In 1929 the stock market crashed and along with it went public and investor confidence in the fairness of the securities markets. In response to this congress created the Securities and Exchange Commission (SEC) in 1934, which was given the authority to stipulate the methods to be used when compiling financial reports. Although the SEC was given this power, it turned to the private sector for the establishment of GAAP. Nonetheless, the SEC has remained active in the process, demonstrating its statutory authority to create accounting standards as it sees fit. Today, standard setting remains in the private sector but not without periodical pressure from the SEC. Articles written by Stephen A. Zeff and Paul B. W. Miller offer insight into the development of accounting standards as well as the prosecution faced by standard-setting boards that create them.
The Zeff article is an assessment of the path of accounting standards setting over the last 75 years. It repeatedly offers examples of instances in which the standard-setting body at the time was pressured or threatened by the SEC. In such occasions, the standard-setting bodies had to find ways to survive these actions. In many situations they had to simply give in to the SEC’s rulings. In other situations the standard-setting body that existed at the time was forced into taking action. I will briefly discuss one example of each of these predicaments.
Since its creation, the SEC has insisted on historical cost accounting, believing it results in the least misleading information. The first standard-setting body, the AIA’s Committee on Accounting Procedure (CAP), knew that in order to maintain credibility wit ...