ICT Role in 21st Century Education & its Challenges.pptx
History of Accounting
1. A History of Accounting
6 n Armed Forces Comptroller Winter 2015
Accounting was first applied over 5,500 years ago in Iraq.
ack then, traders used clay ledgers to record the
sale and purchase of crops and livestock (such as
wheat and goats). While most traders were honest,
there always were a few unscrupulous ones, and
many of the internal controls we follow today can
be traced back to those ancient businessmen. For
example, the Hammurabi Code, written almost four thousand
years ago, includes a law preventing a merchant from recording
a transaction unless he has sealed and signed off on the receipt
of money.1
Public audits of government accounts were first
introduced in ancient Greece about 330 BC.
The Athenian Constitution established the role of auditors and
charged them with conducting regular audits, centuries before
our own Inspector General Act of 1978. States like Sparta and
Athens relied on taxes to raise armies as well as provide for
public services. These early auditors were vital to assure the
public that their tax dollars were properly used and accounted
for, thus ensuring the credibility of the government. Despite the
importance of this task, many of the accountants were indentured
servants not entitled to all freedoms enjoyed by the citizens of
Athens. Because of this, early audit procedures often included
torture. Despite these draconian processes, fraud remained
widespread.
Early audits were aimed at both accountability and
improvement in government operations.
Eventually, Rome eclipsed Greece and adapted many of its
customs including the predilection of leaders to engage in fraud.
In fact, Mark Antony, the Roman general famous for dating
Cleopatra and avenging the murder of Caesar, also was known
as an easily corruptible public official. One of his enemies, Cicero,
accused him of “squandering countless sums of money” – a charge
remarkably similar to language in our own Chief Financial Officers
(CFO) Act, which justifies itself by stating “Billions of dollars are
lost each year through fraud, waste, abuse, and mismanage-
ment among the hundreds of programs in the Federal
Government.”2
Unfortunately whistleblower laws were nonexistent in ancient
Rome and Mark Antony had the hands of Cicero cut off and
displayed in the coliseum for his part in bringing to light Antony’s
shady dealings and poor accounting practices. Even so, good
government and accountability would not be denied.
The first public accounting of government expenditures occurred
under the reign of Caesar Augustus. He succeeded Mark Antony
and brought about a new approach toward government
accountability and financial reporting. Without access to our
modern day Internet or Department of the Treasury’s Federal
We didn’t start the FIAR, it was always burning since the World’s
been turning – Billy Joel
The Army, Navy, and Air Force marked an important milestone in December 2014 when
each Service began audit of its Schedule of Budgetary Activity (SBA). Many readers of
this journal have been working towards this goal for years and are justifiably proud of
this accomplishment. You may not realize, however, how long a journey this has been
and the role and impact accounting and auditing have had on our history.
A HistoryofAccounting
1
The Hammurabi Code is more famous for law 196 which has been summarized as an eye for an eye and a tooth for a tooth.
2
Chief Financial Officers Act 1990, section 102(a)3
by Doug Bennett
B
The Army, Navy, and Air Force
marked an important milestone in
December 2014 when each Service
began audit of its Schedule of
Budgetary Activity (SBA).
2. A History of Accounting
7
The Journal of the American Society of Military Comptrollers n
Agencies’ Centralized Trial-Balance System, Augustus published
the Roman accounts on the walls of public buildings for all to
see. These reports largely described his investments in the
Roman Legion, buildings, and events for the citizens. This effort
at full disclosure, however, did not last long; future emperors
found their own greed was obvious for all to see in these reports
and ceased publishing them. The sacking of Rome by the Gauls,
Visigoths, and Vandals in the fifth century prevented further
developments for the next 800 years.
Modern accounting techniques were first developed
during the 13th and 14th centuries in Venice, Italy.
Advancements in accounting were driven by the banking and
shipping industries. Italy, which straddled ancient maritime trade
routes, became the epicenter for growth in these two industries,
as well as new accounting techniques to manage them. Shipping
required large sums of money to build ships and pay crews long
before any cargo was delivered. Furthermore, the industry involved
large financial risk, since ships frequently were lost due to storms
and groundings. New business models were needed to finance
these ventures and manage risk.
