Accounting: Historical Perspectives
ACCOUNTING: HISTORICAL PERSPECTIVES
With the establishment of the first English colonies in America, accounting, or bookkeeping, as the discipline was referred to then, quickly assumed an important role in the development of American commerce. Two hundred years, however, would pass before accounting would separate from bookkeeping, and nearly three hundred years would pass before the profession of accounting as it is practiced in the twenty-first century would emerge.
For individuals and businesses, accounting records in Colonial America often were very elementary. Most records of this period relied on the single-entry method or were simply narrative accounts of transactions. As rudimentary as they were, these records were important because the colonial economy was largely a barter and credit system with substantial time passing before payments were made. Accounting records were often the only reliable records of such historical transactions.
THE EMERGENCE OF ACCOUNTING
Prior to the late 1800s, the terms bookkeeping and accounting were often used interchangeably because the recording/posting process was central to both activities. There was little need for financial statements (e.g., income statements) because most owners had direct knowledge of their businesses and, therefore, could rely on elementary bookkeeping procedures for information.
Although corporations (e.g., banks, canal companies) were present in the United States prior to the early 1800s, their numbers were few. Beginning in the late 1820s, however, the number of corporations rapidly increased with the creation and expansion of the railroads. To operate successfully, the railroads needed cost reports, production reports, financial statements, and operating ratios that were more complex than simple recording procedures could provide. Alfred D. Chandler, Jr. (1977) noted the impact of the railroads on the development of accounting in his classic work, The Visible Hand, when he stated "after 1850, the railroad was central in the development of the accounting profession in the United States" (p. 110).
With the increase in the number of corporations, there also arose a demand for additional financial information that A.C. Littleton (1933) in his landmark book, The Rise of the Accounting Profession, called "figure" knowledge. With no direct knowledge of a business, investors had to rely on financial statements for information, and to create those statements more complex accounting methods were required. The accountant's responsibility, therefore, expanded beyond simply recording entries to include the preparation, classification, and analysis of financial statements. As John L. Carey (1969) wrote in The Rise of the Accounting Profession, "the nineteenth century saw bookkeeping expanded into accounting" (p. 15).
Additionally, as the development of the corporation created a greater need for the services of accountants, the study of commerce and accounting became more important. Although there had been trade business schools and published texts on accounting and bookkeeping, traditional colleges had largely ignored the study of business and accounting. In 1881, however, the Wharton School of Finance and Economy was founded, and two years later the school added accounting to its curriculum. As other major universities created schools of commerce, accounting secured a significant place in the curriculum.
With a separation of management and ownership in corporations, there also arose a need for an independent party to review the financial statements. Someone was needed to represent the owners' interest and to verify that the statements accurately presented the financial conditions of the company. Moreover, there was often an expectation that an independent review would discover whether managers were violating their fiduciary duties to the owners. Additionally, because the late nineteenth century was a period of major industrial mergers, someone was needed to verify the reported values of the companies. The independent public accountant, a person whose obligation was not to the managers of a company but to its shareholders and potential investors, provided the knowledge and skills to meet these needs.
In 1913, the responsibilities of and job opportunities for accountants again expanded with the ratification of the sixteenth amendment to the U.S. Constitution, which allowed a federal income tax. Accountants had become somewhat familiar with implementing a national tax with the earlier passage of the Corporation Excise Tax Law. Despite the earlier law, however, many companies had not set up proper systems to determine taxable income and few were familiar with concepts such as depreciation and accrual accounting.
As tax rates increased, tax services became even more important to accounting firms and often opened the door to providing other services to a client. Accounting firms, therefore, were often engaged to establish a proper accounting system and audit financial statements as well as prepare the required tax return.
Thus, in contrast to bookkeeping, which often had been considered a trade, the responsibilities of accounting had expanded by the early twentieth century to such an extent that it now sought professional status. One foundation of the established professions (e.g., medicine, law) was professional certification, which accounting did not have. In 1896, with the support of several accounting organizations, the state of New York passed a law restricting the title certified public accountant (CPA) to those who had passed a state examination and had acquired at least three years of accounting experience. Similar laws were soon passed in several other states.
