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4/27/12The Century Of CPA

Click to edit Master subtitle stylePresented by:

Komang Ayu Kumaradewi

(12030111150029)Komang Yuli Pridarsanti(12030111150030)

THE CENTURY OF CPA

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OVERVIEW

The Origin of Regulation The Crash of 1929

The Post-war Boom The Modern Era Conclusion

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THE Origin of Regulation

1830The railway age began with the opening of Liverpool andManchester line.

1844Joint Stock Companies Act in Great Britain.

1886The Supreme court held that commerce originating orending beyond the boundaries of a state was beyond the

power of the state to regulate.First meeting of American Association of PublicAccountants (AAPA).

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THE ORIGIN OF REGULATION

1887

Interstate Commerse Commission (ICC) was establishedby the Congress with the spesific authority to regulaterailroad.

AAPA incorporated in New York. 1890

Sherman Antitrust Act as a respond to the monopolies.

1894

AAPA adopted a resolution recommending that the orderof presentation in the balance sheet should be from themost to the least liquid.

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1906

The Hepburn Act of 1906 gave the ICC the authority toestablish a uniform accounting system for use inestablishing an appropriate rail rates, thereby setting the

stage for the century of regulation of accounting. 1910

AAPA formulate definition of technical accounting termsin order to give uniformity to their meaning. AAPA alsoattempted to make its influence felt in the area of income

taxes.

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1913

Woodrow Wilson on the slogan of new freedom for thepeople as the respond to the dissatisfaction with theliability of the government to control the growth of big

business. 1914

The Clayton Antitrust Act was enacted and the FederalTrade Commission was created to oversee the provisionof the Act.

The federal Reserve Board (FRB) was formed which, forthe first time, created publicly controlled central bankingsystem in the country.

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1917

The new regulatory bodies perceived a need forstandardization in the preparation of financial statementsubmitted to bankers for credit purposes.

FTC suggested that FRB need to maintain a register ofaccountants considered acceptable to practice before theBoard and the Commission.

Uniform Accounting was issued by FRB.

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1918

Approved Methods For the Preparation of Balance Sheet

Statements.

1929

Verification of Financial Statements.

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THE ORIGIN OF REGULATion

Regulation in Britain (1844)

Joint Stock Company Act permit incorporation byregistration only if shareholders would accept unlimitedliability.

As a further safeguard, the Act provided for the periodicbalancing of the accountants and the presentation of afull and fair balance sheet to stockholders.

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THE CRASH OF 1929

Some reactions/ critics: Adolph Berle

So long as accounting standards are not hardenend andthe law doesnt impose any spesific canons, directors

and their accountants may frame their figure, withinlimits, much as they choose.

The fact that accountants themselves have as yet failedto work out a series of standard rules.

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THE CRASH OF 1929

Some reactions/ critics: J.M.B Hoxsey

the lack of uniformity in accounting

no rules in the areas of depreciation and consolidation

companies were not even disclosing which methodsthey were using

companies refused to release their revenue numberson grounds

companies ultraconservatives in undervaluinginventory and taking excessive depreciation

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THE CRASH OF 1929

AIA respond: The respond

Several years earlier the AIA had attempted to

draw the NYSE into conversation. Also NYSE hadbeen relatively lax in its listing requirements.

Although it was organized as early as 1792, itdid not attempt to obtain financial statementfrom listed companies until about 1866.

1900, it requested that all companies applyingfor listing on the exchange agree to publishannual reports.

1926, require all listed companies to publish and

submit to stockholders an annual financial

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THE CRASH OF 1929

AIA respond:

1933

AIA creating a Special Commitee on Corporation withStock Exchange

NYSE requirement was that all companies seeking listingwith the NYSE would have to furnish financial statementsbearing the certificate of accountants qualified under thelaws of some state or country.

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THE NEW DEAL

1933

Roosevelts first 100 days in office: The Emergency Banking Act The Truth-in Securities Act

The Glass Steagal Banking Act 1934

Securities and Exchange Commission (SEC) was createdto administer Truth-in Securities Act, Securities ExchangeAct and several other act.

