Forging Accounting Principles in Five Countries

A History and an Analysis of Trends

Stephen A. Zeff

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317352242
• Edition: 1
• Topic: Business
• Subtopic: Accounting
• Index: Business

This title, first published in 1972, examines five countries that have experience with programs designed to improve the quality of financial reporting. Zeff devotes separate chapters to the historical evolution of the program, and then goes on to compare and analyse the various trends. This book presents an important piece of research to those concerned with the development of accounting principles.

III United States

DOI: 10.4324/9781315665481-3

U.S. Accountancy Bodies

In the United States of America, the most important accountancy body from the standpoint of authoritative pronouncements on accounting principles is the American Institute of Certified Public Accountants (American Institute, AICPA). Founded in 1887 as the American Association of Public Accountants, it was reorganized in 1916 and renamed the American Institute of Accountants the following year. The present name was adopted in 1957. Today, it is an organization of certified public accountants (CPAs) with a membership of about 80,000, drawn from the some 120,000 U.S. CPAs.

One becomes a CPA by complying with the laws and regulations of one of the 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, or Guam. Each of these 54 jurisdictions has created a government agency, usually called a “board of accountancy,” which administers the accountancy law. Ordinarily, a candidate must pass a written examination and offer one to three years of practical experience, usually (but not always) in the practice of public accounting. Eleven States require no practical experience if the candidate fulfills a specified education requirement. By agreement between the Institute and all the jurisdictions, the examination is prepared and graded by the Institute, although the jurisdictions retain the ultimate responsibility for the examination process.

A CPA of one jurisdiction ordinarily may obtain a certificate to practice in other jurisdictions by endorsement. He may elect to become a member of the professional society of CPAs in his jurisdiction, the American Institute, or both. The State societies of CPAs, of which those in New York, California, Illinois, and Texas are the largest, are not affiliated with the American Institute, though they frequently exchange materials and their relations are cordial.

The American Institute, as well as the State societies and virtually all boards of accountancy, have adopted codes of professional ethics. The codes differ in various respects. If a CPA were expelled from membership in the American Institute or a State society, he could continue to practice as a CPA unless his certificate were revoked by the board of accountancy in each of the jurisdictions where he is licensed. It has been the rule, however, for expulsions from the American Institute and State societies to occur only following the revocation of a member’s certificate by one or more boards of accountancy.

The Journal of Accountancy, founded in 1905, is the best-known journal of the American Institute. With a monthly circulation of about 140,000, the Journal has by far the largest number of subscribers of any accountancy journal in the world. Other AICPA journals are Management Adviser (formerly Management Services) and The Tax Adviser, which were begun in 1964 and 1969, respectively. A membership newsletter, The CPA, is published eleven times a year.¹

¹ For a history of the American Institute, see John L. Carey, The Rise of the Accounting Profession (New York: American Institute of Certified Public Accountants, 1969 and 1970), two volumes.

The American Accounting Association (Association, AAA), which was founded in 1916 as the American Association of University Instructors in Accounting, has a membership of about 11,500 and is essentially a voluntary organization of accounting educators at the university level. Although 70 percent of the Association’s members are not educators, its affairs have always been directed by an Executive Committee composed almost wholly of university professors. The Association’s present name was adopted in 1935–36.²The aim of the Association’s quarterly journal, The Accounting Review, like that of the Association itself, is to contribute to the advancement of accounting education and research. Founded in 1926, the Review has a current circulation of 16,500.

² For a history of the Association, see Stephen A. Zeff, The American Accounting Association: Its First Fifty Years (American Accounting Association, 1966).

The National Association of Accountants (NAA) was founded in 1919 as the National Association of Cost Accountants. Its present name was adopted in 1957. While primarily interested in managerial accounting, the NAA in recent years has devoted increasing attention to financial accounting. It publishes the monthly Management Accounting (formerly NAA Bulletin), and has a membership in excess of 70,000. The NAA has more than 150 chapters throughout the United States and in Canada, Latin America, and Europe. Membership is open to all interested persons.

The Financial Executives Institute (FEI) was founded in 1931 as the Controllers Institute of America. Its present name was taken in 1962. FEI’s 8,500 members are corporate financial vice presidents and controllers. Its monthly journal is the Financial Executive (formerly The Controller), with a circulation of 14,000.³The Financial Executives Research Foundation (FERF) is organizationally independent of the FEI and sponsors research projects on a wide range of questions relating to the accounting and finance functions. FERF was founded in 1944 as the Controllership Foundation.

³ For a history of the FEI, see Paul Haase, Financial Executives Institute: The First Forty Years (New York: Financial Executives Institute, 1971). This book was not available to the writer prior to the completion of the manuscript.

While CPAs may be members of any or all of these accountancy bodies, the American Institute is generally regarded as the authoritative spokesman for U.S. certified public accountants. For this reason, together with the fact that it has been the body most actively engaged in issuing pronouncements and research studies on accounting principles, the following discussion of the evolution of the process by which accounting principles are developed in the United States closely follows the activities of the American Institute. The efforts of other organizations are introduced as they fit into the chronological narrative.

