Generally Accepted Accounting Principles (GAAP) refer to a combination of authoritative standards (set by policy boards) and a common set of accounting principles, standards and procedures that most companies use to compile their financial statements. The reason that GAAP are imposed on company reporting is to ensure that investors have an ascertained level of consistency when analyzing companies for investment purposes. Companies are expected to use GAAP when reporting their financial data via financial statements. The GAAP is not written into law, but the U.S. Securities and Exchange Commission (SEC) requires that it be adhered to in the financial reporting of all publicly-traded companies.
Three organizations developed, or influenced the development of, the GAAP in the United States: the SEC, the AICPA, and the FASB. A separate but similar set of rules and principles govern state and local government reporting, as determined by the Governmental Accounting Standards Board (GASB).
Accountants generally apply GAAP through the use of FASB pronouncements referred to as Financial Accounting Standards (FASs), which are periodically published in industry bulletins. There are more than 100 FASs that have been issued over the years. They are supplemented by formal opinions and generally accepted assumptions in a particular sub-segment of the industry. For example, there exists a general assumption that financial statements must be based on the premise that a company will continue in existence unless there is substantial evidence to the contrary. Accountants are guided by these formal standards, rules, and principles, but must also incorporate their own professional judgment into their practices.
In 2005, the U.S. Supreme Court overturned the conviction of accounting firm Arthur Andersen, previously indicted and convicted of obstructing justice for shredding documents of its work done for Enron, the energy services giant under investigation for financial wrongdoing. U.S. v. Arthur Andersen, No. 04-0368 (2005). The government had cited various provisions of the GAAP as evidence of wrongdoing. (However, the conviction was overturned on a technicality, involving the wording of a principal jury instruction that, according to the Supreme Court, was vague and failed to convey the required consciousness of wrongdoing in order to convict.)