A “New Deal” for the Profession: The Expansion of the Committee on Accounting Procedure
DOMINIC DETZEN
Department of Accounting, Vrije Universiteit Amsterdam, De Boelelaan 1105,
1081 HV Amsterdam, The Netherlands
d.detzen@vu.nl
April 2014
Abstract
This article examines the actions of the U.S. accounting profession in the 1930s, focusing on events that
led to the 1938 expansion of the Committee on Accounting Procedure (CAP), the first American body to
establish accounting principles. In this period, three groups of actors exerted pressure on the profession.
First, the New York Stock Exchange (NYSE) engaged in a cooperation with accountants to ratify several
accounting principles. Second, the American Accounting Association (AAA) boldly forged ahead with a
statement of basic accounting principles, eroding the profession’s leadership in accounting thought.
Third, the Securities and Exchange Commission (SEC), while supportive of self-regulation, exerted
pressure on the profession to develop accounting principles, which was answered in 1938 with the
expansion of the CAP. The article examines the profession’s actions in a framework of strategic
responses to institutional pressures, as exerted by the NYSE, the AAA and the SEC.
Keywords: Committee on Accounting Procedure, professionalization, strategic responses, accounting
history
1. Introduction
In pursuing collective upward social mobility, professions are assumed to strive for monopoly in an
“attempt to translate one order of scarce resources – special knowledge and skills – into another – social
and economic rewards” (Larson, 1977, p. xvii). Professions are thus seen as interest groups, who pursue
economic interests by monopolizing the market and socially closing their occupation (MacDonald, 1995).
In the area of accounting, it has been extensively scrutinized how the profession has attempted to
achieve closure, e.g. by establishing a “ring fence” around itself (Walker & Shackleton, 1998) and
defending its jurisdiction (Abbott, 1988). A key aspect of the professionalization project is the “enduring
and institutionalized relationship of indulgence” with the state (Sikka & Willmott, 1995). That is, the
profession is in a constant bargain with the state regarding its position in society, suggesting that it is
caught in a dynamic and continuous struggle for defending its interests with the state (Chua & Poullaos,
1993; 1998). These issues have been explored in a number of settings in different countries (e.g.
Annisette, 2000; Carnegie & Edwards, 2001; Ramirez, 2001; Caramanis, 2002; Sian, 2006).
This paper examines the struggles of the U.S. accounting profession in the 1930s, when both the
economic downturn following the stock market crash of 1929 and corporate scandals put the spotlight
on the profession, challenging it into action to improve accounting and the reliability of financial
statements. In a first step, the New York Stock Exchange (NYSE) cooperated with the profession by
prescribing certain accounting rules for an otherwise largely unregulated profession. In addition, the
Great Depression led to the creation of the Securities and Exchange Commission (SEC), which was
empowered with broad oversight rights and authoritative power, also in the area of accounting.
However, the SEC made clear early on that it did not want to assume a standard setting role and
explained in 1938 that it looked to the profession for “substantial authoritative support” on accounting
practices. The resulting interdependence between state and profession reflected the “’regulative
bargain’ in which the state grants professions autonomy and a monopoly over a defined jurisdiction in
1
return for self-regulation and reciprocal assistance in maintaining state authority” (Suddaby, Cooper, &
Greenwood, 2007, p. 337). Additional pressure was exerted from an increasingly strong academe, which
saw its chance to gain influence in the field. This study analyzes the actions and reactions of these
actors, placing them in the social, economic and political environment of the time. At the end of the
period, described as the first peak of interest in accounting (Storey, 1964), the Committee on Accounting
Procedure (CAP), for years a dormant and reactive working group, was expanded in 1938 in a serious
attempt to promulgate and establish accounting principles. The CAP was a part of the U.S. accounting
association, the American Institute of Accountants (AIA)1, underlying rules and procedures set by the
association. Its members were appointed by the Institute’s president, determined by the association in
cooperation with accounting firms. Following its expansion in 1938, the CAP issued its first Accounting
Research Bulletin (ARB) in September 1939 and was active until 1959, when it was replaced by the
Accounting Principles Board (APB).
Following Canning and O’Dwyer’s (2013) extension of Oliver (1991), the paper uses a multi-actor
framework to assess actors’ strategic responses to institutional pressures. Specifically, the paper is
interested in the struggle for attention and the pursuit of hegemony in the aftermath of the severe
disturbances experienced by the Great Depression and the creation of the SEC. I use the concept of
organizational field, i.e. the “intermediate level between organization and society” (Greenwood,
Suddaby, & Hinings, 2002), to explain the dynamics of the struggle between the actors in the field. Using
this unit of analysis allows a focus on all relevant actors “that, in the aggregate, constitute a recognized
area of institutional life” (DiMaggio & Powell, 1983, p. 148). At the same time, it does not imply that the
outcome of the struggle is regulation, as the concept of regulatory space may do (e.g. Young, 1994;
MacDonald & Richardson, 2004; Canning & O’Dwyer, 2013). This last issue is of specific importance in
the present case because the authority of the CAP and subsequent standard setters is indirect in that it
1
In 1957, the AIA changed its name to American Institute of Certified Public Accountants (AICPA).
2
rests on the enforcement of their promulgations by the SEC, while the bulletins, opinions and standards
themselves are not binding.2
This article contributes to the literature in three aspects. First, it suggests that professions are
not necessarily obsessed with achieving legal monopoly by regulatory capture. In the 1930s, the U.S.
accounting profession focused on maintaining their professional values of judgment and flexibility,
which were seen as the foundation of the profession and thus the core element of their business. Being
threatened by government intervention, the profession responded by defending their professional
values, which, essentially, corresponded to their economic interests. At first, the profession followed a
strategy of avoidance when the SEC was not yet institutionalized and engaged in ‘educating’ the agency.
Following increasing pressure from the SEC, the profession eventually complied and expanded the CAP.
Thus, the article suggests that professions’ self-interest may take other forms than a crude pursuit of
market closure. Self-interest seems both contingent on the objectives of the profession and conditional
on the pressure exerted on the actors.
Second, I shed light on the early relation between the profession and the state, as represented
by the SEC. While the overall political mood of the 1930s was activist, as can be seen by the New Deal
program, the SEC remained pro-business in its early years in that it supported self-regulation when it
came to accounting (Seligman, 2003). Besides lack of interest and a pro-business Chairman, the SEC was
unable to take over regulation of accounting because it was lacking expertise, manpower and funding.
Despite this support from the SEC, the profession took responsibility for promulgating accounting
principles only when the SEC threatened to take action. This result implies that it was not regulatory
capture but a combination of the self-regulatory climate and an inevitable reliance on the profession
that preceded the expansion of the CAP.
2
Relatedly, the term “standard setting” did not appear until the 1970s (Zeff, 2001, fn. 1). Prior to that, accounting
principles were established based on common practice.
3
Third, this study not only adds to the scarce critical literature on the evolution of the U.S.
profession (e.g. Montagna, 1974; Miranti, 1990; Lee, 1995), but also analyzes the establishment of a
precursor of today’s standard-setting bodies.3 By doing so, it sheds light on the reasoning for
establishing the CAP, in particular features that are still in place today, such as the participation of
academics, the indirect authority of the pronouncements and the capacity of the SEC to override
accounting principles and standards.
I employed both primary and secondary sources to assess the period under consideration. As
primary sources, I used the AIA’s yearbooks and monthly bulletins, the American Society of Certified
Public Accountants’ monthly organ, articles in professional and academic journals, such as the Journal of
Accountancy and The Accounting Review, as well as primary sources made available by the SEC
Historical Society. I employed secondary material in the form of published histories of accounting firms,
biographies of leading accounting figures of the time and writings from a traditional historical research
perspective (such as Carey, 1969, 1970; Zeff, 1972, 1984; Previts & Merino, 1998). The use of secondary
sources is of concern to the extent that some of these works’ functionalist views biases my
interpretation of the events and, thus, “define[s] the scope of scholarly inquiry” (Sikka, 2001, p. 758). To
address this potential bias, I aimed to maximize the use of primary sources.
