Certified Financial Management Specialist Practice Exam

Which entity is responsible for establishing Generally Accepted Accounting Principles (GAAP)?

1. Financial Stability Oversight Council

2. FASB

3. Securities and Exchange Commission

4. International Accounting Standards Board

The correct answer is: FASB

The entity that establishes Generally Accepted Accounting Principles (GAAP) is the Financial Accounting Standards Board (FASB). FASB's role is central to the development and improvement of accounting standards in the United States. This independent organization is tasked with setting accounting rules and principles that are necessary for financial reporting processes, ensuring that financial statements are consistent and comparable across different entities. FASB develops these principles through a formal due process that includes research and analysis, exposure of proposed standards for public comment, and the issuance of Statements of Financial Accounting Standards. By doing this, FASB provides guidance that aids accountants, auditors, and companies in preparing their financial statements in a way that reflects the financial position and performance of an organization accurately. In contrast, while the Securities and Exchange Commission (SEC) oversees the securities industry and enforces federal securities laws, it does not directly create GAAP, although it recognizes FASB’s standards. The International Accounting Standards Board (IASB) establishes International Financial Reporting Standards (IFRS), which are separate from US GAAP. The Financial Stability Oversight Council primarily focuses on monitoring the stability of the financial system, rather than setting accounting principles. Thus, FASB’s established authority and its core function as the standard