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THE NEW DEAL

1938

The Commission permit the profession to lead the way informulating accounting principles. The policy was issuedin the form of Accounting Series Release no. 4 (ASR 4),

which stated:that the commission would accept only financialstatement prepared in accordance with accountingprinciples which have substantial authoritative support orin accordance with rules, regulation or other officialpronouncements of the commission or the chiefaccuntant.

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THE NEW DEAL

1938

Formulating the accounting principles itself, began withthe Commitee on Accounting Procedure (CAP), founded in1936 by the AIA.

CAP continued to meet until 1959 and issued 59bulletins.

8 were subsequently consolidated into AccountingTerminology Bulletin No 1: Review and Resume

31 were consolidated into Accounting Reseach Bulletin

No 43

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Click to edit Master subtitle style

THE POST-WAR BOMB

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1945 The End of World War II

The economy surged ahead. The newly found prosperity of middle-class in America

persuaded investment in the stock market. This investors need appropriate information for their

investment decisions. The standard investment advice to determine the

appropriate stock price of the company is to multiply thecompanys earnings by a Price-Earnings Ratio (PE Ratio).

The companys earnings number is a key part of the PEapproach to investment.

Therefore, accounting became vitally important.

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Accounting Alternatives

1963SEC was obliged to list areas that could lead to materialdifferences in reporting, i.e :

1. Valuation of inventories.

2.

Depreciation & depletion.3. Income tax allocation.

4. Pensions.

5. Research & development cost.

6. Goodwill.

7. Time of realizing income.8. All-inclusive vs. an operating concept of income

statement.

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Accounting Alternatives

9. Intercorporate investment.

10. Long-term leases.

11. Principles of consolidation.

12. Business combinations.13. Income measurement in finance companies.

14. Intangible costs in the oil and gas industries.

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Price Level Adjustment

The boom, accompanied by relatively serious burst ofinflation, lead to a debate on price level depreciation.

In periods of price stability, the replacement cost equals theoriginal cost; in periods of inflation the replacement cost isgreater.

Published in 1952, the report (after 5 years study)recommended that financial statements be adjusted forchanges in the general price level.

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Earning Power Debate

AIA

current operating income ; the firms ordinary income,excluding extraordinary gains and losses, temptingmanagement to manipulating the potential earning powerof the company.

SEC & AAA

all-inclusive income ; including all gains and losses, thuspreventing management from manipulating the EPSnumber.

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Calls for Comparability

The debates lead to the call for uniformity in accounting.

Leonard Spacek attributed the lack of comparability to theinability of the Commitee on Accounting Procedure towithstand the pressure of industry.

August 1957, he called for the creation of an AccountingCourt of Appeals.

Then, in the same year, AAA issuing its 3rd revision ofTentative Principles now called Accounting & ReportingStandards.

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the Accounting Principle Board

October 1957

Alvin R. Jennings proposing a new organization to examinebasic accounting assumption, identify best principles, anddevise new methods to guide industry and the accountingprofession.

December 1957

A Special Commitee on Research Programs was appointed.Its report of December 1958 recommended replacing theCommitee on Accounting Procedure with Accounting

Principles Board (APB) and Accounting Research Division(ARD).

1959

APB and ARD were formed.

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the Accounting Principle Board

The objectives of the APB:

Advance the written expression of GAAP, narrow the areasof difference in appropriate practice, and lead in discussions of

unsettled and controversial issues.

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The Turbulent Sixties

1960

The economy was struggling so John F. Kennedysadministration enacted an Investment Tax Credit .

There were 2 methods in accounting the tax benefits: flow-

through method & deferred method. December 1962

The APB ruled in favor of the deferred method (APB 2).

ASR 96 : SEC accepted both method

APB 4 : several alternatives permited (including theimmediate reduction of Income Tax Expese)

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The Turbulent Sixties

1971

Through APB 11 (Accounting for Income Taxes) : APBmandating the deferral method.

Opposition from the Internal Revenue Service and others for

that mandate: Revenue Act of 1971.That Act caused the APB to withdraw its recomendationprior to the final draft.

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Authoritative Opinions

The council recommended that after 1965, all departuresfrom APB Opinions and effective Accounting ResearchBulletins should be disclosed in footnotes to financialstatements or in audit reports of members.

That is, all opinions of the APB were considered to

constitute substantial authoritative support for GAAP.

