Standard setting for financial reporting has been constantly changing and adapting to account for the new challenges and changes posed today by doing business in a fasted paced economy trending towards Globalization. Standards in America trace their history back to the American Institute of Certified Public Accountants (AICPA) which was founded over one hundred years ago in 1887 under the name of the American Association of Public Accountants. At the time the AICPA was formed accounting was still in its early stages of development and was not monitored or regulated by any one authoritative body. Little or no standards existed throughout the early 1900’s and as a result management and accountants were left to their best judgment in recording and reporting their organizations financial information. As the developing world progressed Accounting became more complex and a more concrete financial reporting system was required.
The Stock Market Crash of 1929 followed by the Great Depression are two events that have been linked to the start of accounting standards. In an article titled The History of Accounting it proclaims that “these two events served as the catalyst for the formation of many of the accounting regulations and standards that are in place, 1 today (Errico, Christine, 1).” The Securities and Exchange act established in 1933 by the United States Government formed the basis for regulation of financial markets in the United States. Shortly after the Securities and Exchange Act was established the United States Government created the Security and Exchange Commission more commonly known as the SEC. The SEC is a federal agency charged with the responsibility of enforcing and regulating the Securities and Exchange Act as well as other acts and responsibilities assigned to it by the United States Government, one of the more common known acts is Sarbanes-Oxley of 2002. Following the years of its establishment The History of Accounting describes the first adaptions of Stands in the U.S. when stating “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” (Errico, Christine, 1). The AIA and the American Society for Certified Public Accountants merged together in 1937 officially creating the AICPA.
In a Testimony from February 2002 the former Chief Accountant of the SEC, Robert K. Herdman explained the view and role of the Government in Accounting Standards Setting. He proclaimed that “The SEC relies on an independent, private sector standards-setting process that is thorough, open, and deliberate. While the Commission has the statutory authority to set accounting principles, for over 60 years it has looked to the private sector for leadership in establishing and improving accounting standards. The quality of our accounting standards and our capital markets can be attributed in large part to the private sector standards-setting process, as overseen by the SEC” (Herdman, Robert 2). The AICPA along with various other early accounting societies, institutions, and boards have primarily been responsible for creating, adapting, and modifying accounting standards.
Accounting Standards developed by the AICPA and related parties have come to be known as Generally Accepted Accounting Principles (GAAP) and are constantly changing due to increasing standards, restrictions, and problems faced today in the fast paced global economy. In 1973 the AICPA consolidated some of its partnering accounting standards setting bodies and created one uniformed board with its primary purpose being to develop Generally Accepted Accounting Principles within the United States in cooperation with the SEC. This newly formed standards setting board is known as the Financial Accounting Standards Board (FASB). Since the foundation of the Financial Accounting Standards Board (FASB) in 1973 they claim to have “been the designated organization in the private sector for establishing standards of financial accounting that govern the preparation of financial reports by nongovernmental entities.” FASBs’ mission has been primarily focused on the establishment and improvement of accounting standards for U.S. Nongovernmental entities.
As organizations increasingly engage in Business activities in the global market a need for more reliable and consistent financial reporting among differing bodies of accounting standards has been recognized. FASB describes the beginning action towards this need when stating “Initial efforts focused on harmonization-reducing differences among the accounting principles used in major capital markets around the world. By the 1990s, the notion of harmonization was replaced by the concept of convergence-the development of a single set of high-quality, international accounting standards that would be used in at least all major capital markets” (FASB, 3). The recognition of this new need for global standards gave birth to the International Accounting Standards Committee based out of London England in 1973 and would be renamed the International Accounting Standards Board (IASB) during 2001. Like FASB the IASB is an independent, privately funded organization that was charged with the responsibility to develop and promote a set of accounting standards. These international accounting standards are known as International Accounting Reporting Standards (IFRS) and are considered a better suitor than GAPP by many for international business. In a publication from the IASB titled Who We Are and What We Do they claim “Since 2001, almost 120 countries have required or permitted the use of IFRSs. All remaining major economies have established time lines to converge with or adopt IFRSs in the near future” (ISAB, 4).
Since the beginning of the push towards IFRS the SEC has been continually trying to decide on a course of action to take on accounting and incorporating IFRS standards with the currently used FASB standards (GAAP). FASB claims that they “and the IASB have been working together since 2002 to improve and converge GAAP and IFRS” (FASB, 3).
PricewaterhouseCoopers explains that in February of 2010 the SEC published a statement of support for a single set of high quality global accounting standards and acknowledged that IFRS is best positioned to serve that role. The SEC also issued a roadmap, as directed by the IASB, which outlines the potential switch to IFRS and stated that in the near future a final decision on the manner should be expected by the end of 2011. With IFRS being the most commonly used Accounting Standard throughout the world and the SECs current revealing’s on its position towards IFRS it only seems evident that the United States is moving closer towards adopting International Financial Reporting Standards.
1. Errico, Christine. The History of Accounting Part II:The Formation of Accounting Standards [Internet]. Version 6. Knol. 2008 Jul 30. Available from: errico/the-history-of-accounting-part-ii/dojo5r8xc1mx/3
2. Are Current Financial Accounting Standards Protecting Investors? (2001) (testimony of Robert K. Herdman).
3. “International Convergence of Accounting Standards–A Brief History.” http://www.fasb.org. FASB. Web.
4. Who We Are and What We Do. ISAB, 2011.