THE CENTURY OF CPA

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Komang Ayu Kumaradewi

(12030111150029)

Komang Yuli Pridarsanti

(12030111150030)

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OVERVIEW

The Origin of Regulation The Crash of 1929 The Post-war Boom The Modern Era Conclusion

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THE Origin of Regulation

1830
The railway age began with the opening of Liverpool and Manchester line.

1844
Joint Stock Companies Act in Great Britain.

1886
The Supreme court held that commerce originating or ending beyond the boundaries of a state was beyond the power of the state to regulate. First meeting of American Association of Public Accountants (AAPA).

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THE ORIGIN OF REGULATION

1887
Interstate Commerse Commission (ICC) was established by the Congress with the spesific authority to regulate railroad. AAPA incorporated in New York.

1890
Sherman Antitrust Act as a respond to the monopolies.

1894
AAPA adopted a resolution recommending that the order of presentation in the balance sheet should be from the most to the least liquid.

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THE ORIGIN OF REGULATION

1906
The Hepburn Act of 1906 gave the ICC the authority to establish a uniform accounting system for use in establishing an appropriate rail rates, thereby setting the stage for the century of regulation of accounting.

1910
AAPA formulate definition of technical accounting terms in order to give uniformity to their meaning. AAPA also attempted to make its influence felt in the area of income taxes.

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THE ORIGIN OF REGULATION

1913
Woodrow Wilson on the slogan of new freedom for the people as the respond to the dissatisfaction with the liability of the government to control the growth of big business.

1914
The Clayton Antitrust Act was enacted and the Federal Trade Commission was created to oversee the provision of the Act. The federal Reserve Board (FRB) was formed which, for the first time, created publicly controlled central banking system in the country.

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THE ORIGIN OF REGULATION

1917
The new regulatory bodies perceived a need for standardization in the preparation of financial statement submitted to bankers for credit purposes. FTC suggested that FRB need to maintain a register of accountants considered acceptable to practice before the Board and the Commission. Uniform Accounting was issued by FRB.

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THE ORIGIN OF REGULATION

1918
Approved Methods For the Preparation of Balance Sheet Statements.

1929
Verification of Financial Statements.

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THE ORIGIN OF REGULATion

Regulation in Britain (1844)

Joint Stock Company Act permit incorporation by registration only if shareholders would accept unlimited liability. As a further safeguard, the Act provided for the periodic balancing of the accountants and the presentation of a full and fair balance sheet to stockholders.

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THE CRASH OF 1929

Some reactions/ critics:

Adolph Berle So long as accounting standards are not hardenend and the law doesnt impose any spesific canons, directors and their accountants may frame their figure, within limits, much as they choose. The fact that accountants themselves have as yet failed to work out a series of standard rules.

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THE CRASH OF 1929

Some reactions/ critics:

J.M.B Hoxsey the lack of uniformity in accounting no rules in the areas of depreciation and consolidation companies were not even disclosing which methods they were using companies refused to release their revenue numbers on grounds companies ultraconservatives in undervaluing inventory and taking excessive depreciation

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THE CRASH OF 1929

AIA respond:

The respond Several years earlier the AIA had attempted to draw the NYSE into conversation. Also NYSE had been relatively lax in its listing requirements. Although it was organized as early as 1792, it did not attempt to obtain financial statement from listed companies until about 1866. 1900, it requested that all companies applying for listing on the exchange agree to publish annual reports. 1926, require all listed companies to publish and The Century to CPA 4/27/12 submit Of stockholders an annual financial

THE CRASH OF 1929

AIA respond: 1933
AIA creating a Special Commitee on Corporation with Stock Exchange NYSE requirement was that all companies seeking listing with the NYSE would have to furnish financial statements bearing the certificate of accountants qualified under the laws of some state or country.

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THE NEW DEAL

1933
Roosevelts first 100 days in office: The Emergency Banking Act The Truth-in Securities Act The Glass Steagal Banking Act

1934
Securities and Exchange Commission (SEC) was created to administer Truth-in Securities Act, Securities Exchange Act and several other act.

