Unlike most other modern professions, accounting has a history that is usually discussed in terms of one seminal event – the invention and dissemination of the double entry bookkeeping processes. But a view of accounting history that begins with Luca Pacioli’s contributions overlooks a long evolution of accounting systems in ancient and medieval times.
More fundamental is the question, why should we care about the history of accounting at all? Certainly a glimpse back into this period helps illuminate our past generally, and it is the sort of winding, twisted path that makes for an entertaining story. But perhaps the most compelling reason is to help explain the phenomenal growth that the profession of accountancy has enjoyed worldwide since the first royal charters were granted to the Society of Accountants in Edinburgh less than 150 years ago.
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In 1904, 50 years after the emergence of the formal profession, about 6,000 practitioners carried the title of chartered accountant. In 1957, there were 38,690 chartered and incorporated accountants (Scottish, British and Irish). Today, the Institute of Chartered Accountants in England and Wales alone has a membership of over 120,000 worldwide.
This is to say nothing of the many professionals in the other allied institutes in Canada, New Zealand, Ireland, Australia, Scotland and South Africa, along with American certified public accountants -comprising a vast, worldwide network of professional accountancy dominated by several, mammoth, worldwide accounting firms.
How and why did this relatively new profession develop? Its history is that of human commerce, and even more fundamentally, of writing and the use of numbers and counting.
Some argue that accounting developed purely in response to the needs of the time brought about by changes in the environment and societal demands. Others claim that the development of the science of accounting has itself driven the evolution of commerce since it was only through the use of more precise accounting methods that modern business was able to grow, flourish and respond to the needs of its owners and the public. Either way, the history of accounting throws a light on economic and business history generally, and may help us better predict what is on the horizon as the pace of global business evolution escalates.
Ancient Accounting: Dawn of Man through Luca Pacioli
In attempting to explain why double entry bookkeeping developed in 14th century Italy instead of ancient Greece or Rome, accounting scholar A. C. Littleton describes seven "key ingredients" which led to its creation: Private property: The power to change ownership, because bookkeeping is concerned with recording the facts about property and property rights. Capital: Wealth productively employed, because otherwise commerce would be trivial and credit would not exist. Commerce: The interchange of goods on a widespread level, because purely local trading in small volume would not create the sort of press of business needed to spur the creation of an organized system to replace the existing hodgepodge of record-keeping.
Credit: The present use of future goods, because there would have been little impetus to record transactions completed on the spot. Writing: A mechanism for making a permanent record in a common language, given the limits of human memory. Money: The "common denominator" for exchanges, since there is no need for bookkeeping except as it reduces transactions to a set of monetary values. Arithmetic: A means of computing the monetary details of the deal.
Many of these factors did exist in ancient times, but, until the Middle Ages, they were not found together in a form and strength necessary to push man to the innovation of double entry. Writing, for example, is as old as civilization itself, but arithmetic – the systematic manipulation of number symbols – was really not a tool possessed by the ancients. Rather, the persistent use of Roman numerals for financial transactions long after the introduction of Arabic numeration appears to have hindered the earlier creation of double-entry systems.
Nevertheless, the problems encountered by the ancients with record keeping, control and verification of financial transactions were not entirely different from our current ones. Governments, in particular, had strong incentives to keep careful records of receipts and disbursements – particularly concerning taxes. And in any society where individuals accumulated wealth, there was a desire by the rich to perform audits on the honesty and skill of slaves and employees entrusted with asset management.
But the lack of the above-listed antecedents to double entry bookkeeping made the job of an ancient accountant extraordinarily difficult. In societies where nearly all were illiterate, writing materials costly, numeration difficult and money systems inconsistent, a transaction had to be extremely important to justify keeping an accounting record.
Accounting In Mesopotamia, circa 3500 B.C.
Five thousand years before the appearance of double entry, the Assyrian, Chaldean-Babylonian and Sumerian civilizations were flourishing in the Mesopotamian Valley, producing some of the oldest known records of commerce. In this area between the Tigris and Euphrates Rivers, now mostly within the borders of Iraq, periodic flooding made the valley an especially rich area for agriculture.
As farmers prospered, service businesses and small industries developed in the communities in and around the Mesopotamian Valley. The cities of Babylon and Nineveh became the centers for regional commerce, and Babylonian became the language of business and politics throughout the Near East. There was more than one banking firm in Mesopotamia, employing standard measures of gold and silver, and extending credit in some transactions.
