The first century of the CPA.

Public accounting was one product of the forces that transformed the United States in the late 19th century. The country moved from a primarily rural and agricultural society to one that was urban and industrial. Although the increased importance of Wall Street was a new force, the Main Street bankers in every town and hamlet were equally important as small businesses turned to their bankers for credit. These changes created a more complex social order, requiring the specialized knowledge of new professions.

One emerging profession was public accounting, whose members, like the characters in Frank Baum's contemporary classic, The Wizard of Oz, were in search of the yellow brick road to personal fulfillment. But in the accountants' case, the search involved the acquisition of income and status by winning acceptance for their auditing, management consulting and, later, taxation services.

THE PIONEERING PERIOD

The focal point of the efforts to organize the profession of public accounting was in New York City. Here, two rival organizations competed to create a framework for professional governance. First, there was the Institute of Accounts, an organization founded in 1882 that brought together public accountants, bookkeepers and businessmen interested in accounting. The membership was further unified by a nationalistic outlook supporting the post-Civil War reconciliation of the North and the South. Its leaders included Union Colonel Charles E. Sprague, an accounting theoretician and president of the Union Dime Savings Bank, and Major Henry Harney, formerly of Baltimore, who had served in Robert E. Lee's Army of Northern Virginia.

The rival American Association of Public Accountants (AAPA), founded in 1887, emulated the traditions of the British profession of chartered accountancy. Its founders included Edwin Guthrie, a chartered accountant, Frank Broaker, a correspondent for several British accounting firms, and Richard Stevens, whose family had founded the Stevens Institute of Technology in Hoboken, New Jersey.

Both organizations issued certificates of proficiency to their members. As early as 1884, the Institute of Accounts issued certificates based on passing an examination. The AAPA, the forerunner of the American Institute of CPAs, began issuing certificates in 1887 on the basis of experience. However, this early certification was limited because the organizations could not restrict practice by nonmembers. Legislation was needed to control the growing ranks of practitioners.

It was Henry Harney and Charles Sprague who wrote the original CPA bill that was submitted to the New York legislature. It was introduced in February 1895 but failed to emerge from a House committee and was defeated in the Senate. At the same time, another bill was being circulated by the AAPA. In March 1895, members of the rival organizations met to negotiate the differences between the two bills; the nationalistic bill from the Institute of Accounts was selected with one alteration: The provision requiring CPAs to be U.S. citizens was changed to allow individuals who planned to become citizens to be CPAs. Thus the British-dominated AAPA supported the Institute bill. In 1896, Frank Broaker led the profession's lobbying interests, and the bill passed by almost unanimous vote. It was signed by the governor on April 17, 1896. This law had a grandfathering provision allowing experienced practitioners to become CPAs without taking an examination.

In 1897, the first state CPA society, was established in New York under the charismatic leadership of Charles Waldo Haskins, a descendant of poet Ralph Waldo Emerson.

Within four years of the New York CPA law, Pennsylvania, Maryland and California passed similar legislation. By 1921, with passage of the New Mexico law, the professionalization of public accounting had spread throughout the nation.

In 1905, the AAPA merged with the Federation of Societies of Public Accountants in the United States (a loose connection of state accounting organizations) and kept the AAPA name; many CPAs viewed the merger as the first step in obtaining uniform national standards for the profession. But it soon became apparent the AAPA did not have the authority' to enforce meaningful standards. The merger had failed to heal bitter regional and ethnic divisions among practitioners. By 1916, a decade of frustration had convinced association leaders that the national body had to be reorganized to still criticism of the profession. Following a reorganization, a new name, the American Institute of Accountants, or AIA, displaced the AAPA--ending the nexus that had bound together state and national bodies.

The AIA initiated a program to raise the quality of practice by establishing an extensive professional library, publishing a bibliography, the Accountants' Index, and developing its own Uniform CPA Examination, which it offered to share with any state licensing board.

Moreover, beginning in 1917, the AIA's prestige was enhanced by its contribution to the U.S. victory in World War I. Many CPAs served critical roles in a variety of wartime government agencies. A zenith was reached in 1921, when the AIA's annual meeting delegates were invited by President Warren Harding to the White House.

PERIOD OF CRISIS

Unfortunately, the centralization of control within the AIA eventually led to sharp conflicts between dissident elements. Practitioners' opinions split between the differences in business practices and the socioeconomic backgrounds of members. Many had become incensed by the passage in 1921 of ethical rules prohibiting advertising and client solicitation, believing them to be subtle devices to preserve the market power of the larger firms. Consequently, many dissatisfied CPAs formed their own national organization in Washington, D.C., in 1921, the American Society of CPAs, which Durand W. Springer of Michigan led for nearly 16 years.