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THE NEW DEAL

1938
The Commission permit the profession to lead the way in formulating accounting principles. The policy was issued in the form of Accounting Series Release no. 4 (ASR 4), which stated: that the commission would accept only financial statement prepared in accordance with accounting principles which have substantial authoritative support or in accordance with rules, regulation or other official pronouncements of the commission or the chief accuntant.

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THE NEW DEAL

1938
Formulating the accounting principles itself, began with the Commitee on Accounting Procedure (CAP), founded in 1936 by the AIA. CAP continued to meet until 1959 and issued 59 bulletins. 8 were subsequently consolidated into Accounting Terminology Bulletin No 1: Review and Resume 31 were consolidated into Accounting Reseach Bulletin No 43

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The Century Of CPA

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THE POST-WAR BOMB

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1945 The End of World War II

The economy surged ahead. The newly found prosperity of middle-class in America persuaded investment in the stock market. This investors need appropriate information for their investment decisions. The standard investment advice to determine the appropriate stock price of the company is to multiply the companys earnings by a Price-Earnings Ratio (PE Ratio). The companys earnings number is a key part of the PE approach to investment. Therefore, accounting became vitally important.

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Accounting Alternatives

1963
SEC was obliged to list areas that could lead to material differences in reporting, i.e : 1. Valuation of inventories. 2. Depreciation & depletion. 3. Income tax allocation. 4. Pensions. 5. Research & development cost. 6. Goodwill. 7. Time of realizing income. 8. All-inclusive vs. an operating concept of income statement.

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Accounting Alternatives
Intercorporate investment. Long-term leases. Principles of consolidation. Business combinations. Income measurement in finance companies. Intangible costs in the oil and gas industries.

9. 10. 11. 12. 13. 14.

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Price Level Adjustment

The boom, accompanied by relatively serious burst of inflation, lead to a debate on price level depreciation. In periods of price stability, the replacement cost equals the original cost; in periods of inflation the replacement cost is greater. Published in 1952, the report (after 5 years study) recommended that financial statements be adjusted for changes in the general price level.

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Earning Power Debate

AIA
current operating income ; the firms ordinary income, excluding extraordinary gains and losses, tempting management to manipulating the potential earning power of the company.

SEC & AAA

all-inclusive income ; including all gains and losses, thus preventing management from manipulating the EPS number.

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Calls for Comparability

The debates lead to the call for uniformity in accounting. Leonard Spacek attributed the lack of comparability to the inability of the Commitee on Accounting Procedure to withstand the pressure of industry. August 1957, he called for the creation of an Accounting Court of Appeals. Then, in the same year, AAA issuing its 3rd revision of Tentative Principles now called Accounting & Reporting Standards.

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the Accounting Principle Board

October 1957
Alvin R. Jennings proposing a new organization to examine basic accounting assumption, identify best principles, and devise new methods to guide industry and the accounting profession.

December 1957
A Special Commitee on Research Programs was appointed. Its report of December 1958 recommended replacing the Commitee on Accounting Procedure with Accounting Principles Board (APB) and Accounting Research Division (ARD).

1959
APB and ARD were formed.
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the Accounting Principle Board

The objectives of the APB:
Advance the written expression of GAAP, narrow the areas of difference in appropriate practice, and lead in discussions of unsettled and controversial issues.

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The Turbulent Sixties

1960
The economy was struggling so John F. Kennedys administration enacted an Investment Tax Credit . There were 2 methods in accounting the tax benefits: flowthrough method & deferred method.

December 1962
The APB ruled in favor of the deferred method (APB 2). ASR 96 : SEC accepted both method APB 4 : several alternatives permited (including the immediate reduction of Income Tax Expese)

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The Turbulent Sixties

1971
Through APB 11 (Accounting for Income Taxes) : APB mandating the deferral method. Opposition from the Internal Revenue Service and others for that mandate: Revenue Act of 1971. That Act caused the APB to withdraw its recomendation prior to the final draft.

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Authoritative Opinions

The council recommended that after 1965, all departures from APB Opinions and effective Accounting Research Bulletins should be disclosed in footnotes to financial statements or in audit reports of members. That is, all opinions of the APB were considered to constitute substantial authoritative support for GAAP.

