The Richard C. Adkerson Gallery on the SEC Role in Accounting Standards Setting

Origins of the Relationship

The Partnership is Encouraged

- Strictly Business

While Accounting Series Release (ASR) No. 4 clarified that disclosure could not cure accounting deficiencies, the problem persisted: which accounting principles were considered to have substantial authoritative support? Chief Accountant Carman Blough had been urging accountants to be more involved in the development of accounting principles. ASR No. 4 was a virtual invitation to become more active in the process.

The American Institute of Accountants responded, by expanding its Committee on Accounting Procedure and giving it the responsibility for issuing pronouncements on accounting principles without the need for approval by the Institute’s membership or governing council.

Though few in numbers, the profession was blessed with capable and effective leaders, respected for acting in the public interest. The collaborative efforts with the SEC that ensued might not have occurred without the extraordinary efforts of men such as George O. May, Robert H. Montgomery, Arthur H. Carter and Samuel J. Broad.

The SEC had enough confidence in them to develop a strong, collaborative partnership – an odd coupling of regulator and private sector, perhaps – to develop standards of accounting and financial reporting. The regulator effectively delegated its statutory authority to the private sector, which for many years comprised the auditing profession and the American Institute of Certified Public Accountants.

From the SEC’s standpoint, it resolved the issue of resources and funding while laying the foundation for development of standards by the private sector. Later, former SEC Chief Accountant John C. (Sandy) Burton noted, “The human and financial resources of the profession are far greater than anything the Commission could bring to bear on the job, so the delegation idea is simply more efficient. But I also believe the Commission can be more effective in an oversight role than in a front-line role.” Former SEC Chief Accountant Clarence Sampson added, “The entire process is effective because the profession is obligated to follow its own standards.” ⁽⁹⁾ A side benefit to the SEC was that it would not bear the first levels of criticism over controversial standards, and bountiful criticism there would be.

For several decades, the partnership was occasionally strained, but was marked generally by high degrees of mutual respect and shared goals. The early collaborative efforts were in sharp contrast to the mistrust and ill will that developed before the passage of the Sarbanes-Oxley Act of 2002.

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