Evolution of U.S. GAAP: The Political Forces Behind Professional
Stephen A. Zeff
2005 - As we enter the fifth year of a new millennium, which
is also the 75th year of publication for The CPA
Journal, an assessment of the path of accounting standards
setting over the previous 75 years should enhance our ability
to deal responsibly with the challenges of the next decades.
This commentary on the evolution of U.S. GAAP will be presented
in two parts. The first covers the years from 1930 to 1973.
The second, which will appear in the February issue, covers
the years from 1973 to the present. The commentary and analysis
should be interpreted in the context of several important
concurrent trends in business and economics over the same
The expanding public interest in accounting standards,
reflecting increased participation in the equity capital
markets and improvements in the coverage of accounting
by the financial media.
The increased incidence of business combinations, creating
multinational and conglomerate enterprises.
The great volatility of equity markets and enterprise
The increased pressure placed on corporate executives
for revenue and earnings performance, leading to the emergence
of “managed earnings.”
The arrival of the postindustrial economy, which is oriented
toward services rather than manufacturing, and the increasing
importance of intangible assets, which are largely absent
from company balance sheets.
the following comments on noteworthy developments in U.S.
GAAP from 1930 to 1973, the focus is deliberately on incidents
that represented important changes in practice or in the
way in which accounting principles and standards were set.
The incidents are typically those for which interesting
stories can be told about the underlying factors that led
to the developments. Many of these stories involve efforts
by the preparers of financial statements, or by a branch
of government, to engage politically to promote their narrow
interests: for example, to present a more favorable earnings
picture or to promote the effectiveness of government fiscal
policy. This is not to imply that U.S. accounting standards
do not truly reflect the application of sound concepts,
undiluted by political lobbying; many do. But because these
principled standards have emerged in a natural progression
from underlying concepts, their stories often are not as
interesting—or as revealing about the influence that
government and the broader business climate have on the
accounting profession—as those standards that have
been driven by politics.
the stock market crash of 1929, an American Institute of
Accountants’ (AIA) special committee, in correspondence
with the New York Stock Exchange, recommends five “broad
principles of accounting which have won fairly general acceptance”
and introduces the phrase “[the financial statements]
fairly present, in accordance with accepted principles of
accounting consistently maintained” in the auditor’s
report. These five broad principles, along with a sixth,
are approved by the AIA membership. The purpose is to improve
The AIA committee said in its recommendation, “Within
quite wide limits, it is relatively unimportant to the investor
what precise rules or conventions are adopted by a corporation
in reporting its earnings if he knows what method is being
followed and is assured that it is followed consistently
from year to year.” This policy reflected that of
Price, Waterhouse & Co., a firm with British roots,
which advocated a “disclosure” approach to accounting
completes approval of two major Securities Acts to restore
public and investor confidence in the fairness of the securities
markets after the stock market crash of 1929, and creates
the Securities and Exchange Commission (SEC) with authority
to prescribe “the methods to be followed in the preparation
of [financial] reports.” The SEC becomes a strict
regulator and insists on comparability, full disclosure,
and transparency. In 1935, the SEC creates the Office of
the Chief Accountant. The SEC insists upon historical cost
accounting so that the financial statements do not contain
of the important units created in the SEC is the Division
of Corporation Finance (DCF), which is charged with reviewing
filings by companies to determine whether they satisfy the
SEC’s requirements, especially for conformity with
proper accounting, full disclosure, and comparability.
The United States is the only country where the government
regulator charged with securing compliance with GAAP was
established and began its operations before an entity was
created to determine GAAP. In most other countries, an entity
to determine GAAP was established years or even decades
before the government created a regulator to secure compliance
with GAAP, if such a regulator exists.
DCF reviews the financial statements in both periodic filings
(on a sampling basis) and prospectuses. The DCF writes deficiency
letters to companies, raising questions about certain accounting
and disclosure practices. If the company cannot satisfy
the DCF’s concerns, the company must revise and reissue
its financial statements accordingly. If the company were
to fail to do so, the SEC can stop the trading of the company’s
securities or forbid the public offering of its securities.