A modern banking system was the ideal solution for this new
problem and Cosimo de’ Medici3
formed the Medici bank to fill
this need. Medici’s bank needed modern accounting tools and
techniques to measure and allocate profits to multiple partners,
which lead to the double entry accounting process we use today.
It was up to a Dominican friar, named Luca Pacioli, to publish the
first accounting textbook in 1494. It described these new tech-
niques and introduced the terms debit and credit (anglicized
versions of the Latin words debere and credere that respectively
mean “to owe” and “to entrust”).
An accounting student today would find familiar lessons in Pacioli’s
book, which advised accountants to maintain accurate inventories
of assets, introduced the concept of the journal and ledgers to
facilitate bookkeeping, and proposed the use of a trial balance to
verify postings. For Pacioli, accounting was a means of bringing
order to a chaotic world and even measure the virtue and vice of
men and women before their maker. I cannot comment on the
3
Cosimo de’ Medici founded the Medici dynasty which sponsored artists and scientists such as Leanardo da Vinci and Galileo Galilei
3. A History of Accounting
8 n Armed Forces Comptroller Winter 2015
ecclesiastical arguments; however, we all can agree that
accounting is able to bring order to our political and economic
affairs. While Pacioli was writing his book,4
events in Spain soon
would propel that country to the center of commerce and power.
Accounting and Financial Management became
increasingly important to government during the
15th century.
As many know, Christopher Columbus’ 1492 expedition was
financed by the Queen of Spain. While seeking a new route to
India, he stumbled upon America and claimed it for the Spanish
Monarchy, which quickly began exporting gold, silver, and other
resources back to Spain. In order to manage this wealth, Queen
Isabella established the Spanish House of Trade, a sort of customs
agency. An accountant was appointed to oversee this new
organization and record the receipt and expenditure of all funds.
All entries to the various ledgers had to be approved by first and
second level supervisors – a control still in use today. Recogniz-
ing the value of good accounting, the King expanded the re-
sponsibilities of the House of Trade to include all state
expenditures and revenues. One of the requirements for the
head of this enterprise was that he must be an expert in double-
entry bookkeeping. Accounting in government had risen to the
highest levels, but that esteemed status soon would end with
the first of many scandals to plague government’s private-sector
brethren.
“Everything has remained obscure and they haven’t come up
with anything but procrastination and excuses instead of the
accounts book, which as we suspect, they had smeared with
bacon and which was eaten by the dogs.” – Dutch East India
Company Shareholder Complaint, 1622.
Regular and timely accounting reports are vital to sustain
the confidence of citizens and shareholders alike.
By the 17th century, the Dutch East India Company had become
the world’s largest corporation and was the first company to
issue stock that investors could freely trade. The Company
Charter specified that shareholders were entitled to regular
dividends and required the company to publish regular audited
reports enabling investors to make informed decisions. Despite
this, the company failed to provide the required report for many
years and there were numerous accusations of fraud and theft
by company executives (not unlike the Enron scandal in 2001).
Although the company was successful for many years, it
eventually went bankrupt in 1800. It did, however, usher in the
age of activist shareholders and demonstrated the need for
good accounting in business as well as government.
Accounting information influenced the way we think
about our world and led to the downfall of nations.
By the 18th century, the kings and princes of Europe were
amassing detailed records of taxes collected, expenses, and na-
tional wealth. Early economist Adam Smith relied upon these
data to develop his economic theories, described in The Wealth
of Nations published in 1776. That landmark book on economic
thought introduced us to the concepts of comparative advantage,
labor specialization, and the “invisible hand” of free market
forces. His book remains one of the most influential texts of all
time.
The same data that Adam Smith relied upon for his theories
helped bring about the downfall of King Louis XVI in France.
