WFU Law School
Law & Valuation
3,1 Introduction to Accounting

3.1.1 History of Accounting

Early history. 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, The 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 been avoided.

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 tell us
how long it will take for us to achieve a "principles-based" system; and second, in section 108(a), which requires the
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.


A Story

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:


3,1 Introduction to Accounting

©2003 Professor Alan R. Palmiter

This page was last updated on: March 29, 2004