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American Institute of Certified Public Accountants

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Private sector regulation of accounting has been centered in the activities of the AICPA, the membership organization of certified public accountants throughout the United States. There are also fifty-three state and other jurisdictional (District of Columbia, Puerto Rico, and the U.S. Virgin Islands) societies of CPAs. There is close cooperation between the local societies and the national organization, with policy matters resident in the latter. However, the state societies actively engage in research, promotion and public relations, continuing education for CPAs, and lobbying on behalf of legislation by the states as it affects the welfare and development of the profession.

The issuance of ASR's and discussions of their relevance to practice are summarized periodically in the Journal of Accountancy. An executive vice-president heads the staff organization and in turn reports to the president of the Institute, who is assisted by other officers and the AICPA Council.

Being concerned with policy, however, our attention rivets on two principal functions of the AICPA: (a) its role in generating policy with respect to financial reporting; and (b) its role in defining auditing standards. These areas of concern have come to be called "generally accepted accounting principles" and "generally accepted auditing standards," respectively.

Generally Accepted Accounting Principles Reed Storey has written a delightful account of the long and arduous search for accounting principles. Particularly, he notes the inherent conflict between the ideal and pragmatic, hope and reality, and the prescriptive versus feasible in the pilgrimage toward truth in accounting. Perfection is hindered in part by the democratic nature of the process, and hence the words generally accepted take on added meaning.

What is known as generally accepted accounting principles consists of fifty-one Accounting Research Bulletins [20a] issued by the Committee on Accounting Procedure in the period 1939-1959, and Opinions of the Accounting Principles Board issued between 1959 and 1973. These bodies, which are referred to more commonly by the acronyms of CAP and APB, have been the policy arms of the AICPA since 1939. In addition, established practices among CPAs which have substantive support may be considered to be generally accepted accounting principles.

The Council of the American Institute of CPAs issued a Special Bulletin in October 1964 which defined generally accepted accounting principles. Its essential passages are: "The Council of the Institute, at its meeting October 2, 1964, unanimously adopted recommendations that members should see to it that departures from Opinions of the Accounting Principles Board (as well as effective Accounting Research Bulletins issued by the former Committee on Accounting Procedure) are disclosed, either in footnotes to financial statements or in the audit report of members in their capacity as independent auditors."

"Generally accepted accounting principles" are those principles which have substantial authoritative support. Opinions of the Accounting Principles Board constitute "substantial authoritative support." "Substantial authoritative support" can exist for accounting principles that differ from Opinions of the Accounting Principles Board.

If an accounting principle differs materially in its effect from one accepted in an opinion of the Accounting Principles Board as applied in financial statements, the reporting member must decide whether the principle has substantial authoritative support and is applicable in the circumstances.

If he concludes that it does not, he would either qualify his opinion, disclaim an opinion or give an adverse opinion as appropriate…

If he concludes that it does have substantial authoritative support:
  1. he would give an unqualified opinion and

  2. disclose the fact of departure from the opinion in a separate report or see that it is disclosed in a footnote to the financial statements, and where practicable, its effects on the financial statements.
For most practical purposes official policy supersedes convention and makes it difficult to support alternative strategies in a given area. Accordingly, the bulletins and opinions of the AICPA have had the effect of law as it applies to principles and practices in accounting.

The need for policy may stem from a number of quarters. For example, litigation through the courts has often led to changes in accounting policy, as has the passage of federal laws. Practitioners may bring problems to light as they encounter them in practice. Educators, and especially those engaged in academic research, play an important role in extending the state of the art, such that policy becomes possible in areas that were held previously to be beyond the pale of formalization.

Research has always accompanied policy in accounting, but a major stepforward occurred in 1959 when, following the report of a special committee on research under the chairmanship of Weldon Powell, a Division of Research was formed within the AICPA. Dr. Maurice Moonitz became its first director. This action was taken in recognition of the fact that some problems require more extensive research than others, necessitating that formal research projects be commissioned in certain instances.

