GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The Accounting Principles Board served as the deliberative body for the American Institute of Certified Public Accountants (AICPA), a professional association for those in the accounting industry. This board offered opinions and statements on generally accepted accounting principles (GAAP) in the United States from 1959 to 1973. These standards are used by accountants with federal agencies and corporations. The AICPA replaced the Accounting Principles Board with the Financial Accounting Standards Board (FASB) in 1973 to increase responsiveness to accounting issues.

The historical reputation of the AICPA provided legitimacy to the Accounting Principles Board during its brief life. The AICPA was created in 1887 as the leading industry organization for accountants working in the U.S. This institute set ethical, educational and professional standards for accountants at a time when corporations were expanding worldwide. The first board within the AICPA was the Committee on Accounting Procedure, which existed from 1936 to 1959. The board built on the committee’s work in preventing corrupt accounting principles that contributed to the 1929 stock market crash.

The U.S. Securities and Exchange Commission (SEC) relied on the Accounting Principles Board to establish accounting standards. The SEC is authorized under the Securities Exchange Act of 1934 to set standards for bookkeeping by publicly traded companies. SEC officials have worked with AICPA since 1934 to use the organization’s accounting knowledge for the public good. This public-private partnership allows the SEC to consult with leading accountants on ways to keep accurate accounting ledgers. Most of the opinions by the Accounting Principles Board and FASB have been incorporated into federal policies on public accounting.

The board issued 35 opinions and statements during its 14-year existence. Corporations and government agencies still use 19 board opinions as part of GAAP. A December 1967 decision by the board created criteria for reporting asset depreciation and deferred compensation. In August 1970, the board generated principles for reporting the transfer of assets as part of business combinations and mergers. The board’s decision in October 1972 set standards for corporate reporting of stocks used as payment for employees.

The AICPA replaced the Accounting Principles Board with FASB in 1973 because of criticisms of the previous board. The Accounting Principles Board was seen by critics as insufficiently independent from the federal government and corporations. The design of the FASB is informed largely by the failings of its past boards. The FASB requires its members to resign from corporate boards and sell off business interests during their five-year terms. These requirements allow FASB members to create accounting standards independent of personal and financial interests.

Generally accepted accounting principles (GAAP) are the guidelines, rules, and procedures used in recording and reporting accounting information in audited financial statements. Various organizations have influenced the development of modern-day accounting principles. Among these are the American Institute of Certified Public Accountants (AICPA), the Financial Accounting Standards Board (FASB), and the Securities and Exchange Commission (SEC). The first two are private sector organizations; the SEC is a federal government agency.

The AICPA played a major role in the development of accounting standards. In 1937 the AICPA created the Committee on Accounting Procedures (CAP), which issued a series of Accounting Research Bulletins (ARB) with the purpose of standardizing accounting practices. This committee was replaced by the Accounting Principles Board (APB) in 1959. The APB maintained the ARB series, but it also began to publish a new set of pronouncements, referred to as Opinions of the Accounting Principles Board. In mid-1973, an independent private board called the Financial Accounting Standards Board (FASB) replaced the APB and assumed responsibility for the issuance of financial accounting standards. The FASB remains the primary determiner of financial accounting standards in the United States. Comprised of seven members who serve full-time and receive compensation for their service, the FASB identifies financial accounting issues, conducts research related to these issues, and is charged with resolving the issues. A super-majority vote (i.e., at least five to two) is required before an addition or change to the Statements of Financial Accounting Standards is issued.

The Financial Accounting Foundation is the parent organization to FASB. The foundation is governed by a 16-member Board of Trustees appointed from the memberships of eight organizations: AICPA, Financial Executives Institute, Institute of Management Accountants, Financial Analysts Federation, American Accounting Association, Securities Industry Association, Government Finance Officers Association, and National Association of State Auditors. A Financial Accounting Standards Advisory Council (approximately 30 members) advises the FASB. In addition, an Emerging Issues Task Force (EITF) was established in 1984 to provide timely guidance to the FASB on new accounting issues.

The Securities and Exchange Commission, an agency of the federal government, has the legal authority to prescribe accounting principles and reporting practices for all companies issuing publicly traded securities. The SEC has seldom used this authority, however, although it has intervened or expressed its views on accounting issues from time to time. U.S. law requires that companies subject to the jurisdiction of the SEC make reports to the SEC giving detailed information about their operations. The SEC has broad powers to require public disclosure in a fair and accurate manner in financial statements and to protect investors. The SEC establishes accounting principles with respect to the information contained within reports it requires of registered companies. These reports include: Form S-X, a registration statement; Form 1O-K, an annual report; Form 1O-Q, a quarterly report of operations; Form S-K, a report used to describe significant events that may affect the company; and Proxy Statements, which are used when management requests the right to vote through proxies for shareholders.