The first known accounting systems were
developed in medieval Florence and Venice using
Arabic numerals and double-entry record keeping
to keep track of commercial transactions in the
burgeoning trade of the fourteenth and fifteenth
centuries. That's right, accountants brought Arabic
numbers to Europe -- can you imagine if we still
relied on Roman numerals!
Over time, accounting data has come to be used
to improve efficiency, find mistakes and spot
graft. Accounting data is also widely used in
determining a company's value -- both in securities
markets and legal contexts.
[insert Bernstein - history of risk]
Modern accounting profession. The
CPA profession has recently undergone signifcant
change. Over the past decade, the number of national
firms has fallen from eight to four, through consolidation
and the demise of Arthur Andersen. One of the
centerpieces of the post-Enron regulatory reforms
has been the creation of a new Public Corporation
Accounting Oversight Board. For a summary of the
role of accountants in the disclosure system under
the federal securities laws, see George J. Benston,
Regulation of Accountants and Public Accounting
Before and After Enron.
Move from rules to principles. In
addition, as accounting becomes more global, the
US accounting regime has begun to move from rules
to principles. See William W. Bratton, Enron,
Sarbanes-Oxley and Accounting: Rules Versus Principles
Versus Rents, 48 Villanova
L. Rev. 1023 (2003):
Sarbanes-Oxley triggers the start of a political
process intended over time to produce a new
regulatory regime. The statute follows the standard
regulatory strategy of delegating most of the
task of devising the new regime's terms to an
administrative agency, a new Public Oversight
Board (POB). The regulatory outcome remains
open accordingly. High financial stakes imply
an ongoing political
contest over the POB's political and institutional
gestalt and the terms of any new regulation.
The resulting uncertainty,
although regrettable, probably could not have
Unfortunately, Sarbanes-Oxley does not stop
with an open-ended delegation of authority respecting
the audit function to a new agency. The Act
goes on to address the substance of Generally
Accepted Accounting Principles (GAAP). It does
this first in
section 108(d), which requires the SEC to study
the accounting system to ascertain the extent
to which it is "principles-based,"
as opposed to "rules-based," and to
how long it will take for us to achieve a "principles-based"
system; and second, in section 108(a), which
Financial Accounting Standards Board (FASB)
and any other approved standards-setting body
to adopt procedures ensuring
prompt consideration of new rules reflecting
"international convergence on high quality
accounting standards." Given an ongoing
political contest respecting the shape of the
POB and its regulatory program, critical questions
need to be asked about these substantive initiatives.
There was once an accounting firm
where the senior CPA knew every thing there
was to know about accounting. He could answer
any question. He knew all the tax laws: There
wasn't a better accountant anywhere.
Every morning when he came to
work, he would unlock his desk drawer, open
it up and look inside for a minute, and then
close and lock it again.
This puzzled all of his co-workers,
because it was the only eccentricity that this
person exhibited. They tried many times to look
over his shoulder, or get into his desk when
he wasn't there, without success.
One day when the elderly man was
sitting at his desk, going over an account,
he suffered a heart attack and died. This upset
everyone tremendously. However, now that he
was gone, the other members of the firm could
finally see what was in the drawer.
After obtaining the keys, they
unlocked the desk drawer and cautiously peeked
inside. They found one sheet of paper, and written
in large letters was:
"DEBITS ON THE LEFT...CREDITS
ON THE RIGHT"