No securities commission anywhere in the world possesses
and uses such extensive authority to regulate financial
reporting as the SEC.
its founding, the SEC rejected any deviation from historical
cost accounting in the body of financial statements. This
position was a reaction to a widespread practice during
the 1920s (prior to federal regulation) wherein listed companies
would revalue their assets upward, often based on questionable
evidence of market value. The abuse of this discretion,
especially in the public utility field, was alleged to have
misled investors when judging the values of their shares
prior to the crash of 1929. The SEC was determined not to
allow a repetition of this abuse of judgment. The SEC’s
unyielding policy on historical cost accounting persisted
until 1978, when, for the first time, it proposed a requirement
that oil and gas reserves be periodically revalued, with
the change taken to earnings.
AIA publishes Examinations of Financial Statements,
which introduces the term “generally accepted accounting
principles,” known as GAAP.
SEC issues its first Accounting Series Release, which conveys
its views on accounting and auditing. (The series becomes
known as Financial Reporting Releases in 1982.)
SEC, by a narrow vote, supports a reliance on the private
sector to establish GAAP. Under pressure from the SEC’s
chief accountant, the AIA’s Committee on Accounting
Procedure (CAP) begins issuing Accounting Research Bulletins
(ARB) to provide the SEC with “substantial authoritative
support” for proper accounting practice. The CAP is
composed of 18 practitioners and three accounting academics,
all serving on a part-time basis, with a small research
staff. Dissents are to be recorded.
The SEC has never delegated authority to establish accounting
principles, or to set accounting standards, to the private
sector. By law, it cannot delegate that authority. It has
typically said that it looks to the private sector for leadership.
The SEC can overrule the private-sector body, and its accounting
staff has regularly maintained frequent contact with the
CAP and its successors. (The Sarbanes-Oxley Act of 2002
finally permits the SEC to recognize a private sector accounting
standards setting body and establishes a public funding
mechanism for it.)
permits companies to use a new inventory method, LIFO (last
in first out), for income tax purposes, but only if LIFO
is also used in all corporate reports. There is immediate
pressure to allow LIFO for financial reporting purposes.
This is one of the very few instances in which tax
policy has influenced GAAP. Congress acted in 1938 to avoid
penalizing corporate taxpayers that purchased nonferrous
metals, such as copper, zinc, or antimony, whose price fluctuated
widely. LIFO availability was expanded in 1939 for use by
all corporate taxpayers. Under FIFO (first in, first out),
they paid excessive income taxes in some years and were
not able to obtain refunds in loss years, because of the
time lag between purchase and sale. Because LIFO was a novel
accounting method, Congress was skeptical of its validity
as a measure of income; hence, it imposed the LIFO conformity
rule. Companies wanted to save taxes by using LIFO, and
placed great pressure on the accounting profession to also
accept it for financial reporting purposes, which it did.
AIA committee recommends the wording “present fairly
… in conformity with generally accepted accounting
principles” in the standard form of the auditor’s
Unlike the United Kingdom, where the “true and fair
view” is stipulated in the Companies Acts as the overriding
standard that financial statements must attain, “present
fairly” in the United States has never been mentioned
in federal legislation related to the auditor’s opinion.
As a practical matter, “in conformity with generally
accepted accounting principles” has implied “present
fairly.” The term “principles” in GAAP
refers to both principles and practices.
American Accounting Association (AAA) publishes Professors
W.A. Paton and A.C. Littleton’s monograph An Introduction
to Corporate Accounting Standards, which is an eloquent
defense of historical cost accounting. The monograph provides
a persuasive rationale for conventional accounting practice,
and copies are widely distributed to all members of the
AIA. The Paton and Littleton monograph, as it came to be
known, popularizes the matching principle, which places
primary emphasis on the matching of costs with revenues,
with assets and liabilities dependent upon the outcome of
The Paton and Littleton monograph reinforced the revenue-and-expense
view in the literature and practice of accounting, by which
one first determines whether a transaction gives rise to
a revenue or an expense. Once this decision is made, the
balance sheet is left with a residue of debit and credit
balance accounts, which may or may not fit the definitions
of assets or liabilities.
monograph also embraced historical cost accounting, which
was taught to thousands of accounting students in universities,
where the monograph was, for more than a generation, used
as one of the standard textbooks in accounting theory courses.
the decade, the CAP frequently allows the use of alternative
accounting methods when there is diversity of accepted practice.
