Below are some things that have shaped a big part of the industry I work in.
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1. The Formation of the Securities and Exchange Commission (SEC) - 1934
Event Overview:
- What Happened: In the aftermath of the 1929 stock market crash and the ensuing Great Depression, the United States Congress established the SEC in 1934.
- Impact: The SEC was tasked with regulating the securities markets and ensuring transparency in financial reporting. It granted authority to set accounting standards to private sector bodies, which eventually led to the creation of the Financial Accounting Standards Board (FASB) in 1973.
Importance:
- Why It Was Important: The SEC's formation marked a pivotal moment in financial regulation, aiming to restore investor confidence by ensuring that publicly traded companies provided accurate and transparent financial information.
- Fun Fact: The SEC's first chairman, Joseph P. Kennedy, was the father of future U.S. President John F. Kennedy.
2. The Birth of the Generally Accepted Accounting Principles (GAAP) - 1930s to 1973
Event Overview:
- What Happened: GAAP began to take shape in the 1930s, guided initially by the American Institute of Accountants (now the American Institute of Certified Public Accountants, or AICPA). In 1973, the FASB was established and took over the responsibility for developing GAAP.
- Impact: GAAP provides a common framework for financial reporting, ensuring consistency and comparability across companies.
Importance:
- Why It Was Important: GAAP helped standardize accounting practices, reducing ambiguity and enhancing the reliability of financial statements for investors, regulators, and other stakeholders.
- Fun Fact: The creation of GAAP was partially driven by the financial scandals of the early 20th century, where companies like McKesson & Robbins manipulated their financial statements to deceive investors.
3. The Sarbanes-Oxley Act (SOX) - 2002
Event Overview:
- What Happened: In response to major corporate scandals, including Enron and WorldCom, the U.S. Congress enacted the Sarbanes-Oxley Act in 2002.
- Impact: SOX introduced stringent reforms to improve corporate governance, enhance the accuracy of financial reporting, and combat corporate and accounting fraud.
Importance:
- Why It Was Important: SOX aimed to protect investors by improving the reliability of corporate disclosures and holding executives accountable for financial misreporting.
- Fun Fact: The act is named after its sponsors, Senator Paul Sarbanes and Representative Michael Oxley. Its passage led to the creation of the Public Company Accounting Oversight Board (PCAOB), which oversees the audits of public companies.
4. The Convergence of International Financial Reporting Standards (IFRS) and GAAP - 2000s
Event Overview:
- What Happened: Efforts to harmonize accounting standards globally have been ongoing, with significant strides made in the 2000s. The International Accounting Standards Board (IASB) and the FASB have worked together to converge IFRS and GAAP.
- Impact: The convergence aims to create a unified set of accounting standards that can be applied worldwide, facilitating cross-border investment and economic integration. Note, IFRS does not permit the use of LIFO for inventory valuation and cost of goods sold. You have to use FIFO. GAAP permits both as of this writing.
Importance:
- Why It Was Important: A single set of global standards helps multinational companies streamline their financial reporting, enhances comparability for investors, and reduces the complexity of maintaining multiple accounting frameworks.
- Fun Fact: While full convergence has not been achieved, significant progress has been made in areas like revenue recognition and leasing standards.
5. The Introduction of the Revenue Recognition Standard (ASC 606 and IFRS 15) - 2014
Event Overview:
- What Happened: In 2014, the FASB and the IASB issued a new joint standard on revenue recognition (ASC 606 and IFRS 15), which came into effect in 2018.
- Impact: This standard provides a comprehensive framework for recognizing revenue from contracts with customers, aiming to eliminate inconsistencies and improve comparability. The made-to-order manufacturing financial model takes a lot of these things into account.
Importance:
- Why It Was Important: Revenue is a critical metric for assessing a company's performance. The new standard ensures that revenue is recognized in a manner that reflects the transfer of goods or services to customers, aligning with economic realities.
- Fun Fact: The new standard replaced more than 200 different pieces of revenue recognition guidance in GAAP, providing a much-needed simplification.
Conclusion
The evolution of accounting reporting standards has been driven by the need for transparency, consistency, and reliability in financial reporting. From the establishment of the SEC and GAAP to the introduction of SOX and the convergence efforts between IFRS and GAAP, these milestones have significantly shaped the accounting landscape. Each change has aimed to protect investors, enhance the accuracy of financial statements, and foster trust in the financial markets.
Article found in Accounting and Finance.
