GAAP stands for generally accepted accounting principles. Generally accepted accounting principles are rules and standards for reporting financial information. These rules and standards are established and approved by the financial accounting standards board (Bragg, 2004). These standards and rules are commonly used to prepare and standardize the reporting of financial statements. The financial statements which should adhere to GAAP include cash flow statements, income statements and balance sheets. GAAP rules must upheld consistency, reliability, comparability and relevance principles.
Consistency here means that all financial information is supposed to be collected and presented the same within all periods. Relevance means that information reported in the financial statements should be perfect so that it can help a person evaluating the report to make sound decisions regarding the future of the financial state of the company he may be interested in. Reliability means that information presented is sensible and can be verified by an independent party. Comparability means that company financial statements and other documentation are comparable to similar businesses that are within its area of trading.
Generally accepted accounting principles ensure that all companies are treated the same and the financial information they offer is relevant, consistent, comparable and reliable. GAAP is usually implemented through two principles namely disclosure and measurement principles. Disclosure principles are used to determine the specific values and other information which is essential to be presented in financial statements. Measurement principles are used to recognize and establish the way and timing of items that enter the accounting cycle and effect the financial statements. GAAP is very crucial to investors and creditors because without it, they will never know the correct financial information of the companies they are interested in, since these will companies will be free to decide on what to depend. Companies will end up painting their report thus misleading the investors and creditors.
FASB stands for financial accounting standards board. FASB is one branch of the financial accounting foundation (FAF), an independent, nonprofit corporation (Investopedia, 2003). Its board consist of seven members and they are all accounting professionals. These professionals establish and promulgate standards of financial accounting and reporting in the U.S. FASB is the organization that sets standards and rules of financial accounting for private sectors. Those standards and rules are used to govern the preparation of financial statements. It bears the task of establishing the generally accepted accounting principles for the private sector. Accounting standards are essential in providing an effective market, as information must be credible, transparent and understandable. The FASB does advance corporate accounting practices by making good rules set out for accounting reports, recognizing and resolving issues in a well-timed manner and creating a consistent standard across the financial markets.
Individual businesses, accounting and trade organizations, and government agencies among other sources call for findings from the FASB on matters of all financial information they may require from any company. The FASB does operate through a process of research project, public hearings, discussion memoranda, proposal drafts and comment letters. The FASB key findings on agenda items are published as statements of financial accounting standards, which businesses are required to adhere to. The financial accounting standards advisory council (FASAC), regularly advises the FASB on conforming to its complex mission particularly in the issue of setting the agenda priorities.
SEC stands for security and exchange commission. SEC is a United States government agency that has the duty to oversee securities transactions, activities of all the financial professionals and mutual-fund trading to prevent corruption and deliberate deception (investopedia, 2003). Its main objective is to protect investors and creditors by preventing and prosecuting corruption, insider trading and other deceptive and fraud practices in the stock market. The SEC is consist of five commissioners who are appointed by the president of the U.S. and are approved by the senate (Wallstcheatsheet, 2005). These commissioners serve a five- year period. The statues administered by the SEC are designed to deliver clear-public disclosure, and to protect anyone who is interested in nvesting against corrupt and scheming practices in the security markets.
Generally, all issues of securities offered in interstate commerce, through the internet or the mail must be registered with the SEC. The SEC has four major divisions. First is the division of corporation finance that ensures corporate disclosure of crucial information to the public who are interested in investing. Second, is the division of trading and markets which ensures fairness, order and efficiency in the market activities. Third, is the division of investment management that helps to protect investors and encourages capital information through the supervision and monitoring of the investment management industry. Finally, is the division of enforcement that assists in investigating securities law violations and initiating civil and criminal actions.
In the light of the continuing economic crisis, the two organizations are very crucial to the investors, creditors and other stakeholders. FASB helps the investors and creditors to get the real picture of the companies they are interested in since these companies have to adhere to the Generally Accepted Accounting Principles, which are established by the FASB. This will ensure an efficient market because the information provided will be credible, understandable and transparent. On the other hand, SEC is very influential when we come to stock exchange market. It ensures that there is clear-public disclosure of the securities and more so protect the investors against corruption and uncouth practices in the security markets.