The splintering of the AIA seriously weakened the profession, because it created confusion in the public mind about whose authority prevailed in accounting matters. Disunity made it difficult to mount a response to the rising criticism of the shortcomings of contemporary financial reporting practices. Making matters worse, the profession became vulnerable to encroachment by outside groups during the years of crisis following the stock market crash of 1929.

Most worrisome from the standpoint of professional autonomy were the securities laws passed in 1933 and 1934. The 1933 law was the direct result of the largest financial statement scam in history. Following World War I, Swedish businessman Ivan Kreuger, the "Match King," issued stocks and bonds to gain match monopolies from foreign governments. Kreuger's were the most widely held securities in the United States and the world. Unfortunately, Kreuger operated a hugh pyramid scheme involving 400 subsidiary corporations. He was able to hide his operations from the investing public by insisting the financial statements not be audited. The bankruptcy that followed Kreuger's suicide in 1932 led to numerous changes in financial reporting. The media coverage made it politically expedient to pass laws to prevent such schemes. The result was mandatory audits, by CPAs, of all companies with listed securities.

Some say that it was Colonel Arthur H. Carter, the senior partner of Haskins & Sells, who persuaded Congress to limit the mandated audits, at least for all practical purposes, to CPAs. Just as income tax laws in 1909 and 1913 had created new demands for the work of CPAs, the Kreuger fraud led to more laws benefiting the accounting profession.

Despite new work for CPAs, a worrisome professional autonomy problem emerged when the 1934 act established the Securities and Exchange Commission, empowering it to promulgate standards for financial accounting and auditing. These circumstances underscored the need for a united profession. A consensus among practitioners would give their representatives greater leverage in negotiating with political leaders to countervail the undesired extension of federal regulatory authority. One champion of this view was Robert H. Montgomery, who as president of the AIA in 1936 called for a merger with the American Society of CPAs and a closer association with the state CPA societies. The recombining of the rival bodies helped strengthen the profession and led to the SEC's acceptance of the AIA as promulgator of standards for financial accounting and auditing. This was an important precedent, because it reflected the government's willingness to accept a degree of professional self-governance, provided the public interest was protected. This legacy of government-professional relationships continues to shape the governance of CPAs today.

The new, united American Institute formed the committee on accounting procedure (CAP). The accounting research bulletins issued by it were soon a source of "substantial authoritative support," which the SEC demanded all public companies employ in their financial reporting.

The second initiative in practice standardization established the committee on auditing procedure in 1939, which issued pronouncements addressing the auditing problems revealed in the 1939 McKesson & Robbins case. (The case showed in the yearend 1937 financial statements that the lack of two then-not-required audit procedures--observation of inventories and confirmation of receivables--had helped cover up $19 million in fictitious assets out of total assets of over $87 million.) These pronouncements later served as the nucleus of the statements on auditing procedure.

After a half-century of debate, CPAs had discovered the yellow brick road to professional advancement--a road they would continue to traverse in the years of explosive practice growth that emerged after World War II. The years of conflict were followed by consensus.

THE TAKE-OFF PERIOD

As World War II ended, American society was changing. The income tax base had broadened to encompass much of the populace, and the accounting profession was ready to expand as well. Though there were only' 9,000 practitioners at this time, the growth in the economy presaged a growth in the number of CPAs.

Just as in World War I, many CPAs made major contributions to the national war effort during World War II. As a result, government became more aware of the value of the CPA's specialized skills. In 1945, on the recommendation of John L. Carey of the American Institute, T. Coleman Andrews, a Virginia CPA, was appointed to head the Corporation Audits Division of the General Accounting Office. Andrews professionalized the GAO by installing an audit style in the federal government similar to that used by CPA firms. Andrews received the Institute's 1947 Gold Medal Award for Distinguished Service to the Profession. In 1947, Andrews chaired the Institute's committee on federal government accounting that assisted the first Hoover Commission on the Organization of the Executive Branch of Government. In 1953, he became the first CPA to be appointed commissioner of internal revenue. Subsequently, Andrews was to run for president in 1956; he finished third in the balloting. He remained the only CPA to run for U.S. president until the 1996 campaign of former Colorado Governor Dick Lamm, who challenged Ross Perot for the Reform Party nomination.

