evolution of accounting concepts in the USA and packaging them as international accounting standards in the year 1973 by establishing International Accounting Standards Committee

1. The Unknown Facets of Accounting Standards
- B.V.Raghunandan, SVS College, Bantwal
National Seminar on
“Indian Accounting Standards”
Sri Mahaveera College, Moodbidri
August 16, 2013

2. Double Entry Book-
Keeping
• Luca Pacioli, an Italian
Mathematician and a Collaborator
of Lionardo Davinci created
Double Entry Book-Keeping in
1494
• Double Entry Book-Keeping was a
creation of the Renaissance
Period
• Newton’s Third Law of Motion was
inspired by Pacioli’s creation
• From 1494 to 2013, no other
substitute for Double Entry
System
• The system was versatile enough
for mechanised accounting or
computerised accounting
• It is simple, stable and a Final Say

3. Genesis of Accounting Standards
• In 1966, the Chartered Accountants of England, Canada and
the USA made a proposal to establish an international study
group of accountants
• In 1967, Accountants International Study Group (AISG) was
formed and the group published many papers until 1973, not
attempting an alternate system to double entry book-
keeping, but to create standards
• In June 1973, IASC was set up

4. Developments in the USA
• 1934-35- Securities & Exchange Commission was established
• Division of Corporate Finance (DCF) was created to ensure
conformity with SEC requirement regarding proper
accounting, full disclosure and comparison
• SEC insisted on historical cost accounting to avoid
questionable revaluation of assets
• 1936-American Institute of Accountants introduced the
phrase, “Generally Accepted Accounting Principles”
• 1938-39-AIA through its Committee on Accounting Procedure
(CAP) started publishing Accounting Research Bulletins
(ARB).CAP comprised 18 practitioners and 3 academicians
serving on part-time basis

5. SEC & Congress: Legal Authority
• Accounting bodies did not have the legal authority to impose
the accounting policies
• Politics, lobbying and taxation had their influence on accounting
policies
• 1938-39-The US Congress permitted LIFO method of Issue for
valuation of inventory
• 1940: C.A. Paton and A.C.Littleton’s “An Introduction to
Corporate Accounting Standards” emphasised Matching
Concept and Historical Cost
• 1947- CAP issued ARB 29 allowing FIFI, LIFO and Average
Cost

6. Board Replaces Committee
• 1958 – AICPA proposes setting up Accounting Research Board
to replace Committee on Accounting Procedure (CAP)
• The Board comprises 21 members from Big Eight Accounting
Firms, Academicians
• The APB is charged with “narrowing the differences in
accounting practice,” which effectively means “stop allowing so
many optional treatments.”
• In 1967, APB issued Opinion 11 on Deferred Tax Liability and
Statement 2 on Segment Reporting
• 1971-72-AICPA recommends a full fledged accounting
standards setting body
• July 1, 1973-FASB was set up to supersede APB

7. Formation of IASC
• 2013 is 40th Year of International Accounting Standards since
IASC was formed in 1973
• Objectives:
1. Formulation and Publication of Accounting Standards
2. Promotion of the Worldwide Acceptance
3. Harmonisation of regulations, accounting standards and
procedures relating to presentation of financial statements
• It published 29 Academic Standards until 2001, when IASC
was superseded by International Accounting Standards
Board

8. How Accounting Standards Should be
• Simple to make it a common man’s knowledge
• A single option rather than a multiple option like Weighted
Average Method for Inventory
• Stable and Rigid on the assumption that Accounting is a
passive discipline and not an active one like production and
marketing
• Less Number of Committees in framing and implementing
• The Rationale for every standard or change from existing
practice must be given
• Change should address significant aspect and not minor
aspects
• In conformity with taxation

9. Reality Check………. AS were
• Most Complicated
• Changing very often
• Each Country had its own AS
• US overtook any other country or IAS in
coming up with more than 150 Accounting
Standards- IT Companies made US-GAAP
most popular
• AS for many other activity like Auditing
Standards, Cost Accounting Standards

10. Between 1973-2001
• IAS sent an initial thrill, which died down quickly
• Professional Managers emerged in Corporate America
• Managerial Personnel increased in number
• Auditing Firms helped these Professional Managers in carrying
out Creative Accounting to maximise the wealth of the
professional managers
• Derivatives were allowed by many developing countries
• Governments, Institutions and Individuals tried their luck in the
derivatives markets
• For creating a complex empire, setting up hundreds of
subsidiaries by a single holding company
• Seeking M&A for tax planning and transfer pricing benefits
• Cross Holding of shares

11. End Result
• Stakeholders Had No Voice
• People Having Voice had no Stake
• Managerial Accountability became nil
• Minority Shareholders were silenced
• Auditors became virtually part of Management
• Executive Compensation hit the Roof
• Institutions Started Board Activism and AGM Activism

12. Impact on Accounting and Auditing
• The Big Eight Accounting Firms slowly
became the Standard Setters
• The controversy of industry Vs government
was settled once and for all
• Through M & A, they became Big Five
• They Advised the Clients to resort to
Proforma Reporting
• The Accounting Scandals involved all the
Big Five in 2001
• Arthur Anderson went into liquidation, but
started unwinding in 2002
• IASC issued 41 AS till 2000
• IFRS were brought out subsequently
• Current Cost to Replace Historical Cost

13. Price Waterhouse Coopers
• Started Marketing IFRS
• Started preparing XBRL
• Brought Together Accounting Professionals from All Over the
World
• No longer financial reporters are manually readable

14. • 2004- Global Trust Bank’s
Collapse-RBI to the
rescue of depositors
• 2009- Satyam Computers-
Mahindra Group saved
the Company
• PWC were the auditors
• Spot Exchange of India
Ltd., in 2013

15. What must be done……..
• The solution is a long-term one
• Develop academic practitioners of accounting
• Auditors be appointed at random by the Government
• Scrap Interim Financial Reports
• Bring back the horizontal and simple format of final
accounts
• One method of issue of material, one method of
depreciation and no provision for change of method
• Strengthen the historical cost method
• Scrap

16. THANK YOU