Into The Twentieth Century and Beyond
However prosperous, the United States was still an infant nation when the American Institute of
Certified Public Accountants was formed. The Civil War ended with the U.S. still a predominantly
farming-based economy. It was only the year before that the Apache chief Geronimo had surrendered
to the federal authorities. The ensuing decades saw enormous economic growth as industry began to
overtake agriculture in financial importance.
This period of growth also saw its share of financial scandals. Over-capitalization and stock speculation
caused financial panics in 1873 and 1893. Watered railroad stocks were in the headlines, along with
concerns about growing monopolies in several industries. Labor unions developed in response to
corporate exploitation of workers. Congress responded by passing the first Interstate Commerce Act and
the Sherman Antitrust Act, marking the beginnings of federal regulation of business. When Theodore
Roosevelt became President after the 1901 assassination of William McKinley, he supported the use of
governmental power to control the growing industrial monopolies and the price increases they caused.
The Roosevelt administration helped persuade Congress to establish the Department of Commerce and
Labor to gather the facts needed to enforce antitrust laws. The Interstate Commerce Commission's
powers over transportation were broadened, and the ICC established a uniform system of accounting -
the first instance of accounting used as an instrument of federal regulation.
Unlike the British, who used the balance sheet in an effort to monitor management's use of
stockholders' monies, American corporations of the early 20th century had no comparable history of
losses from stock speculation. Rather, American balance sheets were drafted mainly with bankers in
mind, and bankers of the era cared more about a company's liquidity than earning power.
Beginning in 1920, business practices began changing drastically as the U.S. went through an inventory
depression in which wholesale prices fell 40 percent. Cash flow slowed, loans defaulted and credit
became less available to corporations. In response, businesses sought financing from sources less tied to
their current cash flow. The offering of corporate stock issues became a leading method of financing
expansion. As stockholders, rather than bankers, became the primary audience of financial statements,
the income statement began to take center stage over the balance sheet. Other factors, such as the rise
of income taxation and cost accounting, also shifted the focus to revenues and expenses.
At the turn of the century, there were at least four types of funds statements in use - those that
summarized changes in cash, in current assets, in working capital and overall financial activities.
Accountant H. A. Finney led the movement for use of a funds statement that focused on liquidity by
tracking the sources of changes in working capital. He used a worksheet approach to highlight
meaningful balance sheet changes by aggregating most of the fluctuations that affect working capital,
and offered a standardized method for calculating them.
In the 1940s, the accounting profession increasingly used the funds statement to measure the actual
flow of monies, rather than simply the sum of working capital changes between balance sheet dates.
The funds statement increasingly became a staple for the financial statement and, in 1971, the American
Institute of Certified Public Accountants began requiring its inclusion in stockholders' annual reports.
Nowadays, with more than 330,000 members, the AICPA is the premier national professional association
for CPAs in the United States. Their web site is full of useful resources, including the latest American
accounting news, along with organization-specific materials.