Politicization of Accounting Standard Setting: CAP, APB, and FASB
This paper traces the development of U.S. accounting standard-setting bodies from the Committee on Accounting Procedure (CAP) in 1938 through the Accounting Principles Board (APB) and the Financial Accounting Standards Board (FASB). It examines the conceptual shift from historic-cost, stewardship-focused reporting to a balance-sheet and investor-oriented framework, and presents arguments both for and against the politicization of accounting standards. Supporters argue the shift benefits investors by emphasizing future value, while critics contend it introduces subjectivity and undermines the SEC's original mandate to protect the public interest.
- Introduction and Background: Context for U.S. accounting standard-setting debate
- History of CAP, APB, and FASB Formation: Origins and evolution of major accounting bodies
- Arguments Supporting the Politicization of Accounting Standards: Investor-oriented reporting benefits of FASB shift
- Arguments Against the Politicization of Accounting Standards: Critique of subjectivity and call for SEC authority
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What makes this paper effective
- It presents a balanced structure by dedicating separate sections to arguments for and against politicization, giving each position equal analytical space.
- It grounds its argument in historical context, tracing institutional evolution from the Securities Exchange Act of 1934 through the FASB era to show why the debate matters.
- It uses a single authoritative source consistently and correctly, demonstrating how focused citation can anchor a short analytical essay.
Key academic technique demonstrated
The paper employs a classic pro-con analytical framework: after establishing historical context, it isolates a central controversy and systematically examines both sides. This technique is especially effective in accounting and policy essays because it forces the writer to represent opposing stakeholder perspectives — in this case, investors seeking forward-looking data versus the public interest in objective, auditable historical reporting.
Structure breakdown
The essay opens with a brief historical survey of U.S. accounting bodies, then identifies the pivotal conceptual shift introduced by the FASB's 1972 Discussion Memorandum. Two dedicated analytical sections follow — one defending and one critiquing politicization — before the paper concludes implicitly through the critic's call to restore SEC authority. The structure is compact and thesis-driven, appropriate for a short undergraduate policy essay.
Introduction and Background
The question of who should set accounting standards — and whose interests those standards should serve — has shaped U.S. financial reporting for nearly a century. The evolution from the Committee on Accounting Procedure (CAP) to the Accounting Principles Board (APB) and ultimately to the Financial Accounting Standards Board (FASB) reflects ongoing tensions between professional self-regulation, political influence, and the public interest.
History of CAP, APB, and FASB Formation
The Securities Exchange Act of 1934 set general accounting standards for all American accountants in practice. The AICPA then formed the Committee on Accounting Procedure (CAP) in 1938 so the profession could regulate itself. In 1959, CAP decided that accountants needed a general theory of ethical practice and a constitution to outline the purpose of the profession. This represented a shift away from the situational approach to ethics that had previously dominated the profession, and the Accounting Principles Board (APB) was the result (Flegm, 2005).
In 1972, the FASB created the Discussion Memorandum on the Conceptual Framework for Accounting. "Although the income statement and the matching concept had been the primary focus of financial reporting [until then], FASB changed that focus to the balance sheet… because measuring capital maintenance is difficult, if not impossible, the pragmatic accountant focuses on profit maximization" (Flegm, 2005). Pragmatic demands, politicization, and simply the need for a more realistic view of how organizations regard their own balance sheets all contributed to this change.
The new board's policies "changed the basic emphasis of financial reporting from a report to absentee owners attesting to management's (agents') successful stewardship and accountability, to a report to potential investors reflecting the company's potential (assuming that this could be expressed in dollars)" (Flegm, 2005). This conceptual reorientation marks the central controversy in the debate over the politicization of accounting standard setting.
Arguments Supporting the Politicization of Accounting Standards
The shift toward emphasizing future value and reporting earnings to present and future investors enables companies launching innovative enterprises to gain a foothold in the market. This approach is also more useful to ordinary stockholders and investors because it is easier to understand and reflects their own forward-looking orientation when deciding whether to hold or sell stock in a company. Investors want to know how a stock will perform in the future, not merely its historical value and capital maintenance expenses.
Works Cited
Flegm, Eugene H. "Accounting at a Crossroad." CPA Journal, Dec. 2005.
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