The paper is divided into four sections: Following this introduction, I explain the theoretical
framework for my analysis. In the third section, I devote myself to the analysis of the events leading to
the creation of the CAP. I conclude by discussing the narrative and reflecting on my analysis.
2. Theoretical framework
3
Other critical research on the U.S. accounting profession has focused on more recent events, in particular interand intra-professional conflicts (e.g. Suddaby & Greenwood, 2005; Suddaby, Cooper, & Greenwood, 2007),
professional identity (e.g. Covaleski, Dirsmith, Heian, & Samuel, 1998) or the marginalized (e.g. Hammond, 1997).
Only few historical studies examine the organizational field level (Bealing, Dirsmith, & Fogarty, 1996; Thornton,
Jones, & Kury, 2005).
4
In this article, I follow the reasoning that “institutions are historically contingent” (Thornton, Ocasio, &
Lounsbury, 2012, p. 12) in that the CAP, when being expanded in 1938, was a result of the preceding
institutional struggles. On the one hand, it was set up according to the profession’s preferences of
developing accounting principles from practice without prescribing a preferred treatment on
accountants. On the other hand, it reflected the pressures exerted on the profession by the NYSE, the
AAA and the SEC. The concept of organizational field and Oliver’s (1991) strategic responses to
institutional pressures help to explain the expansion of the CAP and are outlined in the following.
2.1 Organizational field
An organizational field comprises all actors that shape and are shaped by the “processes by which
socially constructed expectations and practices become disseminated and reproduced” (Greenwood,
Suddaby & Hinings, 2002, p. 58). Following Cooper and Robson (2006), who argue that professional
service firms are important sites of professionalization, and the earlier focus on professional
associations (e.g. Abbott, 1988), I examine the key players in the organizational field of accounting to
analyze how the profession responded to institutional pressures in the 1930s, which ended with the
expansion of the CAP. By examining the organizational field, I do not focus on the workings of the
professional firms per se, but on how they acted in the field, expressed their opinions and contributed to
the advancement of the accounting profession. Necessarily, such an analysis emphasizes the actions of
the leading figures of the firms, often their managing partners, who were also the eminent figures in the
profession.
An organizational field is understood to be similar to a regulatory space, which is “an abstract
conceptual space constructed by people, organizations, and events acting together upon a set of specific
regulatory issues subject to public decisions” (Canning & O’Dwyer, 2013, p. 172). Such a concept is
flexible in that the actors that are active in the field may vary over time or by issue that is bound to be
5
discussed. Whereas a regulatory space has the notion of government intervention in that it assumes
some form of regulation as the outcome of a struggle in the arena, an organizational field is a more
neutral term that does not imply negotiations between a (potential) regulator and a regulatee. Instead,
the field can be occupied by the state or state representatives who, given the omnipresent threat of
state intervention in accounting, latently or openly shape the discussions. That is, an organizational field
makes presumptions neither on the activity of the state in the field nor on the outcome of the struggles,
which may also be a realignment of power between private actors.
2.2 Strategic responses in a multi-actor framework
Oliver’s (1991) typology of strategic responses to institutional pressures has been applied by a number
of accounting studies (e.g. Bealing, Dirsmith, & Fogarty, 1996; Shapiro & Matson, 2008; Canning &
O’Dwyer, 2013), which is why I limit myself to a short overview of the central features of Oliver’s (1991)
typology (see also Table 1).
[Table 1 About Here]
According to Oliver (1991), five strategic responses to institutional pressures are available to
actors that range, in increasing order of resistance, from acquiescence, compromise, avoidance and
defiance to manipulation. Acquiescence suggests that an actor accedes to the institutional pressure
exerted. It can do so in more or less conscious ways (habit, imitate, comply). The compromise strategy
implies that actors balance, pacify or bargain when confronted with conflicting institutional demands
such that the outcome is partial conformity. Avoidance refers to an actor’s attempt to sidestep
conforming with institutional pressures, either by concealing nonconformity, buffering themselves or
escaping by changing their activities. Defiance is a strategy that entails either dismissing institutional
rules, challenging the requirements or even attacking the source of the pressure. Finally, using
6
manipulation as the most active response implies an attempt to exert power over (external)
constituents by either co-opting, influencing or controlling the sources of the pressure.
Oliver (1991) goes on to suggest that both the willingness and the ability to conform determine
the degree of resistance that an actor exerts. Resistance, and vice versa conformity, is again determined
by five forces: cause, constituents, content, control, and context. The cause of the pressure concerns the
question why the actor is being pressured, i.e. whether it relates to an issue of social or economic
fitness. The higher the social legitimacy or the economic gain to be achieved by conformity, the less
likely it is that the actor will resist. Constituents refers to the source of the pressure and, specifically,
hypothesizes that the smaller the number of constituents and the higher the dependence on the
pressuring constituents, the more likely the actor will conform. Regarding the content of the pressures,
it is suggested that an increasing compatibility with the actor’s goals and a lower threat to autonomy
encourages the actor to use a passive acquiescence strategy more readily. Control refers to the
processes of exerting pressures, i.e. legal coercion and voluntary diffusion. Thus, the likelihood of
conformity increases with a higher threat of legal consequences as well as a broader diffusion of a
practice across an organizational field. The environmental context of the pressure suggests that a high
level of uncertainty and interconnectedness coincide with a higher likelihood of conformity.
This paper analyzes the strategies used by the accounting profession depending on the
institutional antecedents of the challenges coming from different actors. To do so, the paper uses
Canning and O’Dwyer’s (2013) multi-actor framework by allowing the pressurizing constituent to change
its strategy and thus act in answer to the profession’s response. Focusing on the interactions between
the cause of the pressure and the accounting profession, the paper adds a different shade to the
framework by examining the responses to different constituents (NYSE, SEC, AAA), allowing for a clearer
explication of the profession’s strategies. The article shows that a staged interaction, extending over a
ten year-period following the stock market crash of 1929, resulted in the expansion of the CAP.
7
3. The expansion of the CAP in 1938
The ensuing sections are divided into three segments, corresponding to the challenges to the thought
leadership of the accounting profession in the 1930s by the NYSE (3.1), academe (3.2), and the SEC (3.3).
The final chapter also discusses central features of the expanded CAP that reflect how the challenges
from the three field participants left their mark on the profession.
3.1 Challenge I – Cooperation with the NYSE
Companies’ accounting practices had been criticized already prior to the 1930s. As early as 1922, the
NYSE reprimanded some accounting practices of listed companies and proposed, without following
through, sworn statements and adequate information on companies’ financial position prior to stock
issuance and semi-annually thereafter (Carey, 1969). However, the economic boom of the 1920s
produced a regulatory mood that seemed to prefer laissez-faire, also in the area of accounting. In 1926,
criticism was aired again, this time by Harvard professor William Z. Ripley, who gave numerous examples
of dubious accounting practices he had observed in corporate reports (Ripley, 1926). Besides
disapproving of measurement issues, in particular asset overvaluations and understatements of
depreciation, Ripley was critical of poor disclosure practices due to which shareholders often remained
in the dark regarding accounting practices applied in the financial statements. Applauding the NYSE as
“the leading influence in the promotion of adequate corporate disclosure the world over”, Ripley (1926)
argued that there were limitations in the powers of the NYSE because it had control only over listed
firms. As a result, he proposed federal regulation in the form of the Federal Trade Commission acting
within the power given to it when established in 1914, requiring “corporations to file with the
Commission both annual and special reports in such form as the Commission might prescribe, such
reports to be rendered under oath”. Such a solution would “conduce to popular thrift [by throwing] all
possible safeguards about the investments of the common people”.
