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What Is GAAP Law?

C. Mitchell
C. Mitchell

Most countries have a number of different laws and statutory provisions that pertain to generally accepted accounting principles, which are often collectively referred to as generally accepted accounting principle (GAAP) law. This title is often somewhat deceptive, as there is rarely but one law at play. Accounting laws are usually enforced more in the form of disparate mandates and enforcement actions than as any single black-letter application. The term “GAAP law” is nonetheless frequently used in a great many countries. It is normally understood to represent any of a range of corporate finance laws or statutory reporting provisions that mirror or emulate the principles mandated by financial regulators.

The idea behind any GAAP scheme is to introduce some sort of uniformity and accountability into financial record keeping. Without boundaries, companies and organizations would in all likelihood keep track of their sales, profits, and tax obligations in all manner of disparate ways. Many of these would be well intentioned, but none would likely to be consistent — and some could be downright deceptive. In most countries, generally accepted accounting principles act as financial fence posts within which corporations and other public organizations must work. They are usually set by government regulatory authorities or financial accountancy boards, and are almost always published as guidelines, all of which can be adopted in a variety of ways.

Man with hands on his hips
Man with hands on his hips

Laws that fall under the GAAP law categorization are generally authored by wholly separate entities and rarely adopt GAAP language directly. They are usually presented as financial regulations and general corporate finance laws. Statutes dictating ethical accounting, prohibiting fraud, and proscribing stock inflation are some of the most common examples. With few exceptions, companies that follow their jurisdiction’s generally accepted accounting principles will also comply with all GAAP laws.

GAAP law enforcement is usually somewhat different from regular GAAP enforcement. This means that a company that engages in deceptive or otherwise unsanctioned accounting can face penalties from multiple directions. Law enforcement is usually applied against specific individuals, such as corporate officers or executives. Policy enforcement, on the other hand, more often results in sanctions against the company as a whole.

The agents responsible for doling out these penalties are different, as well. Actual law, GAAP law or otherwise, is usually administered through a country’s justice system, with infractions being prosecuted by government lawyers. Straight GAAP violations are typically handled by the oversight agency that crafted the principles in the first place. The goal of enforcements in either account is to ensure that sound financial management techniques and, at times, financial management tools are being used by all entities uniformly.

Complexities arise most frequently for companies who engage in transnational business. Although most countries’ GAAP laws are similarly spirited, they are often framed and phrased very differently. Fully adhering to one set of accounting principles may be fine in country A, but may not be enough to satisfy the GAAP law of country B. Business finance management in these situations often requires a great deal of research, as well as a careful tailoring of all policies, provisions, and norms.

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