Most of the matters taken up by the CAP during the first
half of the 1940s dealt with wartime accounting issues.
It had difficulty narrowing the areas of difference in accounting
practice because the major accounting firms represented
on the committee could not agree on proper practice. First,
the larger firms disagreed whether uniformity or diversity
of accounting methods was appropriate. Arthur Andersen &
Co. advocated fervently that all companies should follow
the same accounting methods in order to promote comparability.
But such firms as Price, Waterhouse & Co. and Haskins
& Sells asserted that comparability was achieved by
allowing companies to adopt the accounting methods that
were most suited to their business circumstances. Second,
the big firms disagreed whether the CAP possessed the authority
to disallow accounting methods that were widely used by
CAP issues ARB 29, which allows FIFO, LIFO, and average
costing for inventories; LIFO is accepted primarily because
of its acceptability for income tax purposes.
This was the practical effect of the pressure brought by
major companies in the late 1930s and early 1940s to allow
LIFO as part of GAAP. In ARB 43, which in 1953 codified
the previous ARBs on accounting, LIFO was again allowed
as an accepted accounting method, and it still is today.
CAP issues ARB 32, which favors the current operating performance
concept of the income statement, displaying unusual and
extraordinary items after net income; the SEC chief accountant,
favoring the all-inclusive income statement, threatens not
to enforce the ARB.
This difference in view reflected the SEC’s skepticism
that companies could be trusted to use balanced and fair-minded
judgment to distinguish between ordinary and extraordinary
items in the income statement.
pressure from some major companies, the CAP opposes use
of inflation-adjusted depreciation expense except in supplementary
disclosures, a view that the SEC supports. The CAP reaffirms
this view in 1953. In 1947 to 1949, major companies try
to persuade Congress to allow replacement cost depreciation
for income tax purposes, and they hope that an ARB in support
of that position would strengthen their argument. The companies
are also trying to resist labor unions’ claims for
wage increases based on overstated profits during a period
of sharp inflation.
A deeply ingrained belief in historical cost accounting
facilitated the CAP’s decision to reject the recording
of inflation-adjusted depreciation in income statements,
contrary to the lobbying by major companies. The CAP knew,
moreover, that the SEC would not allow companies to use
inflation-adjusted depreciation in determining income even
if it had approved of the practice. It was important to
CAP members to retain its credibility with the SEC.
1950, the CAP attempted to propose an upward revaluation
of assets for companies in inflationary times, using as
an analogy the accepted accounting method of revaluing assets
downward (today’s impairments) for companies facing
severe financial and economic difficulties. But the SEC
made it known that it would oppose any upward valuations,
and the CAP abandoned its attempt.
amends the Internal Revenue Code (IRC) to allow companies
to use accelerated historical cost depreciation for income
tax purposes. Many companies adopt faster depreciation for
taxes but continue to use straight-line depreciation for
financial statements, making deferred tax accounting an
This was an indication that Congress and the Treasury
Department shared the SEC’s view that deviations from
historical cost accounting were to be avoided because they
were difficult to monitor. Therefore,
the legislation allowed accelerated historical cost depreciation,
which, it was assumed, would approximate replacement cost
depreciation in the early years of an asset’s useful
life. This was a belated attempt by Congress to meet companies’
criticisms that they were being taxed on capital. This difference
between depreciation for accounting and for income tax purposes
is what led the CAP to discuss whether deferred tax accounting
was appropriate, or indeed required, when the difference
was due solely to timing.
Spacek, the managing partner of Arthur Andersen & Co.,
begins to criticize the CAP for allowing alternative accounting
methods. This reflects a philosophical split among big accounting
firms: uniformity versus flexibility.
