- Identify significant events in the history of accounting
- Identify the organizations that govern accounting
Over the past five hundred plus years, accounting has seen its share of ups and downs. Here are some of the highlights of accounting in the Western world (with a focus on practices and events that impact accounting in the United States):
As you go through your career in accounting, you’ll find things to add to this list, but for now, you have a pretty good historical perspective of how we got from the first structured bookkeeping to the 21st Century.
Practice Question: Significant Events
Regulations in Accounting
Accounting in the United States is a multi-layered profession. There are some regulations all businesses must adhere to, like the tax code. Then there are strict SEC standards that only large, publicly-traded companies are subject to, and while some companies that aren’t subject to these rules may follow these same standards as best practices—especially when creating externally facing reports—they aren’t technically required to do so. Additionally, for internal (managerial) accounting purposes across all companies, there are some best-practices, but nothing is carved in stone.
Let’s take a look at a few of the accounting authorities in the United States.
The US Securities and Exchange Commission (SEC) has the legal authority to provide oversight and regulation of the accounting profession. However, SEC policy is to stay in the background and allow industry self-regulation. Private organizations provide governance and establish professional accounting standards.
Since its inception in 1934, the SEC has worked closely with the US Department of Justice to prosecute individuals and corporations for securities fraud at all levels. Some defendants have been high-profile investors, including the following:
- Businesswoman Martha Stewart
- Kenneth Lay (of failed Enron Corporation)
- NFL quarterback Fran Tarkenton
- Fraudulent stock trader Ivan Boesky
- Investor Bernie Madoff
The Financial Accounting Standards Board (FASB) is the organization officially recognized by the SEC as the governing body for the accounting profession. The FASB was created in 1973, replacing its predecessor organization, the Accounting Principles Board. However, the FASB continues to use some APB standards that have never been superseded. The FASB operates under the oversight of the Financial Accounting Foundation. The American Institute of Certified Professional Accountants (AICPA) also sets accounting profession standards and rules in cooperation with the FASB.
The body of financial accounting standards and rules published in FASB, APB, and AICPA pronouncements is collectively known as generally accepted accounting principles or GAAP, which we’ll discuss in further detail later. The GAAP guidelines cover all major accounting activities and topics including disclosure, assessing risk or uncertainty, and preparing financial statements. The United States is the only country that uses Generally Accepted Accounting Principles (GAAP).
The FASB and AICPA also set professional standards for auditors, known as generally accepted accounting standards, or GAAS.
All accounting professionals must comply with the rules and regulations of the Internal Revenue Code. The IRC furnishes federal tax law guidelines in the United States through an administrative agency: the Internal Revenue Service (IRS). Some people confuse the IRS with the IRC. The IRS is a department of the US Treasury. The IRC is the actual law that establishes income and other taxes.
The International Accounting Standards Board is the standard-setting body for International Financial Reporting Standards (IFRS). IFRS are used in 166 jurisdictions as of October 2020, including the European Union (EU) and many countries in Asia and South America.
As you develop in your accounting career, or as a small business owner or consultant, you’ll know to refer to these different organizations’ standards as you navigate the complex world of the rules and regulations that govern accounting and business.
Practice Question: Regulations in Accounting