Question

Explain the reasons why the stock market needs U.S. GAAP.

Answer 1

Reasons are:

1. The United States Federal Law requires companies listed on the stock exchange to comply with GAAP while issuing their financial statements to the investors or other stake holders.
2. GAAP ensures compliance with rules, regulations, laws and government policies. It ensures the financial statements are true and fair for reporting purposes.
3. Consistency is ensured as all the companies listed comply with these standards
4. All aspects of the performance of the organisation whether positive or negative are reported while complying with the GAAP requirements.
5. All involved parties are assumed to be acting honestly or the US Government has passed the law to impose severe fines on the management of companies which do not comply with the GAAP requirements.
6. The financial reports cover all financial and monetary situations which can help the stakeholders to take meaningful and well informed decisions.
7. The reliance of the financial statements increases when it complies with GAAP requirements
8. The GAAP standards prescribe various accounting standards to be complied with while preparation of the financial statements.
9. Without GAAP companies can present the financial statements in whichever format they feel like, there wont be a standard financial reporting framework, investors could be easily misled.
10. The GAAP standards ensure ethical business practices.