Spacek became a frequent critic of the CAP’s reluctance
to reduce, or eliminate, the number of optional accounting
ARB 48, the CAP allows the pooling-of-interests method for
business combinations in the presence of certain “attendant
This was one of several controversial subjects that
the CAP attempted to address during the 1950s in the face
of criticism for allowing optional accounting methods. The
pooling-of-interests method was advocated by companies engaging
in mergers and acquisitions so that they would not have
to revalue (usually upward) the carrying amounts of merchandise
inventories and fixed assets acquired and thus reduce the
amount of current and future earnings for the combined entity.
In ARB 48, the CAP established a number of criteria for
distinguishing between poolings and purchases, but it was
not long before these criteria were largely ignored and
only weakly enforced by the SEC.
ARB 44 (Revised), the CAP favors deferred tax accounting
when tax depreciation exceeds depreciation for financial
This was a courageous bulletin on a controversial subject,
yet it dealt only with the tax and financial reporting differences
relating to depreciation, and it was not expressed as categorically
as some would have liked. The CAP did not specify whether
the deferred tax credit account was a liability or part
of shareholders’ equity. Shortly afterward, the SEC’s
chief accountant asked the CAP to clarify the balance-sheet
treatment of the credit. The country’s largest electric
power company subsequently brought a lawsuit to enjoin the
CAP from issuing the clarification, alleging that classification
of the credit as a liability would cause irreparable injury
to the company because of an adverse effect on its debt-equity
ratio. The U.S. Supreme Court ruled that the CAP had the
right to give its opinion on the matter. The CAP then announced
that the deferred tax credit should be shown as a liability.
This incident illustrates how far an industry critic can
go when attacking the authority of the entity that establishes
by Spacek’s criticisms, the Institute (known as the
American Institute of Certified Public Accountants, or AICPA,
from 1957 onward) appoints a special committee to review
the role of research in establishing accounting principles.
The committee proposes an Accounting Principles Board (APB)
to succeed the CAP. The APB comes into existence in 1959
as a senior technical committee of the Institute, and by
the following year its 21 members include representatives
from all of the Big Eight accounting firms, as well as accounting
academics, financial executives, and other accounting practitioners.
Dissents are again to be recorded. The APB is charged with
“narrowing the differences in accounting practice,”
which effectively means “stop allowing so many optional
AICPA Council insists that all of the Big Eight firms be
represented on the APB. The AICPA also creates an Accounting
Research Division that is to conduct research to support
the APB Opinions. Eventually, 15 Accounting Research Studies
are published under the aegis of the APB.
Because of the increasing pressure from companies on
members of the CAP, it became evident that company financial
executives had to be brought into the process for establishing
GAAP. Consequently, for the first time financial executives
were appointed to the committee responsible for establishing
proper accounting practice. As with the CAP, all of the
members of the APB had to be CPAs. Toward the end of the
APB’s life, a financial analyst was appointed to the
was a time when Americans were placing their faith in research.
In 1957, the Soviet Sputnik had beaten the United States
into space, and America responded by taking major steps
to enhance the quality of education in the sciences and
engineering, and also to strengthen the country’s
research base in all technical fields. This support carried
over into other fields, including accounting. The new APB
was expected to prepare and issue research studies prior
to developing its Opinions, and its first research assignment
was to develop a conceptual framework as the basis for its
future work. Research, it was believed, was the most promising
means for resolving the intractable philosophical differences
between leaders of the accounting profession.
APB’s accounting research staff issues Accounting
Research Studies 1 and 3, on basic accounting postulates
and broad accounting principles. They are intended to constitute
the conceptual basis for future APB Opinions that will narrow
the areas of difference. The study on principles, however,
advocates current value accounting for inventories and fixed
assets, which, the APB asserts in a special Statement, is
“too radically different from present [GAAP] for acceptance
at this time.” Studies 1 and 3 fail in their mission
to serve as the conceptual basis for future APB Opinions.