During this era (which lasted until 500 B.C.), Sumeria was a theocracy whose rulers held most land and animals in trust for their gods, giving impetus to their record-keeping efforts. Moreover, the legal codes that evolved penalized the failure to memorialize transactions. The renowned Code of Hammurabi, handed down during the first dynasty of Babylonia (2285 - 2242 B.C.), for example, required that an agent selling goods for a merchant give the merchant a price quotation under seal or face invalidation of a questioned agreement. Thus it is believed that most transactions were recorded and subscribed by the parties during this period.
The Mesopotamian equivalent of today's accountant was the scribe. His duties were similar, but even more extensive. In addition to writing up the transaction, he ensured that the agreements complied with the detailed code requirements for commercial transactions. Temples, palaces and private firms employed hundreds of scribes, and it was considered a prestigious profession.
In a typical transaction of the time, the parties might seek out the scribe at the gates to the city. They would describe their agreement to the scribe, who would take from his supply a small quantity of specially prepared clay on which to record the transaction. Clay was plentiful in this area, while papyrus was scarce and expensive.
The moist clay was molded into a size and shape adequate to contain the terms of the agreement. Using a wooden rod with a triangular end, the scribe recorded the names of the contracting parties, the goods and money exchanged and any other promises made. The parties then "signed" their names to the tablet by impressing their respective seals.
In an age of mass illiteracy, men carried their signatures around their necks in the form of stone amulets engraved with the wearer's mark, and were buried with them at death. Often the seals included the owner's name and religious symbols, such as the picture and name of the gods worshipped by the owner.
After these impressions from the amulets were made, the scribe would dry the tablet in the sun or in a kiln for important transactions which needed a more permanent record. Sometimes a clay layer about as thick as a pie crust was fashioned and wrapped around the tablet like an envelope. For extra security, the whole transaction would be rewritten on this outer "crust," in effect making a carbon copy of the original.
Attempted alterations of the envelope could be detected by comparing it with its contents, and the original could not be altered without cracking off and destroying the outer shell.
Accounting In Ancient Egypt, China, Greece and Rome
Governmental accounting in ancient Egypt developed in a fashion similar to the Mesopotamians. The use of papyrus rather than clay tablets allowed more detailed records to be made more easily. And extensive records were kept, particularly for the network of royal storehouses within which the "in kind" tax payments were kept.
Egyptian bookkeepers associated with each storehouse kept meticulous records, which were checked by an elaborate internal verification system. These early accountants had good reason to be honest and accurate, because irregularities disclosed by royal audits were punishable by fine, mutilation or death.
Although such records were important, ancient Egyptian accounting never progressed beyond simple list-making in its thousands of years of existence. Perhaps more than any other factors, illiteracy and the lack of coined money appear to have stymied its development.
While the Egyptians tracked movements of commodities, they treated gold and silver not as units of fungible value, but rather as mere articles of exchange. The inability to describe all goods in terms of a single valuation measure made cumulation and summation difficult and the development of a cohesive accounting system all but impossible.
Pre-Christian China used accounting chiefly as a means of evaluating the efficiency of governmental programs and the civil servants who administered them. A level of sophistication was achieved during the Chao Dynasty (1122 - 256 B.C.), which was not surpassed in China until after the introduction of double entry processes in the 19 century.
In the 5th century B.C., Greece used "public accountants" to allow its citizenry to maintain real authority and control over their government's finances. Members of the Athens Popular Assembly legislated on financial matters and controlled receipt and expenditure of public monies through the oversight of 10 state accountants, chosen by lot.
Perhaps the most important Greek contribution to accountancy was its introduction of coined money about 600 B.C... Widespread use of coinage took time, as did its impact on the evolution of accounting. Banking in ancient Greece appears to have been more developed than in prior societies. Bankers kept account books, changed and loaned money, and even arranged for cash transfers for citizens through affiliate banks in distant cities.
Government and banking accounts in ancient Rome evolved from records traditionally kept by the heads of families, wherein daily entry of household receipts and payments were kept in an adversaria or daybook, and monthly postings were made to a cashbook known as a codex accepti et expensi. These household expenses were important in Rome because citizens were required to submit regular statements of assets and liabilities, used as a basis for taxation and even determination of civil rights.
An elaborate system of checks and balances was maintained in Rome for governmental receipts and disbursements by the quaestors, who managed the treasury, paid the army and supervised governmental books. Public accounts were regularly examined by an audit staff, and quaestors were required to account to their successors and the Roman senate upon leaving office.
