Accounting standards have in the wake of financial crises been bombarded with negative media attention for misleading investors and sweeping financial problems under the rug. To understand the history of the accounting standards and the standard-setting process, one must understand the accounting theory, which encompasses all the definitions, assumptions, and concepts, including how they are applied in the financial accounting and reporting (Riahi-Belkaoui, 2004). Therefore, the accounting standard-setting process can be considered as a highly analytical and constructive discipline that demands specific answers be they right or wrong. Within the context of company accounting and reporting, for instance, the choice of accounting methods and values are primarily informed by the accounting theory.
Accounting has a rich history dating back to over a hundred years ago when Luca Pacioli, a Franscisccan Monk invented the double-entry bookkeeping. In the years that followed, companies took the lead in improving financial accounting and reporting (FASB, 2013). The 1929 stock market crash, for instance, led to the calls for stricter financial regulations amid claims of misleading accounting and reporting that lead to the unprecedented crash and consequently the Great Depression. The pressure from investors led to the establishment of accounting standards, hence the founding of the American Institute of Accountants, the modern-day the American Institute of Certified Public Accountants (AICPA) in a bid to review and reform financial accounting and reporting requirements (FASB, 2013). In 1933, Securities Exchange Act was passed to restore investor confidence leading to the establishment of the U.S. Securities Exchange Commission (SEC) with the powers and responsibilities of standard-setting for financial accounting and reporting for listed companies (Accounting Foundation, 2017). Although the SEC has delegated rule-making to the private sector, it does not conform to specific standards, but has the powers to change a particular standard to conform to industry requirements.
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The Committee on Accounting Procedure (CAP was one of the first private-sector standard-setting bodies. Following a fierce criticism of its standard-setting approach, it was later replaced by the accounting Principles Board (APB). Although its rule-making approach was by far better than that of its predecessor, it would come under fire for lack of independence, as its board members had the backing of AICPA (Accounting Foundation, 2017). Given the importance of independence in standard-setting processes, APB was in 1973 reformed giving birth to Financial Accounting Standards Board (FASB). Compared to its predecessor, the FASB as currently constituted is composed of seven full-time members representing diverse interest groups, including the government, accounting profession, industry and educators. Financially supported and supervised by the Financial Accounting Foundation (FAF) the FASB established Government Accounting Standards Board (GASB) tasked with issuing standards federal financial accounting and reporting (Accounting Foundation, 2017). FASB also established Emerging Issues Task Force (EITF), which is tasked with identifying and responding to new trends in financial accounting and reporting issues, which are then published in EITF publications. This body is vital, as it makes the standard-setting process effective giving FASB space to concentrate on other long-term financial accounting and reporting problems.
Companies in the US both for profits and not-for-profits, governments, and other organizations that handle finances employ accounting standards to inform financial statements users to make investment decisions. Therefore, investors and lenders alike can use information provided by standard-setting bodies to decide where and when to invest and where to supply resources respectively (Riahi-Belkaoui, 2004). Donors and grantors also look up to this information to evaluate potential recipients of their financial help. Therefore, the guiding principles behind such information are clarity and comparability. The information must also be concise and representationally truthful to allow its wide range of users to make informed financial decisions (Accounting Foundation, 2017). The impacts of improvement of financial accounting and reporting reforms have be subject of scholarly studies, which all seem to attribute healthy investment to strict standard-setting rules and consequently improved financial accounting and reporting.
References
Accounting Foundation (2017). Accounting standards . Retrieved September 3, 2017 from <http://www.accountingfoundation.org/jsp/Foundation/Page/FAFSectionPage&cid=1351027541272>.
Financial Accounting Standards Board (FASB). (2013). Comparability in International accounting standards—a brief history . Retrieved September 3, 2017 from< http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156304264>.
Riahi-Belkaoui, A. (2004). Accounting theory. Boston, MA: Cengage Learning EMEA.
