The History of the Financial Accounting Standards BoardEssay Preview: The History of the Financial Accounting Standards BoardReport this essayThe History of the Financial Accounting Standards BoardDavenport UniversityAbstractThis paper discusses the history and background of the Financial Accounting Standards Board (FASB). The primary goal of the FASB is to devise the Generally Accepted Accounting Principals (GAAP) in the United States. This paper will also discuss the structure and function of the FASB and its standards. Finally, the paper will discuss the future as the FASB and the International Accounting Standards Board (IASB) as they work together to transition to a common world wide standard.
The Role of the Financial Accounting Standard
The FASB is a global authority on accounting and securities law in all of its various branches, with more than 60 international agencies as members.
Although the FASB focuses more on current regulatory matters and current financial and economic developments , it is important to note that the FASB is not the only international body involved in financial accounting.
Federal agencies can create and use new standards for financial instruments with little or no congressional oversight or the sanction of the SEC.
In addition to the various regulatory agencies that regulate the Financial Accounting Standards Board , the FASB can also create standards for financial institutions that provide new regulatory capabilities that are more comprehensive than those currently in force. As a result, it is essential to address the changing national economic and financial system in the Financial Accounting Standards Board:
In a recent report by Federal Reserve Bank of Minneapolis . The financial industry, a small group of large banks with diverse interest levels, also face a change from current, low-level regulatory oversight.
. The financial industry, a small group of large banks with diverse interest levels, also face a change from current, low-level regulatory oversight. The FASB has increased regulatory authority over the past 20 years despite substantial legislative support from Congress. This is partly because it requires the participation of state and local agencies in national securities laws, and partly because the FASB’s mandate is to develop and implement rules and procedures applicable to the financial marketplace. Because the FASB also has the power to propose new regulations to the FASB, a growing number of financial institutions have developed requirements to the FASB that are broadly consistent with existing regulatory processes. The FASB also has the authority to recommend and enforce financial products and services without regard to existing regulations.
The FASB has increased regulatory authority over the past 20 years despite substantial legislative support from Congress. This is partly because it requires the participation of state and local agencies in national securities laws, and partly because the FASB’s mandate is to develop and implement rules and procedures applicable to the financial marketplace. Because the FASB also has the power to propose new regulations to the FASB, a growing number of financial institutions have developed requirements to the FASB that are broadly consistent with existing regulatory processes. The FASB also has the power to propose new regulations to the FASB that are broadly consistent with existing regulatory processes. While most financial institutions in the FASB have not adopted any new regulatory technology and the proposed regulation does not support existing laws, many are exploring new options such as new approaches to addressing the evolving financial system and to implementing existing regulations.
There remains many ongoing requirements for information services in financial systems and compliance to be carried out in the FASB .
In 1494, 2 years after the discovery of America, Luca Pacioli wrote a book on mathematics entitled Summa de Arithmetica, geometria, proportioni et Proportionalita. (Accounting Theory, 2009) “It was a little survey and should have been treated like ordinary books of the time and read then disappeared into historical archives and forgotten. A few brief chapters on practical mathematics made this one special.” (LeMoine, 2004)
These chapters were written on practical mathematics, specifically mathematics of business. Luca stated that a merchant requires three things to ensure he is successful in his business venture: “sufficient cash or credit, an accounting system that can tell him how hes doing, and a good bookkeeper to operate it.” The accounting system proposed by Luca consisted of journals and ledgers and invented double entry bookkeeping. “Debits were on the left side because thats what “debit” meant, “the left”. The numbers on the right were named credits.” (LeMoine, 2004)
The double entry system allowed the bookkeeper to check his progress quickly and easily; he simply needed to add up all of the debits, and then add up all of the credits. If the totals matched then the bookkeeper had done everything correctly, if there was a discrepancy in the totals, “that would indicate a mistake in your Ledger, which mistake you will have to look for diligently with the industry and intelligence God gave you.” Luca wrote. (LeMoine, 2004)
This system of bookkeeping, invented by a Franciscan monk, proved to be so easy to use and well suited to the needs of the merchant class it became the standard for business. (Accounting Theory, 2009). Accounting standards remained largely unchanged until the financial collapse of 1929 and the depression that followed.
In October of 1929, the stock market crashed; companies that had recently showed huge profits went bankrupt and private investors lost their life savings. Everyone questioned how such a thing could happen, how was it possible that a company is highly profitable one day and bankrupt the next, the only answer was fraud. “So far, these events could be chalked up to fraud (albeit widespread fraud) and handled through the ordinary course of justice.” (LeMoine, 2004) The fact that the accountants proved that no fraud had been committed, that in fact, the rules of GAAP had been followed, further eroded the publics confidence in the financial markets. If GAAP allowed companies to report unrealized profitability and reserve funds, serious changes were needed in the rules of accounting. Furthermore, it was determined that the only way to emerge from the depression was to restore the public confidence in the capital markets. The United States Congress began a series of hearings to determine what had happened, what was required to resolve the issues, and what legislation was needed to ensure it didnt happen again. (How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation, 2009)
Congress held a series of hearings on interstate frauds known as the Pecora Commission and eventually passed the Securities Act of 1933, which regulates the sale of securities at the federal level. This was followed in 1934 by Securities Exchange Act of 1934 which regulates the sale of securities in the secondary market, section 4 of the 1934 Act created the Securities and
Exchange Commission (SEC). “Both laws are considered part of Franklin Roosevelts “New Deal” raft of legislation.” (Wikipedia contributors, 2009) Roosevelt appointed Joseph Kennedy as the first Chairman of the SEC. The Act and the creation of the SEC was intended to restore the publics confidence in the markets by providing reliable and guaranteed information that could be used to determine the strength of a companies portfolio. “The main purposes of the laws can be reduced to two common-sense notions:
“Companies publicly offering securities for investment dollars must tell the public the truth about their business, the securities they are selling, and the risks involved in investing.” (How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation, 2009)
“People who sell and trade securities – brokers, dealers, and exchanges – must treat investors fairly and honestly, putting investors interests first.” (How the SEC Protects Investors, Maintains Market Integrity, and Facilitates Capital Formation, 2009)
The commission is made up of five members appointed by the United States President; they serve a term of five years, one of the commissioners serves as the chairman. The terms of the commissioners are staggered so that one ends each year. The commissioners terms end on June 5th, and by law, there can be no more than three commissioners from the same political party to ensure that the commission remains non-partisan. (Wikipedia contributors, 2009)
The commission includes four divisions; Corporate Finance, Trading and Markets, Investment Management, and Enforcement. Uniform accounting standards needed to be enacted and the financial reports of publically traded companies needed to be accurate and consistent from one company to the next. “The New York Stock Exchange (NYSE) and what is now the American Institute of Certified Public Accountants (AICPA) ventured preliminary guidelines in the jointly published Audits of Corporate Accounts of 1934. The congressional Securities Act of 1933 and the Securities Exchange Act of 1934 threatened to supersede such efforts by establishing the U.S. Securities and Exchange Commission (SEC), which was authorized, among other functions, to prescribe standards for the preparation of financial reports. In 1938, however, the SEC voted to forgo this prerogative and allow the private sector to regulate its accounting practice–a policy that the commission has maintained to date.” (Sprinkle,