ACCOUNTING THEORY: TEXT AND READINGS RICHARD G. SCHROEDER MYRTLE CLARK JACK CATHEY 4

THE DEVELOPMENT OF ACCOUNTING THEORY CHAPTER 1 THE DEVELOPMENT OF ACCOUNTING THEORY

Introduction What is theory? Webster defines theory as: “Systematically organized knowledge, applicable in a relatively wide variety of circumstances, a system of assumptions, accepted principles and rules of procedure to analyze, predict or otherwise explain the nature of behavior of a specified set of phenomena.” Normative theory Positive theory Why is the development of a general theory of accounting important? What is the relationship of accounting research to accounting theory? 5

THE EARLY HISTORY OF ACCOUNTING The Zenon Papyri The impact of the Renaissance Fra Luca Pacioli The evolution of joint ventures into ongoing businesses The impact of the industrial revolution and the progressive movement The concept of capital maintenance The accountant as a protector of business interests 6

ACCOUNTING IN THE UNITED STATES SINCE 1930 Meetings between NYSE and AIA AAA The SEC Securities Act of 1933 Securities Exchange Act of 1934 The Committee on Accounting Procedure The Accounting Principles Board The Financial Accounting Standards Board 7

THE ACCOUNTING PRINCIPLES BOARD Formation and structure Types of pronouncements APB Opinions The flap over accounting for the investment tax Credit Rule 203 Criticism of the APB 8

THE FINANCIAL ACCOUNTING STANDARDS BOARD The Wheat Committee The Trueblood Committee The FASB was established The structure of the FASB is illustrated in the following diagram 9

Appoint and fund Financial Accounting Foundation Govern Appoint Board of Trustees Electors - - - - - - - | Appoint and fund Financial Accounting Standards Advisory Committee (approximately 20 members) Financial Accounting Standards Board (7 members) Task Forces of the Standards Board Appoint Administration Staff Research Staff 10

THE FINANCIAL ACCOUNTING STANDARDS BOARD The Mission of the FASB Types of pronouncements Statements of Financial Accounting Concepts Statements of Financial Accounting Standards Interpretations Technical Bulletins 11

THE FINANCIAL ACCOUNTING STANDARDS BOARD Emerging Issues Standards Overload Standard setting as a political process Economic Consequences 12

THE EVOLUTION OF THE PHRASE GENERALLY ACCEPTED ACCOUNTING PRINCIPLES Changed wording of auditor’s certificate brought about by meetings between NYSE and AIA The APB’s definition The Auditing Standards Executive Committee’s definition 13

The Evolution of the Phrase Generally Accepted Accounting Principles The current sources of GAAP consist of four levels described as A, B, C, and D by Statement of Auditing Standards No 69 14

GAAP Hierarchy LEVEL A: FASB Statements FASB Interpretations SEC Rules and Interpretive Releases Accounting Principles Board Opinions (unless amended) Account Research Bulletins (unless amended) LEVEL B: FASB Technical Bulletins AICPA Industry Audit Guides that have been reviewed by the FASB

GAAP Hierarchy LEVEL C: AcSEC Practice Bulletins that have been reviewed by the FASB Consensuses reached by the EITF LEVEL D: AICPA Accounting Interpretations (no longer issued) FASB Implementation Guides Other widely recognized or prevalent accounting practices

The Business Reporting Research Project Steering Committee Working Groups

THE ROLE OF ETHICS IN ACCOUNTING The public accountant as a watchdog 20

Accounting in Crisis – The Events of the Early 2000s Enron and the Accounting Scandals Two major changes in the accounting profession have taken place in the wake of the accounting scandals: Arthur Andersen, formerly one the Big 5 audit firms has gone out of business In July 2002, President Bush signed into law the Sarbanes-Oxley Bill which imposes a number of corporate governance rules on publicly traded companies (Discussed in Chapter 17).

International Accounting Standards The concept of harmonization The IASB The IASB’s objectives: To formulate and publish in the public interest accounting standards to be observed in the presentation of financial statements and to promote their worldwide acceptance and observance To work generally for the improvement and harmonization of regulations, accounting standards, and procedures relating to the presentation of financial statements. 41 Statements of Accounting Standards and 5 Statements of Financial Reporting Standards to date