Academic journal article The Accounting Historians Journal

A Reexamination of the Development of the Accounting Profession-Critical Events from 1912-1940

Academic journal article The Accounting Historians Journal

A Reexamination of the Development of the Accounting Profession-Critical Events from 1912-1940

Article excerpt

Abstract: This study reexamines the accounting profession's response to opportunities and incentives given it during three unique periods in its history to foster reliable accounting, reporting and auditing practices. By profession, we mean the auditors of publicly held companies as represented by the American Institute of Accountants and its predecessor, the American Association of Public Accountants (AAPA). We use two models of professionalism, the Functionalist and the Conflict models, to interpret the profession's response to these events. We find that both self interest and the public interest may have motivated many of the actions taken. These motivations are not, however, mutually exclusive and both may be used to interpret the same behavior.


The accounting profession in the United States developed into its modern form by 1940. The American Institute of Accountants (AIA) was the national organization of accountants. A code of ethics was in place and the AIA had disciplinary authority over its members based on that code. The AIA's Committee on Accounting Procedure, forerunner to the Accounting Principles Board and later the Financial Accounting Standards Board, was responsible for setting accounting standards, albeit not mandatory at the time. A workable, sometimes uneasy, relationship existed between the profession and the Securities and Exchange Commission. The state societies had licensing control over new CPAs, setting educational and experiential requirements, although most used the national examination written by the AIA [Miranti, 1990]. Annual audits of publicly traded companies were legally mandatory.

At the beginning of the century, little of this was in place. There was no national organization of accountants of any size or influence [Previts and Merino, 1979]. The first state licensing legislation was passed in New York in 1896. Other states followed but licensing requirements varied, ranging from substantial experience, educational and examination requirements to virtually none. The minimal amount of regulation over accounting and auditing practice may be explained by the relative simplicity of accounting and a fairly small securities market.

An explosion of mergers and consolidations at the beginning of the twentieth century accelerated the growth of accountancy. Knowledgeable and competent accountants were needed to handle these complex accounting transactions and the status of the fledgling discipline began to rise [Littleton and Zimmerman, 1962; and Previts and Merino, 1979]. Growing companies and expanding manufacturing industries also needed accountants to set up financial and cost accounting systems. With the later passage of tax legislation, accountants carved out a permanent place for their skills in the tax area.

Until the passage of the Securities Acts, public corporations faced little independent oversight. Audits were largely voluntary despite spreading public ownership of stock although companies increasingly engaged auditors to attest to their annual financial reports [Merino et al, 1994]. A large portion of audit work prior to 1920 was the balance sheet audit attesting to a company's collateral and liquidity to satisfy bankers who supplied most corporate financing [Chatfield, 1974]. Companies sometimes requested auditing services for their own information [Miranti, 1990]. The auditor's role was therefore strikingly different from that of today. Francis Pixby, at the 1904 World Congress of Accountants, said that the auditor's duty was to the company not to stockholders [Previts and Merino, 1979, p. 180]. In 1933, the accounting firm Seidman and Seidman wrote that neither audits nor financial reports were for the benefit of stockholders [Letter, 4/6/33]. Many prominent people, including accounting practitioners and academics, criticized audited financial statements as unreliable for investment decisions [Smith, 1912; Kohler, 1926 & 1932; Berle, 1926; Hatfield, 1927; Ripley, 1927; Couchman, 1928; Robbins, 1929; Farr, 1933; Pecora, 1939]. …

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