Taking Account: Key Dates for the Profession

THE CENTURY TIMELINE, PART 1

A timeline details the ups and downs
of the last century for CPAs.

Taking Account:
Key Dates for the Profession

BY ANITA DENNIS

he accounting profession has made remarkable progress since its early days, when practitioners struggled to establish credibility. An examination of some of the most important events during the first nine decades of the 20th century offers a glimpse into what has made the profession what it is today. Although it can’t include all of the period’s important events, the timeline does offer a sense of issues that shaped the profession’s first century. A follow-up article will consider which events of the last decade are likely to have the greatest long-range impact on the profession’s future.

1887 Organization of profession.	The profession takes the first steps toward organization with the formation of the American Association of Public Accountants. However, since the profession has no statutory base, the group’s influence is limited. The name and primacy of the national CPA organization will change throughout the 20th century until it finally becomes the AICPA in 1957.

1896 First CPA law.	New York State’s legislation marks the launch of the accredited accounting profession in the United States.

1899 First woman CPA.	Christine Ross receives New York State CPA certificate no. 143, dated December 27. She has offices at 45 Broadway in New York City.

1900 NYU opens School of Commerce.	Urged on by the New York State Society of CPAs, New York University opens a School of Commerce, Accounts and Finance, one of the first of its kind (along with the Wharton School of Commerce and Finance), with Charles Waldo Haskins as its first dean. Creation of the school was a hard-won battle. “Leaders of the New York State Society had approached several universities,” according to A History of Accountancy in the United States: The Cultural Significance of Accounting, by Gary John Previts and Barbara Dubis Merino, “often to be met with condescension and ultimately rejection; accounting was not deemed an appropriate element of a higher education curriculum.” By 1930, however, more than 300 schools would award degrees in accountancy at the graduate or undergraduate level.

1902 Congress calls for audit reports.	The final report of the Industrial Commission created by Congress to investigate restraint of trade and competition during an age of monopolies, says, “The larger corporations—the so-called trusts—should be required to publish annually a properly audited report.” (In England, which has a strong influence on early U.S. accounting, audits of corporations have been required since an 1856 act.) However, there are no formally accepted U.S. accounting principles and companies continue to publish information as they see fit.

1905 Accountancy gains professional stature. The Journal of Accountancy is born.	Accountants continue to gain recognition, which brings problems as well as benefits. In this year, a judge in the case of Smith v. London Assurance Corp. says, “Public accountants now constitute a skilled professional class, and are subject generally to the same rules of liability for negligence in the practice of their profession as are members of other skilled professions.” In the same year the Illinois society’s publication, The Auditor, is taken over by the national association and renamed the Journal of Accountancy.

1913 First federal income taxes.	The Sixteenth Amendment is ratified, permitting federal tax on incomes. A 1913 editorial in the Journal of Accountancy predicts that tax engagements “will undoubtedly lead in many cases to a realization by the clients of the wider usefulness of the work of accountants and so to more extensive instructions.” According to historians Previts and Merino, “the tax law not only expanded the market for accounting services but also greatly facilitated acceptance of techniques, such as depreciation, that businessmen had long resisted. The accrual procedures that the [national organization] had vigorously lobbied for as the basis for determination of taxable income were most beneficial to those who served small businesses…. Overall, tax reform must be regarded as having had a salutary effect on a nascent profession, and it had a dramatic impact on acceptance of accrual accounting by business.” The 1913 income tax law also changes Americans’ perceptions about money. The two historians say its passage “created another ‘statistical community’ as Americans became members of ‘tax brackets’ and income (rather than wealth) became the measure of the nation’s well-being.”

1913–14 Greater government scrutiny.	The Federal Reserve Act of 1913 and the Clayton Antitrust Act of 1914 establish the Federal Reserve Board and the Federal Trade Commission, respectively. These pieces of legislation focus government attention on audits and financial reporting.

1916 Educators form association.	American Association of University Instructors in Accounting is formed with about 25 members. The group will change its name to the American Accounting Association in 1935.

1917 First Federal Reserve accounting bulletin.	What could be considered accounting’s first official pronouncement is published in the April 1917 issue of the Federal Reserve Bulletin, “Uniform Accounting,” which is later reprinted as the pamphlet Approved Methods for the Preparation of Balance Sheet Statements. The booklet makes recommendations on audit procedures and financial statements. In the same year The Institute library endowment fund develops. The library opens its doors on January 15, 1918, with $147,000 in donations from more than 200 sponsors and about 2,000 books and pamphlets. The national organization’s governing council approves eight rules of professional conduct. The ethics committee demonstrates its intention to enforce the rules by suspending two members for knowingly certifying improper balance sheets. Council approves a model CPA law.

1920 CPA organization gets new headquarters.	The national organization gets its first office building when it purchases 135 Cedar Street in New York City following the sale to members of $90,000 of 7% 20-year bonds.

