Generally accepted accounting principles, referred to as GAAP, represent a set of standards and guidelines for financial accounting and reporting for businesses and other organizations. GAAP serves to provide a uniform way of approaching financial accounting so that organizations release financial reports that are compiled in a consistent fashion. Publicly traded companies must comply with GAAP, and many private businesses and other organizations elect to use GAAP because investors, lenders and potential buyers tend to prefer GAAP compliance.
Trained Accounting Staff
The first step to GAAP compliance involves employing accountants trained in the methods and practices that GAAP dictates and providing them with conditions tailored for their success. One way to accomplish this task is to establish an audit committee that oversees the organization's accounting department, making sure there are sufficient staff and resources to handle the demands of the job. Examples of useful resources include the Financial Accounting Standards Board Accounting Standards Codification project, which is a database of the many accounting principles of GAAP integrated into a single resource.
Establishing and administering appropriate internal controls plays an important role in maintaining GAAP compliance. Part of internal oversight is that companies use an internal audit process to keep tabs on financial reporting within the company. Internal auditors review a wide range of processes at a company beyond GAAP issues, such as productivity, quality, customer satisfaction and market share. Regarding GAAP, internal auditors contribute to the assurance that compliance controls are in place so that all personnel working on transactions and financial reports follow the proper standards.
One critical step to ensuring GAAP compliance is undergoing the external audit process. This step involves an outside firm examining and evaluating the financial statements of a business, reviewing the books to verify that all measurements and presentations were made following GAAP's procedures and guidelines. Firms that handle audits typically specialize in this area so that they are savvy and sharp about spotting moments of non-compliance. They serve a helpful function of validating a company's accounting for itself and for the public. Publicly traded companies must use an external auditor, while private businesses can choose to use one on staff.
Continuing Training and Education
Continuing education and training for all personnel working on GAAP-related projects is necessary to maintaining GAAP compliance. Accounting standards and guidelines are routinely changing, and procedures should be in place for accountants and others to be updated on the newest developments. In addition, organizations should make sure that integrating the latest changes in GAAP is a part of their regular practices so that organizations do not fall behind and risk non-compliance by instituting new practices too late in the process.
- Jupiterimages/Photos.com/Getty Images