8
Ripley’s article had an immediate impact: Not only did the stock market suffer a decline, even
President Coolidge commented on the article by suggesting that states should take care of corporations’
publicity (Zeff, 1972). In passing, Ripley had also referred to an extension of audits of financial
statements under the supervision of shareholders. This comment was noted particularly by the audit
profession, which saw an opportunity to extend its business. A survey conducted in 1927 found that, of
approximately 15,000 companies in the industrial sector, only 892 carried an audit (“There is still plenty
of room”, 1926). Seeing an economic gain to be obtained by conforming to the pressure exercised, the
profession moved swiftly in an apparent attempt to propose a remedy.
George O. May, managing partner of Price, Waterhouse & Co., gave a speech at the 1926 annual
meeting of the AIA “as a direct result of the publication by Professor Ripley” (May, 1926, p. 321). While
disagreeing with many of Ripley’s points, May stated that “the time has come when auditors should
assume larger responsibilities, and their position be more clearly defined. […] In these circumstances it
seems to me that the extension of the independent audit, accompanied by a clearer definition of the
authority and responsibility of the auditors, is one of the most valuable remedies to be found for the
defects of which Professor Ripley complains” (pp. 321-322). To fight off the proposed oversight by the
Trade Commission, May suggested cooperation with stock exchanges and banks to further improve
accounting practices.
May’s proposal seemed to be grounded in his conversations with J. M. B. Hoxsey, a recent
appointee as executive assistant to the NYSE’s Committee on Stock List,4 who wanted to make the
financial statements of listees more informative and reliable (DeMond, 1951). May, who, in November
1926, had convinced his fellow partners that he relinquish his administrative duties and devote himself
largely to professional matters, “cultivated his acquaintance” with Hoxsey (Carey, 1969). Still, May’s
proposal to cooperate, formally brought forward by the AIA, was, to the Institute’s disappointment,
4
The NYSE’s Committee on Stock List was responsible for admitting securities to the stock exchange.
9
strongly rejected by the president of the NYSE. Hoxsey continued to consult May on technical questions
and, as a conciliatory move, made May accounting advisor to the exchange (DeMond, 1951).
Subsequently, May deepened the relation to the NYSE such that his tenacious push for
cooperation was taken up in the aftermath of the stock market crash of 1929, when stock prices
plummeted and accounting practices were amongst the causes cited for the crash (Zeff, 1972, p. 121). In
1930, after reconciling their views on cooperation with the NYSE, the Institute appointed a Special
Committee on Cooperation with Stock Exchanges with George May as its chairman.5 Thus, May “was
able to influence the position taken by both parties” (Grady, 1962, p. 78), given his “dual relation to the
Exchange which was, of course, fully understood by all concerned” (p. 59).
In the next two years, correspondence was exchanged between the two parties, but no
accounting statement was issued. A further push came in March 1932, when the corporate empire of
Ivar Kreuger, also known as the Swedish “match king”, fell apart and Kreuger committed suicide.6 Price,
Waterhouse & Co. investigated the company’s accounts and unwound the fraud finding that “nearly a
quarter of a billion dollars in reported assets had never existed” (Flesher & Flesher, 1986, p. 425).
Kreuger had largely made up the financial statements of his companies and strongly believed in
corporate secrecy, e.g. threatening to withdraw business if a bank asked for an audited balance sheet
(Flesher & Flesher, 1986).
In the aftermath, an investigation by the U.S. Senate put the NYSE in the spotlight, which had
moved quickly to require independent audits of new listing applicants and was now considering to
extend this requirement to all listed companies (Stock Exchange Practices, 1933).7 George O. May, who
5
The five other members were senior partners of large accounting firms: Archibald Bowman (Peat, Marwick,
Mitchell & Co.), Arthur H. Carter (Haskins & Sells), Charles B. Couchman (Barrow, Wade, Guthrie & Co.), Samuel D.
Leidesdorf (S. D. Leidesdorf & Co.), and Walter A. Staub (Lybrand, Ross Bros. & Montgomery).
6
According to Flesher and Flesher (1986), the Kreuger fraud was the most significant business failure at the time,
albeit not the only one. Other cases, in particular the bankruptcy of Samuel Insull’s utilities companies, likely added
to the sentiment that laissez-faire may not be the right policy.
7
Soon after these hearings, which were held in January 1933, the NYSE went forth with such a requirement.
10
also testified before the Senate committee, affirmed the case for an audit requirement by stating: “That
is one of the good things that I think has come out of this. That people have realized that, however
trustworthy people may seem to be, some objective study is eminently desirable. […] Now they have
come to find that, even though it may be only one case out of a hundred, it may sometimes be a
valuable additional protection” (Stock Exchange Practices, 1933, pp. 1273-1274). At the same time, May
wanted to fend off government intervention arguing that auditing financial statements was sufficient:
“Of course, all these things are a question of balancing risks against costs. If you create a machinery of
protection that is unduly expensive, you kill industry and you put a burden on new financing that is out
of proportion to its value” (Stock Exchange Practices, 1933, p. 1274).
The surge to put some ordering in companies’ accounts found additional support in the
hearings: In his testimony, Frank Altschul, Chairman of the Committee on Stock List, emphasized that
relying on audited financial statements implied that the NYSE needed to work “in cooperation with the
accountants in regard to some of the general governing principles of accounting” (Stock Exchange
Practices, 1933, p. 1358). As evidence of the cooperation activities of the NYSE and the accounting
profession, Altschul submitted a preliminary report that was based largely on a September 22, 1932
letter drafted by George May (Grady, 1962).8
At the end of the report stood the recommendation to better educate the investing public on
the nature of accounting as well as “[t]o make universal the acceptance by listed corporations of certain
broad principles of accounting which have won fairly general acceptance […], and within the limits of
such broad principles to make no attempt to restrict the right of corporations to select detailed methods
of accounting deemed by them to be best adapted to the requirements of their business” (Stock
Exchange Practices, 1933, p. 1362). The report named five broad principles of accounting, which could
8
An additional impetus for finding consensus on some broad principles was probably given by the publication of
Berle and Means (1932), who followed in Ripley’s footsteps and criticized accounting and accountants for failing to
safeguard investors.
11
be regarded as widely accepted. Apart from these principles, “it is relatively unimportant to the investor
what precise rules or conventions are adopted by a corporation in reporting its earnings if he knows
what method is being followed and is assured that it is followed consistently from year to year” (Stock
Exchange Practices, 1933, p. 1361).
While generally supportive of the five recommendations, Altschul admitted that imposing these
views on all listed companies may be beyond the power of the NYSE, given that delisting a noncompliant
company may be “very considerable hardship” (Stock Exchange Practices, 1933, p. 1365). Instead, the
Exchange went on to survey all listed companies regarding their application of the principles. The
responses suggested that “all these principles should now be regarded by the Exchange as so generally
accepted that they should be followed by all listed companies—certainly, that any departure therefrom
should be brought expressly to the attention of shareholders and the Exchange” (Audits of Corporate
Accounts, 1934, p. 27).
Between 1932 and 1934, the AIA’s special committee exchanged further correspondence with
the Committee on Stock List, published in Audits of Corporate Accounts (1934). The pamphlet contained
the “five basic principles” of accounting as well as correspondence on the scope of an audit and the
audit report, and was sent to all members of the AIA. After adding another recommendation, the “six
rules or principles”, as they were then known, were approved at the Institute’s annual meeting on
October 15, 1934, making them binding for Institute members.
