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.