1921 Profession becomes integrated.	The first African-American CPA, John W. Cromwell, Jr., passes the CPA exam in New Hampshire. He becomes a mentor to others. In the same year The Accountants’ Index is created. In The Rise of the Accounting Profession: From Technician to Professional, 1896–1936, John L. Carey calls it “a mammoth volume listing all books and articles on accounting published in English up to that time.”

1923 First CPA exam top scorers’ award.	The Elijah Watts Sells Award is created for CPA exam candidates with the highest scores in the country. The first recorded winner is Louis D. Blum of New York (only one award is given for each exam in the first years).

1924 Tax appeals board recognizes CPAs.	Title IX of the Revenue Act of 1924 creates a board of tax appeals to rule on disputed assessments made by what was then called the Bureau of Internal Revenue. Admission to practice before the board is limited to attorneys and CPAs. According to Carey, “Being coupled with lawyers as the only practitioners eligible to practice before the board was a prestige symbol of which CPAs were extremely proud. It was, in fact, the first official recognition of certified public accountants as a class by an agency of the federal government.” In the same year The national organization’s committee on education creates an outline of a standard curriculum for university courses in accounting.

1926 Education becomes focus.	According to a study by the national organization’s special committee for placements, among the members joining between 1917 and 1926, 240 had never graduated high school, 278 were high school graduates and 179 were college graduates. Of new members educated outside the United States, 91 had not finished high school, 71 had and 15 were college graduates. In total, 22% had finished college. Warren Nissley, an Arthur Young partner, organizes a placement bureau to attract college graduates to the profession. It is abandoned during the depression, but the bureau is credited with beginning the shift to recruiting college graduates rather than high school graduates with bookkeeping experience. The profession’s first recruiting brochure is called Accounting is a Career for Educated Men. In 1929 New York will enact the first law calling for a bachelor’s degree to earn the CPA certificate.

1929 Internal controls recognized; the crash.	Verification of Financial Statements, a revised version of the article in the 1917 Federal Reserve Bulletin, is published. According to Carey, it “stressed reliance on the system of internal control, and on the use of tests instead of detailed verification when internal controls were reliable.” It also establishes that testing and sampling don’t always uncover defalcations or all understatement of assets. Stocks tumble in the 1929 market crash. According to Carey, AT&T topples from a high of 310 1/4 to 69 3/4 by 1932, while GE falls from 403 to 8 1/2. The decline prompts “a public outcry against the business sector for violation of the public trust and [has] a significant impact on the direction of accounting practice,” say Previts and Merino.

1930 Profession studies markets.	The national organization, now called the American Institute of Accountants, forms the committee on cooperation with stock exchanges to address pressing concerns in financial reporting.

1931 A major lawsuit shapes liability exposure; Journal of Accountancy meets competition.	In Ultramares, a ruling by Judge Cardozo defines the profession’s liability in cases of negligence and fraud. In the same year The Journal of Accountancy, which has been a consistent revenue producer, shows a small deficit amid a decline in circulation. The committee on publications says: “The great evolution in customs which has been brought about by the automobile, radio and moving pictures has interfered with reading of all kinds, but especially the reading of magazines, and it seems doubtful there will ever be a return to the heyday of 20 or 30 years ago.” Steady increases in revenue begin again in 1934.

1932 Accounting standard setter formed.	In the wake of the 1929 stock market crash, the Institute forms the special committee on the development of accounting principles.

1933 Women CPAs organize.	The American Woman’s Society of CPAs is organized. Its 1934 survey finds 105 women CPAs: 55% are in public practice.

1933-34 SEC is born.	The Securities Act of 1933 and the Securities and Exchange Act of 1934 “changed auditors’ legal environment dramatically,” according to Carey. The legislation introduces the concept of “an independent public or certified accountant” to certify financial statements and imposes statutory liabilities on accountants. The SEC is created to regulate the financial markets and a chief accountant is appointed.

1934 CPAs’ aid fund established.	The Institute establishes Benevolent Fund to assist needy members and families.

1936 Federal Reserve issues financial statement regulations; education requirements codified.	The 1917 Federal Reserve Bulletin article is revised a second time and published by the Institute as Examination of Financial Statements by Certified Public Accountants, superseding the 1929 edition. In the same year The Institute’s committee on education recommends a minimum of four, and preferably five, years of education for accountants—three years of professional training and two in the liberal arts.

1938 National organization authorized to set standards; the McKesson & Robbins fraud.	The SEC delegates its authority to set accounting standards to the American Institute of Accountants and its committee on accounting procedure. SEC Accounting Series Release no. 4 recognizes the standards used by private-sector accountants. In the same year Plaintiffs charge that the management of McKesson & Robbins, a drug and chemical company that has gone into receivership, misrepresented inventories and accounts receivable. Of the $87 million total consolidated assets shown on the 1937 yearend financial statements, $19 million didn’t exist, according to Carey. The company president, who had been convicted of fraud under another name, is accused of taking part in forging documents. Hearings investigate why the company’s CPAs failed to discover the massive fraud. “This was the first time accounting practices were subject to significant public and governmental disclosure, comment, criticism and judgment,” according to Andrew Barr and Irving J. Galpeer, writing in the May 1987 centennial issue of the Journal of Accountancy.

