There have been many important events that have helped turn accounting from a basic tool of farmers and merchants into the high-tech, well-regulated "language of business" that it has become today.
Double-Entry Bookkeeping and the "Father of Modern Accounting"
The origins of modern accounting can be traced to the late 15th century, when Italian friar and mathematician Luca Pacioli codified the technique of double-entry bookkeeping. This technique, which remains a standard bookkeeping practice today, involves recording the full value of each transaction both on the debit side of one or more accounts and on the credit side of one or more accounts. This approach helped businesses and other organizations better manage their finances and created demand for accountants. Pacioli also wrote the first accounting textbook, Summa de Arithmetica, in 1494. For these and other achievements, Pacioli is considered the "Father of Modern Accounting."
Promoting Quality in the Profession
In 1917, the American Institute of Accountants created the Uniform Certified Public Accountant Exam, which measures professional competence. Until then, there was no standardized way for the public or businesses to ascertain the quality of an accountant’s work. Those who took and passed the rigorous examination were known as certified public accountants (CPAs). Today, the CPA designation is the gold standard in the accounting industry, and its recipients have better and more varied job opportunities and earn higher salaries than those who do not hold the CPA designation. To learn about a newly designed examination in effect as of April 1, 2017, visit http://www.aicpa.org/BECOMEACPA/CPAEXAM/NEXTEXAM/Pages/next-cpa-exam.aspx.
Regulating Public Accountancy
The Uniform Accountancy Act is an "evergreen model licensing law developed to provide a uniform approach to regulation of the accounting profession," according to the American Institute of Certified Public Accountants (AICPA) and the National Association of State Boards of Accountancy (NASBA), which developed the act (which was finalized in 1997). The act provides all jurisdictions with a uniform approach to licensing CPAs via three major components known as the three Es: education, examination, and experience. It provides regulating bodies in all states with the tools to ascertain the professional quality of public accountants. A provision in the act also allows certified public accountants (CPAs) to work in other states and jurisdictions without obtaining additional licensing (this concept is called CPA mobility). The AICPA and NASBA offer a Web site, http://www.cpamobility.org, where accountants can check their mobility status.
Technology Changes the Face of Accounting
Over the last 35 years or so, technological developments such as the business computer, the Internet, mobile devices, social media, and cloud computing have changed the way accountants do their jobs. Paper accounting records have been replaced by digital files. Basic accounting tasks have been automated—freeing up accountants for consulting and "big picture" thinking. Snail mail has been supplanted by e-mail and instant messaging. Telephone conversations between accountants and clients are now augmented by real-time interactions online via cloud computing. “One of the most significant benefits of cloud accounting is the access to real-time data,” according to “Accounting in the Cloud: The New Model,” from Accounting Today. “This enables accountants to take on a greater advisory role.” Technology has also made filing tax returns much more efficient. In 2015, more than 87 percent of tax returns were filed electronically, according to the Internal Revenue Service. Accountants still advertise their services in the Yellow Pages, but they more often use social media to promote their businesses and raise their industry profiles. Company Web sites allow job seekers to apply for jobs in a matter of minutes. And accountants can be "on the job" anywhere they have an Internet connection. In a matter of a few decades, technology has changed the way the accounting industry does business, and these changes will continue at a rapid pace in the coming years.
The Creation of International Accounting Standards
Accounting standards are the broad concepts or guidelines and detailed practices that make up accepted accounting practice. These standards often vary greatly by country. For example, the United States uses generally accepted accounting principles (GAAP), while the European Union uses a different set of rules. These various standards became confusing as international business grew and accountants were forced to work with different systems. Accounting regulatory bodies realized that it was necessary to create a common global accounting language. The first attempt to create such standards resulted in the International Accounting Standards (now known as International Financial Reporting Standards, or IFRS), which were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee. In many countries outside the United States, IFRS have become the global standard for the preparation of public company financial statements. Yet, despite a push by the U.S. Securities and Exchange Commission (SEC) to require public U.S. companies to issue financial statements based on IFRS—in addition to following GAAP, the standards currently used in the United States, U.S. accounting firms have resisted adopting IFRS. Many accounting firms are not supportive of adoption of IFRS for several reasons. The highly litigious business environment in the U.S. creates a high degree of legal liability for accountants and accounting firms—whether they are liable for malpractice or not. Many accounting industry firms believe that the rule-based GAAP provide better legal protection than IFRS. Second, some U.S. politicians and accounting industry leaders are reluctant to give up authority over domestic issues to an international body. Finally, U.S. firms have serious concerns about legal issues and the cost-benefit of implementing International Financial Reporting Standards.
Yet, despite reluctance in the U.S. to adopt IFRS, it is becoming increasingly important for U.S. accountants to become financially literate regarding both standards. "[IFRS] requirements elsewhere in the world…impact U.S. companies through cross-border, merger and acquisition activity, and the IFRS reporting demands of non-US stakeholders,” according to “IFRS and U.S. GAAP: Similarities and Differences,” a report from PricewaterhouseCoopers. “Accordingly, it is clear from a preparer perspective that being financially bilingual in the U.S. is increasingly important.”
The SEC and the accounting industry continue to explore the implementation of IFRS, but don’t expect adoption anytime soon.
Visit http://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-ifrs-us-gaap-similarities-and-differences-2015.pdf to learn more about GAAP and IFRS.
Government regulation has played an important role in fueling growth in the accounting industry. As the government has increasingly regulated the business, financial, and health-care industries, demand has increased for accountants.
The most significant law passed so far in the 21st century that regulates the accounting industry is the Sarbanes-Oxley Act of 2002, also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called SOX. It was passed in response to a number of major corporate and accounting scandals—caused primarily by the fraudulent activities within large companies such as Enron, WorldCom, Tyco International, and Peregrine Systems, to name a few. These firms’ scandals resulted in a decline of public trust in accounting and reporting practices. This act arguably includes the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt. SOX legislation is wide-ranging and established new or enhanced standards for all U.S. public company boards, managers, and public accounting firms. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and it requires the U.S. Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. SOX established a new quasi-public agency, the Public Company Accounting Oversight Board (PCAOB), which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. Its stated purpose is to protect the interests of investors and to further the public interest in the preparation of informative, fair, and independent audit reports. Although a private entity, the PCAOB has many government-like regulatory functions. SOX also covers issues such as auditor independence, corporate governance, internal-control assessment, and enhanced financial disclosure.
Other major legal milestones in the history of the U.S. accounting industry include:
- The 16th Amendment to the U.S. Constitution, which was ratified by Congress in 1913. It gave Congress the "power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states."
- The Clayton Antitrust Act of 1914, which created the Federal Trade Commission. The commission stresses private-sector audits and reporting and promotes official standards and independent audits.
- The Budget and Accounting Act of 1921, which created the General Accounting Office (known today as the Government Accountability Office) and the Bureau of the Budget (which is now known as the Office of Management and Budget).
- The New Deal (1933–1936), a series of presidential executive orders and laws passed by Congress that created extensive new banking regulations and federal programs that required the oversight of accountants and auditors.
- The Tax Reform Act of 1986, which significantly reformed the U.S. tax system by eliminating certain tax havens and adjusting taxation rates.
- The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which increased regulation of the financial industry and offered improved protections to consumers.
- The Patient Protection and Affordable Care Act of 2010, which increased the number of people who are eligible for health-care insurance. Implementation of the act has created demand for professionals who specialize in health-care accounting.
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