Question

-What is the GAAP created and why is it important?

-Provide a current example of a company that has ethically violated accounting principles, what happened, what was the penalty? Why is ethics in accounting important?

Answer 1

Generally Accepted Accounting Principles (GAAPs) refers to standards issued by Financial Accounting Standard Board (FASB) for preparation and presentation of financial statements of any organisation. There are guidelines and principles in GAAPs relating to preparation and presentation of financial statements issued by FASB like Principles of Consistency, Regularity, Continuity, and Materiality etc. These principles are needed to be followed by corporations in preparation and presentation of financial statements however there are various issues in preparation and presentation of financial statements as per the financial reporting framework provided by the responsible authority of different countries like comparative analysis, consolidation of financial statement, etc. Therefore, these principles are required to be followed by the organizations to avoid these types of issues. Even International Accounting Standard Board (IASB) has also issued International Financial Reporting Standards (IFRS) to maintain financial transparency and true & fair view of financial statements.

There is a long list of financial reporting scandals of companies which affects all the stakeholders and the economy as well. The latest example of company that has ethically violated accounting principles is Hertz Global Holdings Inc. in which inaccurate financial reporting and restated financial statements to manipulate the pre-tax income that was not as per the requirement of generally accepted accounting principles. This material misstatement is identified by U.S Security and Exchange Commission (SEC) in multiple units of Hertz where financial statements are not in accordance with the reporting requirement of GAAP. Even, SEC has passed an order of penalty of $16M for this inappropriate reporting in financial statements based on the findings during inspection. The inspection of SEC and material misstatement in financial reporting in financial statement affects the market price of share of Hertz as well which affects the value of investors as well. Therefore, we can conclude that appropriate & ethical financial reporting is beneficial for both companies and economy at large.