Development of the

Institutional Structure of
Financial Accounting
Tria Ulfa (1501103010046)
Nadia Hudja (1501103010041)
Outline
• Historical background in USA
• Historical background in Indonesia
• How FASB differs from
• CAP
• APB

• Standards setting process

• Sarbanes-Oxley Act
• Liability crisis
Periods of Accounting Development in USA
Pre 1930

• Accounting largely unregulated

1930-1946

• Formative years, initiated by 1929

stock market crash

1946-1959

• Post-war period

1959 - present

• Modern period
Accounting in USA priod to 1930

• Unregulated
• Accounting practices and procedures used were considered confidential,
lack of uniformity
• 1886: American Association of Public Accountants (AAPA) formed
• 1905: The Journal of Accountancy founded by AAPA

• American Institute of Accountants (AIA) was formed in 1916 from the old
AAPA
• took a unified national outlook relative to issues such as examinations and
qualifications
• name later changed to the American Institute of Certified Public Accountants (AICPA)
in 1957
Stock Market Crash of 1929
• Investors began to question the adequacy of accounting
and reporting practices
• Accounting reports
• Based on widely varying accounting practices
• Frequently misleading
Formative Years: 1930-1936
• NYSE/AICPA
• 1933: AICPA formed Special Committee on Development of Accounting Principles
• Cooperative effort to develop accounting principles to be followed by all companies
• 1st formal attempt to develop GAAP
• Concept allowed corporations to choose those methods and procedures most appropriate
for them within GAAP

• Securities & Exchange Commission (SEC)

• Created in 1934 to administer the Securities Act of 1933
• Eventual message (April 25, 1938) was that unless the profession established an
authoritative body for the development of accounting standards,
• the SEC would do so and
• SEC would mandate the required reports
Formative Years: 1936-1946
• Committee on Accounting Procedures (CAP) formed
1936
• Used primarily inductive approach to developing accounting
rules

• Uniformity improved significantly

• Private sector was firmly established as the source for
accounting policy making in the USA
 Postwar Period: 1946-1959
• Number of stockholders in USA
• 1940: 4 million
• 1952: 7 million
• 1962: 17 million

• Committee on Accounting Procedures (CAP)

• Created an ”oversupply” of ”good” accounting principles
• Devoted its time to solving problems on a piecemeal approach without developing fundamental
principles of accounting
• No underlying accounting theory
Modern Period: 1959-present
• 1959-73: APB and Accounting Research Division
• APB form similar to CAP
• Accounting Research Division published Accounting Research Studies (ARSs)
• Criticisms of APB opinions

• 1973-present: FASB
• Independent of AICPA
• Was to establish standards in the most efficient and complete manner possible
• Launched the conceptual framework project
• Operations differ from CAP and APB
Historical background in Indonesia
Compare CAP, APB, and FASB

Independence CAP APB FASB

Organization Part of AICPA Part of AICPA Sepatae from AICPA

Other full-time Other full-time Full-time FASB

Members
employee employee employee
Compare CAP, APB, and FASB

Characteristic CAP APB FASB

Breadh of
Must be CPA Must be CPA Need not be CPA
Membership

More extensive open

Due Process Litle if any Very limited
hearings
 Compare CAP. APB, and FASB

Characteristic CAP APB FASB

Theoretical Conceptual
Postulates and
document supporting Not attempted framework
principles failed
standards completed

Main use was

Research usage Very limited More extensive
probably in ARSs
FASB’s Standard-Setting Process
Sarbanes-Oxley Public Company Accounting
Reform and Investor Protection Act of 2002
• Established Public Company Accounting Oversight Board (PCAOB)
• Regulatory body of public accounting firms
• Overseen by SEC
• Register & inspect public accounting firms
• Set audit standards

• Step away from self-management by the profession

Sarbanes-Oxley Public Company Accounting
Reform and Investor Protection Act of 2002
• Act is in response to series of high profile corporate accounting scandals;
objective is to restore investor confidence.

• Requires FASB funding to be an assessment from annual fees, not contributions.

• Significant loss of independence
• Funding is dependent on recognition by SEC
Liability Crisis
• Pressure to turn the audit into a fraud detection exercise
• Joint and several liability allows that a single defendant
may be held liable for the entire loss attributable in a
specific case