The postwar period brought significant changes in accounting education, which took on greater importance as many state licensing boards required prospective CPAs to have a college education. In the 1960s, questions raised about the rigor of business education induced the AICPA to form a committee to support research defining the basic body of knowledge that CPAs should acquire in college. The committee, chaired by Elmer Beamer of Haskins & Sells, issued a report in 1969, following Horizons for a Profession, the 1967 Carnegie Corporation-AICPA study of the common body of knowledge for CPAs. The Beamer committee report concluded that a five-year collegiate program was needed to acquire the knowledge necessary to begin a career in public accounting. Nearly a third of a century later, the profession is just now beginning to achieve this goal.

The AIA changed its name to the American Institute of Certified Public Accountants in 1957. Its focus in the 1950s on financial accounting and the need for greater research in standard setting led to the 1959 formation of the Accounting Principles Board. In its 14-year tenure, the APB promulgated 31 opinions. However, the APB disappointed practitioners because of its failure to define an underlying conceptual framework for accounting and its allowance of flexibility in applying accounting procedures. Also, questionable accounting methods employed by several conglomerates in the 1960s did not help the APB, nor did the SEC's disregard of the APB's authority when it overrode the guidance set forth in Opinion no. 2, which prescribed the method of accounting for the investment tax credit. SEC Chief Accountant Andrew Barr believed the opinion did not meet the needs of the economy as visualized by Congress when it passed the bill creating the investment tax credit. Since the APB essentially was defeating the intent of Congress, Barr said the SEC could not support the opinion.

The response to these concerns prompted the formation of two exploratory AICPA committees, the first of which was chaired by Robert M. Trueblood of Touche, Ross & Co. The 1973 Trueblood report, Objectives of Financial Statements, stressed the need for underlying concepts that would be helpful to financial statement users.

Another committee recommended in 1972 that standard-setting activities remain in the private sector but be broadened by involving both users and issuers of financial statements. Those recommendations led to the establishment of the Financial Accounting Foundation, whose main subsidiary, the seven-member Financial Accounting Standards Board, replaced the APB.

The practice of auditing also changed following World War II. First, practice was enriched by the introduction in 1948 of the first of 13 specialized industry audit guides. In 1972, standard setting was revamped by the establishment of the auditing standards executive committee, whose new statements on auditing standards specified minimum levels of practice quality rather than define particular rules of practice, as had been the case earlier.

Further changes came from recommendations made by the Commission on Auditors' Responsibilities, headed by former SEC Commissioner Manuel E Cohen, responding to investigations of the profession in the 1970s by congressional committees. These investigations questioned whether the auditing standard-setting process was too narrowly focused on public companies. The Cohen commission did find that an expectations gap existed between what auditors thought they were providing and what investors thought they were getting from CPAs.

In 1978, a new body, the auditing standards board, replaced the auditing standards executive committee. At the same time, a parallel entity--the accounting and review services committee--was formed to provide guidance for compilation and review services for nonpublic companies.

This period also witnessed a rising sensitivity to the need for effective practice management in the delivery of high-quality professional services that led ultimately to the establishment of the AICPA division for CPA firms in 1978. The division required adherence to quality control standards for membership in either the SEC practice section or the private companies practice section.

Also in 1978, the Public Oversight Board was formed, under the chairmanship of John J. McCloy, to monitor the peer review system that was used to gain compliance with quality control standards. The POB reports annually whether the public interest is being protected.

The three decades following World War II saw the profession of public accounting reach maturity. Of course, there were still conflicts, for example, whether the CPA's providing of tax services was an infringement on the rights of attorneys, but the conflicts were less obvious and were more often with external parties than within the profession.

RENAISSANCE AND SOPHISTICATION 

The period since the mid-1970s has been one of renaissance and increasing sophistication for the profession. Whereas there were only about 9,000 CPAs in 1945, the number had increased to over 95,000 by 1973. By 1996 that number had grown to over 350,000. While most members in 1945 and 1973 were male, today's new entrants to the profession are predominantly female.

Indeed, the past two decades of the CPA movement have been decades of demographic change. As important as the influx of women is to the AICPA, the change in membership from a mostly public accounting orientation to a predominantly managerial accounting background is equally important.

The CPA's primary preoccupation in the late 1970s was with federal government activities. The passage of the Foreign Corrupt Practices Act in 1977 put a great new responsibility on accountants, particularly those in industry. In 1978, the Federal Trade Commission became concerned that the AICPA's ethical rule prohibiting advertising was a restraint of trade.

Much of the accounting news of the 1980s related to the congressional investigation of the profession, which was chaired by Congressman John Dingell (D-Mich.). Bankruptcies during the early 1980s, many occurring just days after the auditor had rendered a clean opinion, raised a hue and cry from taxpayers for new laws to regulate the profession. Leaders of the profession testified before Congress, with many of the messages emphasizing that the accountants themselves were victims of the frauds, not the perpetrators.

