Generally Accepted Accounting Principles (GAAP) and the Sarbanes-Oxley Act provide the sets of the accounting principles, standards, and procedures which the companies apply to form the financial reports
GAAP is the combination of the authoritative standards specifically designed by the International Committee of Accountants and operating under International Accounting Standards (IAS) (Zeff, 1998, p. 401).
According to GAAP, the companies are required to prepare the financial statements in a way that would allow the investors with limited knowledge in financial reporting to analyze them. GAAP embraces such aspects as revenue recognition, classification of balance sheet items, and evaluation of the outstanding shares. The organizations need to follow the principles of accounting while reflecting their financial indicators in the statements. The violation of GAAP is regarded as misleading practice and has multiple legal and ethical implications (Ochoa, 2010, p. 210).
The main GAAP principles are based on the concepts of dual-aspect, money-measurement, entity, going-concern, cost, conservatism, materiality, realization, matching, and accrual principle (Ibarra & Suez-Sales, 2011, p. 36). By following these principles, the organizations can provide the analysts with the information needed for the decision-making regarding the distribution and usage of organic and economic resources: money, land, or labor. The global economy, prices, revenues, goods and service production, food supply, the quality of transport systems, etc. are largely dependent on the way these resources are allocated and applied. In a way, the distribution of resources determines the markets’ prosperity or decline. And since the financial statements may be considered a starting point of the investors’ decision-making, the compliance with the GAAP standards is of significant importance as it will ensure the financial reports’ adequacy.
The Sarbanes-Oxley Act adopted in 2002 became the most significant legislation in the USA in the field of corporate regulation. The Act is focused on the issues of corporate financial reporting and the methods of their reliability control. In particular, it provides the expansion of volumes and the increase in the efficiency of the financial information disclosure. For this, the Securities and Exchange Commission (SEC) elaborated the rules regulating the reflection of the most substantial information in the financial statements that will be useful for the stakeholders: organizational value, financial outcomes, liquidity, costs, the revenue and expenses items, etc. (Romano, 2005). Moreover, the Act requires public organizations to provide information about the changes in their financial positions and operations as soon as possible.
In order to increase the reports’ reliability, a lot of attention is paid to the audit. In all public organizations, audit committees must be created. The committees are responsible for the appointing of auditors and control of their service. The auditor must inform the committee about the important elements of the accounting policy, the principles of the record-keeping, etc. The main auditor’s duties are the review and approval of audit reports as well as the verification of the conclusions made by qualified experts.
The main purpose of the Act adoption was the increase of financial reporting regulation and control after a number of corporate accounting violations (Linck, Netter, & Yang, 2009, p. 3289). The Act has changed the order of the reporting procedures fulfilled by the organizations; it also has introduced new requirements for the expansion of volumes of the disclosed information.
Overall, the Sarbanes-Oxley Act covered the issues of the inner corporate regulation and the evaluation of the control system. In this way, the Act succeeded in the increase of the financial reports’ reliability and helped to minimize the cases of the violations of the accounting principles. Therefore, it is possible to say, that it had a positive impact on the market.
References
Ibarra, V., & Suez-Sales, M. (2011). A comparison of the international financial reporting standards (IFRS) and generally accepted accounting principles (GAAP) for small and medium-sized entities (SMES) and compliances of some Asian countries to IFRS. Journal of International Business Research, 10(3), 35-62.
Linck, J. S., Netter, J. M., & Yang, T. (2009). The Effects and unintended consequences of the Sarbanes-Oxley Act on the supply and demand for directors. The Review of Financial Studies, 22(8), 3287–3328.
Ochoa, O. (2010). Filling the “GAAP”: Why generally accepted accounting principles should inform U.C.C. article 9 decisions*. Texas Law Review, 89(1), 207-226.
Romano, R. (2005). The Sarbanes-Oxley act and the making of quack corporate governance. The Yale Law Journal, 114(7), 1521-1611.
Zeff, S. (1998). International accounting standards versus US-GAAP reporting: Empirical evidence based on case studies. The International Journal of Accounting Education and Research, 33(3), 401.