George O. May, to whom “belongs the lion’s share” of the successful alliance with the Exchange
(Zeff, 1972, p. 125), made it clear that he did not want to limit the professional judgment that
accountants currently exercised. In May’s view, “flexibility” was to be preferred over “uniformity”, broad
principles over a detailed rulebook. Hence, he saw the September 22, 1932 letter “as the opening gun in
the battle for significance accompanied by full disclosure, as against the alternative of a uniformity that
could not be attained without a desirable sacrifice of significance” (Grady, 1962, p. 78).
12
Overall, the events culminating in the adoption of the “six rules or principles” can be seen “as
the first tangible sign that the Institute, as a corporate body, was willing and able to play a leadership
role in the shaping of accounting principles” (Zeff, 1972, p. 125). This achievement originated in the
criticism aired in the 1920s, when Professor Ripley launched an attack on accounting practices. While
not directly criticizing auditors, the accounting profession saw its chance to gain social and economic
legitimacy as, prior to that, audits were not widely spread. The subordinate role that the profession was
playing then is evidenced by the NYSE, seen by Ripley as the leader in accounting, responding negatively
to the AIA’s proposal for cooperation. Likely, the widespread laissez-faire attitude of the regulatory
environment also explained why both Ripley’s attack and the profession’s suggested response failed to
find their mark.
It was only when the Great Depression hit the economy that the accounting profession was
more successful. Again, corporations, instead of auditors, were under pressure. Following the tenacious
efforts of George O. May to establish a connection with the NYSE, the entire Exchange was now more
sympathetic towards the profession. In particular, the fraud scandal surrounding the Kreuger empire put
the profession in a position to advance their interests. The profession successfully portrayed itself as a
remedial factor to the scandals: It had been A. D. Birning, of Ernst and Ernst, who pursued Ivar Kreuger
in an attempt to audit a subsidiary of the empire, possibly playing a principal role in the unfolding of the
events resulting in Kreuger’s suicide (Stock Exchange Practices, 1933). In addition, Price, Waterhouse &
Co. had been hired to investigate and unfold the accounting fraud committed by Kreuger. This aura of
transparency was contrasted by the NYSE being held responsible for failing its oversight function of the
listed companies. Representative LaGuardia of New York argued that the fraud could not have been
possible, “had it not been either for the carelessness, indifference or connivance” of the NYSE (cited in
Flesher & Flesher, 1986, p. 426). Being thus threatened, the NYSE acquiesced by bringing forth a solution
carefully planted by the profession: extending financial statement audits and conforming with principles
13
set out by the AIA. While the former requirement meant a considerable advance of the economic
interests of the profession, the latter “rules or principles” were only a minimum consensus of what
constituted well-established practice, so much so that May’s original letter also spoke of “conventions”.
A functionalist view of this time described the interaction with the NYSE as “most helpful to accountants
in their efforts for improvement in corporate accounting practice” (Staub, 1942, p. 15).
It thus seems that the advancement of the profession in the early 1930s followed a strategy of
manipulation (Oliver, 1991). Having George May as an accounting adviser to the NYSE not only meant
that the profession was co-opting the source of the institutional process, but also that it was able to
shape the values and norms contemplated by the Exchange. When the NYSE came under scrutiny, it put
forward the suggestions made by the profession, which implied that, to an extent, the Exchange was
dominated by the profession. To put it in May’s words, “the whole advance of accounting in this country
is marked by a series of events like this [i.e. the Kreuger fraud]” (Stock Exchange Practices, 1933, p.
1273). As a result, the profession profited immensely from its ability to portray itself as the solution and
thus shape the debate without making concessions of any kind.
3.2 Challenge II – Establishment of the SEC and a rising academe
As Flesher and Flesher (1986) posit, the Kreuger fraud also gave an impetus to the passing of the
securities acts of 1933 and 1934, which regulated the issuance of securities as well as their trading on
exchanges.9 Both acts stipulated that the financial statements of a listed company were to be audited by
an independent public or certified accountant. This reference was introduced due to the efforts of the
accounting profession. The first draft of what became the 1933 Securities Act included only one
provision regarding audits, namely in the case of an investigation into the eligibility of a company for
9
The Securities Exchange Act of 1934 established the SEC, which began operations in July 1934 and took over the
administration of the Securities Act of 1933 from the Federal Trade Commission in September 1934.
14
registration. The AIA immediately sent a letter to the Congressional committee explaining the
importance of an audit to shareholders (Carey, 1969). At about the same time, Colonel Arthur H. Carter,
senior partner of Haskins & Sells, came in touch with the chairman of the Senate Committee and
subsequently appeared before the committee, making a strong case for including an audit provision in
the Securities Acts (Hearings on S. 875, 1933).10 Although Carter was not questioned in a friendly
atmosphere, his appearance, combined with other Institute measures, apparently made an impact on
the legislator such that the final acts required an audit certificate of listed companies.
However, the profession could not prevent the introduction of sections that gave the SEC broad
powers over prescribing the form and content of financial statements and thus over promulgating
accounting principles.11 This part of the regulation was a major threat to the jurisdiction of the
profession and, in spite of the previous public criticism of accounting practices, came largely as a
surprise such that “[n]o policy positions, no strategy for dealing with such legislation, no constructive
proposals for inclusion in such legislation had been worked out” (Carey, 1969, p. 183). The Institute
immediately appointed a Special Committee on Cooperation with the Securities and Exchange
Commission, which engaged in correspondence with the SEC primarily regarding the form and content
of financial statements (see the reports of the Special Committee in the AIA’s yearbooks). Early on, the
profession aimed to urge the SEC to modify the requirements under the Securities Acts and permit
flexibility, so financial statements were “prepared in the form and detail which the management and the
independent accountants believe fairly present the financial condition and operating results of the
corporation” (Joint Committee, 1934, p. 2).
10
It is interesting to note though that Carter was not part of the AIA’s “inner circle” and that his advance was
“without consultation with the Institute” (Carey, 1979, p. 34). This episode seems to have contributed to the reunion of the AIA and the American Society of CPAs, which took place in 1936 (Carey, 1969).
11
Additional concerns arose over section 11 of the 1933 Securities Act, which established legal liability, also of the
certifying accountant, for misleading financial statements.
15
This activism was countered by conciliatory moves on the part of the SEC, which “took pains to
reassure the accounting profession that the SEC would not soon exercise its statutory authority to
develop uniform accounting principles” (Seligman, 2003, p. 116). Still, the five SEC commissioners were
divided: Chairman Joseph P. Kennedy was widely regarded as being “pro-business” (Bealing, Dirsmith, &
Fogarty, 1996), having little interest in accounting (Seligman, 2003). James M. Landis and George C.
Mathews also made clear that they did not want to develop uniform accounting principles.
Commissioner Robert E. Healy, who had earlier been with the Federal Trade Commission where he
examined public utility frauds, aimed to take a more activist role in accounting. Ferdinand Pecora
seemed to be in between the two positions.12 Overall, the regulatory mood still seemed to be supportive
of the accounting profession in that the SEC wanted to establish a working relationship with the AIA
(Carey, 1969, pp. 194-196; 199-202).
In spite of these positive signals, the profession did not continue to provide thought leadership
in accounting. In fact, it seemed to have adopted the recommendations made in a report of its Special
Committee on Development of Accounting Principles: “Since principles of accounting cannot be arrived
at by pure reasoning, but must find their justification in practical wisdom, the committee believes that
the Institute should proceed with caution in selecting from the methods more or less commonly
employed those which should be accorded the standing of principles or accepted rules of accounting”
(AIA 1934 yearbook, p. 276).13 The profession also did not react when Carman G. Blough, the SEC’s first
Chief Accountant when that position was created in 1935, reached out to encourage cooperation. The
SEC, in its endeavor to improve accounting practices, desperately needed a more extensive articulation
12
Commissioner Pecora had earlier led the investigation into stock markets, as a result of which the securities acts
were issued (Carey, 1979).
