Page 31 - Encyclopedia of Business and Finance

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Accounting: Historical Perspectives

managers were violating their fiduciary duties to the own- The national public accounting organization, the
ers. Additionally, because the late nineteenth century was American Association of Public Accountants (AAPA), was
a period of major industrial mergers, someone was needed incorporated in 1887. Reflecting the need of most profes-
to verify the reported values of the companies. The inde- sions for a code of ethics, the AAPA added a professional
pendent public accountant, a person whose obligation ethics section to its bylaws in 1907. The AAPA was reor-
was not to the managers of a company but to its share- ganized as the American Institute of Accountants (AIA).
holders and potential investors, provided the knowledge In 1921, the American Society of Certified Public
and skills to meet these needs. Accountants (ASCPA) was established and became a rival
In 1913, the responsibilities of and job opportunities to the AIA for leadership in the public accounting area.
for accountants again expanded with the ratification of The rivalry continued until 1937, when the ASCPA
the sixteenth amendment to the U.S. Constitution, which merged with the AIA. In 1957, the AIA became the Amer-
allowed a federal income tax. Accountants had become ican Institute of Certified Public Accountants (AICPA).
somewhat familiar with implementing a national tax with In contrast to the public accounting emphasis of the
the earlier passage of the Corporation Excise Tax Law. AIA and ASCPA, the National Association of Cost
Despite the earlier law, however, many companies had not Accountants (NACA) was founded in 1919. The NACA
set up proper systems to determine taxable income and placed an emphasis on the development of cost controls
few were familiar with concepts such as depreciation and and proper reporting within companies. In 1957, the
accrual accounting. NACA changed its name to the National Association of
As tax rates increased, tax services became even more Accountants (NAA) in recognition of the expansion of
important to accounting firms and often opened the door managerial accounting beyond traditional cost account-
to providing other services to a client. Accounting firms, ing. Then, in 1991, recognizing its emphasis on the man-
therefore, were often engaged to establish a proper agerial aspects of accounting, the NAA became the
accounting system and audit financial statements as well Institute of Management Accountants.
as prepare the required tax return.
Thus, in contrast to bookkeeping, which often had EXTERNAL AND INTERNAL
been considered a trade, the responsibilities of accounting REGULATION
had expanded by the early twentieth century to such an During the nineteenth century, the federal government
extent that it now sought professional status. One founda- generally allowed accounting to regulate itself. Then, in
tion of the established professions (e.g., medicine, law) 1913, Congress established the Federal Reserve System
was professional certification, which accounting did not and, one year later, the Federal Trade Commission (FTC).
have. In 1896, with the support of several accounting From this date forward, federal agencies have had an
organizations, the state of New York passed a law restrict- increasing impact on the profession of accounting.
ing the title certified public accountant (CPA) to those The government’s first major attempt at the formal-
who had passed a state examination and had acquired at ization of authoritative reporting standards was in 1917
least three years of accounting experience. Similar laws with the Federal Reserve Board’s publication of Uniform
were soon passed in several other states. Accounting. In 1918, the bulletin was reissued as Approved
Methods for the Preparation of Balance Sheet Statements.
PROFESSIONAL ORGANIZATIONS Although directed toward auditing the balance sheet, the
Throughout the history of accounting, professional report presented model income and balance sheet state-
ments. Because the proposal was only a recommendation,
organizations have made major contributions to the devel-
opment of the profession. For example, in 1882, the Insti- however, its acceptance was limited.
tute of Accountants and Bookkeepers of New York The impetus for stricter financial reporting was pro-
(IABNY) was organized with the primary aim of increas- vided by the collapse of the securities market in 1929 and
ing the level of educational resources available for the revelation of massive fraud in a company listed on the
accountants. In 1886, the IABNY became the Institute of New York Stock Exchange (NYSE). In 1933, the NYSE
Accounts, and it continued to be active in promoting announced that companies applying for a listing on the
accounting education for nearly twenty years. Meanwhile, exchange must have their financial statements audited by
the first national organization for accounting educators, an independent public accountant. The scope of these
the American Association of University Instructors in audits had to follow the revised guidelines set forth by the
Accounting (AAUIP), was organized in 1916. In 1935, Federal Reserve in 1929.
the AAUIP was reorganized as the American Accounting Another major innovation in the regulation of
Association. accounting was the passage of the Securities Act of 1933

8 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION