Committee on accounting procedure

What Is the Committee on Accounting Procedure?

The Committee on Accounting Procedure (CAP) was the first private-sector body in the United States tasked with setting accounting standards. Established in 1939 by the American Institute of Accountants (which later became the American Institute of Certified Public Accountants or AICPA), the CAP played a foundational role in the development of U.S. financial reporting and belongs to the broader category of accounting standards setting. It issued a series of pronouncements known as Accounting Research Bulletins (ARBs) aimed at addressing specific accounting problems and reducing variations in practice.

History and Origin

The Committee on Accounting Procedure was formed in the aftermath of the 1929 stock market crash and the ensuing Great Depression, which highlighted the urgent need for improved financial reporting and greater investor confidence. The Securities and Exchange Commission (SEC), established in 1934, also played a role in encouraging the private sector to take on standard-setting responsibilities. In response to the SEC's Accounting Series Release No. 4, the American Institute of Accountants reorganized and expanded its Committee on Accounting Procedure in 1939.⁹

The CAP aimed to provide authoritative guidance on various accounting issues as they arose. Between 1939 and 1959, the Committee on Accounting Procedure issued 51 Accounting Research Bulletins, addressing topics ranging from revenue recognition to depreciation and inventory valuation.⁸ These bulletins were early efforts to rationalize and legitimize the reporting of business performance. However, the CAP was criticized for its piecemeal, "firefighting" approach, reacting to immediate problems rather than developing a comprehensive, conceptual framework for Generally Accepted Accounting Principles (GAAP).⁷ This lack of a systemized body of accounting theory eventually led to its replacement.⁶ In 1959, the Committee on Accounting Procedure was succeeded by the Accounting Principles Board (APB).⁵

Key Takeaways

• The Committee on Accounting Procedure (CAP) was the first private-sector body responsible for setting accounting standards in the U.S.
• It operated from 1939 to 1959 under the American Institute of Accountants (later AICPA).
• The CAP issued 51 pronouncements known as Accounting Research Bulletins (ARBs) to address specific accounting issues.
• Its "firefighting" approach and failure to develop a comprehensive conceptual framework led to its eventual replacement by the Accounting Principles Board (APB).
• The work of the Committee on Accounting Procedure laid early groundwork for U.S. Generally Accepted Accounting Principles (GAAP).

Formula and Calculation

The Committee on Accounting Procedure did not establish or prescribe specific formulas for financial calculations. Its pronouncements, the Accounting Research Bulletins, provided guidance on accounting treatments and disclosure rather than mathematical formulas. Therefore, this section is not applicable.

Interpreting the Committee on Accounting Procedure

Understanding the Committee on Accounting Procedure primarily involves recognizing its historical significance within the evolution of U.S. accounting standards. While its direct pronouncements (ARBs) have largely been superseded, the CAP represents the initial organized attempt by the private sector to establish uniform accounting practices in the United States. Its work highlights the early challenges of standard-setting, particularly the tension between addressing immediate practical issues and developing a cohesive theoretical framework. The CAP's legacy underscores the iterative process by which Generally Accepted Accounting Principles have developed, leading to the more structured approach seen with later bodies like the Financial Accounting Standards Board.

Hypothetical Example

Imagine a company in the 1940s, "Mid-Century Manufacturing," was grappling with how to properly report the depreciation of its new factory equipment on its financial statements. Prior to the Committee on Accounting Procedure, various companies might have used different methods, making comparisons difficult.

The Committee on Accounting Procedure, through one of its early Accounting Research Bulletins, might have provided guidance on acceptable depreciation methods, such as the straight-line method or declining-balance method. For instance, if Mid-Century Manufacturing chose the straight-line method, they would calculate annual depreciation by dividing the cost of the asset, minus its salvage value, by its useful life. This guidance, while not universally binding at first, helped introduce a degree of consistency in how depreciation was recognized across different businesses.

Practical Applications

While the Committee on Accounting Procedure itself no longer sets accounting standards, its historical contributions are foundational to understanding modern financial reporting. The ARBs issued by the CAP were influential in shaping early accounting practices in the U.S.⁴ Some of the principles and concepts from these bulletins were later incorporated or evolved into current Generally Accepted Accounting Principles. Researchers and accounting historians often study the Committee on Accounting Procedure to trace the lineage of specific accounting treatments and to understand the political and economic forces that influenced the development of U.S. GAAP. The complete archive of the Accounting Research Bulletins is available online through resources like the University of Mississippi library, providing a valuable resource for studying the evolution of accounting thought.

Limitations and Criticisms

The Committee on Accounting Procedure faced several significant limitations that ultimately led to its replacement. A primary criticism was its "piecemeal" approach to standard-setting.³ The CAP tended to address specific accounting problems as they emerged, rather than developing a comprehensive, underlying conceptual framework for accounting standards. This reactive approach resulted in a collection of rules that sometimes lacked consistency and failed to significantly reduce alternative accounting practices.²

Furthermore, the Accounting Research Bulletins issued by the Committee on Accounting Procedure lacked true binding authority, meaning compliance by accountants was not strictly enforced. This diminished their influence and made it difficult to achieve uniformity in financial statements. The CAP was also criticized for its perceived slowness in responding to emerging issues and for being too heavily influenced by the profession it was meant to regulate. These drawbacks highlighted the need for a more structured and authoritative body to establish Generally Accepted Accounting Principles, leading to the formation of the Accounting Principles Board and subsequently the Financial Accounting Standards Board. The debate over rules-based versus principles-based accounting, which the CAP's history informs, continues to be a central theme in standard-setting, with critics arguing that a purely rules-based system, as the CAP's output sometimes leaned, can lead to a "tick-box" mentality rather than a focus on true and fair presentation.¹,

Committee on Accounting Procedure vs. Accounting Principles Board

The Committee on Accounting Procedure (CAP) and the Accounting Principles Board (APB) were successive bodies responsible for setting accounting standards in the United States. The key differences lie in their structure, approach, and perceived effectiveness.

The APB was intended to provide more extensive guidance than the CAP and to establish a more robust set of Generally Accepted Accounting Principles. However, the APB, like the Committee on Accounting Procedure before it, eventually faced its own criticisms regarding its structure, responsiveness, and independence, paving the way for the independent Financial Accounting Standards Board.

FAQs

What was the main purpose of the Committee on Accounting Procedure?

The main purpose of the Committee on Accounting Procedure was to provide guidance on various accounting issues and to help standardize accounting practices in the U.S. during its operation from 1939 to 1959. It aimed to improve the reliability and comparability of financial statements.

What were Accounting Research Bulletins (ARBs)?

Accounting Research Bulletins were the official pronouncements issued by the Committee on Accounting Procedure. These bulletins addressed specific accounting problems and offered recommendations for their treatment, contributing to the early development of Generally Accepted Accounting Principles.

Why was the Committee on Accounting Procedure replaced?

The Committee on Accounting Procedure was replaced primarily because its "firefighting" approach to standard-setting was deemed insufficient. It issued guidance on an ad-hoc basis and failed to develop a comprehensive conceptual framework for accounting standards, leading to continued variations in practice and calls for a more structured and authoritative body.