Throughout the history of accounting, professional organizations have made major contributions to the development of the profession. For example, in 1882, the Institute of Accountants and Bookkeepers of New York (IABNY) was organized with the primary aim of increasing the level of educational resources available for accountants. In 1886, the IABNY became the Institute of Accounts, and it continued to be active in promoting accounting education for nearly twenty years. Meanwhile, the first national organization for accounting educators, the American Association of University Instructors in Accounting (AAUIP), was organized in 1916. In 1935, the AAUIP was reorganized as the American Accounting Association.
The national public accounting organization, the American Association of Public Accountants (AAPA), was incorporated in 1887. Reflecting the need of most professions for a code of ethics, the AAPA added a professional ethics section to its bylaws in 1907. The AAPA was reorganized as the American Institute of Accountants (AIA). In 1921, the American Society of Certified Public Accountants (ASCPA) was established and became a rival to the AIA for leadership in the public accounting area. The rivalry continued until 1937, when the ASCPA merged with the AIA. In 1957, the AIA became the American Institute of Certified Public Accountants (AICPA).
In contrast to the public accounting emphasis of the AIA and ASCPA, the National Association of Cost Accountants (NACA) was founded in 1919. The NACA placed an emphasis on the development of cost controls and proper reporting within companies. In 1957, the NACA changed its name to the National Association of Accountants (NAA) in recognition of the expansion of managerial accounting beyond traditional cost accounting. Then, in 1991, recognizing its emphasis on the managerial aspects of accounting, the NAA became the Institute of Management Accountants.
EXTERNAL AND INTERNAL REGULATION
During the nineteenth century, the federal government generally allowed accounting to regulate itself. Then, in 1913, Congress established the Federal Reserve System and, one year later, the Federal Trade Commission (FTC). From this date forward, federal agencies have had an increasing impact on the profession of accounting.
The government's first major attempt at the formalization of authoritative reporting standards was in 1917 with the Federal Reserve Board's publication of Uniform Accounting. In 1918, the bulletin was reissued as Approved Methods for the Preparation of Balance Sheet Statements. Although directed toward auditing the balance sheet, the report presented model income and balance sheet statements. Because the proposal was only a recommendation, however, its acceptance was limited.
The impetus for stricter financial reporting was provided by the collapse of the securities market in 1929 and the revelation of massive fraud in a company listed on the New York Stock Exchange (NYSE). In 1933, the NYSE announced that companies applying for a listing on the exchange must have their financial statements audited by an independent public accountant. The scope of these audits had to follow the revised guidelines set forth by the Federal Reserve in 1929.
Another major innovation in the regulation of accounting was the passage of the Securities Act of 1933 and the Securities and Exchange Act of 1934. The 1933 act conferred upon the FTC the authority to prescribe the accounting methods for companies to follow. Under this act, accountants could be held liable for losses that resulted from material omissions or misstatements in registration statements they had certified. The 1934 act transferred the authority to prescribe accounting methods to the newly established Securities and Exchange Commission (SEC) and required that financial statements filed with the SEC be certified by an independent public accountant.
With the creation of the SEC and the passage of new securities laws, the federal government assumed a central role in the establishment of basic requirements for the issuance and auditing of financial reports. Additionally, these acts increased the importance of accountants and enlarged the accountant's responsibility to the general public. Under these acts, not only did accountants have a responsibility to the public, they were now potentially liable for their actions.
In 1938, the SEC delegated much of its authority to prescribe accounting practices to the AIA and its Committee on Accounting Procedures (CAP). In 1939, CAP issued its first of fifty-one Accounting Research Bulletins. Responding to criticism of CAP, the AICPA (formerly the AIA) in 1959 replaced the CAP with the Accounting Principles Board (APB). The APB was designed to issue accounting opinions after it had considered previous research studies, and in 1962, the APB issued its first of thirty-one opinions. Although the SEC had delegated much of its standard-setting authority to the AICPA, the commission exercised its right to approve all standards when it declared that companies did not have to follow the rules set forth in APB No. 2, The Investment Credit.
