying Pronouncements
The FASB Accounting Standards Codification is accessible directly through the FASB’s website, which offers a free “basic view” of the standards. For more intensive research, a paid “professional view” is available with advanced search capabilities. An accountant researches an issue by identifying the transaction’s nature and navigating the Codification’s structure. This process involves locating the specific paragraphs that contain the relevant guidance on recognition, measurement, and disclosure.