This article discusses the further development and progression of the accounting industry in response to various economical events from the early 1900’s to 1971. Preliminary intermediate accounting theory is presented. Included is a discussion of the formation and publication of early accounting regulations and pronouncements along with the formation and purpose of early accounting standard-setting organizations.
Introduction: Upon completion of this chapter, the reader will have a greater understanding of the history of the current standard-setting accounting organizations including the formation of Generally Accepted Accounting Procedures (GAAP). The reader will also have greater understanding of the foundation and formation of the current accounting pronouncements and current standard-setting accounting bodies.
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The first U.S. accounting organizations
In the early 1900’s, the Industrial Revolution was fueling the growth of the business industry. As a result, accounting was gaining more and more importance. This led to the need for greater organization and representation within the accounting industry. In response to this, two accounting organizations were independently formed in 1904. The first organization formed was The International Congress of Accountants. Their first meeting was held in St. Louis, Missouri in 1904. This organization is credited with the formation of the organized accounting profession within the United States. In attendance were representatives from the accounting profession from the United States, England, Scotland and Holland. During this meeting, the American Association of Public Accountants was also formed. The American Association of Public Accountants became known as the professional organization for accountants in the United States. Several years later, in 1916, the International Congress of Accountants was reorganized into the American Institute of Accountants (AIA). The American Institute of Accountants was instrumental in creating accounting curriculum within universities and creating the early accounting standards in the United States.
The need for regulation and standards within the United States
Up until 1929, specific methods of accounting were left up to management and accountants to do what they felt was in their best judgment. The lack of standards and rules resulted in accounting records that could not be compared between companies, and different methods of accounting throughout the United States. The accounting industry become more complicated as companies grew bigger. Corporations began trading their stock on the stock market, some businesses merged and other companies combined to form larger companies. In addition, pension plans were introduced, subsidiaries were formed, and larger corporations began doing business internationally. All of these different events created new challenges for the accounting industry. The lack of standards for how to account for pensions, leases, subsidiaries, mergers, stock and stock options, consolidations, international transactions and more was taking its toll on the accounting industry.
In 1929, the stock market crashed followed by the Great Depression. These two events served as the catalyst for the formation of many of the accounting regulations and standards that are in place today. Though it was never publicly blamed, the accounting profession did receive some heat for not having a standard set of accounting rules that could be followed by everyone. It was speculated that the lack of common and comprehensive rules prevented investors and companies who did business with other public companies from having complete and thorough knowledge of their accounting records and practices. In 1934, the Securities and Exchange Commission (SEC) was established following the creation of the Securities Act of 1933 and the Securities Exchange Act of 1934. Congress granted power to the SEC that enabled them to prescribe accounting principles and practices. Over the next few years, the SEC debated over where accounting standards should be developed – in the private or public sector. At the time, the American Institute of Accountants (AIA) published a study titled A Statement of Accounting Principles that many accountants referred to as the authoritative source justifying current accounting practices. This was the start of published standards that was used within the accounting profession.
The formation of the AICPA and other regulatory organizations
In 1937, the American Institute of Accountants and the American Society of Certified Public Accountants merged forming a larger organization, known today as the American Institute of Certified Public Accountants (AICPA). The AICPA became the influential standard-setting organization within the United States where it retains that position today, along with other regulatory organizations. The AICPA had (and still has) power over the development of accounting standards and realized the necessity for such standards to be implemented. To achieve this goal, in 1936, the AICPA created the Committee on Accounting Procedure (CAP) which was followed by the formation of the Accounting Principles Board (APB) in 1959, and later replaced by the Financial Accounting Standards Board (FASB) in 1973. Each of these organizations issued accounting standards and pronouncements throughout their existence. With the exception of the FASB and the AICPA, the other organizations are no longer in existence, though the standards they published are still used to some extent today.