The transition from republic to empire was, at least in part, to control Roman fiscal operations and to raise more revenues for the ongoing wars of conquest. While the facade of republicanism was maintained, the empire concentrated real fiscal and political power in the emperor. Julius Caesar personally supervised the Roman treasury, and Augustus completely overhauled treasury operations during his reign.
Among Roman accounting innovations was the use of an annual budget, which attempted to coordinate the Empire's diverse financial enterprises, limited expenditures to the amount of estimated revenues and levied taxes in a manner which took into consideration its citizens' ability to pay.
Thousands of years between the fall of the Roman Empire and the publication of Luca Pacioli's Summa, are widely viewed as a period of accounting stagnation and medieval practices outside Italy are often ignored in historical summaries. Yet, as historian Michael Chatfield has observed, medieval agency accounting, "laid the foundations for the doctrines of stewardship and conservatism, and the medieval era created the conditions for the rapid advance in accounting technology that occurred during the Renaissance."
While accounting under the Roman Empire was prescribed by the centralized legal codes of the time, medieval bookkeeping was localized and centered on the specialized institutions of the feudal manor. The systems of exchequer and manor necessitated numerous delegations of authority over property from the owners to actual possessors and users. The central task of accounting during this era was to allow the government or property owners to monitor those in the lower portions of the socio-economic "pyramid."
Italian Renaissance: Birth of Double Entry Bookkeeping
The innovative Italians of the Renaissance (14th -16th century) are widely acknowledged to be the fathers of modern accounting. They elevated trade and commerce to new levels, and actively sought better methods of determining their profits.
Although Arabic numerals were introduced long before, it was during this period that the Italians became the first to use them regularly in tracking business accounts – an improvement over Roman numerals the importance of which cannot be overstated. They kept extensive business records, as the use of capital and credit on a large scale developed: The evolutionary trend toward double entry bookkeeping was underway.
Professional Accountancy Travels Across the Globe
George Watson (1645-1723), one of the early Scottish accountants, trained in Holland and passed along instructional materials used by his fellow professionals. By the middle of the19th century, England was in the midst of prosperous times brought on by the Industrial Revolution.
It was the leading producer of coal, iron and cotton textiles, and was the financial center of the world. With this financial surge came a demand for accountants, both for the healthy concerns and those companies declaring bankruptcy in the midst of the competition.
In 1880, the newly formed Institute of Chartered Accountants in England and Wales brought together all the accountancy organizations in those countries. In addition to the 587 members initially enrolled, an additional 606 members were soon admitted on the basis of their experience. Standards of conduct and examinations for admission to the Institute were drawn up, and members began using the professional designations "FCA" (Fellow Chartered Accountant, for a firm partner or proprietor in practice) and "ACA" (Associate Chartered Accountant, signifying a qualified member of an accountant's staff, or a member not in practice).
In the late 1800s, large amounts of British capital were flowing to the rapidly growing industries in the United States. Scottish and British accountants traveled to the U.S. to audit these investments, and a number of them stayed on and set up practice in America. Several existing American accounting firms trace their origins to one or more of these visiting Scottish or British chartered accountants.
City directories from the year 1850 list 14 accountants in public practice in New York, four in Philadelphia and one in Chicago. By 1886, there were 115 listed in New York, 87 in Philadelphia and 31 in Chicago. Groups of accountants joined together to form professional societies in cities across America. In 1887, the first national accounting society was formed - the American Association of Public Accountants, predecessor to the American Institute of Certified Public Accountants.
Into The Twentieth Century and Beyond
However prosperous, the United States was still an infant nation when the American Institute of Certified Public Accountants was formed. The Civil War ended with the U.S. still a predominantly farming-based economy. It was only the year before that the Apache chief Geronimo had surrendered to the federal authorities. The ensuing decades saw enormous economic growth as industry began to overtake agriculture in financial importance.
This period of growth also saw its share of financial scandals. Over-capitalization and stock speculation caused financial panics in 1873 and 1893. Watered railroad stocks were in the headlines, along with concerns about growing monopolies in several industries. Labor unions developed in response to corporate exploitation of workers. Congress responded by passing the first Interstate Commerce Act and the Sherman Antitrust Act, marking the beginnings of federal regulation of business. When Theodore Roosevelt became President after the 1901 assassination of William McKinley, he supported the use of governmental power to control the growing industrial monopolies and the price increases they caused.
The Roosevelt administration helped persuade Congress to establish the Department of Commerce and Labor to gather the facts needed to enforce antitrust laws. The Interstate Commerce Commission's powers over transportation were broadened, and the ICC established a uniform system of accounting - the first instance of accounting used as an instrument of federal regulation.
