Question

One of the major groups that has been involved in the standard-setting process is the American Institute of Certified Public Accountants. Initially, it was the primary organization that established accounting principles in the United States. Subsequently, it relinquished its power to the FASB.

Instructions

1. Identify the two committees of the AICPA that established accounting principles prior to the establishment of the FASB.
2. Speculate as to why these two organizations failed. In your answer, identify steps the FASB has taken to avoid failure.
3. What is the present role of the AICPA in the rule-making environment?

Short answer

1. The two committees of the AICPA that established accounting principles prior to the establishment of the FASB include Committee on Accounting Procedure (CAP) and Accounting Principles Board (APB).
2. The two organizations failed because of the failure of the problem-to-problem approach in providing the required structure for accounting principles and also the approach wasn’t productive enough. The steps taken by FASB to avoid failure include FASB having a full-time and lesser membership, greater autonomy, broader representation, rising independence, and well paid and formal position.
3. The AICPA grades and advances CPA exams, it does not issue accounting guidelines.

Step-by-step solution

Meaning of Certified Public Accountants (CPA)

Certified Public Accountants are the accounting professionals who perform a detailed study of auditing, accountancy, and its similar subjects for providing services later. The authorities concerned permit CPA for revising financial statements.

Explanation for ‘a’

The committee established by AICPA before setting up the FASB includes the Committee on Accounting Procedure (CAP). During the period (1939-1959), 51 Accounting Research Bulletins (ARB) were issued by the Committee on Accounting Procedures (CAP). AICPA formed Accounting Principles Board (APB) in 1959 to replace the CAP. However, before getting substituted by the FASB, 31 official pronouncements called APB opinions were released by APB.

Explanation for ‘b’

The committee on Accounting Procedure (CAP) used a problem-to-problem-based method to overcome accounting issues but did not succeed in providing a collection of standardized accounting principles that were essential. Accounting Principles Board (APB) was created to provide such standards, but it wasn’t beneficial. Moreover, the Accounting Principles Board (APB) did not respond to the accounting abuses and usually met with opposition from various organizations.

Steps taken by FASB to prevent failure are as follows:

• Smaller membership
• Full-time salaried membership
• Larger autonomy
• Increased Independence
• Broader representation

Explanation for ‘c’

The AICPA boosts the FASB’s efforts in the present standard-setting environment. Issues papers prepared by the Accounting Standards Executive Committee (ASEC), recognize present financial reporting issues for particular industries and present alternative treatments of the problem. Additionally, the AICPA plays a great role in advancing auditing standards with the help of the Auditing Standards Board. These standards provide rules for regulating auditing practice and for enforcing and developing professional ethics.