Once again, the central question of historical cost
accounting versus current value accounting was raised. The
SEC chief accountant, as well as two previous chief accountants,
all of whom served on the advisory panel for Studies 1 and
3, expressed their unqualified opposition to any deviation
from historical cost accounting. Because of the way in which
CPAs had been educated since at least the late 1930s, few
knew anything about current value accounting, and they often
rejected it because it went beyond their acquired expertise.
In the 1960s, a number of leading accounting academics—Baxter,
Edwards and Bell, Solomons, Chambers, and Sterling—wrote
articles and treatises advocating one or another version
of current value accounting, but their messages were not
received favorably by firms, the SEC, or the APB.
Congress enacts an investment tax credit in order to stimulate
the purchase of equipment and machinery by companies, the
APB issues Opinion 2 (in a close vote, four of the Big Eight
dissent), which requires that the credit be subtracted from
the asset cost and not be included in current earnings.
Under pressure from accounting firms, industry, and the
Kennedy Administration, the SEC announces it will allow
either accounting method to be used by companies. The APB
is similarly defeated on accounting for the credit on two
subsequent occasions, in 1967 and 1971, because of intense
lobbying by industry.
The SEC’s decision embarrasses the APB. This was the
first instance in which both government and industry opposed
an ARB or an APB Opinion. The controversy and discord stirred
by this episode led the financial press to pay more attention
to financial reporting than ever before. In turn, this coverage
made companies more aware of the APB’s efforts to
reduce accounting options, which companies interpreted as
meaning the removal of some of their flexibility in the
choice of accounting methods. To many, the disagreement
over the accounting treatment of the investment tax credit,
which arose on three occasions between 1962 and 1971, was
the epitome of political interference in the establishment
of accounting principles. In the government’s view,
it was a matter of providing companies with an incentive,
including an accounting incentive, to stimulate the growth
of the economy. The companies themselves wanted to report
higher accounting earnings in times of an economic malaise.
Opinion 5 establishes criteria for the capitalization of
financing leases by lessees, but few lessees actually capitalize
the cost and recognize the corresponding liability for long-term
financing leases. The leasing industry had opposed a stronger
set of criteria.
Leasing as an instrument for long-term financing became
a growth industry in the 1950s. One of the appealing arguments
made by the leasing industry was that the leasing of long-lived
assets, instead of issuing bonds and buying them, would
keep the asset and the corresponding liability off the lessee’s
balance sheet. Thus was born off–balance sheet financing.
Protecting its own self-interest, the leasing industry lobbied
the APB not to establish accounting principles that would
make leasing less attractive to potential lessees.
U.S. securities market begins to become even more competitive,
and the decade is one of numerous multinational and conglomerate
mergers. The financial press begins following accounting
controversies more closely. The SEC Chairman begins criticizing
the APB for not narrowing the areas of difference in accounting
practice, and suggests that, if the APB does not do so,
the SEC will do so itself.
Congress had authorized the SEC in 1934 to establish
proper accounting practice, and in the 1960s the SEC was
becoming impatient with the APB’s slow progress in
promoting comparability. The
SEC’s usual way of inciting the APB into more aggressive
behavior was to threaten that it might begin establishing
accounting principles itself. Leaders of the accounting
profession were united in the view that this process should
remain in the private sector. Of course, the SEC did issue
occasional Accounting Series Releases on accounting matters,
and it could exercise influence over the general direction
of the APB’s deliberations. The SEC was not a passive
observer of the process, but it preferred that the private
sector take the initiative for establishing accounting principles.
Moreover, the accounting firms were willing to underwrite
the substantial cost of the process through their support
of the AICPA.
issues Opinion 8, which establishes the principle that pension
liabilities during the period of employee service be shown
in balance sheets, but the application of the Opinion does
not result in many companies reporting more pension liabilities.
1973, 1974, 2002
treatment of unusual or extraordinary items had always been
fraught with difficulty. In Opinion 9, on reporting the
results of operations, the APB finally endorses the SEC’s
preferred all-inclusive income statement, although it says
that extraordinary items should be reported separately.
