2.3 Development of financial reporting standards in the US: the Securities and Exchange Commission and the Financial Accounting Standards Board

Although trading of securities was not purposely regulated, this topic was covered by state laws for contracts and general transactions. Before the 1930s securities state regulation preceded federal regulation of the securities markets.1 After the financial crash of 1929, in an attempt of restoring public confidence in capital markets and promoting financial stability, the US Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934 that was responsible for creating the Securities and Exchange Commission (SEC).2 These two acts had the objectives of protecting investors and assuring the disclosure of reliable and honest information.3 The Securities Exchange Act of 1934 empowered the SEC with the authority to register, regulate, oversee brokerage firms, transfer agents, clearing agencies as well as stock exchanges and other securities self-regulatory organizations. The SEC requires periodic reporting of information by listed companies, mandatory independent external audit of the information disclosed and it has the disciplinary power over all regulated entities.4 At this point and until 1973, accounting standards were developed solely by accounting professionals and the SEC looked to the accounting profession to provide guidance on what constituted generally accepted accounting principles. Afterwards, the development of the US accounting standards became in charge of the Financial Accounting Standards Board.5

The Financial Accounting Standards Board is an independent private sector organization established in 1973 (under the supervision of the Financial Accounting Foundation6) designated for establishing standards of financial accounting and reporting in the US.7 The Financial Accounting Standards Board is officially recognized by the SEC and the American Institute of Certified Public Accountants to set the US financial standards.8 Its mission is “to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors, and users of financial information.”9

The Financial Accounting Foundation’s standard-setting boards, the Financial Accounting Standards Board and the Governmental Accounting Standards Board are responsible for developing the US-Generally Accepted Accounting Principles (US-GAAP).10 Given the cultural diversity and high litigation practices in the US,11 these standards are very detailed and rules-based. The US-GAAP are used among others, by companies to prepare their financial statements and show how they are managing business.12

It was only in the post-World War II that the SEC gained “unparalleled” powers among securities regulators worldwide, especially when there were not many securities regulators set up yet. Most were set up in the 1990s and early 2000s and it was only then that the US gained strong influence and positioned itself in the forefront of corporate finance innovation and regulation.13 The strong influence of the SEC at the time can be observed when in 1999, its chairman Arthur Levitt became also chairman of the nominating committee for the appointment of International Accounting Standards Committee’s new trustees (when it decided to renew its governance in 1999). The International Accounting Standards Committee is introduced below in section 5. In the nineties the SEC’s growing power beyond the US capital market would later in 2000 prove to be determinant to the EU endorsement of the International Financial Reporting Standards (IFRS). These developments are further explained in section 5.