1. Accounting Theory ( 5th edition) Wolk, Tearney & Dodd
Copyright March, 2000
Chapter 3: Development of the Institutional Structure of Financial Accounting
Historical background in USA
How FASB differs from
CAP
APB
Standards setting process
Institutional problems facing FASB
Liability crisis
Chapter 3: Development of the Institutional Structure of Financial Accounting

2. Periods of Accounting Development
Pre 1930
1959-present
Accounting largely unregulated
Formative years, initiated by stock market crash
Post-war period
Modern period

3. 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”

4. 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.”

5. 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

6. 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

7. Formative Years: 1930-36 NYSE/AICPA
1933: AICPA formed Special Committee on Development of Accounting Principles
Cooperative effort to develop accounting principles to be followed by all companies
1st formal attempt to develop GAAP
Concept allowed corporations to choose those methods and procedures most appropriate for them within GAAP

8. Formative Years: 1930-36 Securities & Exchange Commission (SEC)
Created in 1934 to administer the Securities Act of 1933
Eventual 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

9. Formative Years:
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

10. 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

11. 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

12. Modern Period: 1959-present
: APB and Accounting Research Division
APB form similar to CAP
Accounting Research Division published Accounting Research Studies (ARSs)
Criticisms of APB opinions
: Wheat and Trueblood Committee Reports

13. Modern Period: 1959-present
1973-present: FASB
Independent 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...

14. Accounting Theory ( 5th edition) Wolk, Tearney & Dodd
THE CONSTITUENCY
The Foundation (FAF)
Sponsoring Organizations
Explain and
Seek Views
Discuss & Express Views
Nominations from Sponsors
Elects
Board of Trustees of FAF
Funds
Select
Oversee
The FASB
Financial Accounting Standards
Advisory Council (FASC)
Appoint & Fund
Copyright March, 2000
Sponsoring organizations: six (6) are members of the Financial accounting Foundation (FAF)
AAA
AICPA
Financial Analysts Federation
Financial Executives Institute (FEI)
National Association of Accountants (name changed to the IMA)
Securities Industry Association
FAF elects Board of Trustees
members from sponsoring organizations plus
up to two members at large not included in the six sponsoring organizations
Board of Trustees selects FASB members, funds the activities, and provides the oversight role.
FASB
includes seven (7) members serving five-year terms
individual can serve maximum of two terms
members must be ”independent” as to employment and investments
Financial Accounting Standards Advisory Council (FASC)
advises FASB on its operating and project plans
appointed by Board of Trustees
Chapter 3: Development of the Institutional Structure of Financial Accounting

15. Compare CAP, APB, and FASB
Independence
CAP
APB
FASB
Organization
Part of
AICPA
Separate from AICPA
Members
Other full-time employer
Full-time FASB employee

16. Compare CAP, APB, and FASB
Characteristic
CAP
APB
FASB
Breadth of Membership
Must be CPA
Must be
CPA
Need not be CPA
Due Process
Little, if any
Very limited
More extensive; open hearings

17. 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 limited
Main use was probably in ARSs
More extensive

18. FASB’s Standard-Setting Process
Identify problem
Form task force
Produce discussion memorandum
Circulate to interested parties
Convene a public hearing
Issue exposure draft and request comments
Consider written comments
Another exposure draft or a final vote is taken by the board
5 of 7 votes needed to issue a standard

19. Institutional problems facing FASB
SEC has the legal authority to set standards whenever it chooses
AICPA
Accounting Standards Executive Committee
Emerging Issues Task Force (EITF)
GASB overlapping responsibilities
Congressional subcommittee reports

20. 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

21. Accounting Theory ( 5th edition) Wolk, Tearney & Dodd
Copyright March, 2000
Chapter 3: Development of the Institutional Structure of Financial Accounting
Historical background in USA
How FASB differs from
CAP
APB
Standards setting process
Institutional problems facing FASB
Liability crisis
Chapter 3: Development of the Institutional Structure of Financial Accounting