The Committee on Accounting Procedures (CAP)
The Committee on Accounting Procedures was formed to issue pronouncements regarding accounting procedures and practices and to establish generally accepted practices within the United States. For the first several years of its existence, the Committee on Accounting Procedures was relatively inactive. It wasn’t until the SEC threatened more involvement with accounting standard setting that the CAP became more active.
The early publications by the Committee on Accounting Procedures were published as Accounting Research Bulletins (ARB’s). These pronouncements were not mandatory and received their authority from general acceptance rather then from a governing body. They served only as a guideline for generally accepted procedures. In 1953, all the previously published ARBs were consolidated into one bulletin with succeeding bulletins issued. The list of Accounting Research Bulletins published by the Committee on Accounting Procedures (CAP) is shown below:
| ARB Number | Date Issued | Title |
| ARB No. 1 | August 1953 | Review and Résumé (of the eight original terminology bulletins) (amended with ARB No. 43, June 1953) |
| ARB No. 2 | March 1955 | Proceeds, Revenue, Income, Profit and Earnings (amended) |
| ARB No. 3 | August 1956 | Book Value (unchanged) |
| ARB No. 4 | June, 1957 | Cost, Expense and Loss (amended) |
| ARB No. 43 | June 1953 | Restatement and Revision of Accounting Research Bulletins Nos. 1-42, and Accounting Terminology Bulletin No. 1 (originally issued 1939-1953) |
| ARB No. 44 | October 1954 | Declining-Balance Depreciation Revised July, 1958 (superseded by SFAS No. 96, December 1987) |
| ARB No. 45 | October 1955 | Long-term Construction-type contracts (unchanged) |
| ARB No. 46 | February 1956 | Discontinuance of Dating Earned Surplus (unchanged) |
| ARB No. 47 | September 1956 | Accounting for Costs of Pension Plans (superseded by APB Opinion No. 8, November, 1966 then superseded by SFAS No. 87, December 1985) |
| ARB No. 48 | January 1957 | Business Combinations (superseded by APB Opinion No. 16, August, 1970 then superseded by SFAS No. 141, June 2001 |
| ARB No. 49 | April 1958 | Earnings Per Share (superseded by APB Opinion No. 9, December, 1966 then superseded by SFAS No. 128, February 1997. |
| ARB No. 50 | October 1958 | Contingencies (superseded by SFAS No. 5 in March, 1975) |
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ARB No. 51
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August 1959 | Consolidated Financial Statements |
Note: SFAS stands for “Statement of Financial Accounting Standards”. These are standards that were issued by the Financial Accounting Standards Board (FASB) from 1973 to the present. The formation and publications of the FASB is covered in great detail the next chapter, The History of Accounting Part III.
As you can see, several of the bulletins have since been superseded by recent publications. Where available, links to the current publications are provided. The Accounting Research Bulletins issued by the Committee on Accounting Procedures represents the beginning of Generally Accepted Accounting Procedures (GAAP). The initial standards have since evolved and continue to change to meet the ever-changing demands of the accounting profession and business industry.
The Accounting Principles Board (APB)
Following the formation of the CAP, the Accounting Principles Board (APB) was formed in 1959. The purpose of the Accounting Principles Board was to address the standards that the Committee on Accounting Procedures was issuing their pronouncements. There was a great deal of criticism surrounding the Committee on Accounting Procedures (CAP). Some of the issues raised against CAP were the fact that all members must also be members of the AICPA. This meant that executives, investors, and members of academia could not be part of the standard setting procedures and membership was limited to Certified Public Accountants only. Without allowing executives, investors, and members of academia to take part in the pronouncements issued by CAP, there were significant pitfalls and unanswered areas within accounting standards. In addition, the accounting industry felt that standards issued by CAP were done so in a piecemeal fashion with inconsistent results. To respond to these criticisms, the AICPA decided to create the Accounting Principles Board (APB). The APB had between 17 and 21 members selected from the accounting profession, academia, the government, and business industries. The APB issued pronouncements called “opinions”. The purpose of the APB Opinions was to discuss controversial issues and narrow the areas of differences within the accounting practice. The opinions were not mandatory practice, however, and soon, like other pronouncements, they became controversial with most of them eventually being superseded by later publications.
