Accounting Standards: From Local to Global (A Brief History)
Accounting Standards: From Local to Global (A Brief History)
Recently, James Quigley, Chief Executive Officer of Deloitte Touche Tohmatsu, one of the "Big Four" auditing firms, made news by stating the recent recession halted progression toward a set of global accounting standards. Although an average reader of business news may understand the importance of bringing "standard" American accounting methods in line with global standards, a casual reader may be unaware of the development of these standards over time.
With the development of the Industrial Revolution came the need to raise vast amounts of capital for business operations, which in turn led to the development of the corporation, and with that absentee ownership (i.e., investor). Naturally, investors needed financial reports of the entities in which they've invested. Yet, despite the capital flowing into a growing American economy throughout the 19th century, there were not any organizations with the authority to standardize accounting and financial reporting methods. As a result, until some semblance of standardization was in place, a number of differing methods were utilized across the country to account for and report on the financial status of corporations, which often caused confusion and at times led to fraudulent accounting and reporting to occur.
It was not until the 20th century that a modicum of standardization in accounting principles was put in place. Throughout the past century until the present day, a number of organizations of varying authority have put forth accounting standards, which have also been of varying breadth, in the United States. From 1932 to 1934, following the stock market crash of 1929, the American Institute of Accountants (the precursor to the American Institute of Certified Public Accountants) and the New York Stock Exchange engaged in setting formal accounting standards. The federal government would complement this effort by going even further with the Securities Act of 1933 and Securities Exchange Act of 1934. The 1934 law specifically led to the creation of the Securities and Exchange Commission (SEC), which was given the authority to set accounting standards for companies who had to register their securities, among other responsibilities. Later, the American Institute of Accountants created the Committee on Accounting Procedure, which issued a total of 51 Accounting Research Bulletins from 1939 to 1959. Although an important step forward in establishing accounting standards, the bulletins dealt with accounting issues in too constricted of a way to be of much use in setting national standards. The Committee was replaced by the Accounting Principles Board of the American Institute of Certified Public Accountants (AIcpA). The Board issued 39 Opinions, but, again, a standardization of accounting principles eluded the organization.
In 1973, the object of setting national standardized accounting methods took big step forward when the Financial Accounting Standards Board (FASB) was created by the independent Financial Accounting Foundation to replace the Accounting Principles Board. To that end, it has issued seven Statements of Financial Accounting Concepts and over 100 Statements of Financial Accounting Standards that have established Generally Accepted Accounting Principles (GAAP). Because of the Foundation's independence, the standards it sets and publishes are the result of a collaborative process with input from variety organizations, for example, the AICPA, SEC, the American Accounting Association, the Institute of Management Accountants, and other finance related organizations.
Despite the progress made in establishing national standards, accounting and auditing problems with corporations still existed and came to light in the early part of this century with the collapse of Enron and WorldCom. This led to the federal government passing the Sarbanes-Oxley Act of 2002, a far reaching law that created the Public Company Accounting Oversight Board (PCAOB). PCAOB was given broad oversight over auditing and reporting standards for public companies and auditing operations of public accounting firms, including the power to set and enforce auditing standards. It is important to note, however, that even with the national standardization of accounting principles, there still exist alternative methods for accounting (after all, it is referred to as Generally Accepted Accounting Principles and not Solely Accepted Accounting Principles). Additionally, these methods continue to develop as financial instruments and transactions continue to evolve and become more sophisticated.
Just as a set of national accounting standards developed over time in the U.S., other forms of accounting method developed in other nations. In 1973, accountancy groups from nations across the globe, for example, Mexico, Ireland, Australia, Japan, and the U.S., created the International Accounting Standards Committee. The goal of this organization was standardize global accounting and reporting methods. In 2001, the Committee was replaced by the International Accounting Standards Board (IASB), based in London, which carried out the same goal, although with much broader support. Many nations have already adopted these standards, for example, the European Union requires member nations to apply these standards to certain companies within member nations, and the SEC has already set this year as the beginning of America's convergence with the standards set forth by the IASB.
Ultimately, the convergence of a number of accounting methods across the globe into one international standard, and also a reduction of alternative accounting methods, will happen because national and regional economies are becoming increasing more interconnected. A global economy with global corporations that in turn have global stake-holders (e.g., employees and investors that span the entire the planet) needs one set of global accounting standards. AS a result, full-fledged convergence is only a matter of time is only a matter of time, with the recent recession only causing a bump in the road.
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