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Development of the Institutional Structure of Financial Accounting

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					Chapter 3:
Development of the Institutional
Structure of Financial Accounting
Lecture
   Historical background in USA
   How FASB differs from
     CAP
     APB
   Standards setting process
   Institutional problems facing FASB
   Sarbanes-Oxley Act
   Liability crisis
Historical Background in USA
    Pre 1930       Accounting largely unregulated


                   Formative years, initiated by 1929
    1930-46        stock market crash


    1946-59        Post-war period


    1959-present   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
Historical Background in USA
    Pre 1930       Accounting largely unregulated


                   Formative years, initiated by 1929
    1930-46        stock market crash


    1946-59        Post-war period


    1959-present   Modern period
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
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
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
Historical Background in USA
    Pre 1930       Accounting largely unregulated


                   Formative years, initiated by 1929
    1930-46        stock market crash


    1946-59        Post-war period


    1959-present   Modern period
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
Historical Background in USA
    Pre 1930       Accounting largely unregulated


                   Formative years, initiated by 1929
    1930-46        stock market crash


    1946-59        Post-war period


    1959-present   Modern period
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 Committee Reports
     Wheat
     Trueblood
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
   FASB’s organizational structure...
                         THE CONSTITUENCY

Sponsoring Organizations

  The Foundation (FAF)              Explain and                      Explain and
                                    Seek Views                       Seek Views


   Nominations
  from Sponsors          Elects


   Board of Trustees of FAF                        Appoint & Fund


 Funds     Select       Oversee


               The FASB                           Financial Accounting Standards
                                                  Advisory Council (FASC)
          Discuss & Express Views
Compare CAP, APB, and FASB

 Independence      CAP           APB            FASB


                  Part of       Part of      Separate from
  Organization
                  AICPA         AICPA           AICPA

                 Other full-   Other full-     Full-time
   Members         time          time           FASB
                 employer      employer        employee
Compare CAP, APB, and FASB

 Characteristic       CAP             APB            FASB


  Breadth of        Must be          Must be      Need not be
  Membership         CPA              CPA            CPA

                                                      More
  Due Process     Little, if any   Very limited     extensive;
                                                  open hearings
Compare CAP, APB, and FASB

 Characteristic     CAP           APB            FASB


  Theoretical
                              Postulates and   Conceptual
  document           Not
                                principles     framework
  supporting      attempted
                                  failed       completed
   standards
                             Main use was
                                                 More
 Research usage Very limited probably in
                                               extensive
                                ARSs
FASB’s Standard-Setting Process
 1. Identify problem          6. Issue exposure draft and
 2. Form task force              request comments
 3. Produce discussion        7. Consider written
    memorandum                   comments
 4. Circulate to interested   8. Another exposure draft
    parties                      or a final vote is taken
 5. Convene a public             by the board
    hearing                   9. 4 of 7 votes needed to
                                 issue a standard (2002)
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
   IASB, an increasingly strong competitor
   Sarbanes-Oxley Act
IASB, an increasingly strong
competitor/partner?
   International Accounting Standards Board
      Name coined in 2001
      Original IASC established in 1973
   Convergence projects in process
      U.S.
      Japan
   Can/Should two GAAPs exist?
      IFRS
      U.S. GAAP
Sarbanes-Oxley Public Company Accounting
Reform and Investor Protection Act of 2002
    Established Public Company Accounting
    Oversight Board (PCAOB)
      Regulatory body of public accounting firms
      Overseen by SEC
      Register & inspect public accounting firms
      Set audit standards
    Significant step away from self-
    management by the profession
Sarbanes-Oxley Public Company Accounting
Reform and Investor Protection Act of 2002 (SOX)
    Act is in response to series of high profile
    corporate accounting scandals; objective is
    to restore investor confidence.
    Requires FASB funding to be an assessment
    from annual fees, not contributions.
      Significant loss of independence from SEC
      Funding is dependent on recognition by SEC;
      therefore, is quasi-governmental body
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
Lecture Recap

   Historical background in USA
   How FASB differs from
      CAP
      APB
   Standards setting process
   Institutional problems facing FASB
   Sarbanes-Oxley Act (SOX)
   Liability crisis

				
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posted:3/10/2012
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