Historical Developments in the Accountancy Profession, Financial Reporting, and Accounting Theory: Volume 25

The development of the public accountancy profession in the last 200 years has increased the demand for the labor of professional accountants and enhanced the role and status of the professional public account. This increase in both the demand for the labor of professional accountants and for the professional services, which professional accountants provide, has resulted from the growth of capitalist enterprises, as well as institutional work on the part of members of the organized public accountancy profession. The objective of this chapter is to trace the historical development of the public accountancy professions in the United Kingdom and in France in response to contrasting institutional logics in these two countries. While legal requirements for external audits of company financial statements provided the basis for the development of the public accountancy profession as early as the end of the eighteenth century, differences in institutional logics, including differing conceptions of the relationship between individuals and the state, led to differences in the development of the public accountancy professions in the two countries. The primary argument of this chapter is that contrasting institutional logics have influenced the history of the public accountancy profession, which has evolved into one of the key regulatory structures of modern capitalism.

In this chapter, we study the evolution of the auditor’s report from its emergence more than 150 years ago to the present. During this period, the standard auditor’s report has evolved from a rudimentary form to its current and more sophisticated structure with a clearly defined title, addressed to specific entities, and systematically divided into sections that are meant to highlight certain aspects of the audit examination. We describe the major events that have affected the financial reporting environment in the United States and, in turn, how these events have transformed the auditor’s report over the last century. As will be demonstrated in the chapter, the progression of the presentation of the auditor’s report, from being a certification to the standard report of the present day, has been guided primarily by the kind of information that investors and creditors wanted to know in relation to their investments in public companies. However, the desire for that information was often influenced by periodic incidents of corporate scandals. These scandals made it imperative that a monitoring mechanism was established to maintain the confidence of investors and creditors in the reporting of financial information about companies and the overall functioning of the capital markets.

Accounting conventions, norms, and standards play an important role in modern society in various areas related to the measurement of economic performance, allocation of capital, regulation of commercial activity, and taxation. From a historical perspective, the emergence of accounting standards-setting bodies at national and international levels is a recent phenomenon, dating perhaps only to the early years of the twentieth century. Accounting standards setting as a whole has been influenced by several key factors, including the practices of commercial enterprises and professional accountants, rules and regulations created by law, and academic theories regarding the nature of assets and the measurement of business income. The purpose of this chapter is to trace the historical development of accounting standards setting in the United States during the first part of the twentieth century, until approximately 1939, which marked the creation of the Committee on Accounting Procedure of the American Institute of Accountants, which was most likely the first accounting standards-setting body in the industrial world. From 1900 to 1939, there were significant debates about the advisability and feasibility of uniform accounting standards and the manner in which such standards ought to be implemented. These debates formed the basis for subsequent national and international accounting standards-setting bodies and are worthy of detailed examination.

During the first half of the twentieth century, “accounting theory,” developed primarily by accounting scholars and academics, provided the primary basis for the practice and teaching of financial accounting in the United States. Since the creation of the Financial Accounting Standards Board (FASB) in the early 1970s, the FASB conceptual framework has provided the primary basis for accounting standards setting as well as for the practice and teaching of financial accounting. While the purpose of creating a conceptual framework has been to develop an agreed upon set of concepts and principles to guide accounting standards setting, a related goal has been to reduce diversity in accounting practice and to move toward greater uniformity. This chapter traces the influence of accounting theory on the conceptual framework and explores some of the consequences of this influence.

At a congress of the European Accounting Association, held more than 20 years ago, the President of the Belgian Institute of Registered Auditors, Paul Behets (1998), delivered a plenary speech with the title: Are Financial Statements an Obsolete Product? Behets’ answer was “no,” that financial statements are an essential component of the financial reporting system that is necessary for the proper functioning of capital markets. In this chapter, we reach a similar conclusion, but for somewhat different reasons. A central argument of this chapter is that an effective system of corporate governance requires an effective financial reporting system, and that an effective financial reporting system requires a well-ordered system of financial accounting. Behet’s speech provides evidence that financial reporting, and the role of traditional audited financial statements within financial reporting, have undergone a period of change. The future of financial reporting is difficult to predict with any degree of certainty, but it is likely to be a future marked by change. One possible path for change was suggested by Elliot (1994), who indicated that the accepted model of financial reporting might be replaced by electronic information systems providing financial and other forms of information about companies, not necessarily in the form of audited financial statements, which would be widely available via the Internet. Under this scenario, a decision-maker could decide on the types of information that were important to them, and then arrange the information in the ways they see fit. Financial reports in their present form (i.e., audited financial statements) might become obsolete as users decide individually on the types of information that are important to them. If this scenario came to pass, the question arises whether there would be a continuing need for financial reports as presently constituted. It is the argument of this chapter that, even if it is technologically feasible for financial reports to be changed from their present form, there would still be a need for financial reports as an important component of corporate governance.