One of the accounting profession's responses to this outcry was the creation of the National Commission on Fraudulent Financial Reporting (the Treadway commission) to investigate the causes of financial reporting frauds. Although the Treadway commission report, issued in 1987, gave many recommendations for limiting such frauds, the main points were that effective internal auditors were needed and corporate audit committees should be more active.

Accompanying the bankruptcies of the 1980s came lawsuits. Plaintiffs believed CPA firms had deep pockets, and the number of lawsuits filed was much greater than in previous decades. It is hoped the joint and several liability that caused many firms to pay out large judgments despite little or no wrongdoing will be countered by the 1995 federal law--the Securities Litigation Reform Act--limiting judgments in such cases.

Other newsworthy events of the 1980s included the 1984 establishment of the Governmental Accounting Standards Board and the late 1980s mergers of several large CPA firms. At the same time, the emergence of the personal computer was changing the way audits were conducted and the type of information that was audited.

One of the most controversial issues of the 1980s related to education. The knowledge needed to practice public accounting had broadened and deepened since 1896 and even since 1938, when New York implemented the first requirement for CPAs to be college graduates. Consequently, many leaders in the profession began to recognize that a baccalaureate degree was not sufficient to allow a person to pass the Uniform CPA Examination; more education was needed.

Beginning in the late 1970s, several universities established professional schools of accountancy, which grant master's degrees. This led to accreditation of accountancy programs in 1982, when the American Assembly of Collegiate Schools of Business agreed to provide special accreditation for accounting after the AICPA threatened to start its own accreditation agency. Subsequently, the AICPA passed a rule limiting membership after the year 2000 to CPAs who have at least 150 semester hours of college education.

As CPAs start their second century, they do so as highly educated, respected professionals. In many respects, theFT have accomplished the goals of their forebears.

The history of the CPA is rich in its variety. There has been conflict, and there has been consensus, and always there has been the legal framework. From the original 1896 New York law to the 1995 federal securities legislation, CPAs have benefited from changing laws, but because of the CPA's responsibility to the public, the profession has constantly been under the scrutiny of lawmakers.

Perhaps Dennis Beresford best summed up the profession when he made the following statement at the 1989 American Accounting Association annual meeting:

"I firmly believe that accounting improvement in the United States has come about not merely as a matter of nature taking its course. Improvement has occurred as a result of sustained, committed, cooperative effort. Every step of accounting evolution has been helped along by a good firm push."

Such a statement should give CPAs hope for the future. With sustained, cooperative effort, individuals can help accomplish the goals of the profession. The profession has reached a level of maturity, but the CPA is still traveling down that yellow brick road. While today's CPAs do not face the problems of the pioneer CPAs, they still have to reach out to find fulfillment.

EXECUTIVE SUMMARY

* IN THE LATE 1800s, post-Civil War America moved from an agricultural to an industrial society, creating a complex society requiring the knowledge of new professions, among them accounting.

* EFFORTS TO ORGANIZE THE PROFESSION began in New York City, where, in 1896, the first state accounting law was passed. In 1921, the passage of the New Mexico law marked the spread of public accounting as a profession to every, state in the nation.

* THE TWENTIES WERE YEARS OF turmoil that saw' a splintering of the profession when dissatisfied CPAs formed their own national organization, a criticism of the shortcomings of financial reporting practices and the encroachment by outside groups during the years of crisis following the stock market crash of 1929.

* THE 1933-34 SECURITIES LAWS, a result of a stock pyramid scam, called for audits of all companies with listed securities. Soon after, CPAs united to stave off federal regulatory authority, which led to the government's acceptance of some self-governance.

* THE POST-WORLD WAR II ERA WAS A maturation time, with the focus on education, standard setting and accounting methods.

* THE FORMATION OF CONTEMPORARY important bodies began in the 1970s: the Financial Accounting Foundation, the Financial Accounting Standards Board and the AICPA auditing standards board, the accounting and review services committee and the division for CPA firms as well as the independent Public Oversight Board.

* JUST AS IN THE PAST, CPAs today also confront a round of challenges: litigation, the technology explosion, the 150-hour education requirement and the scrutiny of lawmakers, to name only a few.