Unlike the British, who used the balance sheet in an effort to monitor management's use of stockholders' monies, American corporations of the early 20th century had no comparable history of losses from stock speculation. Rather, American balance sheets were drafted mainly with bankers in mind, and bankers of the era cared more about a company's liquidity than earning power.
Beginning in 1920, business practices began changing drastically as the U.S. went through an inventory depression in which wholesale prices fell 40 percent. Cash flow slowed, loans defaulted and credit became less available to corporations. In response, businesses sought financing from sources less tied to their current cash flow. The offering of corporate stock issues became a leading method of financing expansion.
As stockholders, rather than bankers, became the primary audience of financial statements, the income statement began to take center stage over the balance sheet. Other factors, such as the rise of income taxation and cost accounting, also shifted the focus to revenues and expenses.
At the turn of the century, there were at least four types of funds statements in use - those that summarized changes in cash, in current assets, in working capital and overall financial activities. Accountant H. A. Finney led the movement for use of a funds statement that focused on liquidity by tracking the sources of changes in working capital. He used a worksheet approach to highlight meaningful balance sheet changes by aggregating most of the fluctuations that affect working capital, and offered a standardized method for calculating them.
In the 1940s, the accounting profession increasingly used the funds statement to measure the actual flow of monies, rather than simply the sum of working capital changes between balance sheet dates. The funds statement increasingly became a staple for the financial statement and, in 1971, the American Institute of Certified Public Accountants began requiring its inclusion in stockholders' annual reports.
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Nowadays, with more than 330,000 members, the AICPA is the premier national professional association for CPAs in the United States. Their web site is full of useful resources, including the latest American accounting news, along with organization-specific materials.
Brown, Richard, ed. A History of Accounting and Accountants. Edinburgh: Jack, 1905.
Calhoun, George M. The Business Life of Ancient Athens. Chicago: University of Chicago Press, 1926.
Chiera, Edward. They Wrote on Clay. Chicago: University of Chicago Press, 1938.
Geijsbeek, John Bart. Ancient Double-Entry Bookkeeping: Lucas Pacioli's Treatise. Denver: University of Colorado, 1914.
Keister, Orville R. "Commercial Record-Keeping in Ancient Mesopotamia." Accounting Review 38 (April, 1963), 371-76.
Littleton, A. C. Accounting Evolution to 1900. New York: American Institute Publishing Co., 1933.
Peragallo, Edward. Origin and Evolution of Double Entry Bookkeeping, A Study of Italian Practice from the Fourteenth Century. New York: American Institute Publishing Co., 1938.
Weber, Charles. The Evolution of Direct Costing. Urbana: Center for International Education and Research in Accounting, 1966.
History and Development of Accounting Standards
Accounting has been around since the beginning of civilization. ¡§Accountants participated in the development of cities, trade, and the concepts of wealth and numbers.¡¨ (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 1800¡¦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. ¡§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.¡¨ (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.
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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 group determined that the APB must be dissolved and a new standard-setting structure be created. This structure is composed of three organizations: the Financial Accounting Foundation (it selects members of the FASB and funds and oversees their activities), Financial Accounting Standards Advisory Council (FASAC), and the major operating organization in this structure, the Financial Accounting Standards Board (FASB). FASB has 4 major types of publications. Statements of Financial Accounting Standards are the most authoritative GAAP setting publications. There are more than 150 issued to date. Statements of Financial Accounting Concepts, first issued in 1978 are a part of FASB conceptual framework project. Read about Ball and Brown Study
These seven concepts are not a part of GAAP. Interpretations modify or extend existing standards. There are about 50 interpretations published to date. Technical Bulletins are the forth type of publication and are guidelines on applying standards, interpretations, and opinions. Interpretations usually solve some very specific accounting issue that will not have a big, lasting affect. Generally accepted accounting principles (GAAP) are a collection of rules, procedures and conventions that define accepted accounting practice. GAAP is not written in law, although the SEC requires that it be followed in financial reporting by publicly traded companies.
Every day, accountants make judgments about how to record business transactions. GAAP are guidelines or, more precisely, a group of objectives and conventions that have evolved over time to govern how financial statements are prepared and presented. The Financial Accounting Standards Board, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission provide guidance about acceptable accounting practices. GAAP has four basic assumptions, four basic principles, and four basic constraints. These are the Statements of Financial Accounting Concepts.
