Question

What are the various circumstances in which a firm is required to prepare financial
statements in accordance with GAAP?

Answer 1

If a corporation's stock is publicly traded, its financial statements must adhere to rules established by the U.S. Securities and Exchange Commission (SEC). The SEC requires that publicly traded companies in the U.S. regularly file GAAP-compliant financial statements in order to remain publicly listed on the stock exchanges. GAAP compliance is ensured through an appropriate auditor's opinion, resulting from an external audit by a certified public accounting (CPA) firm.Although smaller companies are not required to use GAAP, there are certain situations, such as obtaining credit or seeking investors, which require, by contract, those companies to also follow GAAP when preparing their financial statements.