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Authoritative Opinions

Rule 203: result of the replacement of the APB bythe FASB

Content of Rule 203:

A member of the AICPA shall not express an opinion that

financial statements are represented in conformity withGAAP if such statements contain any departure from anaccounting principle promulgated by the FASB which has amaterial effect on statements taken as a whole, unless themember can show that due to unusual circumstances the

financial statements would otherwise have beenmissleading.

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THE MODERN ERA

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the Financial Accounting StandardsBoard

Both the AICPA & the AAA proposed studies on the mosteffective organization structure for establishing accountingprinciples.

1970

The president of the Institute called a special conferenceproposed two studies to explore the means by whichaccounting principle should be established and to reviewthe objectives of financial statements.

March 1971

The Wheat Study Group was appointed.

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the Financial Accounting StandardsBoARD

March 1972

The report of this group was submitted to the AICPA andadopted by the AICPA Council in June.

1973

The APB demised and the FAF, the FASB and the FASACestablished (on July 1).

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Structure & Function

The principal duties of FAF :

1. to appoint the member of FASB, FASAC and GASB;

2. to raise the fund for their operations.

. The FASB consists of 7 full time members and has

a stated mission to establish and improvestandards of financial accounting and reporting forthe guidance and education of the public.

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Structure & Function

The FASAC has a minimum of 20 members. TheCouncil assist the standards Boards by :

1. maintaining contanct with business and the accountingprofesion,

2. sugesting new issues,3. pressing or delaying old issues, and

4. acting as a sounding board on tentative positions takenby the Board.

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The Transition

Several significant things that occured to permit thetransition from the APB to the FASB:

1. The AICPA had to relinguish its primary role, begun with theCommitee on Accounting Procedure, in the setting of

accounting standards.2. The new Institutional structure had to be given some

authority. This movement was initiated by the FASBs Rulesof Procedure. Rule 203 amanded to give FASBpronouncements official recognition by CPA. ASR No. 150released in December 1973.

3. The introduction of very deliberate process of arriving at anew standard.

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The Transition

Steps in the FASBs due process: Preliminary evaluation;

Admission to agenda;

Early deliberations;

Tentative resolution (Exposure Draft); Further deliberations (Hearings);

Final resolution (Standard).

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Emerging Issues Task Force (EITF)

EITF created to attempt to resolve pressing issuesrapidly due to the length of the process of arrivinga new standard.

It consist of 16 permanent person whose chairman

is the FASBs Director of Research and TechnicalActivities.

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Government Accounting Standard Board(GASB)

GASB was established in 1984 to parallelthe FASB and to report to the FAF.

It has 5 members that appointed to five-

year terms by the FAF acting inconsultation with the GASAC. The initial agreement was that the GASB

would rule on issues affecting state and

local government. Standards set by the NCGA (the prior

organization) would be binding in theabsence of a ruling by the GASB. Where

neither the GASB nor the NCGA had ruled,

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Ongoing Dissent

One of the difficulties with the APB : it wascomposed only of members of the AICPA and wasappointed and financed by the Institute.

The hope to overcome the difficulties : creating

FASB as a semi-independent organization withbroader base of support and full-time members.

In fact, many problem persists.

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Ongoing Dissent

Controvercies & criticisms:

1. Opposition in accounting policy about reported earnings

2. Criticism about the volume of standard setting

3. The discovery of illegal political contributions of 17

major companies in 19734. Hesitation of the effectiveness of SEC

5. Private interest group that take part in the operation ofFASB, which sets accounting standard, is not suited tocontrol the accounting standards which affect the

Federal Government and the public.

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Ongoing Dissent

The AICPA affraid that accounting would be sweptfrom the private sector.

In September 1977, it separated its membershipinto 2 groups : the SEC Practice Section and the

Private Companies Practice Section. It also established a Public Oversight Board to

exercise oversight of the SEC Practise Section andinstituted peer reviews.

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CONCLUSION

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Conclusion

The First Century of AICPA has been a dramaticand curious history.

It is a history in which standards have tended to beset reactively rather than proactively.

Whether the end result will be more informationfor shareholders or more convenient system forbureaucratic enforcement of accounting rulesremain to be seen.

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