Developments Prior to 1930

The First Terminology Committee

In April, 1909, the Board of Trustees of the American Association of Public Accountants (AAPA), predecessor body of the American Institute of Certified Public Accountants, appointed a Special Committee on Accounting Terminology, this being the first evidence that a professional accounting body sought to express itself on the subjects of accounting or auditing. The Board’s charge to the committee was

to collate and arrange accounting words and phrases and show in connection with each the varying usages to which they are put…. This committee will not attempt to determine the correct, or even the preferable usage where more than one is in existence.⁴

⁴ Twenty-second anniversary Year-Book (1909) of The American Association of Public Accountants, p. 159.

Chaired by Seymour Walton, the committee went immediately to work and reported scores of definitions of accounting terms at the annual meetings in 1909, 1911, and 1913. In 1915, the committee proposed a list of terms and definitions for official membership approval. Although its report was adopted, the committee was not reappointed.

The 1917 Memorandum on Auditing Procedures

Two further developments in the 1910s, one well known and the other not, exhibited the accounting profession in a more active leadership role.

Shortly after they had been created by Congressional legislation in 1913 and 1914, respectively, the Federal Reserve Board and Federal Trade Commission (FTC) became concerned about the highly variable quality of financial reports and independent audits. In 1914, the Board issued a circular which intimated that it might recommend and give preference to commercial paper accompanied by balance sheets certified by professional accountants. It was rumored that if such certificates were required, the Board might make its own selection of accountants whose certificates would be acceptable – a circumstance, writes Carey, “which would be most distasteful to the profession.”⁵In 1915, Edward N. Hurley, FTC Vice-Chairman, indicated an intention to establish uniform accounting systems for all the principal businesses in the country, perhaps on an industry basis.⁶The AAPA Committee on Federal Legislation, alive to the developments in Washington, met in 1915 and 1916 with both the Board and the FTC. Members of the prestigious committee were Robert H. Montgomery (Chairman), Harvey S. Chase, and George O. May.

⁵ Carey, op. cit., Vol. I, p. 118. ⁶ 6 Ibid., p. 63. For the FTC view, see the Annual Report of the Federal Trade Commission, for the year ended June 30, 1916, pp. 14–17.

In the fall of 1916, the AAPA membership voted to reconstitute itself as The Institute of Accountants in the United States of America (shortened the following year to the American Institute of Accountants), with membership to be determined by an Institute examination rather than, as before, on the basis of one’s credentials as a certified public accountant or as a result of having practiced the profession for a minimum of three continuous years. The aim was to forge a strong national organization, which, like the Scottish and English Institutes of Chartered Accountants, would be a “qualifying body.” Membership in the new Institute was to become a qualification in itself, apart from the CPA certificate, which was granted by the States. Nonetheless, 95 percent of the 1,105 members of the new body were CPAs.⁷

⁷ For a discussion, see Carey, op. cit., Vol. I, pp. 111–28. In 1936, as part of a merger with the American Society of Certified Public Accountants, the American Institute adopted a policy that all future candidates for membership must be CPAs. Ibid., p. 370.

At the time of the reorganization, the governing Council of the Institute received a letter from Edward Hurley, who was by then FTC Chairman, indicating dissatisfaction with financial statements certified by public accountants. Observing that the Federal Reserve Board shared this concern, Hurley suggested that consideration might be given to the creation of a Federal register of public accountants whose certificates would be acceptable to the Board and the FTC. “This letter,” writes Carey, “had the effect of a bombshell on the Council.”⁸After considerable discussion, it was finally decided to instruct the Institute’s Committee on Federal Legislation, composed of the same members as the AAPA committee of the same name, to meet with both the Board and the FTC, point out the nature and objectives of the new Institute, urge them not to establish a Federal register, and offer the Institute’s full cooperation.

⁸ 8 Ibid., p. 130.

As a result of these discussions, the Institute committee agreed to prepare a memorandum on auditing procedures which would be submitted to the FTC. After a first attempt at writing an original statement, the committee decided to adapt an internal document drawn up some years before by Price Waterhouse & Co. The memorandum was unanimously endorsed by the Council and thereupon approved, after minor changes, by the FTC. The Federal Reserve Board then agreed to publish the document as a “tentative proposal” for the consideration of bankers, companies, accountants, and their respective associations. It appeared as a 15-page article in the April 1, 1917 issue of the Federal Reserve Bulletin under the unlikely title, “Uniform Accounting,” for the memorandum dealt mainly with auditing, not accounting.⁹A reprint entitled

⁹ 9 See ibid., pp. 133–34. Carey speculates that “Mr. Hurley’s interest in uniform accounting was catered to” by the choice of title. Ibid., p. 133.

APPROVED METHODS FOR THE PREPARATION OF BALANCE SHEET STATEMENTS, A Tentative Proposal Submitted by the Federal Reserve Board for the Consideration of Banks, Bankers, and Banking Associations; Merchants, Manufacturers, and Associations of Manufacturers; Auditors, Accountants, and Associations of Accountants

was prepared in 1918, and over the next dozen years some 65,000 copies were distributed. Writes Carey:

This bulletin was sent to all members of the I...

Table of contents

• Cover Page
• Half Title Page
• Title Page
• Copyright Page
• Introduction
• Title Page
• Foreword
• Preface
• Contents
• I GREAT BRITAIN
• II MEXICO
• III UNITED STATES
• IV CANADA
• V A CRITICAL REVIEW OF THE EVOLVING TRENDS