Inspired by my recent thirty-year high school reunion (Go Spartans!), I began to think about the changes that have occurred over the last thirty years in accounting and financial reporting. Not only has standard setting changed dramatically (we were at Statement of Financial Accounting Standards No. 44, Accounting for Intangible Assets of Motor Carriers, in 1980), but the process of preparing and auditing financial reports has also undergone a radical transformation.

Back in the early 1980's, only a few chosen auditors even had a computer, and they were bulky Compaqs. As a young auditor, we went on “deliveries” to bring important papers and documents to clients and other audit teams. Working out of the Newark, N.J. office of one of the “Big Eight,” meant trips all over N.J. Our workpapers consisted of large, fold out green sheets. In order to add columns, we had to tape on extra sheets and expertly fold them to fit into the workpaper folder. Everything was done in pencil, or “pentels.”  Ten-key calculators were heavy and awkward, required an outlet, and resembled adding machines. Administrative assistants took messages on pink “while-you-were-out” memo pads. We didn't have e-mail, voicemail, or fax machines. (I didn't send my first fax until 1985, when the paper was so thin, and the ink nonpermanent that you had to write over it if you wanted the fax preserved in the workpapers.) Client reports were manually compiled in the “report processing” department, and every draft needed to be proofed and manually bound.

Back to the Big Eight. As a 1984 college graduate, I interviewed with Arthur Young, Touche Ross, Price Waterhouse, Ernst & Whinney, Deloitte, Haskins & Sells, Peat Marwick, Arthur Anderson, and Coopers & Lybrand. There were books written for new college graduates about the corporate culture at each of the firms. It was considered an honor to work for one of them. Now, we have the Big Four. As a member of Penn State University's advisory committee to their accounting department (and the mother of a Penn State accounting major), the prestige still stands, but more top-level students opt for second-tier and local and regional firms. I think the students today are more open minded and, quite frankly, more in touch with their career needs.

Preparers had it tough back then, too. Information for the annual financial report was created manually by sending out “year end packages” to all of the business units. The information was then manually summed and typed into the reports by hand. When the 10-K or 10-Q was complete, it was mailed to the Securities and Exchange Commission in Washington, D.C. If there was a concern that it wouldn't get there in time, it was sent by overnight mail. I remember delivering a report to the SEC in person to get it there in time. Newark is a less than an hour flight from Washington, DC. We could hop on a plane and deliver it in a few hours before the SEC offices closed for the day.

Technology has changed both the audit process and the preparer process immensely over the years.  It amazes me that we even got a report out on time back in the day, given how efficient technology has made the process over the years.

The More Things Change …

Financial accounting standard setting has evolved tremendously as well. Thirty years ago, then SEC Chairman Harold Williams gave a speech to the New York State Society of CPAs on the topic of what trends companies and auditors should expect in the eighties. The hot accounting issues at the time were pension accounting, cash flows, and inflation accounting. The SEC had proposed a limited auditor report on internal controls a year earlier to immense resistance. So much so, that the proposal was dropped in June of 1980, and the SEC asked companies to voluntarily report on their internal controls. The Foreign Corrupt Practices Act (FCPA), passed in the late seventies, was just starting to be enforced, amidst revelations of off-book payments to foreign officials.

Technology has changed both the audit process and the preparer process immensely over the years. It amazes me that we even got a report out on time back in the day, given how efficient technology has made the process over the years.

Williams also talked about the increase in emphasis by the firms on “management advisory” services as a revenue source, and questioned whether they impeded independence and the profession's commitment to its traditional role. The SEC issued ASR No. 250 in 1978, which required disclosure of non-audit services performed by the independent auditor in terms of a percentage relationship to audit fees. They followed up with ASR No.264 in 1979, which required details of the factors that management, the audit committee (if they had one and only 85 percent of public companies did), and auditors should consider in determining whether a proposed engagement should be offered or accepted, essentially giving the auditor and the company the responsibility for the guardianship of the auditor's independence. Williams said he had hope that the profession would embrace the voluntary internal control reports and that the peer review process and related disciplinary mechanisms would be enough to incent the right behavior. We all know how that played out some twenty years later. The Sarbanes-Oxley Act was borne out of the inability of the profession to self-regulate appropriately.

Inflation accounting was probably the biggest issue of the day. Users were demanding inflation-adjusted financial reports. The SEC issued guidance to include a discussion of the effects of inflation and changing prices on the financial statements in the Management's Discussion and Analysis.  Today, we worry more about deflation.

There was already some talk of “international harmonization” of accounting standards at the time.  The International Accounting Standards Committee (IASC) was formed in the 1970s and had issued 31 International Accounting Standards (IASs) by 1980. Today, more than 115 countries are using International Financial Reporting Standards (IFRS), and the SEC is set to make a decision in 2011 on whether and when the United States should join them.

In 1980 FASB was still in its adolescence—it was formed in 1973, and everyone was in an uproar as they were developing the conceptual framework. By 1980, the objective of financial reporting took on more of a user orientation. So, the trend began toward an increasing emphasis on the needs and expectations of users of financial statements. The board had also recently welcomed its first “user,” a financial analyst named Frank E. Block.  Before then, financial reporting was generally viewed from an “objectivity” point of view, especially when it came to measurement. The trends toward greater use of fair-value accounting was just beginning. The most objective measurement was deemed the most appropriate, as it was most reliable. The thinking was that users would adjust the objective measurement based on their own models to determine value.  The conceptual framework was still in its infancy. Today, the conceptual framework is undergoing another rewrite, as FASB and IASB work together on a converged framework. (Don't hold your breath though, while I believe this should be a priority project, the boards recently put it on pause, as they work on other projects.)

The “Big GAAP, Little GAAP” debate was also alive and well in 1980. There were reports, papers, and lively discussions about whether there should be differential financial reporting for small businesses. Today, the Blue Ribbon Committee, sponsored by the AICPA, FAF, and NASBA is expected to recommend separate accounting standards for private entities set by its own accounting standards board.

So, while we have seen many advances in technology that have made financial reporting a more efficient process over the last thirty years, the issues and concerns are largely the same. I wonder if we will be talking about these same issues in another thirty years. I'll leave that to my daughter and her generation to resolve.