The Institution & Professional Contribution Phase

Institution Contribution Phase (1933-1959)

The Environment: 

Role played by institutions in ringing about the first formal attempts to develop GAAPs:

Starting Point from Management Contribution Phase

Starting from the AIA that established a board of examiners to create a uniform CPA examination and the NYSE by publishing a listing requirements for the corporations to publish annual financial statements. 

The Creation of SEC (Securities Exchange Commission)

Now comes another institution created by congress called SEC to administer various federal investment laws including:

1. Securities Act 1933 that regulates issuance of securities &
2. Securities Act 1934 that regulates the trading of securities

SEC role in the development of accounting principles:

Section 13(b) SEA (Securities Exchange Act) 1934 provides that: 

the commission may prescribe, in regards to reports pursuant to 

• the title, 
• the form or form in which the required information shall be set forth, 
• the items or details to be shown in the balance sheet & earnings statement & 
• the methods to be followed in preparation of reports etc.

A threat message to accounting profession by SEC

Then the SEC sends a definitive message that unless the profession established a standard-setting body, the SEC would use it’s mandate and develop accounting principles. Here SEC role is as creative irritant (motivator@push power) in development of accounting principles in USA.

The Introduction of  "May's broad principle" 

George O May (English man) later proposed that the AICPA begin a cooperative effort with the stock exchange. As a result, the AICPA’s special committee in cooperation with stock exchange suggested the following general solution to the NYSE committee: the more practical alternative would be: to leave every cooperation free to choose its own methods of accounting within …very broad limit… but require disclosure of the methods employed & consistency in their application. The committee proposed the first formal attempt to develop generally accepted accounting techniques. Known as May’s “broad principles”.

The CAP (Committee on Accounting Procedure) contributions to increase substantial support

SEC then challenged the profession to provide “substantial authoritative support” for accepted accounting principles, and the increasing criticism from the newly created AAA (American Accounting Association) and its members. In 1938, the  Institute decided to empower the CAP to issue announcements. CAP then issued 12 ARBs (Accounting Research Bulletins) during 1938-1939 period alone. During 1946-1953 CPA issued 18 ARBs.

The relevance of CAP criticized

In spite of these efforts, 1957-1959 was marked with an intensive criticism of the CAP for various reasons including: failure to give adequate hearings to financial executives & accounting practitioners; failure to work unpopular issues; failure to develop a comprehensive statement of basic accounting principles.

Professional Contribution Phase (1959-1973)

The Environment:

The interventions of professional associations and agencies in the formulation of a accounting theory was spurred on by efforts to eliminate undesirable techniques and to standardized acceptable techniques

CAP's dissolution

• CAP was discontent by the president of AICPA Alvin R. Jennings with the question "how successful we have been in narrowing areas of difference and inconsistency in the preparation and presentation of financial information"
• in 1957, a Special Committee of Research Program is set up
• at 1958 a recommendation to dissolve CAP and it's research departments is proposed by the committee & was accepted by AICPA.
• in 1959, APB (Accounting Principle Board) and ARD (Accounting Research Division) is established with the mission to advance the written expression of what constitutes GAAPs (Generally Accepted Accounting Principles)

The Unsuccessful Contributuons of APB and AAA (1959-1973)

 APB Issuing various Opinions, 31 of it dealing with controversial issues. later it found itself embattled and criticized for:

1. A Limited Controversial or Random opinions including:
• APB 8: pension accounting
• APB 11: income tax allocations
• APB 2 & 4: investment tax credit
2. Failing to solve problems of accounting for business combinations and goodwill

AAA also participated in research study and attempts to develop an integrated statement of basic accounting theory.

The Consequences on Depending on such A&A (Associations and Agencies)

• A&A did not rely on any established theoretical framework
• Authority of the statements was not clear cut
• flexibility on accounting techniques still exists allowing alternative treatments