The timeline offers a quick overview of important developments that occurred during the JofA’s first 100 years. Here’s a closer look at some of those events and the people behind them.
The Revenue Act of 1909 and ratification of the Sixteenth Amendment in 1913. The 1909 law, the first of its kind, imposed a tax of 1% on all corporate income over $5,000. The Sixteenth Amendment, which superseded the 1909 act, added an individual income tax beginning at 1% on taxable incomes over $3,000. Rep. Cordell Hull (D-Tenn.), a key figure in drafting the 1913 income tax legislation, was advised by Robert H. Montgomery, one of the profession’s founders.
“Uniform Accounting.” What is the proper form of financial statements and audit procedures? This question arose in the midst of attempts to create uniform accounting procedures. Early in the 1900s the Federal Trade Commission and the Federal Reserve Board attempted to involve themselves in this question. A federal legislation committee of the American Institute of Accountants (a predecessor of the AICPA), headed by AIA leader Robert H. Montgomery and including George O. May, set out to include the profession in the debate. The resulting article, “Uniform Accounting,” based on a memorandum written by John C. Scobie for Price Waterhouse & Co., ultimately was published in the Federal Reserve Bulletin in 1917 and became the initial guidance offered by a professional accounting body.
Early CPA examination. John J. Forbes, an AICPA council member, suggested in 1917 that the Institute correlate its membership exam with the states, opening the door for the profession to set its own uniform standards for the level of knowledge required to become a CPA. When the AIA board of examiners offered a standard exam to state boards of examiners, three accepted: Kansas, New Hampshire and Oregon. The exam came on the heels of the first model accountancy bill, published in 1916, as the profession attempted to move toward uniformity in licensing. By 1937, 44 states were using the uniform exam; by 1952 all jurisdictions were doing so.
Securities legislation. The Securities Act of 1933 and the Securities Exchange Act of 1934 mandated independent audits and created the SEC. George O. May had lobbied for legislation requiring audits. Arthur H. Carter had testified before the Senate Committee on Banking and Currency that financial statements used in prospectuses should be certified by licensed, objective accountants. The acts gave CPAs a recognized role in protecting the capital markets and secured the audit franchise for practitioners.
The McKesson & Robbins case. In 1937 McKesson & Robbins’s financial statements showed assets of $19 million for a nonexistent drug company and $1.8 million gross profit on fake sales of $18 million. The publicity in the wake of this massive fraud was the first public scrutiny of accounting practices. Following public hearings and actions of the profession and the SEC, auditing procedures were expanded to encompass confirmation of receivables, physical inventory inspection, greater review of internal controls and expanded auditor and management responsibility. The Institute set up the Committee on Auditing Procedure (later the Auditing Standards Board) to establish guidance in this area. Its first chairs were CPAs Patrick W. R. Glover and Samuel J. Broad. The group issued 54 statements on auditing procedures through 1972.
SEC Accounting Series Release no. 4. This April 1938 release followed the SEC decision not to take on the role of setting accounting principles, but rather to leave this responsibility to the private sector. SEC chief accountant Carman G. Blough, a CPA, and his mentor at the agency, George C. Matthews, the commissioner in charge of accounting, were pivotal in influencing the decision. Authority to set accounting principles essentially was delegated to the AIA and its Committee on Accounting Procedure, chaired by George O. May. This committee later would become the Accounting Principles Board, and its duties ultimately would be taken over by the FASB.
The Continental Vending case. This 1969 Supreme Court decision established that relying on the guidance in GAAP and APB Opinions was no longer a shield against litigation. The decision led the profession, among other steps, to create the Study Group on the Establishment of Accounting Principles (the Wheat committee), which recommended creating the FASB, and the Study Group on the Objectives of Financial Statements (the Trueblood committee), which considered the basic objectives of accounting statements.
The Moss and Metcalf investigations. In 1976, “The Accounting Establishment: A Staff Study,” a report by a subcommittee headed by Sen. Lee Metcalf (D-Mont.), accused the profession of a lack of independence and failure to protect the public interest after several company collapses. Rep. John Moss (D-Calif.) proposed an agency to regulate CPAs who audit public companies. Wallace E. Olson, then Institute president, was able to rally the profession to counter the suggestions. Among other steps, the profession in 1977 set up the Public Oversight Board, headed by John J. McCloy, to oversee peer review and quality control inquiries in firms that audit public companies. That same year, the AICPA council voted to create the division for firms, which, among other things, required peer review for firms that belonged to the Institute’s SEC and private companies practice sections.
The Plan to Restructure. In the 1980s, Reps. John Dingell (D-Mich.) and Ron Wyden (D-Ore.) began investigations of the profession after several corporate failures. One of the profession’s responses was the Special Committee on Standards of Professional Conduct, headed by George Anderson during the tenure of AICPA Chair Rholan E. Larson. In 1989, the AICPA membership’s endorsement of the Plan to Restructure Professional Standards, based on the Anderson committee recommendations, allowed a change in AICPA bylaws to require that all members who audit publicly held companies work for a firm that belongs to the SECPS. Another step was the National Commission on Fraudulent Financial Reporting, chaired by James Treadway, whose landmark 1987 report offered recommendations on limiting fraud. Its work is carried on today by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Tort reform. “The Liability Crisis in the United States: Impact on the Accounting Profession,” a report in the early 1990s by the largest accounting firms, came at a time of soaring CPA professional liability premiums. Pivotal in the battle to secure legislation against frivolous lawsuits was the AICPA Special Committee on Accountants’ Legal Liability, headed by former Institute Chair Ray Groves. Many of its recommendations were included in the Private Securities Litigation Reform Act of 1995, which replaced the concept of joint and several liability with a proportionate liability standard, limiting the damage for accountants.
Reform in the government arena. The Single Audit Act of 1984 established guidelines for financial statement audits of state and local governments. The Chief Financial Officers Act of 1990 and subsequent reform legislation established requirements intended to ensure the federal government would have timely and reliable financial information for decision making. Both acts were passed during the tenure of Charles A. Bowsher as U.S. Comptroller General.
The Sarbanes-Oxley Act of 2002. The act created the Public Company Accounting Oversight Board to oversee auditors of public companies and set public company auditing standards, among other steps. AICPA Chairs William F. Ezzell and James G. Castellano and AICPA President and CEO Barry Melancon worked to ensure the profession’s voice was heard as the legislation was made final .
|An Eyewitness to
“T here was a lot going on during that time,” recalls former AICPA president Philip B. Chenok, of the years between 1980 and 1995 when he headed the organization. “At the heart of it were our efforts to improve the quality of practice.”
In Chenok’s book, Foundations for the Future: The AICPA from 1980 to 1995, he writes that upon taking office, “I was immediately bombarded with a host of issues that threatened to revolutionize the ways CPAs would conduct themselves in the coming years.” It seemed to the Institute’s leadership that some of these issues could be identified before they became major problems. As a result, the AICPA implemented a strategic planning process. Its leaders developed a mission statement emphasizing the need for CPAs to serve the public interest and undertook a number of initiatives. For example, the Special Committee on Standards of Professional Conduct developed a series of proposals that were subsequently approved by the membership, including mandatory peer review, continuing professional education, the 150-hour requirement and more effective enforcement of the Code of Professional Conduct. Issues addressed during that period included specialization, fraud detection, legal liability, standards overload, advertising, competitive bidding, solicitation, contingent fees and commissions.
“Many of these issues are still with us,” Chenok concluded in a recent interview.