mpanies and the worlds top-5 accounting firms, have resulted in lawsuits and bankruptcies, as well as government rescue efforts, to the detriment of many investors and taxpayers. Some of these companies were formerly prestigious financial institutions with huge capital and with global reach such as Citigroup, JP Morgan, and AIG. This paper seeks to study this recent phenomenon with a view to identifying what would perhaps be a good long-term solution.
The generally accepted accounting principles (GAAP) have been tagged as one of the fundamental causes of the recent financial and banking crisis that originated in the United States and sent shock waves throughout the world. According to the Accounting Dictionary, the GAAP consists of “standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.” There is no central authority that promulgates the rules of GAAP; instead the Securities and Exchange Commission accepts and enforces the compiled issuances from FASB, AICPA, and other sources. The Accounting Principles Board (APB) of AICPA defines GAAP as encompassing “the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time,” and that the principles are derived from “experiences and reason” that have proved useful.(AICPA, 1970, cited in Wolk et al., 1997). Voluminous rules under GAAP have been issued over the years, and the complexity of these rules which have not been consistently organized around fixed and commonly agreed principles have not increased our understanding of financial reports. In fact, they have fostered a lack of clarity and transparency.
Although the GAAP are designed for the preparation of financial statements for external users, internal decision makers also use them for various purposes including decisions regarding promotions and year-end bonuses to its executives. Management has some leeways to impact