Introduction
Accounting has been a crucial part of any financial proceedings from ancient times. From the ceramic tablets with the simplest recordings in ancient Egypt to the modern-day Excel spreadsheets, humanity has always not only known the value of proper accounting but actively needed it in their day-to-day operations. However, through the centuries, reflecting on their experience, people have improved the regulations and standards surrounding this sphere. One thing that remained constant is the absolute necessity to accurately report and record every transaction for the proper functioning of the business in question and the larger economy. In other words, non-compliance with such standards as Governmental Accounting Standards Board (GASB) and Financial Accounting Standards Board (FASB) in accounting can have pervasive and non-pervasive consequences on the budget, departments of the company, and other repercussions.
GASB vs. FASB
There are plenty of systems of standards for accounting around the world, with FASB and GASB being the ones used in the US. The main difference between the two standard systems is that GASB is applied for governmental or public transactions, whereas FASB is for business or private sector accounting. Both have the inherent goals of streamlining the financial reporting process while ensuring its accuracy and reliability. GASB and FASB help the stakeholders easily and quickly assess the data to make an informed choice, providing transparency for the public and regulation bodies, according to Nwogugu (2021). Furthermore, the standards bring benefits to the entities themselves by allowing accurate tracking of financial data. Having similar goals, at first, FASB was applied across the sectors, with GASB later created out of concern of FASB applicability for the governmental procedures. Thus, the standards are similar at their core with the differences in whom they target: US taxpayers, public officials, company investors, and shareholders.
Impacts of Non-Compliance on the Financial Entity
The first major impact is the effect on budgeting and maintaining proper records. Generally, if the organization is not compliant with the standards, including GASB and FASB, there is a risk that their accounting and budgeting suffer as a result. As Tysiac (2020) points out, “…it is important to focus on removing the unnecessary complexity” (p. 2). Therefore, a non-compliant firm may be unaware of all the transactions and stock, which could lead to another effect involving its multiple departments. Every department will be influenced by the mismanagement of the resources steaming from the error in the reporting and not functioning properly. In the end, the result is the interruption of operation, consequent bankruptcy, and future dissolvement of the company as repercussions.
In another unlikely scenario, the firm may keep two records: a public one with the corrected data to meet FASB standards and a private one with the actual figures. This case can mainly happen in tax evasion cases. According to Nguyen et al. (2020), “if the compliance cost grows up, the probability of enterprises committing tax fraud might increase” (p. 106). In other words, if the taxes are high and fines as repercussions are low, it is obvious for the business not to comply and keep a double record. However, this repeated behavior can have more serious legal consequences, escalating to the shutting down of the company by the authorities.
The Levels of Non-compliance Effects
The levels of non-compliance effects in accounting can be divided into two categories: pervasive and non-pervasive or material. Even though the misstatement can be both material and pervasive sometimes, in some cases, they are different. Material non-compliance tends to be on a smaller scale and represents an error on the financial statements, confined by the misinterpretation of that statement. Meanwhile, pervasive error influences the work outcome of the different departments of the company, the whole organization, and even society. In other words, the cashier stealing a few dollars from the register would have a material effect with minimal consequences to the business in question. On the other hand, the embezzlement of funds by a high-ranking manager would lead to pervasive impacts on the company. This non-compliance can escalate into a bigger impact if the issue concerns taxes, government, or even the company’s health, as many businesses have a crucial effect on society and the economy, according to Granof et al. (2021).
Conclusion
Overall, it is beneficial for the companies and governments to comply for their own sake. In other words, it is essential to comply to keep the proper records to ensure the profitability and continuation of operation, not to mention the risks of legal repercussions. The non-compliance influences the financial entity, the economy, and society. Therefore, not only following the standards but enforcing them is crucial.
References
Granof, M. H., Khumawala, S. B., & Calabrese, T. D. (2021). Government and not-for-profit accounting: Concepts and practices. John Wiley & Sons.
Nguyen, L. T., Nguyen, A. H. V., Le, H. D., Le, A. H., & Truong, T. T. V. (2020). The factors affecting corporate income tax non-compliance: A case study in Vietnam. The Journal of Asian Finance, Economics and Business, 7(8), 103-115. Web.
Nwogugu, M. I. (2021). International Constitutional Political Economy and Sustainability Issues Inherent in Accounting and Derivatives Standards-Setting Organizations. In Geopolitical Risk, Sustainability and “Cross-Border Spillovers” in Emerging Markets, Volume II (pp. 249-299). Palgrave Macmillan, Cham.
Tysiac, K. (2020). Standard setters focus on costs vs. benefits, “big three” projects. Journal of Accountancy, 1–7. Web.