Companies had preferred to place extraordinary news that
was bad in the earned surplus statement, and extraordinary
news that was good in the income statement. Under APB Opinion
9, companies began rationalizing good news as ordinary and
bad news as extraordinary. In 1973, APB Opinion 30 establishes
a “Discontinued Operations” section of the income
statement and defines extraordinary so narrowly that the
classification no longer exists as a practical matter. In
1974, FASB’s SFAS 4 designates gains and losses on
the premature extinguishment of debt as extraordinary. In
2002, SFAS 145 rescinds SFAS 4.
This sequence of developments served to confirm the SEC’s
belief that companies could not be trusted to use their
discretion to make balanced and fair-minded judgments on
accounting treatments when given such flexibility.
issues Opinion 11, on deferred tax accounting by the thinnest
majority, which narrows the areas of difference on this
This was one of the APB’s successes. Industry opposed
this pronouncement vociferously, and companies placed pressure
on their audit firms to vote against it. Several days after
the final vote was cast, one of the Big Eight members in
the majority signified that it was changing its vote. The
Opinion was already being printed, and the APB’s decision
had been announced. To resolve this crisis, the AICPA president
called an urgent meeting of the APB members and managing
partners of the Big Eight, where it was made clear that
once a vote was cast at a board meeting, it was final. In
the end, it was agreed that the original vote to approve
the Opinion would stand. This vividly illustrates the pressures
that would build on the major accounting firms when optional
accounting methods were to be disallowed in an Opinion.
process of narrowing the areas of difference was a wrenching
experience within the accounting profession, because some
firms, including Price Waterhouse and Haskins & Sells,
opposed the Opinion because they disagreed in principle
with deferred tax accounting.
issues Statement 2, on segment reporting. Because the issue
is so sensitive among companies, due to the many conglomerate
mergers, the APB does not mandate that companies disclose
segment revenues and profits. The Financial Executives Institute
(FEI) undertakes a major research study on the subject whose
purpose is to persuade the SEC not to make any hasty rules
on the sensitive subject.
in 1969, because of the APB’s failure to issue an
Opinion, the SEC adopts a segment reporting requirement
for new issuers, and later extends it to all companies filing
annual reports. In 1976, FASB, the APB’s successor
body, will issue a standard on the subject.
Mergers and acquisitions during the 1960s created conglomerate,
or diversified, enterprises. The question arose: How well
were their respective product lines performing in these
new combinations? Citing competitive reasons, the companies
did not wish to disclose their revenues or earnings by product
line. Investors nonetheless sought out that information.
Because of pressures from industry, the APB could only manage
to issue a nonbinding Statement, not a binding Opinion,
on the subject. The pressure on the SEC to take action itself
came not from the user community, but from Congress.
1966, the Senate Subcommittee on Antitrust and Monopoly
held a public hearing on the economic efficacy of conglomerate
mergers. One of its witnesses, an economist, contended that
it was difficult to evaluate their effectiveness without
information about the profitability of their product lines.
The subcommittee’s chairman asked if the SEC would
be requiring the public disclosure of such information,
and the SEC chairman said that it had no such plans but
that it possessed the authority to do so. Not long thereafter,
reacting to pressure from the subcommittee’s chairman
(who was a powerful figure in Congress), the SEC chairman
made it known that he wanted to see the private sector take
the lead in recommending disclosures of conglomerate companies’
product-line information. Statement 2, weak though it was,
was the APB’s response. Although FEI sponsored a major
research study to provide the SEC with guidance, in the
end, the SEC acted unilaterally.
SEC requires, for the first time, a Management’s Discussion
and Analysis of Operations (MD&A), a narrative discussion
of the risks and uncertainties facing a company, including
their implications for its future liquidity and solvency.
In 1974, 1980, and later, the SEC expands the required disclosures
to be contained in the MD&A.
The economic environment and the makeup of business enterprise
were becoming increasingly complex and more susceptible
to unpredictable change, both domestically and internationally.
The SEC concluded that investors required a narrative discussion
of risks and uncertainties that could not be conveyed in
the financial statements and footnotes.