The first of the four basic assumptions is the economic entity assumption, which assumes that the business is a separate entity because the revenues and expenses are kept away from personal items. This applies even for partnerships and sole proprietorships. The going concern assumption assumes that the business will be in operation for a long time. This validates the methods of asset capitalization, depreciation, and amortization. The monetary unit assumption assumes a stable currency is going to be used. The FASB accepts the US dollar as the monetary unit of record. The periodicity assumption assumes that the business operations can be recorded and separated into different periods.
This is required for comparison between present and past performance. FASB also created for basic principles for public accounting to follow. The first of which is the historical cost principle. This principle requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities. The revenue recognition principle requires companies to record revenue when it is realized or realizable and earned, not when cash is received. This way of accounting is called accrual basis accounting. The third principle is the matching principle.
Expenses must be matched with revenues as long as it is reasonable to do so. The last principle is called the full disclosure principle. The full disclosure principle states that any and all information that affects the full understanding of a company's financial statements must be include with the financial statements. Some items may not affect the ledger accounts directly. These would be included in the form of accompanying notes. Examples of such items are outstanding lawsuits, tax disputes, and company takeovers. The first of the four constraints is the cost-benefit relationship. The cost-benefit relationship states that the benefit of providing the financial information should also be weighted against the cost of providing it.
Materiality, the second constraint, states that significance of an item should be considered when it is reported. Materiality is based on weather or not the amount report will conceivably effect a third parties decision based on the information presented. The industry practice constraint states that accounting procedure should follow industry practices. This is important so that companies are easier to compare. Conservatism states that when choosing between two unfamiliar solutions, the conservative method should prevail. This is a simple concept that basically states that it is better to understate than to overstate financial information. In 1984 the FASB created the Emerging Issues Task Force, which deals with new and unusual financial transactions that have the potential for becoming common practice.
An example of an issue that would be addressed is accounting for Internet based companies. It acts more like a problem filter for the FASB and deals with short-term, quickly resolvable issues, leaving long-term, more pervasive problems for the FASB. During the 1990¡¦s there was a wide range of accounting scandals, which had not been seen in the past. It became evident that change was needed in the auditing profession. Auditors were being influenced by management at large corporations. SEC chairman Harvey L. Pitt made the following statement in a press statement on January 17, 2002: The past seven months have tested the mettle and resiliency of our country, our markets, and the investing public's confidence.
With the events of September 11th, the bankruptcy of Enron and, just last week, the indictment of Arthur Andersen, we have witnessed how critical our appropriately vaunted capital markets are to the strength, security and spirit of our Country and our economy. All Americans have felt, and continue to feel, the consequences of these events. In response to the unexpected and rapid bankruptcies of large companies such as the Enron Corporation and WorldCom, Inc., concerns about the integrity and reliability of financial disclosures, and the adequacy of regulation and oversight of the accounting profession, the Sarbanes-Oxley Act of 2002 was enacted into law on July 30, 2002. (Sarbanes)
The law is named after sponsors Senator Paul Sarbanes (D-MD) and Representative Michael G. Oxley (R-OH). It was approved by the House by a vote of 423-3. The Senate voted unanimously in favor (99-0). (Wikipedia) The foundation for this reform was the creation of the Public Company Accounting Oversight Board to oversee the audits of public companies. The PCAOB was given broad authority to regulate the auditing profession. The PCAOB has the authority to impose civil penalties, and possible permanent revocation of a firm¡¦s ability to audit public companies.
The potential impact of disciplinary actions was noted by former SEC Chief Accountant Lynn Turner, who told Securities Law Daily (August 27, 2004) that ¡§the PCAOB has to use these inspections to drive changes in the rules and, quite frankly, get tough on enforcement.¡¨ Looking high and low for any ¡§hot tip,¡¨ the PCAOB has even established online and telephone systems for anonymous tips and complaints. (Farrell) Over time, the importance of the PCAOB will only increase.
In October 2004, William McDonough (PCAOB Chairman) stated that more issuer restatements should be expected as the result of the 2004 inspections. The PCAOB is expected to grow to over 300 full time employees and 7 regional offices across the country. (Farrell) The PCAOB will likely expand its role, its responsibility, and its dedication to fulfill its mission to provide accurate and complete information to the investing public.
The accounting profession has grown and changed vastly based on the financial needs of the time. Accounting started with very basic inventory methods using stone markings in clay, and has evolved into a very complex combination of rules and regulations. The future of the profession is sure to see many more changes as the needs of investors and management change. What becomes apparent is that the future of accounting is extraordinarily bright. After all, so long as there are transactions, there will be the need for accountants to analyze, assess and recommend alternatives.