DALE L. FLESHER, CPA, CIA, CMA, CGFM, is the Arthur Andersen Alumni Professor and associate dean in the School of Accountancy at the University of Mississippi, University. A prolific writer, he is a former editor of the Accounting Historians Journal. In 1990, he received the Leon Radde Award from the Institute of Internal Auditors as the outstanding auditing educator worldwide. PAUL J. MIRANTI, CPA, PhD, is an associate professor of accounting at Rutgers University, New Brunswick, New Jersey. In addition to writing many articles, he is the author of a forthcoming book entitled A History of Corporate Finance (Cambridge University Press). GARY JOHN PREVITS, CPA, PhD, is professor of accountancy and associate dean in the Weatherhead School of Management at Case Western Reserve University, Cleveland, Ohio. He was the founding president of the Academy of Accounting Historians and is a coauthor of A History of Accountancy in the U.S.A. to be published in 1997 (Ohio State University Press). Dr. Previts received the AICPA 1996 Lifetime Achievement in Accounting Education Award.

Important Dates, People, Events

1887--Formation of the American Association of Public Accountants (AAPA), the direct lineal ancestor of the American Institute of CPAs

1896--First CPA law passed on April 17 in New York

1896--First CPA by waiver of exam: Frank Broaker (alphabetical order)

1896--First CPA exam given; first to pass: Joseph Hardcastle, age 69

1897--First state CPA society founded in New York

1898--First woman to pass CPA exam: Christine Ross

1904--First Congress of Accountants, held in St. Louis

1905--First issue of Journal of Accountancy

1905--First rules of professional conduct

1909--Corporation excise tax law enacted

1913--Passage of the Sixteenth Amendment to the U.S. Constitution. Enlarged scope of services: taxes and management services

1916--AAPA changes name to American Institute of Accountants (AIA)

1917--Publication of "Uniform Accounts;' the first set of auditing standards published in the Federal Reserve Bulletin

1917--First Uniform CPA Examination given

1921--American Society of CPAs established in Washington, D.C.

1921--First CPA in Congress: William E. Wilson, Evansville, Indiana

1921--Entire country has CPA laws with passage of New Mexico law

1928 New York passes law (to take effect in 1938) requiring CPA candidates to hold a college degree

1931--Ultramares Corp. v. Touche; CPAs held to be liable to third parties for gross negligence

1932--Ivan Kreuger dies, his swindle uncovered; CPAs, led by George O. May, support federal securities legislation, which is passed in 1933

1932--New York Stock Exchange requires audits

1934--Securities Exchange Act; first SEC chief accountant: Carman G. Blough

1936--Committee on accounting procedure (CAP) established

1936--The term "generally accepted accounting principles" used in AIA report

1936--Merger of AIA and American Society of CPAs

1938 New York requires CPA candidates to be college graduates

1939--McKesson & Robbins case

1939--CAP begins publishing accounting research bulletins

1939--Committee on auditing procedure established

1943--Income tax withholding begins

1944--First year of AIA/AICPA Gold Medal Award for Distinguished Service to the Profession; some recipients: George O. May, William A. Paton, Arthur H. Carter, T. Coleman Andrews, Robert H. Montgomery, Carman G. Blough, Maurice H. Stans, Lloyd Morey

1945--GAO Corporation Audits Division formed; head: T. Coleman Andrews

1945--World War II ends; continuing professional education starts; Thomas Leland of Texas A&M writes first AIA CPE course

1948 First specialized industry audit guide issued

1949--Conflict with tax lawyers

1953--First CPA IRS commissioner: T. Coleman Andrews

1957--AIA name changed to AICPA

1959--Accounting Principles Board formed

1961--First APB opinion issued

1962--APB Opinion no. 2 unpopular; SEC Chief Accountant Andrew Barr does not support APB 1967--Joint Carnegie Corporation-AICPA education project studying the common body of knowledge for CPAs; publication of Horizons for a Profession

1972--Retirement of Andrew Barr, longest-serving chief accountant of the SEC

1973--Financial Accounting Standards Board formed

1973--Equity Funding fraud; auditing around computer not sufficient

1974--Cohen commission report reveals expectations gap exists

1974--Committees chaired by Senator Lee Metcalf and Congressman John Moss complete their investigations into the profession

1977--Creation of the AICPA division for CPA firms

1977--Foreign Corrupt Practices Act important to accountants in industry

1978 Government forces CPAs to allow advertising; Congress passes Inspector General Act

1980s--Committee chaired by Congressman John Dingell; 150-hour education movement; public interest becomes part of AICPA mission statement (indicating maturity)

1984--Congress passes Single Audit Act

1984--Governmental Accounting Standards Board established

1987--Treadway commission report

1989--Mergers of several large CPA firms