APB issues Opinions 16 and 17, on business combinations
and intangibles, following intense lobbying by industry
and government either for or against the pooling-of-interests
accounting and the mandatory amortization of goodwill over
a defined useful life. Pooling of interests is continued
in specified circumstances, and the APB minimizes the negative
impact on net income by amortizing intangibles over 40 years.
Coming at the end of a decade marked by a record number
of mergers and acquisitions, Opinions 16 and 17 were preceded
by unprecedented corporate lobbying. The FEI blanketed the
nation’s press with news releases critical of the
APB, and lobbied Congress and the SEC as well. One branch
of government advocated the elimination of pooling-of-interests
accounting, if only to stem the tide of mergers and acquisitions.
The Big Eight themselves were divided and were under pressure
from their audit clients. A final vote, by the narrowest
majority, in support of an Opinion on business combinations
and goodwill was thwarted when one of the Big Eight changed
its mind several weeks after the vote was taken. In order
to obtain sufficient majorities on both subjects, the subjects
had to be treated in two Opinions, drafted at the last minute.
No one was satisfied with the high-pressure environment
in which these matters were resolved.
APB issues Statement 4, Basic Concepts and Accounting Principles
Underlying Financial Statements of Business Enterprises.
This was originally intended to be a mandatory Opinion,
and was to be the successor to the APB’s failed conceptual
framework, Accounting Research Studies 1 and 3. By issuing
an advisory Statement, the APB betrays the deep division
of opinion among its members over the formulation of a conceptual
Arthur Andersen & Co. held strongly the view that
progress could not be made on controversial accounting issues
until the APB agreed on the objectives of financial statements.
The firm counted on the APB to issue an Opinion on this
subject, and when it issued a nonauthoritative Statement
instead, the Arthur Andersen partner serving on the APB
of the Big Eight are so critical of the intense political
lobbying of the APB leading up to Opinions 16 and 17 that
they announce they have lost confidence in the APB as a
source of principles for sound financial reporting. Criticisms
such as these prompt the AICPA to establish the Wheat Study
Group, on the establishment of accounting principles, and
the Trueblood Study Group, on the objectives of financial
The 1970s were a decade when Corporate America and,
in some cases, the government, consistently thwarted the
APB’s proposed Opinions. Company executives were awakening
to the strategic importance of flexibility in the choice
of accounting methods, especially when engineering, or defending
against, company takeovers. Questions
were raised whether a part-time board, such as the APB,
could stand up against such pressures, because the accounting
firms represented on the board had clients with vested interests
in the outcome of the board’s deliberations. Many
observers concluded that research had not contributed to
a resolution of difficult accounting questions, as few of
the APB’s Accounting Research Studies seemed to have
an impact on the board’s thinking.
APB is successfully pressured by industry not to proceed
with possible Opinions on accounting for marketable securities
(opposed by the insurance industry), for long-term leases
(opposed by the leasing industry), and for the costs of
exploration and drilling of oil and gas (opposed by the
petroleum industry). The leasing industry went to members
of Congress to prevent the APB from taking action.
Although the APB always held its meetings behind closed
doors, it gradually opened its process to symposia and then
to public hearings, so that interested parties could express
their views in person rather than only by writing letters
of comment on exposure drafts. All three subjects taken
up in 1971 were accorded public hearings. Industry opponents
continued to be vociferous. The leasing industry organized
a national letter-writing campaign to more than 50 members
of Congress, arguing that the APB was injuring industry’s
ability to raise funds for expansion and modernization.
After many of the Congressional recipients pointedly inquired
of the SEC why the APB would create a hardship on industry,
the SEC advised the APB to postpone further action.
the third time, industry prevents the APB from requiring
that the investment tax credit be amortized over the useful
life of the purchased equipment and machinery instead of
being taken immediately into earnings. Congress passes legislation
authorizing companies to use any method of accounting for
This was the ultimate denouement for the APB, and it
came in December, during the later stages of the Wheat Study
Group’s deliberations. This legislation continues
to be valid law today, although the credit was reduced to
0% in 1986 and thus is no longer a taxation issue.