13
The Committee reports referred to are drawn from the AIA’s yearbooks, which were available to all Institute
members. The reports were written by the (vice-)chairman of the Committee or, in the CAP’s case, also by the
research director, and were directed to the council of the AIA. The reports are to be understood as a progress
report or a year-end reflection on the Committee’s conduct and the status quo of deliberations.
16
of accounting principles as authoritative guidance in its enforcement activities. Without agreement on
basic principles, the SEC was unable to fulfill its mission and police companies’ financial statements.14
Prompted into action by the profession’s “apparent abdication as a leading force in the
establishment of accounting principles” (Zeff, 1984, p. 454), the resulting void was filled by the American
Accounting Association (AAA). The association was founded in 1916, but reorganized in 1936, primarily
to add the development of accounting principles to its scope of activities (Zeff, 1966). It was primarily
the editor of the Accounting Review, Eric L. Kohler, who started the offensive when he criticized the
profession’s case for professional judgment as meaning “no more than that the accountant must be
sufficiently pliable to meet the demands of new clients and the new demands of old” (Kohler, 1934, p.
334). He argued that “the profession is either unwilling or incapable of doing any straightforward
thinking on its own behalf” (Kohler, 1934, p. 334). Given that the profession exerted only that originality
“which will be required to restrain, shall we say, a securities and exchange commission that may get out
of hand,” he urged academe to “take the lead in defining accounting standards” and to “secure for
themselves their proper leadership in professional affairs” (Kohler, 1934, p. 336).
At the first meeting following the association’s reorganization, the 1936 Executive Committee
had Commissioner Mathews as a guest, who explained current accounting problems of the SEC and
emphasized the SEC’s need for an authoritative literature in accounting (Zeff, 1966). Soon, the AAA
began debating among its Executive Committee such a fundamental statement and the long debates
culminated in the “Tentative Statement of Accounting Principles Affecting Corporate Reports” (AAA,
1936). The statement proposed three major principles: measurement at cost, an all-inclusive income
statement, and a distinction between paid-in capital and earned surplus. While supporting these
14
It is a marking feature of GAAP that companies can apply their preferred accounting practice, unless this practice
is outlawed or another practice is specifically required for the underlying transaction. In turn, this characteristic
implies that, without a statement of accounting principles, the SEC could not require companies to change their
accounting practices.
17
propositions, the Executive Committee stated upfront that their statement was to be seen “as an
experimental formulation of principles”, based on which discussion and a more comprehensive
formulation was to develop (AAA, 1936, p. 187).
This document was what the SEC needed and what it could use in its review of financial
statements. Emphasizing the Commission’s perception of “a great need for a more generally recognized
body of accounting principles”, Chief Accountant Blough (1937, p. 30) stated: “[The document’s]
importance to me is in the fact that it is an expression of opinion on significant accounting principles
from a body of men whose word may be taken authoritatively by practicing accountants seeking
guidance in the many problems that face them.”
While the document was heavily debated within academe, the profession did not react to the
statement, in spite of several attempts by the AAA to stimulate discussion (Zeff, 1966). Given that
practitioners avoided the subject of accounting principles entirely, it seemed only natural for the
profession, including the editors of the Journal of Accountancy, to ignore the statement (Greer, 1956).
This attitude was fostered by the belief on the part of some that the AAA was trespassing on the
profession’s preserve, but was not justified in speaking for practitioners (Zeff, 1966).15
Overall, the establishment of the SEC brought about two conflicting outcomes. On the one hand,
the profession was once again able to manipulate the debate on the need for an audit. While the
legislator had envisioned an audit only in case of further investigations, the profession was able to have
a passage included in the securities acts that required an audit of registrants’ financial statements, thus
being able to extend their business. On the other hand, the profession faced the threat of state
intervention in their organizational field. Having the authority to prescribe accounting practices, the SEC
15
A few years later, the Institute published its own monograph, written by Sanders, Hatfield and Moore (1938).
The book, commissioned already in 1935, was a survey of accounting practice without carrying much evaluation or
being as prescriptive as AAA (1936). In fact, the later elaboration on the AAA’s statement by Paton and Littleton
(1940) seems to have made a wider impact on accounting practice.
18
was able to intrude on the profession’s core competences. Practitioners seemed to be taken by surprise
(Carey, 1969), possibly fearing that uniform accounting requirements meant a reduction in their
judgment, client orientation and, thus, their main selling point. By the time that the drafts of the bills
were debated, the correspondence with the NYSE was not yet publicly available and, for fear of hostile
questioning and adverse publicity, the profession retreated from the official law-making process, but
remained in touch with people involved in the process (Carey, 1969). When the SEC was established, the
profession aimed to alter the agency’s focus from the prescription of accounting principles towards
general recommendations regarding the form and content of financial statements. It is not known
whether the profession was aware of the attitude of the SEC commissioners and their general
preference to treat accounting lightly. However, as Wiesen (1978) points out, the lack in expertise and
knowledge on the part of the legislator was apparent throughout the hearings of the Senate committee
debating the securities acts. It can be conjectured that the profession saw this knowledge gap and
perceived the need to limit a looming state intervention. By following a strategy of avoidance, it aimed
to reduce the scrutiny under which accounting practice was.
Inevitably, this strategy created a void that, in a next step, academe attempted to fill. The efforts
by the AAA to contribute to the discussion was primarily due to the profession’s inactions and failure to
come forth with a pronouncement of accounting principles. Accordingly, the reorganization of the
association was initially met with suspicion from the AIA, fearing that a rival organization was on the rise
(Carey, 1969). Following the AAA (1936) statement, however, the AIA responded with a defiance
strategy. Presumably, the non-response was due to the fact that practitioners still looked down on
academics as “being theoretical at the expense of practicality” (Blough, 1937, p. 30). Given that
academics had hitherto not been very influential, the profession “made light of academic instruction in
accounting, and derided any attempted leadership by “professors”” (Greer, 1956, p. 4). It appears then
that the AAA did not pose much of a threat to the profession, which could readily ignore the statement.
19
Had it not been for the SEC, the AAA’s statement would probably have long been forgotten. However,
given that the SEC was looking exactly for such an explication of accounting principles, the statement
received an additional backing that irritated the profession (Carey, 1970). Having academics serve the
SEC by coming forth with deductive pronouncements was an anathema to the profession such that the
combination of a rising academe and the SEC as a potential follower of the AAA’s statements began to
build pressure on the profession.
3.3 Challenge III – The SEC threatens to take over
It was not the AAA that encouraged the profession to take action, but the SEC. The Commission had
been made up primarily of “lawyers or economists, with less than a perfect understanding of accounting
and auditing” (Carey, 1979, p. 35). Both Joseph P. Kennedy, SEC Chairman from 1934 to 1935, and James
M. Landis, Chairman from 1935 to 1937, had a preference for self-regulation and wanted to leave the
promulgation of accounting principles to the profession (Seligman, 2003). However, over the years, the
pressure on the profession seemed to increase. Landis was “[c]ordial and conciliatory at first, [but] he
became increasingly critical of the accounting profession” (Carey, 1979, p. 35). In January 1935, he was
telling the New York State Society of CPAs “we need you as you need us”, whereas he soon became
irritated by the attitude of accountants in dealing with cases before the Commission (Carey, 1969).
In the first six months of 1935, listed companies had filed their registration statements with the
SEC and it became clear that the areas of differences in accounting practices were considerable, giving a
major impetus to the drive for developing accounting principles (Blough, 1967). These results seemed to
add to Landis’ attitude such that he stated in a December 1936 speech (cited in Starkey, 1937, p. 436):
“The impact of almost daily tilts with accountants, some of them called leaders in their professions,
often leaves little doubt that their loyalties to management are stronger than their sense of
responsibility to the investor. Such an experience does not lead readily to acquiescence in the plea
20
recently made by one of the leaders of the accounting profession that the form of statement can be less
rigidly controlled and left more largely to professional responsibility alone. Simplicity and more
adequate presentation is of course an end much to be desired, but a simplicity that misleads is not to be
tolerated. The choice here of more or less regulation is an open one for the profession.”
