The recent economic downturn along with notable controversies at Enron and Arthur Andersen have increased public interest in the history of the business world. While stock market trends may be a more exciting topic for the average reader, the history of accounting in America shows that the business world is not entirely corrupt. Since the end of the Civil War, the field of accounting has evolved to ensure greater transparency, accuracy and efficiency in documenting expenses and revenue. Every accountant should know a little bit about accounting history to put his work into perspective.
Carnegie's Influence on American Accounting
The end of the Civil War brought a railroad boom that led the United States into a Second Industrial Revolution. The increase in railroad mileage required not only additional natural resources but a clear system of accounting for participating companies. Andrew Carnegie has been credited with bringing cost accounting to the business world in the late 1860s when he worked with the Keystone Bridge Company. Carnegie's background in accounting and investments was helpful in determining an accounting system that tracked costs daily, accounted for wasted money within each department and changed employee evaluation. The cost accounting system used at Keystone Bridge Company was emulated elsewhere in the steel and iron industry with outlying companies adopting this system as the Gilded Age progressed. Carnegie, John D. Rockefeller and other "robber barons" were prominent in accounting history because they held positions in their younger years as financial agents, personal secretaries and bookkeepers.
Cost Accounting in the 21st Century
Alfred Sloan and General Motors were able to compete with Henry Ford in the 1920s in part by using advanced cost accounting techniques. Sloan and GM financial wizard Donaldson Brown introduced new accounting measures to deal with the company's diverse vehicle lineup. In order to determine if car labels like Chevrolet and Cadillac were successful, GM measured return on investment and return on equity as part of their standard accounting practices. The introduction of return on investment and equity allowed GM to determine if they were earning profits off investments in high-end brands. GM's accounting metrics created a more flexible budget and a quicker response to market changes in the competitive 1920s.
Public Regulation of Accounting
The U.S. Congress has been responsible for two major pieces of financial accounting regulation in the 20th century, starting with the Securities Act of 1934. This New Deal legislation created the Securities and Exchange Commission (SEC) as an oversight body for trading of stocks and bonds. An important mission of the SEC is to maintain transparency in financial reporting and stock information, requiring accurate accounting from firms on American stock exchanges. More recently, Congress passed the Sarbanes-Oxley Act of 2002 in response to accounting scandals at Enron and WorldCom. This legislation required internal accounting controls instituted by executives at businesses, accounting firms and consultancies based in the United States. Sarbanes-Oxley is designed to eliminate accounting tricks and discourage disconnects between executives and accountants that caused the controversies.
Private Regulation of Accounting Standards
The American accounting profession has created several organizations since the Great Depression to set standards for its members. The Committee on Accounting Procedure was created in 1939 by the American Institute of Certified Public Accountants (AICPA) to settle philosophical disputes among American accountants. This committee lasted until 1951 and published 51 Accounting Research Bulletins addressing accounting issues in an ad hoc fashion. The AICPA created the Accounting Principles Board in 1959, a body that was responsible for popularizing generally accepted accounting practices (GAAP). The Financial Accounting Standards Board (FASB) was founded in 1973 to solve the problems of the first two generations of accounting boards. Instead of issuing proclamations and periodic notices, the FASB has been responsible for creating standardized rules and regulations for American accounting firms and departments.
Advancements in Accounting Technology
The accounting profession has been revolutionized several times in the past 150 years by technological advancements. The advent of the tabulating machine in 1890 allowed quicker processing of receipts and reconciliation of books. IBM's 700 computer line was first used by accountants and businesses in the early 1950s, second only to the federal government in the coming computer revolution. Accounting firm Arthur Andersen's creation of a computer payroll system for General Electric in 1953 showed accounting firms the nearly endless possibilities for bookkeeping and money management. In recent years, accounting software like PeachTree and QuickBooks have brought the financial ledger into the electronic world with features unthinkable to accountants only a generation ago.
- Photo by Ian Routsala (Flickr)