What is the US GAAP?
GAAP or “Generally Accepted Accounting Principles” are the basis for preparation of accounts by US companies.
GAAP is considered to be among the toughest and most conservative accounting standards in the world. As a
result, accounts prepared under US GAAP are considered more trustworthy and transparent than many others.
Recent scandals involving Enron and WorldCom, have however, severely dented confidence on this score.

Who formulates GAAP?
The Financial Accounting Standards Board (FASB) in the US is the organization in the private sector for
establishing standards of financial accounting and reporting. These standards govern the preparation of
financial reports and are officially recognized as authoritative by the Securities and Exchange Commission
(SEC) and the American Institute of Certified Public Accountants. SEC has the statutory authority to establish
financial accounting and reporting standards for public companies. However, throughout history, the
commission’s policy has been to rely on the private sector demonstrating the ability to fulfill the responsibility
in public interest.

It has an open decision making process, which is open to public observation and participation. It receives many
requests for actions on various financial accounting and reporting topics.

What are GAAP’S goals?
Accounting standards are essential to the efficient functioning of the economy because investors, creditors,
auditors and others rely on credible and transparent information. Decisions on resource allocation rely heavily
on accounts. Financial information about the operations and financial information about the operations and
financial position of individual entitles also is used by the public in making various other zecision. FASB
endeavors to

1. improve the usefulness of financial reporting by focusing on primary characteristics of relevance and
reliability

2. keep standards current to reflect changes

3. consider promptly any significant areas of deficiency

4. promote international convergence of accounting standards

Why has it not been able to prevent accounting scams?
No accounting standard by itself can prevent such scams. If accounting and reporting is done under GAAP, the
reader of the financial statements and reports is assured that he is reading credible and transparent
information. But if the firm does not prepare its statements in accordance with GAAP and the auditor
incorrectly certifies it, that is no fault of the standards. This is what happened in the case of Enron and more
recently WorldCom. Enron is accused of hiding material information from the auditors, which could not be
captured in financial statements, making the entire report misleading.