This statement prompted a reaction from the AIA and the chairman of the committee on
cooperation with the SEC, Rodney F. Starkey of Price, Waterhouse & Co., approached Landis, asserting
that “his remarks about the accounting profession had created considerable disturbance” (Starkey,
1937, p. 436). Landis suggested to get in touch with Carman Blough, with whom it was arranged that the
Office of the Chief Accountant “would refer to our committee in the future all accounting questions
which came before them on which they felt that they should take issue with the accountants who had
signed the statements” (Starkey, 1937, p. 436). This new and more extensive cooperation was seen as a
hopeful sign that, in spite of the negative stance taken in speeches made by SEC officials, the profession
would be able to control the debate on accounting principles.16
Blough’s department was the only one in the Commission with sufficient accounting expertise,
but lacked the manpower to take the lead in establishing accounting principles. In 1937, Chief
Accountant Blough had started to ask more directly for the support of the profession to ensure investor
protection by helping to define generally accepted accounting principles: “Almost daily, principles that
for years I had thought were definitely accepted among the members of the profession are violated in a
registration statement prepared by some accountant in whom I have high confidence. Indeed, an
examination of hundreds of statements filed with our Commission almost leads one to the conclusion
that aside from the simple rules of double entry bookkeeping, there are very few principles of
accounting upon which the accountants of this country are in agreement” (Blough, 1937, p. 31). Blough
16
Presumably as evidence of the fact that Blough seemed anxious to cooperate, Starkey (1937) included
correspondence between his committee and the Chief Accountant, in which the parties resolved some critical
accounting issues that had come to the attention of the SEC.
21
again emphasized that the Commission intended to lead the establishment of accounting principles only
“as a last resort. It is hoped the profession will itself develop greater consistency in the many places
where uniformity appears essential” (Blough, 1937, p. 37).
Blough himself was a supporter of self-regulation and believed that the elimination of areas of
differences by way of developing accounting principles was a task of the profession (Blough, 1967).
Some of the SEC commissioners did not share this view and, from late 1936 to early 1938, engaged in an
“increasingly heated controversy” about the SEC’s accounting policy (Blough, 1967, p. 5). After entering
the SEC without a clear approach on accounting, William O. Douglas, Chairman from 1937 to 1939, soon
sided with Commissioner Healy in an attempt to “challenge the laxness of the Commission’s accounting
policies” (Seligman, 2003, pp. 197-198).17 Coming from the Chairman, these efforts received additional
vigor, but Williams found himself outvoted by the other commissioners, of which primarily
Commissioner Mathews favored the profession to take the lead in accounting.
In April 1937, the SEC inaugurated its Accounting Series Release (ASR), in which the Chief
Accountant gave “opinions on accounting principles for the purpose of contributing to the development
of uniform standards and practice in major accounting questions” (ASR No. 1).18 A few months later,
Blough spoke at the 50th anniversary of the AIA and made clear that he expected the profession to
develop and promulgate some established accounting principles, with the SEC to “follow the better
thought in the profession” (AIA, 1937, p. 190). The ASR series was to be understood as an explanation of
“what we considered to be the most generally accepted accounting practice among the better
accountants in the country and not a promulgation of any new ideas or anything that had not been
followed by accountants rather generally” (AIA, 1937 p. 190).
17
The SEC’s early policy was, for example, evidenced in a 1937 staff study advocating “financial statements
reflecting improper accounting practices to remain unchanged provided such statements were footnoted to set
forth the proper procedure” (cited in Seligman, 2003, p. 198).
18
Blough was “a little embarrassed” by this foreword, which he did not write, suggesting that he was in
disagreement with some in the SEC with regard to the extensiveness of the ASR series (AIA, 1937, p. 189).
22
Twelve months later, the SEC “decided to give the profession a chance to lead the way” by
issuing ASR No. 4 (Blough, 1967, p. 6), in which it required “substantial authoritative support” for
accounting practices applied by corporations. While the exact kind of support remained undefined, it
could come from rules, regulations and other releases by the SEC, including published opinions of the
Chief Accountant (ASR No. 4). The release made clear that the SEC had the final vote on whether an
accounting practice was appropriate, but also suggested that the Commission would agree to
accounting practices that were generally accepted and, hence, had authoritative support. Thus, ASR No.
4 gave the profession an opportunity to develop and establish among itself recognized accounting
principles.19
And, indeed, representatives of the large accounting firms soon came together and discussed
ways to meet the challenge.20 Quickly, the idea of developing a statement of accounting principles that
all firms would follow was shelved, but the need for cooperation acknowledged. It was felt that a more
formal group of representatives, possibly an Institute committee, ensuring wide representation would
give pronouncements more weight. Since the AIA did not have a sufficiently large budget to fund such
work, the firms agreed to provide additional funding such that an AIA committee could operate for
several years.
Subsequently, the Institute followed up on an idea proposed by George O. May who, in late
1937, had suggested an expansion of his (Special) Committee on Accounting Procedure, which, based on
research, should be enabled to address any accounting area (Zeff, 1984). The Special Committee had
been installed in 1930 and was to express its opinion on accounting questions put before it by
companies and professionals.21 While the term “special” was deleted from the name in 1936, the
19
The Sanders, Hatfield and Moore (1938) monograph, published around that time, had again made apparent the
diversity of accounting practice, showing the need to find some common ground in accounting.
20
This paragraph draws from Blough (1967).
21
A Special Committee on Procedure had already been in place from 1918 to 1929 (Zeff, 1972).
23
Committee remained as passive as before, not issuing any recommendation on accounting practice.
May’s proposal was further refined in July 1938 by P. W. R. Glover, a member of AIA’s Executive
Committee, who suggested that the work of the Committee was not to be reviewed by other Institute
bodies, thus giving it additional authority in their pronouncements.
These proposals needed to overcome two concerns that were still widespread at the time: First,
it was feared that any pronouncement of a Committee would be in conflict with the views of the SEC,
the NYSE or the AAA, and thus fail to win support (Zeff, 1984). As a result, May had a strong preference
for coordinating the Committee’s efforts with these parties and work together in the development of
accounting principles (Zeff, 1972). The second concern related to the bindingness and the development
of the pronouncements. As was commonly felt, flexibility and judgment were highly valued in the
profession and accounting practice should drive the development of principles, instead of vice versa.
Such an inductive, almost democratic, approach was captured by AIA president Clem W. Collins stating:
“[U]ntil the profession has been given an opportunity to discuss proposed principles and procedures and
to freely express opinions in regard thereto, I do not feel that any official group in the Institute should
attempt to lay down the law” (Collins, cited in Zeff, 1984, p. 456).
In its 1938 report, the Committee on Accounting Procedure recognized “the existence of a
widespread demand for greater uniformity in accounting” (AIA 1938 yearbook , p. 136). It debated how
much uniformity was required and, defending professional judgment, mentioned only cautiously a move
towards enlarging the CAP, establishing a research department and “ultimately formulating rules on
specific points.” This was a “more ambitious suggestion”, in which a pivotal role would fall to close
cooperation with the SEC, the Stock Exchange and the AAA.
24
It was this idea that found the support of the Council and an enlarged Committee was set up in
late 1938, beginning its work in 1939.22 The background of the CAP’s twenty-two members reflected
May’s “strong personal view” that widespread support for the Institute’s Committee was best (Zeff,
1972, p. 134). The Committee reported in its first report following the expansion that its members were
“representative of all sections of the country, of all types of accounting firms, and of teachers of
accounting” (AIA 1939 yearbook, p. 139).