Responding to criticism of the APB, a study group chaired by Francis M. Wheat was established to review the board structure and the rule-making process. The committee recommended that an independent, full time, more diverse standards board replace the APB. Following the recommendations, the Financial Accounting Standards Board (FASB) was established in 1973. This board is independent of the AICPA and issued its first statement in 1973.
THE CHANGING GENDERIZATION OF THE WORK FORCE
With the separation of bookkeeping from accounting, the demand for women bookkeepers dramatically increased, and by 1930, over 60 percent of all bookkeepers were women. A similar increase in the demand for women accountants, however, did not occur. Although World War II created some opportunities for women in accounting, at the start of the second half of the twentieth century accounting still was not considered an appropriate career for most women. In fact, in 1950, only 15 percent of the more than 300,000 accountants in the United States were women. Moreover, less than 4 percent of college students majoring in accounting then were women.
In the 1960s, social and legal events began that ultimately provided opportunities for women in the profession of accounting. As these events occurred, the overall demand for accounting services and accountants also greatly increased. This demand became so large that the traditional labor pool of men was not sufficient to maintain the accounting work force. Concurrently, women majoring in accounting increased dramatically from less than 5 percent of all accounting majors in 1960 to more than 50 percent in 1985.
Given the increase of women accounting majors and the inability of the traditional labor pool to meet the work force demand, accounting (especially public accounting) increased the hiring of women. By 1990, women comprised a majority of the accounting work force. It would be the beginning of the twenty-first century, however, before women began to obtain a significant number of upper-level management positions in accounting.
THE TWENTY-FIRST CENTURY
The accountant, the accounting firm, and the accounting profession of the twenty-first century are quite different from what existed at the beginning of the twentieth century. In contrast to a bookkeeper manually recording entries in a large bound volume, an accountant is now responsible for information concerning all facets of a business and is dependent on the latest technology for processing that information. In contrast to small local firms, accounting firms now can be large international organizations with reported revenues of billions of dollars. In addition to the traditional audit/attest information, accounting firms provide their clients with tax services, financial planning, system analysis, consulting, and legal services. At the beginning of the twentieth century, the accounting profession was just emerging. Today, the profession is comprised of thousands of men and women working in public and private firms as well as profit and non-profit organizations as members of management teams or as valued consultants.
see also Accounting
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Chandler, Alfred D., Jr. (1977). The Visible Hand: The Managerial Revolution in American Business. Cambridge, MA: Harvard University Press.
Chatfield, Michael, and Vangermeersch, Richard, eds. (1996). The History of Accounting: An International Encyclopedia. New York: Garland.
Edwards, James Don (1988). History of Public Accounting in the United States. New York: Garland.
Hills, George H. (1982). The Law of Accounting and Financial Statements (2nd ed.). New York: Garland.
Johnson, H. Thomas, and Kaplan, Robert S. (1987). Relevance Lost: The Rise and Fall of Management Accounting. Boston: Harvard Business School Press.
Littleton, A.C. (1988). Accounting Evolution to 1900 (2nd ed.). New York: Garland.
Lockwood, Jeremiah (1938). "Early University Education in Accountancy." Accounting Review 38(2): 131-143.
Miranti, Paul J., Jr. (1990). Accountancy Comes of Age: The Development of an American Profession. Chapel Hill: University of North Carolina Press.
Previts, Gary John, and Merino, Barbara Dubis (1998). A History of Accountancy in the United States: The Cultural Significance of Accounting. Columbus: Ohio State University Press.
Reid, Glenda E., Acken, Brenda T., and Jancura, Elise G. (1987). "An Historical Perspective on Women in Accounting." The Journal of Accountancy 163(5) (May): 338-355.
Study on Establishment of Accounting Principles. (1972) "Recommendation on the Study on Establishment of Accounting Principles." The Journal of Accountancy 133(5) (May): 66-71.
Wootton, Charles W., and Kemmerer, Barbara E. (1996). "The Changing Genderization of Bookkeeping in the United States, 1870–1930." Business History Review 70(4) (Winter): 541-586.
Wootton, Charles W., and Kemmerer, Barbara E. (2000). "The Changing Genderization of the Accounting Workforce in the US, 1930–1990." Accounting, Business & Financial History 10(2) (July): 303-324.
Carol J. Normand
Charles W. Wootton