A list of the Accounting Principles Board (APB) Opinions that were published is shown below:
| APB Opinion Number | Date Issued | Title |
| APB Opinion No. 1 | November 1962 | New Depreciation Guidelines and Rules (superseded by SFAS No. 96, December 1987) |
| APB Opinion No. 2 | December 1962 | Accounting for the “Investment Credit” (amended with APB Opinion No. 4, March 1964) |
| APB Opinion No. 3 | October 1963 | The Statement of Source and Application of Funds (superseded by APB Opinion No. 19, March 1971) |
| APB Opinion No. 4 | March 1964 | Accounting for the Investment Credit (amendment of APB Opinion No. 2) |
| APB Opinion No. 5 | September 1964 | Reporting of Leases in Financial Statements of Lessee (superseded by SFAS No. 13, November 1976) |
| APB Opinion No. 6 | October 1965 | Status of Accounting Research Bulletins (Amendment of ARB No. 43) |
| APB Opinion No.7 | May 1966 | Accounting for Leases in Financial Statements of Lessors (superseded by SFAS No. 13, November, 1976) |
| APB Opinion No. 8 | November 1966 | Accounting for the Cost of Pension Plans |
| APB Opinion No. 9 | December 1966 | Reporting the Results of Operations |
| APB Opinion No. 10 | December 1966 | Omnibus Opinion – 1966 (Consolidated Financial Statements, Poolings of Interest, Convertible Debt and Debt Issued with Stock Warrants Installment Method of Accounting |
| APB Opinion No. 11 | December 1967 | Accounting for Income Taxes (superseded by SFAS No. 96, December 1987) |
| APB Opinion No. 12 | December 1967 | Omnibus Opinion – 1967 |
| APB Opinion No. 13 | March 1969 | Amending Paragraph 6 of APB Opinion No. 9, Application to Commercial Banks |
| APB Opinion No. 14 | March 1969 | Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants |
| APB Opinion No. 15 | May 1969 | Earnings Per Share (superseded by SFAS No. 128, February 1997) |
| APB Opinion No. 16 | August, 1970 | Business Combinations (superseded by SFAS No. 141, June 2001). |
| APB Opinion No. 17 | August 1970 | Intangible Assets (superseded by SFAS No. 142, June 2001) |
| APB Opinion No. 18 | March 1971 | The Equity Method of Accounting for Investments in Common Stock |
| APB Opinion No. 19 | March 1971 | Reporting Changes in Financial Position (superseded by SFAS No. 95, November 1987) |
| APB Opinion No. 20 | July 1971 | Accounting Changes (superseded by SFAS No. 154, May 2005) |
| APB Opinion No. 21 | August 1971 | Interest on Receivables and Payables |
| APB Opinion No. 22 | April 1972 | Disclosure of Accounting Policies |
| APB Opinion No. 23 | April 1972 | Accounting for Income Taxes – Special Areas (amended by SFAS No. 96, December 1987 and SFAS No. 109, February 1992) |
| APB Opinion No. 24 | April 1972 | Accounting for Income Taxes – Investments in Common Stock Accounted for by the Equity Method (superseded by SFAS no. 96, December 1987) |
| APB Opinion No. 25 | October 1972 | Accounting for Stock Issued to Employees (superseded by SFAS No. 123, December 2004) |
| APB Opinion No. 26 | October 1972 | Early Extinguishment of Debt |
| APB Opinion No. 27 | November 1972 | Accounting for Lease Transactions by Manufacturer or Dealer Lessors (superseded by SFAS no. 13, November 1976) |
| APB Opinion No. 28 | May 1973 | Interim Financial Reporting |
| APB Opinion No. 29 | May 1973 | Accounting for Nonmonetary Transactions (amended by SFAS No. 153, December 2004) |
| APB Opinion No. 30 | June 1973 | Reporting the Results of Operations, Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. |
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APB Opinion No. 31
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June 1973 | Disclosure of Lease Commitments by Leassees |
Note: SFAS stands for “Statement of Financial Accounting Standards”. These are standards that were issued by the Financial Accounting Standards Board (FASB) from 1973 to the present. The formation and publications of the FASB is covered in great detail the next chapter, The History of Accounting Part III.
