How the U.S. Accounting Profession Got Where It Is Today: Part I

1. How the U.S. Accounting Profession Got Where It Is Today: Part I John T. Rigsby Business Assurance

2. 1. Why did the American auditing profession emerge? • Prior to 1930’s no laws required an audit • 1913 Congress passed first Revenue Act increasing complexity and need to keep good records • 1924 Board of Tax Appeals authorized CPAs to practice before it, as well as lawyers • Federal agencies sought its advice because of their growing reputation • Began establishing auditing standards for FTC and FRB, and first authoritative standards issued in 1929 at the request of the FRB • By 1926 more than 90% of the companies on the NYSE were audited

3. 1.What were some of its important characteristics? • Growing stature and reputation • Increasing reliance in establishing accounting and auditing standards by federal and state agencies • Large degree of influence in setting professional standards • Served in growing number of governmental position and emerged as prominent public figures

4. 1.What were some of the services offered? • Consulting services have always been offered by CPA firms • Accounting, auditing and tax, though, constituted the solid core of the firms’ services

5. 2.Why and how did ‘GAAP’ develop? • Following the 1929 stock market crash, a committee of the Institute proposed ‘five broad principles’ of accounting, which were officially approved in 1936 by vote of membership • The Securities Act of 1933 and the Securities Exchange Act of 1934 established the SEC and required F/S audits of cos listed on stock exchanges; the SEC delegated the establishment of acct principles to the Institute • In 1937/8, the Institute established the Committee on Accounting Procedures to issue Bulletins establishing substantial authoritative support for acct principles

6. 2. Why did CAP develop and what brought its demise? • The federal government, represented by the SEC, needed a body of experts to establish accounting principles and narrow the areas of differences by delineating an acceptable range of of accounting practices. • The SEC had neither the resources, the expertise, nor the process required to establish substantial authoritative support for a body of accounting principles • The Institute and the CAP worked with the SEC in establishing a process generating authoritative support for a recognized range of accounting practices • In the 1950s. Leonard Spacek criticized CAP as inadequate in narrowing differences of opinion; established APB and undertook basic and applied research as well as issue pronouncements on GAAP

7. 2. Why did the APB develop and what brought about its demise? • The APB was charged to do basic research and reduce the range of acceptable practice to a much greater extent • During the 1960s there was a vibrant dialogue on accounting principles by practitioners, academics and others • The corporate mergers of the 1960s placed pressure on executives to deliver earnings performance and reduced the number of publicly traded cos, placing pressures on partners • Clients began pressuring partners, the SEC and Congress to resist the APBs new standards, as a result of which the APB suffered several stunning reversals and the loss of credibility • Criticized for too many detailed, cookbook rules that could be circumscribed by clients • Early 1970s, the FASB was established outside of the Institute

8. 2. Why did FASB develop? • FASB developed to try to overcome some of the limitations of the APB • Outside of AICPA, full-time members with large research staff, and financial support of FAF • During its first five years it also had a rocky road with the SEC and had to deal with a very political environment

9. 2. How has it managed so far to keep the SEC and Congress at bay so that it has been able to survive? • Establishment of a public process by which accounting standards are developed involving input from all parties that would be affected and delaying controversial decisions until greater unanimity could be found

10. 3. Why and how did ‘GAAS’ develop? • In 1939 the Institute established a standing committee to promulgate bulletins on auditing procedures • In 1947 the Committee on Auditing Procedures recommended a set of 10 ‘GAAS’ and developed auditing standards over the years to regulate the audit profession • During the 1970s, Rep. Moss and Sen. Metcalf attacked the ability of the auditor to be independent of their clients; they died or retired before anything was done, though • The Institute sought to better regulate itself by the establishment of the Division of CPA Firms to fend off possible governmental regulations and also installed a Public Oversight Board to oversee the activities of the SEC Practice Section, including quality control standards and peer reviews

11. 3.What are some of the compromises reached with the Justice Dept and FTC in the 1970s? • Portions of its Code were deemed to be in restraint of trade • By 1979, Institute compelled to drop its advertising ban and to allow contingency fees and commissions so long as not an attest relationship with client • Profoundly changed the climate of the firms and competition among them became more intense and vicious • ‘Locked in a fierce battle marked by vigorous price cutting’ • Mason blamed the FTC and the Justice Dept for creating this ‘unprofessional and undignified atmosphere’ • Resulted in deep cuts in audit fees in the 1980s

12. 3. What are some of the factors that have caused the audit profession to be accused of shifting from a profession perspective to a market perspective? • Declining number of publicly traded companies with increased mergers • Emphasis by client’s executives on enhanced performance • Increased amount of competition among firms resulting in much lower audit fees • A large increase in the amount of consulting fees and a substitution of consulting services fees for the smaller audit fees

13. 4. Why has the ‘scope of services’ been a problem for the audit profession? • As a larger portion of the firms’ fees came from consulting, the auditor’s ability to be independent of the client comes into question • Auditing just become a feeder activity that leads to consulting where there real money is • Brings up the question at what point does the auditor lose their ability to be objective and independent of the client since to insist upon adequate evidence to support the audit opinion might lose the client and the consulting fees?

14. 4. How has the way in which the profession has dealt with scope of services changed over time? • The profession has consistently said that consulting does not affect the ability to do an audit; a Chinese wall was built by Andersen and adopted by other firms to separate consulting from auditing activities • The SEC required publication of the amount and type of consulting services for a time, but it was rescinded with the Reagan years • The firms went back to saying that consulting had no effect until Enron resulted in Sarbane-Oxley, which limits the types of consulting services that may be performed and requires approval by the Board of Directors of the client