Clem W. Collins, in his function as Institute President, became the chairman of the CAP, while
George O. May, who was made vice-chairman, conducted the Committee’s activities, being its de facto
chairman (Zeff, 1972). It was not only regional representation that was considered important.
Representatives from the larger accounting firms were included, as were partners from smaller firms.23
Three full-time accounting academics were invited as members (Roy B. Kester, A. C. Littleton,
and William A. Paton), with Thomas H. Sanders of Harvard University becoming the first research
director. These appointments give testimony to the increased reputation of academics, partly in
response to the publication of AAA (1936). Following his work as Chief Accountant, Carman Blough, now
a manager at Arthur Andersen, also became a member of the CAP. His successor as Chief Accountant,
William W. Werntz, who had taken over from Blough in August 1938, was present at the CAP’s initial
meeting, ensuring it of the SEC’s full support and cooperation (Zeff, 1972).24 Thus, the Committee could
hardly have more posture, not only because of the reputation of its members, but also because of its
wide representation.
22
Higgins (1965) reports that this decision was largely due to the workings of Warren Nissley, a partner at Arthur
Young & Co.
23
Although considerable differences in size existed between accounting firms, they were not as pronounced as
nowadays and talk about the Big Eight did not begin until twenty years later, presumably in Wise (1960).
24
Subsequent reports to the AIA’s council make clear that representatives of the NYSE were frequently invited to
Committee meetings, suggesting this angle was also covered (see AIA yearbooks).
25
However, one is misled by the assumption that the CAP’s unparalleled reputation, paired with
its opportunity to express its preferred accounting principles, translated into a decisive effort at
establishing accounting principles. After having contemplated the preparation of a statement of broad
accounting principles in the spirit of AAA (1936), the CAP quickly decided that such work was
impractical, also because of fear that “the SEC lost patience and began to make its own rules” (Blough,
1967, p. 8).
Instead, the CAP chose an inductive approach for its work, giving only “lip service to theory”
(Previts & Merino, 1998, p. 284).25 Accordingly, the Committee stated in its 1939 midyear report: “The
present plan of the committee is to consider specific topics, first of all in relation to the existing state of
practice, and to recommend, wherever possible, one or more alternative procedures as being definitely
superior in its opinion to other procedures which have received a certain measure of recognition and, at
the same time, to express itself adversely in regard to procedures which should in its opinion be
regarded as unacceptable” (AIA 1939 yearbook, p. 140).
When the CAP began its work in 1939, a question arose regarding the authority of these
pronouncements. The CAP and the Institute refrained from putting pronouncements to a vote before
the AIA’s membership, which, if approved, would have made the bulletins binding for Institute
members. Instead, it was deemed “desirable that further opportunity should be afforded for discussion
of the broad questions” underlying the bulletins (AIA 1939 yearbook, p. 142). Thus, application of the
bulletins was not required for accountants and companies could deviate from the ARBs, although the
burden of proof would lie upon those who departed from the rules (see, e.g., Accounting Research
Bulletin (ARB) 1). The ARBs’ authority depended entirely on their general acceptability, which was
inevitably accentuated by the SEC’s insistence that registrants follow the CAP’s recommendations.
25
The appointment of Thomas Sanders as research director may also have convinced Committee members that
“accounting principles need be no more than reflections of existing practice” (Previts & Merino, 1998, p. 284).
26
Overall, it seems that it was “the almost pathological fear by accounting practitioners of
governmental intervention in their affairs” that drove the profession to expand the CAP (Zeff, 1984, p.
458). After the passage of the securities acts, the profession may have believed that the SEC did not
pose much of a threat, given the conciliatory moves from commissioners. However, the SEC quickly lost
patience with the auditors, particularly when the diversity of accounting practices became known via
the registration statements and, again, Sanders, Hatfield, and Moore (1938). This transparency was a
great achievement for the early SEC, which, thereafter, quickly changed its tone, almost to the point
where it threatened intervention. Only then did the profession feel pressured and complied with the
SEC’s requests of establishing accounting principles.
The setting up of the CAP reflects the challenges to the profession in the 1930s in that the
Committee was an effort to settle the debate with the SEC once and for all. Institute leaders proposed a
plan to ensure wide representation of Committee members and, thus, legitimacy of both the CAP and its
pronouncements. From early on, the CAP was “very careful to keep in close touch with the Chief
Accountant of the SEC” (Blough, 1967, p. 8). In that sense, the inductive approach of the CAP’s work not
only reflected the profession’s unwillingness to ““force” a consensus on accounting principles” (Zeff,
1984, p. 458), but also its reluctance to take the lead on a particular position without having considered
the opinions of all parties involved, including those of the SEC, the Stock Exchange and other regulatory
bodies and associations. This stance of the profession also expressed itself in the debate on “uniformity”
versus “flexibility” that dominated much of the literature at the time.
The SEC had also been under pressure. In its first decade of existence, the Commission was a
fledgling agency that still needed to demonstrate its regulatory effectiveness against the suspicion that
it was just another activist New Deal agency soon to be dissolved.26 Likely, the fact that the SEC was a
26
For an analysis of the SEC’s early years, especially its legitimation efforts in response to the McKesson & Robbins
fraud, see Bealing, Dirsmith, & Fogarty (1996).
27
young, possibly controversial, institution combined with the early conciliatory signals led the profession
to believe that an avoidance strategy was sufficient to fight off government intervention. Likewise, the
early experiences regarding the Commission’s lack of accounting expertise and manpower may have
suggested that the profession could get away with not responding to the pressure. When the SEC turned
out to be annoyed by the profession’s inaction and send credible signals, e.g. by the appointment of an
able Chief Accountant, that it was willing to act within its legislative powers, the profession needed to
change strategies and complied.
At the same time, components of a co-opting strategy seem to have been chosen in that the CAP
was cooperating closely with the SEC, the AAA, the NYSE and others. By doing so, the profession was
able to pacify the SEC, although the Commission continued to keep a watchful eye over the activities of
accountants, as evidenced by an excerpt of a speech given by Jerome N. Frank, SEC Chairman from 1939
to 1941, reprinted in the SEC’s 1939 annual report (p. 121): “I understand that certain groups in the
profession are moving ahead in good stride. They will get all the help we can give them, so long as they
conscientiously attempt that task. That’s definite. But if we find that they are unwilling or unable,
perhaps, because of the influence of some of their clients, to do the job thoroughly we won't hesitate to
step in to the full extent of our statutory powers.”
4. Discussion and Conclusion
This article has examined the events leading to the expansion of the CAP, the first U.S. body to establish
accounting principles. When the Committee was expanded, it stood at the end of a first peak of interest
in accounting (Storey, 1964). In its central features, the CAP reflected the struggles that the accounting
profession faced in the decade prior to the expansion. The NYSE, the AAA and the SEC each presented a
challenge to which the profession needed to respond such that accountants’ attitude towards their work
changed slowly over the years. Whereas professional values had been regarded very highly at the
28
beginning of the 1930s, some need to promulgate accounting principles was increasingly acknowledged
in the aftermath of the Great Depression to bring “order out of chaos” (Carey, 1970, p. 84). Nonetheless,
the CAP’s promulgations were binding only indirectly, i.e. via the SEC’s enforcement actions, whereas
they were not put to Institute membership vote, thus not being authoritative by themselves.
The setup of the CAP shows that the members of the Committee were chosen not just from the
profession, but also from academe, which had challenged accountants with their AAA (1936) statement.
