Who Established Generally Accepted Accounting Principles?

Generally Accepted Accounting Principles (GAAP) represent a common set of accounting principles, standards, and procedures that standardize how companies record, summarize, and report financial information. Adherence to GAAP ensures consistency, comparability, and transparency in financial reporting, allowing investors and other stakeholders to make informed decisions. GAAP’s development was an evolving process shaped by several influential organizations, not a single entity.

The Primary Standard-Setting Body

The Financial Accounting Standards Board (FASB) is the independent, private-sector organization responsible for establishing and updating GAAP in the United States. Established in 1973, the FASB sets accounting standards for public companies, private businesses, and non-profit organizations. The U.S. Securities and Exchange Commission (SEC) recognizes the FASB as the designated accounting standard-setter for public companies.

The FASB operates under the oversight of the Financial Accounting Foundation (FAF), established in 1972 to select board members and provide financial support. The Board comprises seven full-time members who sever all prior professional ties to maintain independence. The FASB follows a comprehensive due process, including extensive research, issuing exposure drafts for public comment, and holding public meetings to ensure broad stakeholder participation.

Early Efforts in Establishing Accounting Principles

Before the FASB, the American Institute of Accountants (AIA), later the American Institute of Certified Public Accountants (AICPA), played a significant role in early standard-setting. In 1939, encouraged by the SEC, the AICPA formed the Committee on Accounting Procedure (CAP). The CAP issued 51 Accounting Research Bulletins (ARBs) from 1939 to 1959, addressing various accounting issues.

Despite its contributions, the CAP faced criticism for its “piecemeal” approach, lacking a comprehensive theoretical framework for accounting principles. This limitation led to its replacement in 1959 by the Accounting Principles Board (APB), also created by the AICPA. The APB’s mandate was to develop a more structured and comprehensive set of accounting principles.

The APB consisted of 18 to 21 part-time, volunteer members, primarily drawn from large public accounting firms, industry, and academia. Until 1973, the APB issued 31 Opinions and 4 Statements, which significantly shaped financial reporting. However, the APB was criticized for its part-time membership, raising concerns about independence and response speed to complex accounting issues. These challenges led to the APB’s dissolution and the establishment of the full-time, independent FASB in 1973. Many of the APB’s opinions continue to be part of GAAP.

Governmental Oversight and Influence

The Securities and Exchange Commission (SEC), a U.S. government agency established in 1934, holds statutory authority to prescribe accounting principles and reporting requirements for publicly traded companies. While the SEC possesses this authority, it has historically relied on private-sector bodies, such as the FASB, to develop these standards. This delegation recognizes the private sector’s expertise and resources in the accounting field.

The SEC’s acceptance of FASB-issued standards grants them authoritative status for public companies. The Commission actively oversees the FASB’s standard-setting process and retains the power to intervene or prescribe its own accounting principles if necessary to protect investors or ensure market integrity. The SEC enforces compliance with GAAP for public companies; non-adherence can result in significant penalties and fines.