History and Development of Accounting Standards

Accounting has been around since the beginning of civilization. ÐŽ§Accountants participated in the development of cities, trade, and the concepts of wealth and numbers.ЎЁ (Giroux) The importance of accounting cannot be overemphasized. Equally important are the standards used to guild the application of accounting practice. Without principles and standards, financial reporting would not fairly present the financial position of a company. Accounting has changed and evolved vastly over time and continues to change. I will discuss the evolution and history of accounting, the Conceptual frame work of accounting, and the governing bodies which shape the standards and principles of accounting practice.

The beginning of civilization occurred during the transition from hunter-gatherer to farmer. Farming led to crop surplus and therefore the need to trade and barter. Jericho, the oldest city known to historians was the first known trading center for surplus goods. Personal wealth created the need to keep track of inventories. Ancient bookkeepers used small clay balls called tokens to count and keep track of existing wealth. These tokens were used as evidence of transactions. Over time, the tokens were used to make impressions in clay along with pictures which represented the first attempts at accounting. These events took place around 5000 B.C. (Giroux)

Evidence suggests that double entry bookkeeping developed in Italy around 1200 B.C. The first book written on double entry bookkeeping was written by Luca Pacioli in 1494. (Smith) Pacioli was referred to as the father of accounting, but he did not actually invent the system he described. He simply wrote about the business practices used by merchants in Venice at the time. Many of his writings were used for several centuries. With the development of technology, wealth, and trade came the need to adequately account for the complexity involved. Scribes became accountants and in the process invented numbers and writing. Accounting played a central role in the development of civilizations. Accountants invented writing, participated in the development of money and banking, invented double entry bookkeeping, and helped develop the confidence in capital markets.

The industrial revolution started around 1750. As industry, mass transportation and capital markets were established, the role of accountants expanded. By the mid to late 19th century there was a strong need for professional accountants. The earliest of the big four accounting firms was started by William Deloitte in 1845. Today the firm still bears his name, Deloitte and Touche. Samuel Price and Edwin Waterhouse formed their partnership in 1849. William Cooper started his firm in 1854. By this time, the profession of accountants was firmly established.

The United States took its lead from entrepreneurs in Europe. During the late 1800ÐŽ¦s cost accounting was developed to increase efficiencies in the factories. The expansion and development of big business, such as Standard Oil and U.S. Steel, created the need for more sophisticated accounting systems to keep track of expanding divisions within these large corporations. Around the turn of the century the United States overtook Britain as the leading industrial power in the world. This rapid growth created the need for greater regulation. Insiders benefited from price fixing, stock manipulation, and various schemes of questionable legality. Financial statements were audited, but the auditors usually worked for the company and did not have motivation to protect the interests of third party investors.

World War I ended in 1919. (Library of Congress) After the War there was a surge of securities activity. ÐŽ§During the 1920s, approximately 20 million large and small shareholders took advantage of post-war prosperity and set out to make their fortunes in the stock market. It is estimated that of the $50 billion in new securities offered during this period, half became worthless.ЎЁ (SEC) Before the stock market crash in 1929, there was little support for reform of financial reporting. Black Friday changed all that. People and banks lost huge fortunes, and the public lost faith in the capital markets. There was a consensus that for the economy to recover, the public's faith in the capital markets needed to be restored. Congress held hearings to identify the problems and search for solutions. Based on the findings in these hearings, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. Congress established the Securities and Exchange Commission in 1934 to enforce the newly-passed securities laws, to promote stability in the markets and, most importantly, to protect investors. The SEC was given the mandate to establish accounting principles. Although the SEC was given the authority to govern accounting practice, they believed the private sector had the resources and talent to develop appropriate accounting standards. (Kieso, 6-7)

The American Institute of Certified Public Accountants and its predecessors have a history dating back to 1887, when the American Association of Public Accountants was formed. In 1916, the American Association was succeeded by the Institute of Public Accountants, at which time there was a membership of 1,150. The name was changed to the American Institute of Accountants in 1917 and remained so until 1957, when the name was again changed to the American Institute of Certified Public Accountants. The American Society of Certified Public Accountants was formed in 1921 and acted as a federation of state societies. The Society was merged into the Institute in 1936. (AICPA)

At the urging of the SEC, the AICPA appointed the Committee on Accounting Procedure in 1939. Between 1939 and 1959, The CAP issued 51 accounting research bulletins. These bulletins dealt with problems as they arose and failed to address accounting principles. Because accounting principles were not addressed, the AICPA created a new standard setting body. In 1959, the Accounting Principles board was created to determine appropriate practices, establish accounting principles, and to reduce the inconsistencies in practice. The APB released APB opinions, which were based on research studies. The mission of the APB was to develop an overall conceptual framework. It issued 31 opinions and was dissolved in 1973 for lack of productivity and failure to act promptly. In 1971, many feared that the government would step in to regulate the profession. Because of that fear, a study group on accounting principles was formed. This group was referred to as the Wheat Committee.

The Wheat Committee was named after its chair, Francis Wheat. The committee was instructed to examine the organization and operation of the APB. They were looking for a way to get better results. In 1972, the Wheat Committee submitted their findings to the AICPA. This