Wheat Study Group, appointed in 1971 by the AICPA, recommends
that an independent, full-time standards-setting body, the
Financial Accounting Standards Board (FASB), which would
be overseen by a Financial Accounting Foundation, should
replace the part-time APB. FASB will have a large research
staff, follow an elaborate due process, and have a sizable
budget, financed by donations to the Foundation and the
sale of publications. Dissents are to be recorded. The AICPA
approves this recommendation in its entirety in 1972.
FASB began operations on July 1, 1973. It was the first
full-time accounting standards-setting body in the world,
and it was hoped that the members’ separation from
their former employers would assure their independence of
mind. To project an air of independence, FASB’s office
was deliberately set in Connecticut, outside of New York
City, where many corporate headquarters were located, and
outside of Washington, where the SEC was located. FASB was
endowed with a much larger full-time research staff than
had been available to the APB; it eventually increased in
size to more than 40. FASB
was also the first accounting standards setter to be established
apart from the organized accounting profession, and not
everyone in the AICPA’s leadership liked giving up
one of its most important functions, the setting of accounting
standards. Unlike the CAP and the APB, FASB members did
not have to be CPAs (two of the initial seven members were
not). The Financial Accounting Foundation raised all of
the FASB’s funding from the private sector.
C. (Sandy) Burton, an accounting professor, becomes the
first SEC chief accountant who had not served on the SEC’s
accounting staff in the 1930s. He is not imbued with the
SEC’s philosophical attachment to historical cost
accounting. Burton was to become an activist chief accountant
during his term (1972–1976). It would not be until
1992 that the SEC again hired a chief accountant who had
not come up through the SEC staff ranks. After 1992, all
of the chief accountants would be from accounting firms
Burton had studied at Haverford College, where he was
exposed to the teaching of Professor Philip W. Bell, who
was a leading advocate of current cost accounting. Burton’s
background became important in the inflationary decade of
the 1970s, when he preferred replacement cost accounting
to FASB’s preference for general price-level accounting.
was an activist chief accountant and an articulate spokesman.
During his term, the Commission issued 70 Accounting Series
Releases (more than a third of which dealt with financial
reporting), compared to 126 Releases issued during all of
the period from 1937 to 1972. He said that he and FASB had
a policy of mutual nonsurprise, by which each would not
catch the other by surprise. Yet he surprised FASB by declaring
that, while FASB should take the lead on issues of recognition
and measurement, disclosure was primarily the province of
the SEC. Many believed, however, that measurement and disclosure
the APB hastily issues Opinion 31, which requires lessees
to disclose certain rental data for noncapitalized leases,
the SEC, in Accounting Series Release 147, responds by requiring
lessees to disclose the present value of financial leases
and the impact on the lessee’s earnings. This SEC
initiative provides a transition toward SFAS 13 three years
later, which may have been made somewhat easier to issue
because lessees were already calculating and disclosing
the present values of their financial lease commitments
This Release exemplified Burton’s reliance on disclosure
to deal with a sensitive accounting matter. To most company
executives, disclosure is not threatening. Yet financial
analysts thrive on disclosure. One
of the enduring findings of the many years of capital market
research in accounting is that disclosure is a substantive
issue. Yet executives and accountants refer to “mere”
disclosure, rather than changing the contents of the balance
sheet or income statement, which in their minds are truly
A. Zeff, PhD, is the Herbert S. Autrey Professor
of Accounting at the Jesse H. Jones Graduate School of Management,
Rice University, Houston, Texas.
author used this outline as the basis of a lecture to the
International Symposium on Accounting Standards, organized
by the Chinese Ministry of Finance and held at the National
Accounting Institute in Beijing on July 12, 2004.
Photo Courtesy of Dale Flesher, University of Mississippi.
2–7: Photos courtesy of The Accounting Hall of Fame
at Ohio State University.
as otherwise noted, all other photos are courtesy of the
SEC Historical Society (www.sechistorical.org).