Financial Accounting Standards Board (FASB)

Historical Background

The Securities Act of 1933 provided for federal regulation of financial accounting and reporting for public companies and, by extension, for the practice of public accounting in the United States, and it invested this authority in the Federal Trade Commission. In the Securities Exchange Act of 1934, Congress created the Securities and Exchange Commission (SEC) and assigned it responsibility for this regulatory oversight. Between 1936 and 1938, the SEC moved to delegate this responsibility back to the private sector, on the premise that the accounting profession's decades of leadership in the development of the practice and theory of accounting enabled it to discharge this responsibility efficiently, effectively, and in the public interest.

A succession of private entities took up this regulatory task. The first was an agency of the American Institute of Certified Public Accountants (AICPA), the Committee on Accounting Procedure (CAP), which operated from 1936 through 1959. It issued more than 50 accounting research bulletins, but its modular, ad hoc approach to issues did not lend itself to developing a conceptual framework for financial reporting standards. The AICPA organized its successor, the Accounting Principles Board (APB), in 1959 to develop such a framework. Although the APB issued 31 opinions, it garnered little prestige, due, in part, to perceptions that it was not sufficiently proactive and productive, and it eventually ceased operating in 1973.

After review by the Study Group on the Establishment of Accounting Principles (the “Wheat Committee”), the accounting profession in 1973 established a new institutional apparatus to develop a conceptual framework and to promulgate standards for financial accounting and reporting, including a third private organization to assume this role, the FASB. Independence from other business organizations and professional associations was a distinctive feature of this apparatus from the beginning, and this helped the FASB gain early official recognition from the SEC and the AICPA as a standard setter. At the same time, to avoid disruptions for preparers, auditors, and users of financial reports, the FASB provided a bridge of continuity with the CAP and the APB by continuing to recognize the pronouncements of these entities, except where it amended or superseded them, for example, with its own statements of financial accounting standards.

Two parallel advisory and oversight bodies have helped to promote the FASB's independence, by informing its work with guidance from experienced leaders in the profession, while minimizing direct interference from the constituencies it regulates: (1) the Financial Accounting Standards Advisory Council (FASAC) and (2) the FAF, of which the FASB is a subsidiary.

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