It pays to understand the history of accounting in order to understand its importance. In this short text and the accompanying video, the history of accounting standards is briefly described.
This nugget was created by Ben Graziano.
In the 1980s and 1990s the problems of so-called creative accounting were pointed out by various individuals, including British banking analyst Terry Smith (in his book Accounting for Growth) and the world’s most successful investor, Warren Buffet (for example, in his typically clear-minded analysis of the impact of accounting Goodwill on company valuation).
In addition, various accounting scandals and global economic crises added further pressure for reform. One of the most famous reforms – the Sarbanes-Oxley act enacted in the USA in 2002 – occurred in response to the corporate accounting scandals of the US publicly-listed companies Enron and MCI Worldcom.
Later, further reforms were enacted following the subprime mortgage-induced financial crisis of 2008 (marked by the collapse of the investment bank Lehman Brothers). In response to these and many other events, accounting rules have changed considerably in the first two decades of the 21st century.
Today, there are two main types of accounting standard:
The differences between these two standards mainly relate to the treatment of intangible asset value and inventory accounting. More about this can be found here
The film below provides a brief introduction to GAAPs.