Running head: GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

U.S. Generally Accepted Accounting Principles

Helen Winton, Marteca Soler-Bodden & Michael Sanford

International College of the Cayman Islands

Course: BE-104 Intro to Accounting

Instructor: Judy Blair-Jackson
Date: 11th December 2016

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Abstract
The report examined the important concepts providing a detailed explanation of terms
related to U.S. Generally Accepted Accounting Principles. As part of the team's research, the
report included background information on accounting considerations under U.S. GAAP. Some
of the ethical issues in accounting and various basic accounting principles used in financial
reporting. This report also uses various scholarly sources to conduct an analysis on the Ernst &
Young and Lehman Brothers.

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Firstly, a brief synopsis of the background history behind of U.S. GAAP. While the
federal government calls for public companies to prepare financial states according to GAAP,
they are not the organization responsible for its conception and supervision. This was done by
the Securities and Exchange Commission (SEC), who in turn assigned the Financial Accounting
Standards Board (FASB,) on its behalf to revise and administer reporting principles for public
firms in the U.S (PricewaterhouseCoopers LLP, 2015). FASB is the supervisory body whose
main function is to develop and implement GAAP (Levy, 2015). This was implemented in an
effort to have companies portray its fiscal position in the best interest of investors so that they
would not be misled. GAAP was first used back in the late 1930s by the American Institute of
Accountants (AIA). At the moment, all 50 states prepare their financial statements under GAAP
(The Comprehensive Guide to Understanding GAAP).
FASB and the International Accounting Standard Board (IASB) regularly make efforts
into coordinating with each other in order to develop a universal conceptual framework (Lugo,
2008). However, some provision made by FASB to amend the consolidation analysis that
responds to concerns raised by stakeholders in regards to the present reporting for consolidation
of specific business organizations (Levy, 2015). Those issues were that the disclosing entity
would have to merge another business organization wherein the controlling company did not
have valid rights to act predominantly on its personal interest where the disclosing entity does
not have the majority support of the companys voting rights or does not have economic benefits
it would be obligated to (PricewaterhouseCoopers LLP, 2015).

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The major requirements affected in this revision are limited partnerships (LP) and related
legal organizations for instance limited partnership companies (LLC), evaluating fees paid to an
operator or another related relationship as a variable interest, the result of fee provisions and
associated parties on the primary beneficiary basis, and lastly the effect of specific types of
mutual funds (PricewaterhouseCoopers LLP, 2015).
The key distinction among GAAP and IFRS is that GAAP is standards-driven, whereas
IFRS is principle-driven. Using a principle-based structure there is the likelihood for diverse
interpretations of similar transactions, which could lead to a wide-ranging of disclosures in
audited financial statements (Kaiser, 2014).
Differentiation in consolidation within U.S. GAAP and IFRS could occur after a noncontrolling entitys position of reporting guidelines contrast from that of the controlling entity.
Despite the fact that under U.S. GAAP its within reason to formulate dissimilar reporting
guidelines inside a consolidation group in order to deal with circumstances applicable to specific
industries, exclusions under the rule toward consistently preparing principles in a consolidated
group dont subsist within IFRS. Furthermore, possible revisions could arise during certain
circumstances if a parent the controlling company has a financial year-end unlike that of a
consolidated non-controlling interest. Under U.S. GAAP, major operations recorded in the break
phase may entail disclosure, while IFRS might have need of recognition of operations recorded
in the break phase during the preparations of the consolidated financial statements (Kaiser,
2014).
Furthermore, we reviewed the scope exemptions in the U.S. GAAP. The majority of
entities are obligated to be evaluated under FASB Accounting Standards Codification (ASC)

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810-10. ASC 810-10 (Carcello, 2009) offers guidance on common consolidation issues, as well
as guidance associated with variable interest entities (VIEs) and consolidation of entities
controlled by contract. ASC 810-10 comprises of three factors; overall, control of partnerships
and similar entities, and research and development arrangements. ASC 810-10 exempts
particular special purpose entities from consolidation under the U.S. GAAP VIE model, but these
exceptions are a small amount (PricewaterhouseCoopers LLP, 2015).
A new statement issued as at March 31, 2016, resulted in considerable revisions of
essential requirements to a number of inconsequential amendments due to the yearly
development practice. As a result, they influence various components of accounting, for instance,
recognition, measurement, preparation, and disclosure. IFRS requirements have the most impact
on U.S. companies located else in the world through cross-border mergers and acquisitions. IFRS
has growing authority on U.S. GAAP, due to the insistence from non-U.S. stakeholders.
Therefore, its obvious that being financially bilingual in the U.S. based on a preparation
standpoint, is gradually becoming more and more imperative (Kaiser, 2014).
When researching companies that have broken or went against GAAP protocol, we turn
our heads toward the Lehman Brothers collapse. Financial services firm Lehman Brothers filed
for Chapter 11 bankruptcy protection on September 15, 2008. The filing remains the largest
bankruptcy filing in U.S. history, with Lehman holding over $600 billion in assets (Mamundi,
2008)
The Lehman Brother survived many crises during its existence, but the housing market
crisis back in 2008 spelled the end for the fourth-largest U.S. investment bank (BBC News,
2008). During the investigation conducted by Anton R. Valukas, the Bankruptcy Examiner on the

