U.S. Accounting: Before, Now, and the Future


Accounting has been a part of our everyday lives, perhaps since the beginning of time. During the seven years of prosperity, as recounted in the Bible, it is believed that someone made an inventory of the gathered food and received money all throughout the seven years of aridity and death in Egypt. Contemporary accounting techniques and measures were being utilized as far back as even during the time of the American Industrial Revolution in the 1800’s.Formal U.S. accounting may have started when the American Association of Public Accountants (AAPA) was established in 1887. The certificates issued by the organization were based on experience. In 1894, AAPA ratified a proposition which promoted its first standard relative to the balance sheet. Two years later, the first CPA bill was enacted which permitted seasoned practitioners to become Certified Public Accountants (CPAs) without taking an assessment test.

During the early 1900s, the Federation of Societies of Public Accountants was instituted, which merged later on with the American Association of Public Accountants. In 1906, a committee that would devise ethical guidelines for its members to follow was formed by AAPA. When the Clayton Antitrust Act was legislated, the Federal Trade Commission (FTC) was formed which expanded the government’s focus in audits on private sectors. In addition, FTC promoted the formal guidelines and independent audits.

The American Institute of Accountants (AIA), formerly known as the AAPA, was created in 1916. In its restructuring, the association rejected the motion to federally license the accountants. The group also led the “Uniform Accounting” project, which were the first authoritative written directions about the income statement. Moreover, AIA’s supervising board authorized eight rules of professional behavior and a model CPA law.

The 1920’s -1930’s

In Washington, the American Society of Certified Public Accountants (ASCPA) was founded. The organization, which was oriented to state-level jurisdiction and several accounting services, attempted to prevent the sale of CPA credentials. ASCPA then merged with AIA that was fixated on federal jurisdiction and had auditing measures similar to East Coast.

Before the Great Depression started in 1929, several Revenue Acts were enforced. This led to the authorization of the use of lower cost or market as a method in pricing the inventory, establishment of the Board of Tax Appeals, and the institution of a special technique in disclosing revenues from installment sales. When the stock market collapsed, it resulted to Great Depression. According to the Journal of Accountancy, over the following four years, the U.S. industrial production plummeted, the money stock slid, and the number of banks decreased.

The 1931 Ultramares case exemplified the auditors’ liability in the event of fraud or negligence. A year after the case, the New York Stock Exchange obliged its registered corporation to conduct audits. Probably the most notable milestone in the 1930s was the legislation of the Securities Act of 1933 and of the Securities Exchange Act of 1934. This led to the formation of the Securities and Exchange Commission (SEC) whose primary task was to monitor and standardize financial markets. The Corporate Finance Section is one of the fundamental divisions under SEC. Its main function is to review the corporations’ periodic filings in order to identify if these entities comply with SEC requirements. Successful feats include the establishment of the National Committee on Municipal Accounting, which was entrusted to develop unified auditing and reporting guidelines for state and local governments, and the use of “generally accepted accounting principles” on AIA’s Examination of Financial Statements.

Several momentous events occurred in 1938. This is when the Institute Committee on Accounting Procedure (CAP) became the first U.S. accounting standard-setting body for private sectors. In addition, the chief accountant of SEC obtained backing to promote Accounting Series Release No. 4, which acknowledged the part of professions in the private sector in instituting precepts that were identified to have “considerable authoritative support.” The Accounting Series Release also expressed the SEC’s point of view on auditing and accounting.

As a result of the highly publicized SEC’s probe on McKesson & Robbins fraud case, AIA instituted a standing committee that would release announcements on generally accepted auditing standards. In the same year, the Congress authorized the use of LIFO, a new inventory method, by entities.

The 1940s – 1950s

Different alternative accounting techniques were authorized during this period. In 1941, the institute of Internal Auditors was founded while income tax withholding commenced in 1943. Two years later, the U.S. Government Accountability Office (GAO) formed its Corporate Audits Division to supervise government audits. Meanwhile, the Committee on Accounting Procedure released ARB 29, which permitted the use of FIFO, LIFO, and average cost method in inventory valuation, and ARB 32that favored the idea of “current operating performance” on income statements.

The year 1953 earmarked the promulgation of the first codification of GAAP in Accounting Research Bulletin No. 43. In addition, the Congress modified the Internal Revenue Code in order for business firms to use accelerated historical cost depreciation on income tax resolves.

The AIA changed its name to American Institute of Certified Public Accountants (AICPA) in 1957. Also, the ARB 48, which authorized the “pooling of interest” approach for business combinations under specific “attendant circumstances”, was released. Later that year, a revised ARB 44 was issued in which “deferred tax accounting” was most likely when tax depreciation surpassed depreciation for financial disclosures intents.

CAP was replaced by the Accounting Principles Board (APB) in 1959 as AICPA’s authoritative financial accounting body. After its formation, APB would review the part of research in instituting accounting principles. Under the sponsorship of the Board, 15 Accounting Research Studies were produced.

The 1960s – 1970s

During this period, the APB’s accounting staff released what are known as Accounting Research Studies 1 and 3 regarding “fundamental accounting postulates” and “broad accounting principles”.. However, Studies 1 and 3 were unsuccessful on their intention to provide a theoretical basis for eventual APB Opinions.

The American Accounting Association (AAA) released ASOBAT or A Statement of Basic Accounting Theory which recommended that the assessment of accounting data be footed on its pertinence, provability, measurability, and freedom from bias. In 1968, the Tax Reform Act was legislated and the National Committee on Governmental Accounting promulgated the state and local governments’ authoritative GAAP — the GAAFR or the Governmental Accounting, Auditing, and Financial Reporting.

