Question

Why is GAAP so important for external financial reporting but not for internal management reporting?

Answer 1

GAAP provides for standard manner of financial statements preparation and reporting of Financial statements for its users across companies and enable for uniform comparision for their investment decisions.

Generally investors will make their decisions based on external reporting made by external auditors.

Using GAAP helps the following :

Comparability with other companies

Consistency in application of accounting principles

Reliability - GAAP provides reliability for auditors to certify the accounts are as per standards allowed uniformly.

Acceptability - GAAP financial statements are only accepted by regulatory authorities.

Whereas internal management reporting goes with rules and processes set by management for execution of their planning, strategy to achieve their targets. Internal management reporting is only for management for reviewing the process deviations set by them, rectification and correction of same. Internal reporting will not be published to outside. So no need to follow any GAAP reporting as it was management audit or review.