The last leg of our journey brings us to the 20th century when two principal events propel standardization of accounting in the United States: (1) the Sixteenth Amendment to the Constitution in 1913 and (2) the stock market crash of 1929.
Sixteenth Amendment. The Sixteenth Amendment establishes a system of federal income taxation, which requires the periodic determination of income by individuals and businesses. It has a profound effect on the accounting profession because it requires records to support the determination of taxable income, which essentially makes accounting systems mandatory. It propels standardization in accounting because it limits the number of reporting options to make income determination more uniform across companies. However, it conflicts in many ways with generally accepted .accounting practices of the time. For example, it requires businesses to report income on a calendar-year basis, which conflicts with the acceptability of reporting income on a fiscal-year basis in the accounting profession. A fiscal year is a year-long period that encompasses a natural business cycle and allows a business to prepare its required accounting information during its slowest business period. All businesses must compute and report income for tax purposes; however, only corporations arc actually taxed on business income. Sole proprietorship and partnership income is taxed at the individual owner's level.
Stock Market Crash. The stock market crash of 1929, followed by the Depression of the 1930s, leads to federal regulation of the securities market. Such regulation appears in the form of the Securities and Exchange Act of 1933, which requires that all companies issuing capital stock (shares of companies that indicate ownership rights) to the public must register with the Federal Trade Commission (FTC) and disclose to the public certain financial information. The Securities and Exchange Act of 1934 requires the submission of annual financial information for all publicly owned corporations to a new commission called the Securities and Exchange Commission (SEC). This regulation limits the reporting options available for companies and requires full disclosure of financial results so that investors can compare companies. In general, the SEC allows the accounting profession to determine accounting rules for businesses.
The Financial Accounting Standards Board (FASB) is thethird accounting rule-making body. The FASB is a hill-time, paid group of professionals who are responsible for developing accounting standards for reporting to external financial statement users (investors and others outside the business).
The pronouncements of the FASB are referred to as Statements of Financial Accounting Standards (SFAS). In addition to numerous accounting standards, the FASB has developed six Statements of Financial Accounting Concepts, which serve as a common framework for the development of future Statements of Financial Accounting Standards. The SFASs, as well as the bulletins, opinions, and principles issued by the CAP and APB, comprise what are known as generally accepted accounting principles (GAAP). These principles direct acceptable accounting practice and are based on the four basic concepts (business entity, going concern, monetary unit and periodicity) described previously.
The SEC officially recognizes GAAP as being authoritative and requires that the information filed with the SEC comply with GAAP. If a company's financial information is audited by a certified public accountant, it must comply with GAAP. Auditing is the process of examining a company's financial records by a CPA to ascertain whether they complied with GAAP.
The American Institute of Certified Public Accountants (AICPA) is a national organization which is actively involved in the development of accounting standards and sets auditing standards for public accounting firms. The AICPA, which administers the CPA examination, is the professional organization for all certified public accountants.
In recent years, the idea of standardization in financial accounting for external users has become internationalized. The International Accounting Standards Committee (IASC) is leading the way toward standardization of international accounting for external reporting. To date, compliance with international standards is voluntary, but a growing number of companies and countries are complying to improve comparability among international companies operating in various countries throughout the world.