Financial reporting—balance sheets—income statements—financial notes and disclosures—is the language we use to communicate information about the financial condition of a company, public or private, a not-for-profit organization, or a state or local government.

The accounting standards developed and established by the FAF’s standard-setting boards—the Financial Accounting Standards Board and the Governmental Accounting Standards Board—are the rules that determine how that language is written. Those rules are known collectively as U.S. Generally Accepted Accounting Principles—or U.S. GAAP.

Companies, not-for-profits, governments, and other organizations use accounting standards as the foundation upon which to provide users of financial statements with the information they need to make decisions about how well an organization or government is managing its resources.

Investors and lenders can use this information to decide where to supply resources or lend money. Donors, including foundations and grantors, can use this information to decide where to donate. Citizens can use this information to decide where public officials are spending tax dollars.

That information must be clear, concise, comparable, relevant and representationally faithful.

For companies to secure financing they need to hire workers, build plants, and invest in research and development, they must report financial information in a way that investors find useful. High quality financial accounting and reporting standards promote better information in the marketplace. Better information fosters greater transparency. Transparent, relevant information helps investors and lenders make better decisions about where to put their money with confidence. Investors, recognizing the value of high quality financial information, support an objective and inclusive standard-setting process. This “virtuous cycle” ultimately helps make our capital markets more efficient and robust.

Accounting has a long history. Double entry bookkeeping—debits on the left, credits on the right—began hundreds of years ago. It was first codified in the 15th Century by a Franciscan monk named Luca Bartolomes Pacioli. His work was built on that of another Italian scholar, Benedetto Cotrugli.

Portrait of Luca Bartolomes Pacioli, 1495

The extent to which improvements in financial reporting have affected our country’s economic growth has been the subject of much scholarly research—and there is evidence that improved financial reporting helped spur investment at critical moments in our economic history.

During the Industrial Revolution, as America’s transportation links were being forged, railroad companies pioneered the use of financial reporting to attract public and private financing for projects. Companies reporting financial information to investors produced an influx of investment that led to a revolution in the way that goods were brought to market—and to unprecedented economic growth.
Pacific Railroad Bond, May 1, 1865
For many years, public companies themselves took the lead in accounting innovation. The expansion of the U.S. automobile industry in the 1920s can partially be attributed to accounting modernization. General Motors, by presenting its financial information in the form of ratios such as return on investment and return on equity, was able to provide the market with more detailed and useful metrics. As a result, the company could adapt more quickly to market changes and make better decisions regarding investments. This type of analysis ushered in a new system of data reporting that benefited GM, its investors and the highly competitive automobile industry.

The pivotal economic event of the 20th century, the Great Depression, focused the U.S. on the need for comprehensive accounting reform. Many market participants felt that poor accounting and reporting procedures helped cause the downturn. In 1930, the American Institute of Accountants (known as the AICPA since 1957) and the New York Stock Exchange began an attempt to revise financial reporting requirements. Shortly thereafter, passage of the Securities Act of 1934 chartered the Securities and Exchange Commission, and gave the SEC the power to oversee accounting and auditing methods.

For nearly 40 years, the SEC looked to bodies established by the accounting profession to develop and establish accounting standards.

SEC Commission, 1936 (Courtesy, SEC Historical Society)

By the 1970s, market participants’ thinking about accounting standard setting evolved, as they came to believe in the importance of an independent standard-setting structure, separate and distinct from the accounting profession—so that the development of standards would be insulated from the self-interests of practicing accountants and their clients. Following a detailed study, the accounting profession in 1972 recommended creation of a new body, the Financial Accounting Foundation, to serve as the nation’s accounting standard-setting authority.

Through the FAF, the FASB in 1973 became the designated standard-setter in the private sector for setting standards that govern the preparation of corporate financial reports along with not-for-profit organizations.

In 1984, the Government Accounting Standards Board (GASB) was formed under the FAF umbrella to issue standards and other communications that result in decision-useful information for users of government financial reports. Today owners of municipal bonds, members of citizen groups, legislators, and oversight bodies rely on this financial information to shape public policy and make wise investments.

Throughout its history, the SEC has relied on the private sector to create and implement accounting standards. Today, the FASB remains at the forefront of fulfilling the SEC’s mandate on behalf of the U.S. capital markets.

Today, the need for relevant comparable financial reporting is greater than ever. Moreover, this need applies across the international landscape of our increasingly global economy. The United States controls some $15 trillion in foreign assets, and the global capital markets depend on a constant flow of useful and understandable financial information from U.S. companies to make decisions about providing resources in the world’s most powerful economy.

American companies must supply the market with high-quality financial information to enable both U.S. and international investors to make better decisions. Without clear accounting standards and an open, independent process for creating and improving these standards, capital markets around the world would function less efficiently, driving up costs for all participants and sectors of the economy.

The global economy is dynamic and often unpredictable. In order to maintain stability, institutional and retail investors must be able to trust publicly-available financial information. Accounting standards are created to meet this need, and are enacted to guide reporting companies along this path. For the U.S. and global capital markets, there is simply no other alternative.