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Lehman Brother case, his report emphasized attention towards the use of a repurchase agreement
that caused ramifications concerning in the manipulation of audited financial statements by Ernst
& Young. Record revenues from its real estate business followed and they reported record profits
every year from 2005 to 2007. This was done in an effort to enhance the bank's deceptive
financial position about the date of the year-end balance sheet. Andrew Cuomo, the attorney
general eventually filed charges against the Lehman Brothers auditors Ernst & Young sometime
in December 2010, claiming that the firm "significantly aided... an immense accounting fraud"
by favorably improving the accounting treatment concerning the Lehman Brothers audited
financial statements (Reed, 2010).
On April 12, 2010, a New York Times article exposed that the Lehman Brother acquired a
small company, Hudson Castle Group Inc., to transfer a number of trades and assets from
Lehman's books as a way of influencing accounting figures of Lehman's mortgage finances and
mortgaged-backed risks. A legal executive of Lehman Brothers described Hudson Castle Group
Inc. as an "alter ego" of Lehman. According to the story, Lehman owned one-quarter of Hudson
Castle; Hudson Castles board of directors was governed by the Lehman Brothers, most of
Hudson Castles employees were ex- Lehman employees (Story & Dash, 2010).
From the inception of U.S. GAAP, there has been a wide range of accounting principles
that have been added and developed over the years that are now common usage and practice by
CPA professionals.
There a 13 different types of basic accounting principles that are well-known and are
used on reoccurring basis, there are accrual principle, conservatism principle, consistency
principle, cost principle, economic entity principle, full disclosure principle, going concern

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

principle, matching principle, materiality principle, monetary unit principle, reliability principle,
revenue recognition principle, time period principle and consistency principle (Basic Accounting
Principles, n.d.).
The two principles selected for discussion in the research paper were the consistency
principle and the full disclosure principle. The consistency principle speaks to the fact that, a
business should adopt an accounting principle and continue to use its accounting basis
consistently over future financial years. The only time a change in the adopted accounting
principle should occur is if the businesss new approach will help improve financial results. The
full disclosure principle is to provide in the auditors notes section of the financial statements
where it requires a business to disclose requisite information so that external and internal
individuals who are familiar with reading financial information can consider important decisionmaking issues that are concerning the company (Basic Accounting Principles, n.d.).
All public companies must disclose information about their financial performance to the
public on an annual basis. The role of GAAP auditors is to ensure that these disclosures are
accurate (Mullin, n.d).
The primary role of the internal auditor is to examine business activities related to risk
management, internal controls, and corporate governance to ensure overall efficiency. The
internal auditor is responsible for evaluating the accounting, operating, and administrative
controls of the company being audited. They also will ensure that transactions are recorded
accurately, ensure the company is in compliance with the laws, regulations, and policies. The
also ensure that management is addressing current and prior concerning control deficiencies
(Internal and External Audits, 2003).

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The external auditors, on the other hand, provide a comprehensive review of the
companys balance sheets, financial statements, and financial reporting. The external auditor is
responsible for ensuring the board of directors and management with assurance about the
effectiveness of financial reporting, recording transactions, and regulatory reports, provide an
overview of the companys financial activities and lastly provide them with information useful to
maintaining a banks risk management processes (Internal and External Audits, 2003).
Some of the ethical issues found during preparation of audited financial statements were
a misappropriation of assets and disclosure omissions. Misappropriation of assets otherwise
known as stealing or embezzlement can occur at various tiers of a company (Freedman, 2016).
An example of this is when the CEO of a company might charge a family night out to dinner on
his companys credit card instead of his own personal credit card. Another example of this could
be when a receptionist takes home stationary for his or hers own personal use.
Not issuing a full disclosure about necessary information is known as an ethical omission.
Just like how intentionally recording transactions wrongfully is considered fraudulent financial
reporting, so is failing to disclose information to investors (Freedman, 2016). If the information
withheld is significant in the investors decisions, it must be disclosed (Freedman, 2016).
To conclude, all accounting students are expected to have a sound understanding of the
concepts and what is U.S. GAAP. The rules and standards that are set are to regulate and to be
adhered by public trading companies. Accounts look to GAAP to provide consistency, integrity,
and fairness when it comes to the framework and presentation of financial statements. GAAP
provides a foundation for financial information to be reported in an accurate and honest way to

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managers, investors and financial institution to make the best possible financial decisions (The
Comprehensive Guide to Understanding GAAP).
The key dissimilarity between preparing financial statements with GAAP as opposed to
without specifically is related to how to report revenue and expenses when they are recognized.
GAAP calls for companies to use accrual accounting, which contrasts from cash accounting
because revenues and expenses are reported collectively during the actual transaction rather than
merely when cash is traded. This is particularly influential for purchases completed on credit or
paid for over a long period. When a product is acquired on credit, cash accounting would require
the purchase to be recorded upon receipt of the cash. This could end up happening considerably
later than the transaction itself. Accrual accounting under GAAP attempts to reveal a companys
true financial position, irrespective of the businesss cash-flow (The Comprehensive Guide to
Understanding GAAP).

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