Accounting history has tended to ignore the accounting research enterprise, focusing instead on particular episodes or periods, such as histories of standards setting or histories of the accounting profession. In effect, methodological and theoretical differences within the accounting research discipline have so profoundly divided the discipline that researchers working in one area are relatively unable or unwilling to understand the key issues in other areas. This chapter seeks to shed some light on the greatest divide in accounting research: the divide between positive and critical accounting research. This chapter argues that both positive and critical accounting research can trace their origins to certain key figures who were doctoral students at the University of Chicago in the late 1960s and early 1970s. The chapter employs Foucault’s concept of genealogy to examine the origins of the positivist and critical paradigms in accounting research.

It has been said that standards issued by the International Accounting Standards Board (IASB) are more congruent with a principles-based approach to standards setting than those of the Financial Accounting Standards Board (FASB). Revelations concerning accounting manipulations at Enron Corp., and the ensuing scandal resulting from these revelations, have prompted the FASB to reassess its approach to accounting standards setting with the possible intent of moving FASB standards-setting processes closer to a principles-based approach. One area that IASB standards tend to emphasize more than FASB standards is the concept of substance over form. The bankruptcy of Enron Corp. provides a vivid illustration of how companies may use the legal form of transactions to obscure their economic substance. The purpose of this chapter is to examine the concept of substance over form by investigating Enron’s use of misleading accounting practices in the following areas: (1) off-balance sheet financing; (2) revenue recognition; and (3) financial statements disclosures. In these three areas of accounting concern, the chapter sets forth the relevant US Generally Accepted Accounting Principles (US GAAP) requirements, along with the ways in which Enron manipulated GAAP while concealing the economic substance underlying the transactions. It is the argument of this chapter that had the concept of substance over form been properly applied at Enron, investors and creditors would have been provided with a more realistic view of the company’s financial position and its results of operations, perhaps avoiding what became the one of the largest corporate bankruptcies in US history. The conclusion is that the FASB should focus on the concept of substance over form as it contemplates moving toward a principles-based approach to accounting standards setting.

This chapter explores the concept of prudence in accounting from several different perspectives. In particular, we discuss the elimination of prudence from the conceptual framework of the International Accounting Standards Board in 2010 and its reinstatement in 2018. We also explore the tension between a cautious view of prudence and an asymmetric view of prudence. Finally, we discuss historical debates concerning the concept of prudence in philosophy, legal theory, and economics. In specific terms, we address whether prudence constitutes a moral virtue or whether it is merely a technique for deciding between alternative courses of action. The primary argument of the chapter is that prudence has been an important moral virtue and a component of commercial and accounting practice throughout history, even though accounting standards setters have now relegated it to secondary importance.

Both American and International Accounting Standards lead to the invisibility of most brand values in financial statements, as these standards recognize only those brands acquired externally either through a purchase or a merger. Nonetheless, over the last several decades, it has become increasingly evident that company value is primarily driven by intangible assets such as brands and other intellectual property. As such, in a knowledge-based economy, it is increasingly important for companies to develop these assets. Empirical evidence produced by prior research also demonstrates that brand values are market value relevant, that is, knowledge about their existence and value is important to investors. Consequently, and in tangent with the increased use of fair value measurements based on projected future cash flows, we argue in this chapter that it might be time to end the invisibility of brands.

The purpose of this chapter is to trace the evolution of the concept of measurement in financial reporting and to address the question of whether measurement in financial reporting is a process of “measurement” or whether it constitutes something else, which should not be called measurement, but rather characterized a practice which assigns numbers to elements in financial statements as opposed to the process of measuring. The chapter begins with an examination of the concepts of measurement put forth in recent years by the United States Financial Accounting Standards Board and the International Accounting Standards Board, followed by a summary of the general theory of measurement in the natural sciences, and finally a review of the arguments raised by accounting theorists such as Edwards and Bell (1961), Chambers (1966), and Sterling (1970) with respect to the measurement of business income. We agree with Sterling’s argument that business income should be “measured” by the difference between net equity (i.e., assets − liabilities) at two points in time, adjusted for investments and disinvestments by owners, and also the argument that the difference in equity should be determined by the change in exit prices of net assets at the beginning and the end of the accounting period. However, we are less convinced by his argument that the determination of exit prices constitutes a “measurement” process. This leads to the principle argument of this chapter, which is that “measurement” in financial accounting may not constitute a measurement process at all.