For the first time, the SEC compelled a Management’s Discussion and Analysis of Operations (MD&A). It accounted for the dangers and uncertainties that face a company and its impact on future liquidity and solvency. This was followed by APB’s Statement 4 or the Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprise.

From 1970 to 1971, some of the Big Eight Accounting Firms declared that they had lost their trust in APB due to extreme political lobbying. This resulted to the formation of the Wheat Study Group and Trueblood Study Group. The issuance of the Wheat Report led to the creation of the Financial Accounting Standards Board (FASB), an independent, full-time standard-setting agency that would be supervised by the Financial Accounting Foundation (FAF). Meanwhile, the Trueblood Committee resolved that the main objective of the financial reports was to provide information to outside users.

There are several significant events that occurred in 1973. Among them were the establishment of the International Accounting Standards; the collapse of the Equity Funding and the discovery of its colossal computer-based fraud; the issuance of SEC with Accounting Series Release 147 which obliged lessees to report the current value of financial leases and its effect on the lessee’s revenue; the supersession of APB with the Accounting Standards Executive Committee (AcSEC) that was tasked to issue Statements of Position, and the issuance of SEC’s Accounting Series Release 150 in which the Commission would look to FASB for command in introducing accounting standards.

There were other developments that ensued. These included the designation of the Cohen Commission to the Equity Funding among other scandals. Moreover, there was the institution of a SEC Practice Section and a Private Companies Practice Section that was tasked to do peer review and quality review. The promulgation of SEC’s Accounting Series Release 250 that required corporations to report to the ratio of non-audit to audit fees was also one of the developments. Finally, there was the issuance of SSARs No. 1 that described assessment and compilation and stipulated the form of reports that were to be submitted.

1980s – 1990s

In collaboration with the National Association of State Boards of Accountancy, the AICPA published the first bill that would standardize the public accounting practice. This was legislated as the Uniform Accountancy Act. Moreover, the Restructuring Professional Standards to Achieve Professional Excellence in a Changing Environment was issued by the Anderson Committee as a reply to concerns regarding the profession’s competence to serve the public interest and maintain their trust.

In the mid1980s, the National Commission on Fraudulent Financial Reporting or the Treadway Commission detailed how financial frauds could be curtailed or prevented and how auditors could minimize the “expectations gap” amongst themselves and the public. In addition, the peer review program became compulsory, as instructed by AICPA. Meanwhile, the AICPA Special Committee on Financial Reporting suggested a business reporting standards in the early ‘90s. In addition, the Federal Accounting Standards Advisory Board was established and it would later on be acknowledged as an agency authorized to institute GAAP standards for federal government entities.

From 2000 – Present

In 2001, Enron was declared bankrupt. The following year, the accounting fraud in WorldCom was discovered and the company declared bankruptcy. This was followed by other accounting frauds which led to the legislation of the Sarbanes-Oxley Act of 2002 (SOX). Among other actions, SOX formed the Public Accounting Oversight Board (PCAOB) that set the guidelines for accounting in public companies. Also, FASB and IASB issued a Memorandum of Understanding (MoU) regarding the convergence of the accounting standards. Agenda items on the MoU discussed the accounting standards regarded as lacking in the U.S. GAAP and in IFRS.

The most controversial and contentious provision of the Act is Section 404. Under the said provision, the external auditor’s opinion is required on the internal control that an entity possesses over its financial reporting. In 2004, accelerated filers were mandated to adhere to SOX 404 by incorporating the external auditor’s opinion on the efficacy of their internal control over financial reporting. In the same year, the PCAOB released its first auditing guidelines for public companies. In addition, FASB modified Statement No. 123 on compensatory stock options in order to bring American policies closer to international accounting guidelines. Furthermore, FASB released a draft to unify the International Accounting Standards Board’s IFRS 2 on share-based payment.

In response to the critical issues related to the auditing profession, the Treasury Department created the Advisory Committee on the Auditing Profession. After two years, statements based on the International Financial Reporting Standards were submitted to the SEC.

The FASB and the SEC issued guidelines on fair-value accounting in 2008. It consisted of directions on how the fair value can be determined when there is no pertinent market evidence. More so, through the Emergency Economic Stabilization Act, the U.S. Treasury was permitted to purchase problem assets as an attempt to enhance and better the financial institution’s balance sheet and to maintain the flow of credit. After one year, the IFRS for small- and medium-sized entities was presented by the International Accounting Standards Board. The standards offered a new substitute for small U.S. private firms. Also, a new board and amendments on GAAP that recognize the unique functions of the financial statements of private companies were proposed by a blue-ribbon committee on private entities.

In 2010, FAF devised the Post-Implementation Review Process which is constructed to assist the current actions of FAF Trustees in assessing the efficacy of the FASB’s and the Governmental Accounting Standards Board’s (GASB) accounting standards. The same organization instituted the Private Company Council which will improve the discussion and deliberation of the concerns of private entities relative to the FASB’s scheme in preparing accounting guidelines.

The released converged guidance by the FASB and the International Accounting Standards Board (IASB), in 2014, was considered as a notable milestone in bettering and converging one of the most important parts on financial disclosures. With the transition of U.S. GAAP to IGAAP (IFRS), there are a lot more changes and developments to expect that impact the country’s accounting standards, policies, and regulations.