The U.S. business sector is comprised of many varying industries and sub-industries. So, how is someone interested in multiple areas of business supposed to interpret financial reporting in different fields?
That’s where the rules of the generally accepted accounting principles (GAAP) apply.
In this article, we'll discuss the basics of GAAP standards and share 10 steps you can take to help ensure you're GAAP-compliant.
What is GAAP? GAAP is set by the Financial Accounting Standards Board (FASB) and is meant to establish financial transparency across multiple industries. GAAP is defined by 10 general concepts:
- Principle of Regularity
- Principle of Consistency
- Principle of Sincerity
- Principle of Permanence of Methods
- Principle of Non-Compensation
- Principle of Prudence
- Principle of Continuity
- Principle of Periodicity
- Principle of Materiality
- Principle of Utmost Good Faith
Essentially, GAAP is an umbrella of 10 accounting standards and regulations under which public companies in the U.S. must comply when reporting their financial statements. Running a public business properly requires meeting each of them, and following those standards is important to maintaining a healthy enterprise.
Additionally, this consistency helps investors and creditors more easily identify a business’ bottom line across a given period. For example, an architecture firm may have vastly different expense reports from a law firm, so GAAP requires that the businesses report their spending and earnings using the same terms and procedures to make them universally assessable.
Here are 10 ways you can meet the principles of GAAP:
- Establish good hiring practices. Attaining your business goals is difficult without the help of a strong support system, so start by identifying the values of your company and the qualities you want to see in members of your team. Then, form a standard by which you measure new applicants consistently.
Don’t be afraid to leverage the opinions of your existing employees in filling open positions. Their firsthand experience can be helpful in identifying company needs that may otherwise go unnoticed or without priority.
Remember: creating a strong work environment requires you to employ skillful individuals with unique ideas, and those candidates often come from a variety of backgrounds and situations.
- Perform ongoing training to reduce errors. One of the overarching pillars of GAAP’s rules and regulations is consistency, so an error in financial reporting is damaging to a business. Failing to meet GAAP standards can have a negative effect on your credibility with lenders and investors and also result in fees.
Ensure that your staff is trained and equipped to properly handle any potential discrepancies in your financial statements. This further emphasizes the importance of recruiting capable professionals for your firm.
- Regularly earn CPE credits. Keeping up with your annual CPE credits can seem like an afterthought amid a busy season. However, attending CPE courses helps you stay abreast of industry news and updates—including changes that may impact how you apply the GAAP standards in your business.
If you put off earning your required 40 CPE credits until the end of the year, you’ll have to dedicate a substantial percentage of your schedule exclusively to attending CPE courses, which can affect other areas of the business.
Instead, aim to complete 25 percent of your annual CPE each quarter. It’s considerably easier to dedicate three to four hours per month (or six to seven hours every other month) to CPE than trying to find 40 available hours in November or December. Also, remember that you’re not restricted to only live or in-person CPE courses. On-demand CPE webinars offer the same credits and are much more convenient.
- Optimize your client intake process. In evaluating clients that seek help from your business, it’s important to have a planned intake process. Handling administrative work too slowly or erroneously could raise a red flag for clients. Plus, the less prepared your business is in taking on a new client, the more it takes off your bottom line.
Make sure your new client intake paperwork includes the following: an engagement letter, a general intake form, and a tax intake form. Holding a client meeting with these materials already in hand will demonstrate your firm’s preparedness to your client.
- Use credit card authorization forms. When you begin discussing payment options with your client, one of the best ways to ensure your working relationship goes smoothly is to have them sign a credit card authorization form during the intake process.
Such an agreement should permit you to charge their debit or credit card directly for easier payment, but it can also protect you during any hazardous payment disputes down the road.
- Implement a security policy. While documenting your business’ official security policy may not be a revolutionary concept, the need for one today is essential (and an integral aspect of maintaining GAAP compliance).
Many accounting professionals understand the risk that third-party actors pose to their firms and take the necessary steps to maintain the integrity of their networks. However, not every company has recognized that its staff and volunteers actually represent just as much of a risk to data and network security.
With a well-organized and easy-to-understand security policy, you can considerably reduce your risk of cyberattacks, data breaches, and compliance violations. Plus, having an official policy is key in remaining PCI compliant and is required by the IRS as part of Form W-12.
- Keep sensitive data safe with strong passwords. Even though we all know the importance of selecting a secure password, it’s an area that commonly faces complacency. Although larger firms are more frequently subject to data breaches, even the most established businesses worldwide have proven they are not immune.
The Password Management Quick Reference for CPAs details each of the things you should be aware of in choosing passwords, like employing a password manager and multi-factor authentication. Taking these precautions is critical to keeping your business safe and adhering to the GAAP standards.
- Choose the right solutions for your business. Technology is a fundamental element of a modern accounting firm, which makes selecting the right solutions crucial. To make sure you don’t waste your budget and resources on technology that isn’t right for your business, you need to first understand your firm’s unique needs and take time to weigh all of your options.
For example, what types of features and functionalities are must-haves and which are simply nice to have? How important is it for a new solution to integrate with your existing software? What level of customer support do you need? Knowing the answers to these questions can help you choose the right technology to support your business and your customers.
- Embrace modern payment options. Did you know 95 percent of Americans prefer paying bills online rather than in person? Further, a 2020 survey from the Federal Reserve Bank of Atlanta reported, "the share of consumers using checks at least once in a typical month has declined in every year since 2010." Based on this data, it’s safe to assume a large number of your clients would prefer to pay online by credit card, debit card, or eCheck.
The CPA’s Ultimate Guide to Credit Card Processing provides accounting industry professionals with a comprehensive guide to payment processing, including how to choose a payment solution that is not only best suited for your needs but also features tools to make it easier to comply with GAAP.
- Adopt an online payment solution. It’s almost unfathomable to imagine operating an accounting firm without technology. Yet, many accounting professionals still take an outdated approach to invoicing and accepting payments. If your business still relies on physical means for taking payments from clients, it’s time to look into an online payment solution.
An online payment solution allows your clients to securely pay invoices how they want to, instead of restricting them to only in-person transactions with cash or requiring them to mail a paper check. Additionally, online payment technology enables you to offer automatic recurring payments, adding convenience for you and your clients.
Committing to following the generally accepted accounting principles can yield major benefits for both you and your business. And if you implement the tips above, you'll find it much easier to be GAAP-compliant.
Curious how an online payment solution like CPACharge can boost your business and help you adhere to the GAAP standards? Get in touch with our team!