United States General Accounting Office Report to the Ranking Minority Member, GAO Committee on Commerce, House of Representatives September 1996 THE ACCOUNTING PROFESSION Appendixes to Major Issues: Progress and Concerns GOA years 1921 - 1996 GAO/AIMD-96-98A United States General Accounting Office GAO Washington, D.C. 20548 Comptroller General of the United States B-258991 September 24, 1996 The Honorable John D. Dingell Ranking Minority Member Committee on Commerce House of Representatives Dear Mr. Dingell: These appendixes to our report, The Accounting Profession: Major Issues: Progress and Concerns, (GAO/AIMD-96-98), contain the individual recommendations made by the major study groups affecting the accounting profession from 1972 through 1995 and the actions taken on those recommendations. We have organized the individual recommendations by the five major issues that frequently reoccurred throughout our study period. The American Institute of Certified Public Accountants (AICPA), the Financial Accounting Standards Board (FASB), and the Securities and Exchange Commission (SEC) assisted us in identifying the actions taken in response to the individual recommendations. These appendixes also include (1) a summary of the major studies, including the studies’ report titles and information on the membership of the study groups, (2) a list of experts on the subject of accounting and auditing we consulted with and other knowledgeable individuals we interviewed in conducting the study, (3) copies of written comments received from the AICPA, FASB, and the SEC on a draft of this report, and (4) a list of major GAO contributors to this study. Sincerely yours, Charles A. Bowsher Comptroller General of the United States Page 1 GAO/AIMD-96-98A The Accounting Profession Contents Letter 1 Appendix I 6 Major Studies of the Accounting Profession From 1972 Through 1995 Appendix II 16 Major Recommendations From 1972 Through 1995 and Actions Taken to Improve Auditing and Financial Reporting Appendix III 145 Statements, Opinions, and Releases Referenced in Appendix II Appendix IV 148 Experts Consulted in Our Review of the Accounting Profession Page 2 GAO/AIMD-96-98A The Accounting Profession Contents Appendix V 153 Comments From the American Institute of Certified Public Accountants Appendix VI 157 Comments From the Public Oversight Board Appendix VII 160 Comments From the Financial Accounting Standards Board Appendix VIII 167 Comments From the Securities and Exchange Commission Appendix IX 174 Major Contributors to This Report Tables Table II.1: Auditor Independence 16 Table II.2: Audit Quality 40 Table II.3: Setting Accounting Standards 81 Table II.4: Setting Auditing Standards 112 Table II.5: Expanded Reporting and Auditor Services 118 Table III.1: Selected FASB Statements of Financial Accounting 145 Standards Page 3 GAO/AIMD-96-98A The Accounting Profession Contents Table III.2: Selected FASB Concept Statements 145 Table III.3: Selected FASB Status Reports 145 Table III.4: Selected AICPA Statements on Auditing Standards 146 Table III.5: Selected AICPA APB Opinions 147 Table III.6: Selected AICPA Statements of Position 147 Table III.7: Selected AICPA Statements on Standards for 147 Attestation Engagements Table III.8: SEC Accounting Series Releases 147 Table III.9: SEC Financial Reporting Releases 147 Abbreviations AcSEC Accounting Standards Executive Committee ADC acquisition, development, and construction AICPA American Institute of Certified Public Accountants AIMR Association for Investment Management and Research AMEX American Stock Exchange APB Accounting Principles Board ASB Auditing Standards Board ASR accounting series release AU Auditing section of AICPA Professional Standards looseleaf service AudSEC Auditing Standards Executive Committee BL Bylaws section of AICPA Professional Standards looseleaf service BRT Business Round Table CEO chief executive officer CON statement of financial accounting concepts COSO Committee of Sponsoring Organizations of the Treadway Commission CPA certified public accountant CPE continuing professional education EDP electronic data processing EITF Emerging Issues Task Force of the FASB ET Ethics section of AICPA Professional Standards looseleaf service FAF Financial Accounting Foundation FASAC Financial Accounting Standards Advisory Council FASB Financial Accounting Standards Board FDI Act Federal Deposit Insurance Act FDICIA Federal Deposit Insurance Corporation Improvement Act of 1991 FEI Financial Executives Institute Page 4 GAO/AIMD-96-98A The Accounting Profession Contents GAAP generally accepted accounting principles GAAS generally accepted auditing standards GASB Governmental Accounting Standards Board MAS management advisory services MD&A management’s discussion and analysis NAA