What Steps Can a Company Take to Make Sure That It Is Adhering to GAAP?
GAAP refers to a set of standard accounting rules and regulations. For certain types of firms, it is good business practice to adhere to GAAP, while for others such adherence is mandatory. Firms can take numerous steps to ensure compliance and can also obtain help from independent outsiders in the process.
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GAAP
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The term GAAP stands for generally accepted accounting principles and is a set of rules and regulations developed by the Federal Accounting Standards Advisory Board (FASAB). For many corporations, it is mandatory to comply with GAAP. Federal entities and public corporations whose stocks are traded in stock markets must ensure their financial statements conform to GAAP. GAAP evolves constantly to reflect the changes in the business as well as regulatory environment. The Federal Accounting Standards Board (FASB) publishes periodic updates for accounting professionals who must stay abreast of the latest changes to GAAP.
Accountants
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The primary responsibility for GAAP adherence rests with the firm's accountants. Therefore, the most important step an organization can take to ensure compliance is to work with accounting professionals certified by the American Institute of Certified Public Accountants (AICPA). Such a certified professional can either be a full-time employee or work for an independent accounting firm. While large organizations have substantial accounting departments with several certified public accountants (CPAs), small firms tend to partially or fully subcontract their accounting to outside experts. A small business with five employees may employ no accountant, for instance, while a midsize firm with a dozen employees may have one accountant who is supported by an independent CPA as needed. This will ensure that the firm's bookkeeping practices are always in line with the latest directives issued by the AICPA.
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Audits
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A financial audit is the process of examining the accounting records of an entity to assess the extent of compliance with GAAP. Such an audit is carried out by a specialized firm, whose only service tends to be auditing the books of other entities. The auditor will be given full or extensive access to the audited firm's books and will usually spend a great deal of time, sometimes months, going through the records as well as interviewing employees. If the auditor's statements about the firm are later found to be inaccurate or misleading, the auditor can be sued and could suffer substantial damage. Such audits are mandatory for publicly traded corporations and highly desirable for large private firms.
Employee Training
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Finally, a firm should train all its employees whose actions can impact the accuracy of accounting entries. Employees in the warehouse, for instance, must be aware of how to account for changes in inventory levels as well as such things as spoilage or losses. Truck drivers must ensure that daily delivery reports are accurate and all signatures confirming deliveries are complete. While the accounting department is ultimately responsible for GAAP compliance, all personnel must do their part for optimum results.
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References
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