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October 2007 Big GAAP vs. Little GAAP Generally accepted accounting principles (GAAP) are the conventions, rules and procedures that define accepted accounting practice. They include broad guidelines and detailed rules that provide a standard by which to measure economic activity in the form of financial statements. The first serious attempt to develop formalized accounting principles began in 1930, primarily because of the stock market crash of 1929 and the widespread perception that the lack of stringent financial reporting requirements had contributed to the rampant stock market speculation that ended with the crash. Since that time, the adoption of accounting standards has proliferated and the standards have become increasingly complex. Some accountants complain about "standards overload" and argue that there are too many standards which are too complex. These complaints are not new and, with a myriad of standards, these complaints must be given credence. However, the solution is not an easy one. Some say the solution is to reduce and simplify GAAP for some entities. For instance, some recommend that smaller entities follow a separate, less complex set of standards than those mandated for larger entities. Even this simple suggestion has complications, such as how to determine what constitutes a small entity. Size could be determined by assets, revenues, net worth, number of employees or some other measure, making it difficult to choose the best alternative. Those who disagree argue that different standards would reduce the quality of financial reporting. For example, a small entity may operate in a complex business environment with complex accounting standards that the entity should be required to follow, but may not simply because they are a small entity. This "big GAAP vs. little GAAP" debate has raged on for years. Over the years though, advocates of "little GAAP" have been unable to gain acceptance of their proposals. The debate continues today without a clear answer in sight.
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