A case can be made that the reason the US is an international leader is the fact that we have such a well-developed system of accounting. As such, global investors can look at financial statements with a confidence that encourages more investment. We can take pride in knowing that one of our most important exports has been our system of financial reporting. No third world country can aspire to economic success without embracing rigorous accounting standards simply because no investor is likely to risk capital on a venture which cannot be quantified.
That is perhaps the greatest single problem that even countries as large as Russia and China must resolve. Without accounting, free enterprise cannot exist. As globalization continues, the role of the accountant takes on increasing importance in creating economic opportunities for every occupant of the world.
?«American Institute of Certified Public Accountants, Summary of AICPA Operations, August 21, 2005, ; http://www.aicpa.org/dues/summary.htm; ?«Farrell, James J. and Shadab, Houman B., The Focus of Future PCAOB Auditor Inspections, June 2005, ?«Giroux, Gary, A Short History of Accounting ; Business, ?«Kieso, Donald E., Weygandt, Jerry J., Warfield, Terry D., Intermediate Accounting 11th ed., Hoboken, N.J., 2004 ?«Library of Congress, America¡¦s story from America¡¦s Library, ?«Sarbanes, Paul S., PCAOB Selection Process, December 19, 2002, General Accounting Office Report, ?«Securities and Exchange Commission,
?«Smith, Murphy L., Luca Pacioli: The Father of Accounting, March 26, 2002, ; http://acct.tamu.edu/smith/ethics/pacioli.htm; ?«Solomons, David, Making Accounting Policy, New York; Oxford University, 1986 ?«Wikipedia, Sarbanes-Oxley Act, September 1, 2005,
History development of accounting principles
Callahan-Babylonian, Assyrian and Sumerian civilizations the producers of the first organized government in the world, and some f the oldest written languages and the oldest surviving business records; the Egyptian civilization - where scribes formed the pivots on which the whole machinery of the treasury and other departments turned; the Chinese civilization - with government accounting playing a key and sophisticated role of the great estate of Apollonian Introduced an elaborate system of responsibility accounting In 256 BC; and the Roman civilization - with laws requiring taxpayers to prepare statements of their balancing positions and with civil rights depending on the level of property declared by the citizens. The presence of these forms of bookkeeping In the ancient world has been attributed to various factors, including the invention of writing, the introduction of Arabic numerals and of the decimal system, the diffusion of knowledge of algebra, the presence of inexpensive writing material, the rise of literacy, and the existence of a standard of medium of exchange. The Development of Accounting Principles Various groups in the united States of America (USA), Australia and elsewhere, implementing a mix of approaches, have subjected accounting theory and principles to a constant re-examination and critical analysis.
In order to simplify the discussion, four phases of this process may be identified. In the first phase (1900-33), management had complete control over the selection of financial Information disclosed in annual reports; in the second phase (1933-59) and third phase (1959-731 the professional bodies played a significant role in developing principles; and in the fourth phase, which continues to the present, it has become increasingly noticeable that standard-setting bodies such as the Financial Accounting Standards Board (FAST) in the USA and the Australian Accounting Standards Board in Australia (SAAB) ND various pressure groups are moving towards a plasticization of accounting.
Management Contribution Phase (1900-33) The influence of management in the formulation of accounting principles arose from the increasing number of shareholders and the dominant economic role played by industrial corporations after 1900. The diffusion of share ownership gave management complete control over the format and content of accounting of ad hoc solutions to urgent problems and controversies. The situation generated dissatisfaction during the asses. Two Americans, William Z. Ripley and J. M. B. Huxley, ere particularly outspoken in arguing for an improvement in standards of financial reporting. Similarly, Adolph A. Berne and Gardener C. Means pointed to corporate wealth and the power of industrial corporations and called for the protection of investors.
In the United States, the main players of the time were a professional association of accountants, the American Institute of Accountant (AI), which in 1917 established a Board of Examiners to create a uniform certified practicing accountant (CPA) examination, and the New York Stock Exchange (NYSE), which from 1900 required all reparations applying for listing to agree to publish annual financial statements. A theoretical and a controversial debate of the period was the question of accounting for interest costs. The Abs's Discussion Memorandum on Accounting for Interest Costs traces the background of the interest as a cost controversy. Another important event of the era was the growing effect, on accounting theory, of taxation of business income.
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