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Authoritative Opinions

Rule 203: result of the replacement of the APB by the FASB Content of Rule 203:
A member of the AICPA shall not express an opinion that financial statements are represented in conformity with GAAP if such statements contain any departure from an accounting principle promulgated by the FASB which has a material effect on statements taken as a whole, unless the member can show that due to unusual circumstances the financial statements would otherwise have been missleading.

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THE MODERN ERA

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the Financial Accounting Standards Board

Both the AICPA & the AAA proposed studies on the most effective organization structure for establishing accounting principles.

1970
The president of the Institute called a special conference proposed two studies to explore the means by which accounting principle should be established and to review the objectives of financial statements.

March 1971
The Wheat Study Group was appointed.

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the Financial Accounting Standards BoARD

March 1972
The report of this group was submitted to the AICPA and adopted by the AICPA Council in June.

1973
The APB demised and the FAF, the FASB and the FASAC established (on July 1).

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Structure & Function

The principal duties of FAF :

1. 2.

to appoint the member of FASB, FASAC and GASB; to raise the fund for their operations.

The FASB consists of 7 full time members and has a stated mission to establish and improve standards of financial accounting and reporting for the guidance and education of the public.

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Structure & Function

The FASAC has a minimum of 20 members. The Council assist the standards Boards by :
1.

2. 3. 4.

maintaining contanct with business and the accounting profesion, sugesting new issues, pressing or delaying old issues, and acting as a sounding board on tentative positions taken by the Board.

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The Transition
Several significant things that occured to permit the transition from the APB to the FASB:
1.

2.

3.

The AICPA had to relinguish its primary role, begun with the Commitee on Accounting Procedure, in the setting of accounting standards. The new Institutional structure had to be given some authority. This movement was initiated by the FASBs Rules of Procedure. Rule 203 amanded to give FASB pronouncements official recognition by CPA. ASR No. 150 released in December 1973. The introduction of very deliberate process of arriving at a new standard.

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The Transition
Steps in the FASBs due process:

Preliminary evaluation; Admission to agenda; Early deliberations; Tentative resolution (Exposure Draft); Further deliberations (Hearings); Final resolution (Standard).

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Emerging Issues Task Force (EITF)

EITF created to attempt to resolve pressing issues rapidly due to the length of the process of arriving a new standard. It consist of 16 permanent person whose chairman is the FASBs Director of Research and Technical Activities.

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Government Accounting Standard Board (GASB)

GASB was established in 1984 to parallel the FASB and to report to the FAF. It has 5 members that appointed to fiveyear terms by the FAF acting in consultation with the GASAC. The initial agreement was that the GASB would rule on issues affecting state and local government. Standards set by the NCGA (the prior organization) would be binding in the absence of a ruling by the GASB. Where The Century Of CPA 4/27/12 neither the GASB nor the NCGA had ruled,

Ongoing Dissent

One of the difficulties with the APB : it was composed only of members of the AICPA and was appointed and financed by the Institute. The hope to overcome the difficulties : creating FASB as a semi-independent organization with broader base of support and full-time members. In fact, many problem persists.

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Ongoing Dissent

Controvercies & criticisms:

1. 2. 3.

4. 5.

Opposition in accounting policy about reported earnings Criticism about the volume of standard setting The discovery of illegal political contributions of 17 major companies in 1973 Hesitation of the effectiveness of SEC Private interest group that take part in the operation of FASB, which sets accounting standard, is not suited to control the accounting standards which affect the Federal Government and the public.

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Ongoing Dissent

The AICPA affraid that accounting would be swept from the private sector. In September 1977, it separated its membership into 2 groups : the SEC Practice Section and the Private Companies Practice Section. It also established a Public Oversight Board to exercise oversight of the SEC Practise Section and instituted peer reviews.

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CONCLUSION

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Conclusion

The First Century of AICPA has been a dramatic and curious history. It is a history in which standards have tended to be set reactively rather than proactively. Whether the end result will be more information for shareholders or more convenient system for bureaucratic enforcement of accounting rules remain to be seen.

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