Deliberations of the expanded Committee took into account the views of the SEC, whose Chief
Accountant was often present in meetings, but also of other groups, such as the NYSE or the association
of cost accountants. This inclusion of stakeholder groups implies that the profession intended to set up a
highly reputable body as well as to put the challenges to its conduct of business to rest. Zeff (1972;
1984; 2001) shows that the profession was indeed able to do so, at least until after World War II.
By grounding the profession’s responses in a multi-actor framework of strategic responses to
institutional pressures (Oliver, 1991; Canning & O’Dwyer, 2013), the article examines the staged
interaction between the profession and three pressurizing constituents. The first interaction, between
the NYSE and the profession, shows how actors change their responses over time, depending on the
pressure they are facing. In the 1920s, the NYSE was the frontrunner in ensuring quality in financial
statements and was thus unwilling to cooperate with the profession, when Ripley (1926) attacked the
corporate accounting practices and the profession saw an opportunity to advance their interests. The
power balance shifted in the aftermath of the 1929 stock market crash and the Ivar Kreuger fraud, when
the NYSE was heavily criticized for failing to oversee the proper accounting of its listees. Being thus
pressured, the NYSE relied heavily on the input previously received from accountants and not only
installed an audit requirement for its listees, but also cooperated with the profession in the
development of Audits of Corporate Accounts (1934). Surprisingly, the profession was less in the
29
spotlight during that time and was able to make considerable advances and profit from its appeal both
to transparency and its professional values.
The second challenge took place at around the same time, i.e. when the securities acts were
passed, giving the SEC broad powers to develop accounting principles to be followed in financial
statements. During the law-making process, the looming state intervention, combined with a lack of
expertise in the area of accounting, triggered the profession into action. On the one hand, it lobbied
successfully for an extension of audits, both in the Senate hearings and behind closed doors. Thus,
accountants were able to exploit the challenge by influencing the decision-making process. On the other
hand, the lacking expertise on the part of the legislator seems to have encouraged the profession to
think that a passive reaction by “educating” the SEC would be most successful to avoid state
intervention. However, when listed companies filed their registration statements with the SEC, the
diversity of accounting practices became apparent, making clear the need for a pronouncement of
accounting principles. Likewise, the SEC appointed an able Chief Accountant and was, henceforth, able
to talk to the profession at eye level. While the profession continued to remain silent, academics, who
had long been critical of the profession’s stance, saw a chance to increase their significance by filling the
regulatory vacuum produced by the profession’s inaction. Their resulting AAA (1936) statement was
seen as an intrusion on the profession’s territory and received the support of the SEC. This backing by
the Commission resulted in the profession being irritated, although the statement itself was seen as
inadequate, primarily because it was grounded in theory, instead of accounting practice. However, the
profession did not perceive academics as contenders for thought leadership and, thus, remained quiet,
pursuing a defiance strategy.
The third challenge then came from the SEC, which was increasingly annoyed by the profession’s
reluctance to develop accounting principles. Repeatedly, the Commission had encouraged the
profession to narrow the areas of differences in accounting practice, as can be seen in the speeches by
30
the Commissioners and the Chief Accountant. The profession, however, did not respond. That is, rather
than pursuing control of the looming regulation, the leading figures in the accounting profession
emphasized accountants’ integrity. They argued that “inflexible rules and standards will never prevent
abuses. Honesty of purpose is essential. The accomplishment of the profession, and its high standing in
the business community bear undeniable testimony of integrity” (Stempf, 1938, p. 15). Any other
approach to one’s work would lead to “vocational suicide” (Nissley, 1937, p. 101). Accounting rules were
seen to coincidence with a redundancy of integrity and professionalism, not only bringing about a
“displacement of CPAs by technicians” (Previts & Merino, 1998, p. 275), but also “subordinating the
public practice of accounting to a system of principles” (Scott, 1939, p. 400). Eventually, the SEC
increased the pressure on the profession and, by issuance of ASR No. 4, opened the way for accountants
to provide the Commission with “substantial authoritative support” for accounting practices. Given the
legal coercion that the SEC had, the profession did respond, pursuing a compromise solution by
promulgating accounting principles under the condition that these must have been developed in
practice. Such an inductive approach was made possible by the expansion of the CAP in 1938.
Overall, the article suggests that the period of the 1930s brought considerable advancements for
the accounting profession. While they were able to advance their business interests in the form of
extended audit requirements, they also needed to show conformity in the promulgation of accounting
principles. The latter aspect may appear surprising because both Marxian and Weberian theories would
suggest that, in response to the establishment of the SEC, the profession would have acted swiftly to
fend off the influence of the state, in particular given the SEC’s support of self-regulation. However, the
SEC had to threaten to take over regulation before the profession took action. Ex post, this situation
suggests that the profession may have foregone not only the opportunity of regulatory capture, but also
of business opportunities that the implementation of uniform accounting requirements presented.
31
However, this article is partly in the spirit of Halliday (1987) who argues that there is something
beyond monopoly that triggers the profession into action. While Halliday (1987) attributes this striving
to a public interest reasoning, this article argues that it is a matter of how self-interest is understood or
framed. That is, self-interest may take a pure economic form, e.g. when closing off the market. Selfinterest can also be indirectly related to economic reasoning, as in the present case, when the
profession’s raison d’être was based on their professional judgment. Establishing accounting principles
by fiat would have meant that the foundation of accountants’ business would be under attack. The
professional values seemed to be at stake and preserving them as long as possible appeared to be more
pertinent than establishing a professional committee with wide-reaching power. In that sense, the
hesitating profession waited until the last moment to see whether it could avoid having to promulgate
accounting principles altogether. When it became apparent that it was not able to do so, it chose the
lesser of two evils and conformed to the self-regulatory scheme that the SEC had supported.
In sum, “the forces unleashed by the Great Depression were irreversible” (Zeff, 1984, p. 452)
and the resulting demand for more uniform accounting principles and higher quality financial
statements required the profession to take responsibility in the promulgation of accounting principles.
As early as 1939, Scott (1939) wrote on how the changing economy affected the profession, emphasizing
that the recent fraud cases had shown the need for “an effective machinery for adjustment of these
internal [conflicts of] interests” (p. 400). Corporations depended on accounting, needing guidance on
accounting principles that could not come from management. The demand for accounting principles was
seen as “a product of the concrete process of living. The clear formulation of a consistent body of
accounting principles is a necessary step in current economic evolution” (p. 401). In that sense, the
profession moved forward, albeit hesitantly, to continue its thought leadership in accounting.
32
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Table 1: Oliver’s (1991) strategic responses to institutional pressures
Panel A: Typology
Strategies
Acquiesce
Tactics
Habit
Imitate
Comply
Balance
Compromise Pacify
Bargain
Definition
Unconscious adherence to taken-for-granted rules or values
Conscious or unconscious mimicry of institutional models
Conscious obedience to, or incorporation of norms and values
Achieve parity among multiple constituent interests
Partial conformity by combination of resisting and appeasing
Exact some concessions from external constitutents
Avoid
Conceal
Buffer
Escape
Disguise nonconformity behind facade of acquiescencce
Partial detachment of activities from external contact
Exit domain or significantly alter activities
Defy
Dismiss
Challenge
Attack
Ignore institutional rules and values
Contest rules and values
Assault, belittle or denounce values and sources of values
Manipulate
Co-opt
Influence
Control
Neutralize opposition or source of pressure
Shape values, beliefs and practices
Establish power and dominance over external constituents
Panel B: Institutional antecedents
Predictive factor
Social legitimacy
Cause
Economic gain
Likelihood of acquiescence
Increasing
Increasing
Constituents
Number of actors
Dependence
Decreasing
Increasing
Content
Compatibility
Threat to autonomy
Increasing
Decreasing
Control
Legal coercion
Diffusion of practice
Increasing
Increasing
Context
Uncertainty
Interconnectedness
Increasing
Increasing
38