National Association of Accountants NASD National Association of Securities Dealers NYSE New York Stock Exchange OTC over-the-counter PCPS Private Company Practice Section of the AICPA PITF Professional Issues Task Force of the SECPS POB Public Oversight Board QCIC Quality Control Inquiry Committee QREC Quality Review Executive Committee QR Quality Review Program Manual RICO Racketeer Influenced and Corrupt Organizations Act S&L savings and loan SAS statement on auditing standards SEC Securities and Exchange Commission SECPS SEC Practice Section of the AICPA SFAS statement of financial accounting standards SOP statement of position SRO self-regulatory organization SSAE statement on standards for attestation engagements Page 5 GAO/AIMD-96-98A The Accounting Profession Appendix I Major Studies of the Accounting Profession From 1972 Through 1995 Study/Date/ Members Background 1. Establishing Financial Accounting In March 1971, the AICPA appointed the Wheat Committee to study the establishment of Standards, Report of the Study on accounting principles and make recommendations for improving that process. The Establishment of Accounting Principles Committee was formed in response to the wave of criticism on corporate financial (Wheat Committee), AICPA, March 1972 reporting during the mid-1960s arising from the rapid expansion of accounting firms, the development of increasingly complex and innovative business practices, and the Francis M. Wheat, Chairman corporate merger movement. The Wheat Committee concluded that there needed to be John C. Biegler a substantial change in the structure for establishing financial accounting standards to Arnold I. Levine insure public confidence in the way financial information is reported. The Wheat Wallace E. Olson Committee recommended creating a Financial Accounting Foundation, a Financial Thomas C. Pryor Accounting Standards Board, and a Financial Accounting Standards Advisory Council. Roger B. Smith David Solomons 2. Objectives of Financial Statements, Report In April 1971, the AICPA appointed the Trueblood Committee to provide a statement of of the Study Group on the Objectives of basic objectives that would be responsive and relevant to the needs of users. Previously Financial Statements (Trueblood Committee), issued objectives, while appropriate, were stated in relatively abstract terms, which AICPA, October 1973 offered little practical guidance in the preparation of financial statements. The Committee’s conclusions followed a fundamental concept that financial statements Robert M. Trueblood, Chairman should aid economic decision-making, and it emphasized the needs of outside users Richard M. Cyert rather than the operating needs of business managers. The Committee also stated that Sidney Davidson accounting concepts should serve the goals of both private and public sectors of the James Don Edwards economy. The work of the Trueblood Committee laid the fundamental groundwork for the Oscar S. Gellein Financial Accounting Standards Board’s (FASB) work during the 1970s on establishing a C. Reed Parker conceptual framework for accounting. Andrew J. Reinhart Howard O. Wagner Frank T. Weston 3. The Adequacy of Auditing Standards and In May 1973, the AICPA appointed the Special Committee on Equity Funding to study Procedures Currently Applied in the whether the Equity Funding collapse in 1973 suggested a need for changes in generally Examination of Financial Statements, Report accepted auditing standards. The Committee concluded that, except for certain of the Special Committee on Equity Funding, observations relating to the confirmation of insurance in force and auditing related party AICPA, February 1975 transactions, generally accepted auditing standards were adequate and there were no changes called for in the procedures commonly used by auditors. Martin L. Stone, Chairman J.T. Arenberg, Jr. Leo E. Burger Robert C. Holsen A.E. Mackay (continued) Page 6 GAO/AIMD-96-98A The Accounting Profession Appendix I Major Studies of the Accounting Profession From 1972 Through 1995 Study/Date/ Members Background 4. Federal Regulation and Regulatory In April 1975, the Moss Subcommittee undertook a comprehensive study of federal Reform, Report by the Subcommittee on regulatory agencies that included an assessment of the independence, performance, Oversight and Investigations of the and economic effects of the activities of regulatory agencies under the Subcommittee’s Committee on Interstate and Foreign jurisdiction. This study was prompted by attacks on federal regulation and the Commerce, U.S. House of Representatives Subcommittee’s obligation to measure the performance of agencies it created. The study (Moss Subcommittee), October 1976 attempted to determine the true problems of regulation,