The History of Accounting Standards

Following the Great Depression and the tremendous number of dollars that was lost in the stock market, the government created the Securities and Exchange Commission and Congress passed the Securities Act of 1934. By that law, the SEC was given the responsibility to audit the financial statements of publicly held corporations, and the accounting profession, led by the American Institute of Accountants (now the American Institute of Certified Public Accountants) was tasked with coming up with the standards that auditors would follow.

The Birth of GAAP

By 1939, the institute had created the first auditing standards for the industry; and two years later, it released a guide for independent auditors to follow. By 1971, it had issued countless rules that were put into what is known now as the so-called Generally Accepted Accounting Standards, also known as GAAS. And along with it came also GAAP, the Generally Accepted Accounting Principles that govern the auditing process. And because of the burgeoning workload, the full-time Financial Accounting Standards Board relieved the American Institute of Certified Public Accountants of responsibilities and became responsible for the audits of all organizations not affiliated with the federal government.

Peer Review

Part of the responsibility of the Financial Accounting Standards Board -- dating back to the early 1960s -- is to review the credentials of major firms to enhance the quality of their audits. Every major firm must be reviewed by another accounting firm of like size to be sure that it is following the rules as set out by the institute. In addition, any of the firm's partners who are responsible for the audit of five or more SEC clients must have their work reviewed by another of the firm's partners. Finally, if a partner has been responsible for the same client for more than seven years, that partner must relinquish the client to another partner in the firm.

Continuing Education

Seeing to it that its membership keeps up with new processes and requirements of the AICPA has been a priority of the institute since its beginning in 1933. For years, this requirement was imposed on those people who were directly responsible for audits. However, in 2001, membership in the AICPA required completion at least 120 hours of education for each three-year period.

Regular Overhaul Of Regulations

Since its inception in 1933, the AICPA has regularly assessed the regulations it imposes and maked changes based on new information. It pays special attention to the ethics demonstrated by those people inside the reporting companies to further reduce the incidents of fraud.

The Result

Investors were blindsided by fraudulent financial statements from the likes of MCI and Enron that encouraged them to invest in those companies. When those were uncovered, the AICPA and the FACB redoubled their efforts to prevent those from ever happening again. Because of their efforts, both investors and the general public can count on those financial statements for correct information.