In 1972 the Division of Research was replaced with the office of Technical Research and Dr. Douglas R. Carmichael was appointed as its director. This change occurred because of the creation of the Financial Accounting Standards Board which then assumed policy-related research within its organization.

We have noted that policy statements of the Committee on Accounting Procedure was output in the form of fifty-one Accounting Research Bulletins. Since 1959, the policy statements which have emanated from the Accounting Principles Board have been titled Opinions and Statements. It is the task of CPAs acting in the capacity of independent auditors to audit their clients' financial affairs and express opinions on the extent to which a client's financial statements conform to generally accepted accounting principles. He must also express an opinion on the extent to which the statements are a fair representation of the financial condition and operations of the firm for the specified period. This role, known as "the attest function," is pivotal to the professional status of the CPA and therefore earns the close attention of the AICPA as well as the SEC and other regulatory agencies.

This framework is purposive in that all observations are directed to the fundamental questions of fair presentation. These questions include the following:

I. Values: Are the figures accurate?
A. Rules: Have generally accepted accounting principles (specifically APB Opinions), and other legal and regulatory procedures (or well-established industry practices) been followed?
1. Consistently

(a) On an inter-period basis-specifically in accordance with those used in the preceding year?

(b) On an intra-period basis-have similar events been treated in a similar manner?
2. Applied correctly
II. Have the principles and procedures been applied correctly?

III. B. Timing: Are the figures in their proper time-frame?
  1. Was there a proper cut-off?

  2. Was there a proper matching?
(a) Were time-related (period) costs matched with their proper time periods?

(b) Were activity-related (product) costs matched with their appropriate revenues?

B. Realization: As financial statements are prepared on a "going-concern" basis, certain key figures imply certain assumptions about future value.

IV. An audit objective is to evaluate the reasonableness of these expectations.
  1. Payability: What is the probability of having to make certain payments, e.g., refunds or payments against warranties?

  2. Salability: Are inventory items actually salable, or are they damaged, obsolete, or otherwise unmarketable?

  3. Usability: Does plant and equipment have future utility?

  4. Collectability: Are accounts receivable as shown (net of the allowance for doubtful accounts) actually collectable?

  5. Deferability: Is there proper cause to defer prepaid expenses and similar accruals to future accounting periods?
In assessing management's assumptions of realization, the auditor relates to past and present conditions-not to speculative future ones such as the probability of collecting receivables should a major depression occur in the following year, or the continued utility of a machine that is rendered prematurely obsolete by a revolutionary invention.

Because future events are of the nature of probabilities rather than certainties, there is room for error. This "room for error" is expressed by a confidence-level/reliability relationship covering a reasonable range of expected values. It is here that the much-maligned conservatism of the auditor can be applied with justification-his preference is for expected values in the low range with respect to future receipts, and in the high range for future payments. Figures generated in this manner give the user an assurance that matters will likely turn out better than stated, but it is unlikely that they will worsen, i.e., there should be a pleasant (or at least satisfying) rather than an unpleasant outcome to realization prognoses.

D. Integrity: Do the figures represent reality and what actually happened?
  1. Arm's-length: Were sales and other transactions consummated at arm's-length, or do the figures represent certain undisclosed "discounts," "gifts," or "kickbacks"?

  2. Exclude all improper transactions: Do the figures include transactions that are improper from the viewpoint of generally accepted accounting principles, e.g., "puffing" sales or the cost balance to make things look better, or valuing fixed assets at market value?

  3. . Include all proper transactions: Do the figures represent a complete account of all proper transactions-have all sales been recorded, have all receipts been deposited, and so forth?

  4. Contingent liabilities: Has the firm honestly disclosed contingent liabilities arising out of past or present transactions, such as pending lawsuits, warranties and guarantees, tax liability arising out of differences between income reported for tax versus financial purposes?

  5. Evidence: Can the integrity of the financial data be substantiated by independent means?

    (a) By direct physical examination?

    (b) Or by examining the system of documents and records?

  6. Price-levels: Do the financial statements imply real increases in sales.

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