Who Made GAAP? The History of Financial Accounting Standards

Generally Accepted Accounting Principles (GAAP) represent a common set of accounting standards, rules, and procedures that companies use to compile their financial statements. These principles ensure consistency, comparability, and transparency in financial reporting across different organizations. This article delves into the origins of these principles and identifies the entities responsible for their establishment and ongoing evolution.

Early Foundations and Influences

Before formalized accounting standards, financial reporting in the United States varied significantly among companies. The Great Depression in the 1930s highlighted a need for greater transparency and uniformity in financial information. Inconsistent reporting made it challenging for investors and regulators to assess a company’s financial health.

This period spurred early efforts by professional accounting organizations to bring order to financial reporting. The American Institute of Accountants (AIA), a predecessor to the modern American Institute of Certified Public Accountants (AICPA), played an initial role in establishing foundational guidance. These early initiatives laid groundwork for a more structured approach to accounting principles.

Evolution of Standard-Setting Bodies

The first formal attempt to establish accounting standards came with the creation of the Committee on Accounting Procedure (CAP) in 1939, formed by the American Institute of Accountants. CAP issued Accounting Research Bulletins (ARBs) that addressed specific accounting problems, providing guidance. Despite its contributions, CAP faced criticism for its part-time, volunteer structure, which limited its ability to respond quickly to emerging issues.

Recognizing these limitations, the Accounting Principles Board (APB) replaced the CAP in 1959, also under the AICPA. The APB aimed to be more authoritative, issuing APB Opinions that were binding. However, the APB, composed of practicing accountants, struggled with independence issues and slow responses to complex accounting challenges. This led to calls for a fully independent, full-time standard-setting body.

The Current Standard-Setter

The Financial Accounting Standards Board (FASB) was established in 1973 as the independent, private-sector organization responsible for setting accounting standards in the United States. Its creation marked a shift towards a more autonomous standard-setting process, free from direct influence of professional accounting firms. The FASB’s mission is to establish and improve financial accounting and reporting standards to provide useful information to investors and other users of financial reports.

The FASB comprises seven full-time members with diverse backgrounds in accounting, business, finance, and academia. These members are appointed for five-year terms and are eligible for reappointment, ensuring consistent leadership. The Board develops and issues Accounting Standards Updates (ASUs), the authoritative source of generally accepted accounting principles. The process involves research, public input, and deliberation before a final standard is issued, requiring a simple majority vote of the Board members.

Key Influencers and Oversight

While the FASB is the primary standard-setter for GAAP, other influential bodies play roles in the ecosystem of financial reporting. The Securities and Exchange Commission (SEC), a federal government agency, has authority to establish accounting principles for publicly traded companies. The SEC delegated this responsibility to the FASB, retaining oversight. It ensures FASB standards are in the public interest and enforces compliance for companies under its jurisdiction.

The American Institute of Certified Public Accountants (AICPA), while no longer setting GAAP directly, continues to be an influencer. The AICPA provides guidance to its members on GAAP application, provides education, and upholds ethical standards. Its role evolved from direct standard-setting to advocacy, education, and support for accounting professionals in applying principles.