he Securities and Exchange Commission (SEC) was created by the Securities Exchange Act of 1934. The act empowered the SEC to set accounting principles and financial disclosure requirements for the corporations that it regulates. These corporations are quite large and have ownership interests that are widely dispersed among the public. Such corporations are referred to as publicly held. Thus, for at least publicly held corporations, the Securities and Exchange Commission (SEC) has legislative authority to set GAAP. This raises a question about the relationship between the SEC and the FASB.
The FASB is a private (nongovernment) organization whose authority to set GAAP derives from two sources. First, the business community and the accounting profession, by accepting FASB rulings, provide one source of support. In the United States, accounting principles have traditionally been set in the private sector, and the FASB’s standards have received a reasonable amount of support. At the same time, not everyone is entirely happy with the FASB’s pronouncements. Some people criticize the FASB for issuing standards that are too complex and too costly to implement. Part of the FASB’s responsibility is to balance financial statement users’demands for better information with the costs incurred by those who provide that information.
The second source of the FASB’s standard-setting authority is the Securities and Exchange Commission (SEC). Although the SEC has legislative authority to set GAAP for publicly held corporations, it prefers to rely on the accounting profession’s private rule-making bodies to do this. In fact, the SEC has formally indicated that it will recognize GAAP as prescribed by the FASB. The SEC does, however, retain the right to overrule FASB pronouncements, and it occasionally exercises this right. Figure 1.8 shows the relationships among the different organizations involved in setting accounting standards.
- Generally Accepted Accounting Principles (GAAP)
- The Financial Accounting Standards Board (FASB)