As you can see, several of the APB Opinions have since been superseded by recent publications. Where available, links to the current publications are provided. The Accounting Principles Board Opinions issued by the Accounting Principles Board represents the continued changes and further development of Generally Accepted Accounting Procedures (GAAP).
While the Accounting Principles Board made significant progress towards establishing accounting standards, like their predecessors, they too came under criticism. There were difficulties associated with the passage of certain opinions – specifically APB Opinion No. 2 and No. 4. In addition to the difficulty related to those opinions, concerns were raised about the APB itself. Some of those concerns questioned the following:
The independence of the members of the APB: Members of the APB were part-time workers who often were full-time accountants working for other companies. Their ability to focus on the responsibilities required by the APB was continuously questioned. In addition, since members were often accountants who may have worked in other industries (i.e., government, manufacturing, banking, etc.) the subject of neutrality was often raised. Often times the members received criticism questioning whether they could make unbiased, neutral decisions regarding opinions and pronouncements they issued.
Structure of the Board: The board was comprised of a member from each of the largest 8 accounting firms of that time. The “Big 8” accounting firms were referred to as: Arthur Andersen, LLP, Arthur Young, LLP, Coopers and Lybrand, LLP, Deloitte Haskins and Sells, LLP, Ernst and Whinney, LLP, Peat Marwick Mitchell LLP, (later KPMG Peat Marwick), Price Waterhouse, LLP and Touche Ross, LLP. These firms were categorized as “The Big 8” based upon their size and global reach.
Response Time: The accounting industry felt that the APB was not acting quickly enough in response to concerns raised about published opinions. There were also criticisms and concerns that problems were not being investigated and solved quickly enough by the board members. This was believed to be due to their part-time schedules at the Accounting Principles Board.
The AICPA responded to the criticisms and concerns about the APB by forming a committee in 1971 to study the development of financial accounting principles and to determine the objectives of financial statements. The findings of the committees and the succeeding organizations formed as a result of the criticisms against the APB are discussed in detail in the next chapter.
Next Article: The History of Accounting Part III
The next article will follow the progression of the accounting industry from 1971 through to the present day. The formation of one of the current accounting standard-setting organization, the FASB will be presented along with other major changes affecting the accounting industry.
References and Further Reading:
AICPA (2006) American Institute of Certified Public Accountants http://www.aicpa.org/
CPAClass.com (2006) U.S. GAAP By Topic http://cpaclass.com/gaap/gaap-us-101.htm
FASB (2007) FASB Pronouncements and EITF Abstracts http://www.fasb.org/st/
Kieso, D.E., Weygandt, J.J. and Warfield, T.D. (2006) Intermediate Accounting New Jersey: John Wiley & Sons
Schroeder, R.G., Clark, M.W. and Cathey, J.M. (2005) Financial Accounting Theory and Analysis New Jersey: John Wiley & Sons
U.S. GAO (2003) Accounting Firm Consolidation: Selected Large Public Company Views on Audit Fees, Quality, Independence and Choice. http://www.gao.gov/new.items/d031158.pdf
Citation:
Errico, Christine. The History of Accounting Part II:The Formation of Accounting Standards [Internet]. Version 6. Knol. 2008 Jul 30. Available from: http://knol.google.com/k/christine-errico/the-history-of-accounting-part-ii/dojo5r8xc1mx/3.
Business For Thought 
Posted on 2011/10/02
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