Chapter 3: Development of the Institutional Structure of Financial Accounting
Historical background in USAHow FASB differs from
CAPAPB
Standards setting processInstitutional problems facing FASBLiability crisis
Periods of Accounting Development
Pre 1930
1930-46
1946-59
1959-present
Accounting largely unregulated
Formative years, initiated by 1929 stock market crash
Post-war period
Modern period
Accounting in USA prior to 1930
Unregulated
Accounting practices and procedures used were considered confidential, lack of uniformity
Bankers and other creditors provided the only real direction in accounting practices
Little investment in private corporations until post World War I lump-sum retirement of Liberty Bonds fueled the ”people’s capitalism”
Key Events in USA prior to 1930
1886: American Association of Public Accountants (AAPA) formed
1896: AAPA plus another group, The Institute of Bookkeepers and Accountants, were both behind the successful passage in New York State of the law that created the professional designation of “Certified Public Accountant.”
Key Events in USA prior to 1930
1905: The Journal of Accountancy founded by AAPA
American Institute of Accountants (AIA) was formed in 1916 from the old AAPA
took a unified national outlook relative to issues such as examinations and qualifications
name later changed to the American Institute of Certified Public Accountants (AICPA) in 1957
Stock Market Crash of 1929
Investors began to question the adequacy of accounting and reporting practices
Accounting reports Based on widely varying accounting practices
Frequently misleading
Formative Years: 1930-36
NYSE/AICPA1933: AICPA formed Special Committee on Development of Accounting PrinciplesCooperative effort to develop accounting principles to be followed by all companies1st formal attempt to develop GAAPConcept allowed corporations to choose those methods and procedures most appropriate for them within GAAP
Formative Years: 1930-36
Securities & Exchange Commission (SEC)Created in 1934 to administer the Securities Act of 1933Eventual message (April 25, 1938) was that unless the profession established an authoritative body for the development of accounting standards,
• the SEC would do so and • SEC would mandate the required reports
Formative Years: 1936-46
Committee on Accounting Procedures (CAP) formed 1936
Used primarily inductive approach to developing accounting rules
AAA preferred a deductive approach
Uniformity improved significantly
Private sector was firmly established as the source for accounting policy making in the USA
Postwar Period: 1946-59
Number of stockholders in USA
1940: 4 million
1952: 7 million
1962: 17 million
Primary problem of comparability of earnings among different companies
Postwar Period: 1946-59
Committee on Accounting Procedures (CAP)
Created an ”oversupply” of ”good” accounting principles
Devoted its time to solving problems on a piecemeal approach without developing fundamental principles of accounting
No underlying accounting theory
Conflicts with the SEC
Modern Period: 1959-present
1959-73: APB and Accounting Research Division
APB form similar to CAP
Accounting Research Division published Accounting Research Studies (ARSs)
Criticisms of APB opinions
1972-73: Wheat and Trueblood Committee Reports
Modern Period: 1959-present
1973-present: FASBIndependent of AICPA
Was to establish standards in the most efficient and complete manner possible
Launched the conceptual framework project
Operations differ from CAP and APB
Organizational structure...
THE CONSTITUENCY
The Foundation (FAF)
Sponsoring Organizations
Explain and Seek Views
Explain and Seek Views
Discuss & Express Views
Nominations from Sponsors Elects
Board of Trustees of FAF
Funds Select Oversee
The FASB Financial Accounting StandardsAdvisory Council (FASC)
Appoint & Fund
Compare CAP, APB, and FASB
Independence CAP APB FASB
OrganizationPart of
AICPA
Part of
AICPASeparate from
AICPA
MembersOther full-
time employer
Other full-time
employer
Full-time FASB
employee
Compare CAP, APB, and FASB
Characteristic CAP APB FASB
Breadth of Membership
Must be CPA
Must be
CPANeed not be
CPA
Due Process Little, if any Very limitedMore
extensive; open hearings
Compare CAP, APB, and FASB
Characteristic CAP APB FASB
Theoretical document supporting standards
Not attempted
Postulates and principles
failed
Conceptual framework completed
Research usage Very limitedMain use was probably in
ARSs
More extensive
FASB’s Standard-Setting ProcessIdentify problem
Form task force
Produce discussion memorandum
Circulate to interested parties
Convene a public hearing
6. Issue exposure draft and request comments
7. Consider written comments
8. Another exposure draft or a final vote is taken by the board
9. 5 of 7 votes needed to issue a standard
Institutional problems facing FASB
SEC has the legal authority to set standards whenever it chooses
AICPAAccounting Standards Executive Committee
Emerging Issues Task Force (EITF)
GASB overlapping responsibilities
Congressional subcommittee reports
Liability Crisis
Pressure to turn the audit into a fraud detection exercise
Joint and several liability allows that a single defendant may be held liable for the entire loss attributable in a specific case
Chapter 3: Development of the Institutional Structure of Financial Accounting
Historical background in USAHow FASB differs from
CAPAPB
Standards setting processInstitutional problems facing FASBLiability crisis