1939 First auditing standard.	Statement on Auditing Procedure no. 1, Extensions of Auditing Procedures, recommends that auditors be present at inventory taking, that an audit might require a physical test and that auditor’s get confirmations of inventories in warehouses and of accounts receivable.

1957 The AIA becomes the AICPA.

1959 APB arrives.	The Accounting Principles Board is formed to develop authoritative principles, but it is handicapped from the start. “The board had limited authority and could not force compliance with its pronouncements,” Previts and Merino note.

1962 Investment tax credit stirs controversy.	The Revenue Act of 1962 provides an “investment tax credit”—effectively a tax reduction to stimulate investment in productive assets. Under time pressure, the APB decides in its Opinion no. 2 that the credit should be accounted for in a way that would dilute the credit’s intended effect. The opinion stirs such controversy within and outside of the profession that by 1964 the SEC says it will not require registrants to abide by Opinion no. 2. “The political sector had delivered a strong message; accountants’ theoretical and/or technical preferences would not be allowed to undermine political objectives,” according to Previts and Merino. As part of an effort to reinforce APB authority, a 1964 AICPA council resolution calls for the disclosure of departures from APB opinions.

1965 CPAs prevail in IRS status.	Public law 89–332 confirms the status of CPAs to practice on tax issues before the IRS. This follows years of controversy with the legal profession. “The authority of CPAs in the tax field was firmly established,” says Carey.

1970 The Penn Central bankruptcy.	Previts and Merino call it the “largest bankruptcy (in terms of assets) in history.” They say the “$4.6 billion transportation empire’s failure called into question not only regulators’ but also auditors’ effectiveness.”

1971-74 The years of supercommittees.	Three Institute bodies address pressing issues for the profession: The Wheat committee recommends formation of an independent accounting standard- setting body, which ultimately leads to formation of the Financial Accounting Standards Board. The Trueblood committee focuses attention on the needs of the broad range of financial statement users. The Cohen commission considers expectations of auditors in a changing business environment.

1971 CPE is recommended.	The AICPA council resolution urges state boards to adopt mandatory CPE requirements.

1973 FASB trumps APB.	The Financial Accounting Standards Board is established in light of criticisms of the APB. “The APB’s failure to capture the confidence of professionals and gain the support of the SEC, beginning with the investment credit issue, foretold that the APB lacked necessary stature to influence the outcome of debate over accounting principles,” according to Previts and Merino. The AICPA revises its code of ethics, creating rule 203, which requires members to comply with the standards of an outside organization. Compliance with standards becomes part of the ethics process.

1977 SECPS and PCPS increase self-regulation.	Highly publicized bankruptcies are among the events that bring calls for government intervention in the accounting profession. The AICPA establishes the division for CPA firms, consisting of the SEC practice section (SECPS) and the private companies practice section, as part of an effort at greater self-regulation. Changes include quality review every three years and creation of an independent Public Oversight Board for the SECPS.

1979 SSARS no. 1 is approved.	Statement on Standards for Accounting and Review Services no. 1 defines reviews and compilations for the first time and prescribes reports for each service.

1982 ASR no. 250 abolished.	The SEC rescinds Accounting Series Release no. 250, which had required disclosure in proxy statements of nonaudit services performed by auditors.

1984 GASB succeeds the NCGA.	The Government Accounting Standards Board succeeds the National Council on Governmental Accounting to set standards for state and local governments.

1984 Single audits become mandated.	The Single Audit Act requires a comprehensive single audit for state and local governments that receive federal assistance.

1985–88 Congressional hearings focus on CPAs.	Accounting is the subject of more than 20 oversight hearings by Congressman John Dingell (D–Mich.), chairman of the Subcommittee on Oversight and Investigations of the House Energy and Commerce Committee, Previts and Merino recount. In the early 1990s Congressman Ron Wyden (D–Ore.) investigates accountants’ role in S&L failures.

1987 Treadway Commission issues report; Plan to Restructure Professional Standards.	The Report of the National Commission on Fraudulent Financial Reporting, headed by former SEC Commissioner James C. Treadway, makes recommendations on financial management and fraud. As part of the profession’s response, the “expectation gap” auditing standards will cover issues such as auditors’ responsibility to detect fraud and to report errors, irregularities and illegal acts. In the same year: AICPA members approve the Plan to Restructure Professional Standards, including mandatory quality review of public reporting by requiring that CPA firms with SEC clients belong to the SECPS. It also requires CPE for all members and imposes new education requirements.
ANITA DENNIS is a JofA contributing editor.