Question

Violating GAAP

Why is it permissible to violate generally accepted accounting principles when preparing reports used by company management?

Answer 1

SOLUTION:-

Why is it permissible to violate generally accepted accounting principles when preparing reports used strictly by company management? As we know that privately owned companies are not required to disclose detailed financial and operating information in most instances and they decide what type of information should be made available to the public. However, companies that are publicly owned are required to give comprehensive disclosure about their financial condition, operating results, management compensation, and other areas of their businesS Disclosure laws and regulations are monitored and enforced by ine Securities and EXchange Commission SEC regulations require publicly owned companies to disclose certain types of business and financial data on a regular basis to SEC and to the company's stockholders. The SEC also requires disclosure of relevant business and financial information to potential investors when new securities, such as stocks and bonds, are issued to the public, although exceptions are made for small issues and private placements. Publicly owned companies prepare two annual reports, one for the SEC and one for their shareholders. Form 10-K is the annual report made to the SEC, and its content and form are strictly governed by federal statutes. It contains detailed financial and operating information, as well as a management response to specific questions about the company's operations Generally accepted accounting principles (GAAP) and specific rules of the accounting profession require that certain types of information be disclosed in a business's audited financial statements. As noted above, these rules and principles do not have the same force of law as SEC rules and regulations. Once adopted nowever, they are widely accepted and followed by the accounting profession. Indeed, in some instances disclosures required by the rules and regulations of the accounting profession may exceed those required by the SEC It is a generally accepted accounting principle that financial statements must disclose all significant information that would be of interest to a concerned investor, creditor, or buyer. Amon g the types of information that must be disclosed are financial records, accounting policies employed, and litigation in progress, lease intormation, and details of pension plan funding. Certified financial statements contain a statement of opinion from an auditor, in which the auditor states that it is his or her opinion that the financial statements were prepared in accordance with GAAP and that no material information was left undisclosed. If the auditor has any doubts, then a qualified or adverse opinion statement is written However, when we prepare reports for the management, it is not necessary to prepare it in full compliance of GAAP or SEC's regulations. The rationale behind this is that the reports are meant for internal use and to analyse the profitability, making business decisions other matters relating to the company

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