“[C]ertain groups in the profession are moving ahead in good stride. They will get all the help we can give them so long as they conscientiously attempt that task. That’s definite. But if we find that they are unwilling or unable . . . to do the job thoroughly, we won’t hesitate to step in to the full extent of our statutory powers.”
- June 30, 1939 SEC Chairman Jerome N. Frank, Fifth Annual Report of the Securities and Exchange Commission
In response to the SEC’s Accounting Series Release No. 4, the American Institute of Accountants (AIA) reorganized its Committee on Accounting Procedure (CAP) in 1939 and increased it from 8 to 22 members, all accounting practitioners except for three academicians.
To emphasize its importance and the AIA’s intent to demonstrate leadership, Clem W. Collins, AIA president, was designated CAP chairman. George O. May, who had led the prior committee as well as the AIA Special Committee on Cooperation with Stock Exchanges, served as CAP vice-chairman.
One of the charter CAP members was former SEC Chief Accountant Carman G. Blough, who had become a partner of Arthur Andersen & Co. Blough later joined the AIA as full-time research director in 1944. William W. Werntz, Blough’s successor as SEC Chief Accountant (1938 -1947), also later became a CAP member and was its last chairman. The bonds between the SEC and the CAP were not insubstantial.
A two-thirds majority vote by the CAP was necessary to issue an Accounting Research Bulletin (ARB). The CAP issued three ARBs in 1939, the first of which included rules that had been recommended in 1933 to the New York Stock Exchange. The CAP would issue 51 ARBs during its existence, several of which survive in today’s FASB’s Codification, and four Accounting Terminology Bulletins.
Several relatively contemporaneous publications would aid and influence both the CAP and the SEC. The first was an American Institute of Accountants (AIA) 1936 statement Examination of Financial Statements by Independent Public Accountants, dealing with some accounting principles, though oriented primarily to auditing. The AIA’s 1938 Statement of Accounting Principles, authored by three academicians, was intended to be a survey and statement of best practices. Thomas Sanders, one of its authors, would become part-time research director for the CAP.
Another influential publication was An Introduction to Corporate Accounting Standards, published in 1940 by the American Accounting Association. That work enshrined the concepts of matching costs and revenues, and that accounting is not a process of valuing assets and liabilities, but the allocation of historical costs and revenues to periods. That was music to the SEC’s ears, which had struggled with asset appraisal write-ups. However, cost-based accounting would wane decades later when mark-to-market valuations gained favor.
The CAP decided early on that formulating a statement of broad principles would take too long and instead approached issues on a case-by-case basis. Without a framework and often without adequate research, the CAP relied on the members’ collective experience for agreement on member-suggested solutions. In 1949, the CAP reconsidered developing a framework but instead codified and updated its first 42 ARBs. The CAP was criticized for its piecemeal, “firefighting” approach to setting standards and its failure to reduce the number of alternative accounting procedures.
The SEC remained active, adopting in 1940 Regulation S-X, which governed the form and content of financial statements filed with the Commission. Regulation S-X did not deal with recognition or measurement matters. However, the SEC strongly influenced accounting practice through periodic meetings with the CAP, as well as through informal rulings and private conferences with registrants.
The CAP was a great response to Accounting Series Release No. 4, but after 20 years few believed that its process could “get it right.” It would be succeeded in 1959 by the Accounting Principles Board.
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