Corruption and warfare throughout the 18th century left the
French treasury in debt. Recognizing his financial predicament,
Louis XVI hired Jacques Necker, a conservative Swiss banker, to
oversee his finance ministry. In 1781, Mr. Necker published “An
Account of the King” – similar to our Statement of Net Cost –
which painted a very unflattering picture of the King’s stewardship.
For example, the report identified expenditures the King made
for his residence exceeding the combined expenditures for
police, bridges and roads, and social support for the poor and
homeless citizens of Paris. The citizens were incensed at this
extravagant lifestyle. Within a decade, revolution spread
throughout France and the King and Queen lost their heads to
the guillotine in 1793.
Financial reporting and audit readiness are not new.
Our Founding Fathers understood financial transparency and
accountability were critical to establishing a government of, by,
and for the people. One of the Congress’ first acts, in 1776, was
to establish the United States (U.S.) Treasury and the position of
Auditor General to assure accountability. Six years later, the
Department of the Treasury published a Balance Sheet of sorts
4
Pacioli’s book was titled: Summa de arithmetica, geometria. Proportioni et proportionalita
One of the Congress’ first acts, in 1776,
was to establish the United States (U.S.)
Treasury and the position of Auditor
General to assure accountability.
4. A History of Accounting
9
The Journal of the American Society of Military Comptrollers n
noting that the new country had a surplus of about $850,000. A
congressional audit in 1783 found that the Treasurer, Mr. Robert
Norris, kept good accounts. Albert Gallatin, who served from
1801 until 1814 (the longest term, nearly 13 years, as Secretary of
the Treasury in our history) was responsible for a law in 1801 that
required an annual report by the Secretary of the Treasury. He
submitted the first one later that year as Secretary. He also
helped create the House Committee on Finance (which would
evolve into the powerful House Ways and Means Committee) to
assure Treasury's accountability to Congress by reviewing the
Department's annual report concerning revenues, debts, loans,
and expenditures. Perhaps underestimating the challenges of
accounting in a government as large and complex as ours, the
writers of our Constitution enshrined the requirement for financial
reporting.
“No money shall be drawn from the Treasury, but in consequence
of appropriations made by law: and a regular statement of
account of the receipts and expenditures of all public money
shall be published from time to time.” – Article I, Section 9,
Clause 7 of the United States Constitution.
Good accounting is the law for businesses and government.
The 19th century brought us the Industrial Revolution – and new
demands on accounting. Capital markets, along with auditing
and accounting expanded dramatically until 1929, when the
stock market crashed and ushered in the Great Depression. To
help restore confidence in the financial markets, the Congress
passed the Securities Acts of 1933 and 1934 that created the
Securities and Exchange Commission; required companies to
keep accurate books, records, and accounts, and specified
maintenance of a system of internal accounting controls allowing
the preparation of financial statements in accordance with
Generally Accepted Accounting Principles (GAAP). The concept
of GAAP and audited financial statements gives investors
confidence and enables our businesses to grow. Former Treasury
Secretary Lawrence Summers described the idea of GAAP as
the single most important innovation shaping our capital markets.
Today, our economy is the largest as well as the most innovative
in the world.5
Seeking to replicate these same benefits into federal financial
management, the Congress passed a series of laws to expand
requirements and established the Budget and Accounting
Procedures Act of 1950. These included the Federal Managers’
Financial Integrity Act of 1982 (FMFIA), the Chief Financial Officers
Act of 1990 (CFO Act of 1990), the Government Management
Reform Act (GMRA) of 1994, and the Federal Financial
Management Improvement Act of 1996 (FFMIA).
The FMFIA is designed to enhance accountability and promote
good government by requiring ongoing evaluations and reports
of the adequacy of the systems of internal accounting and ad-
ministrative control of each executive agency. Many of you are
more familiar with Office of Management and Budget (OMB)
Circular A-123, Appendix A, which provides detailed guidance on
the Annual Statement of Assurance called for by the FMFIA. The
CFO Act of 1990 instituted a number of reforms including estab-
lishing the position of CFO at each cabinet level agency, and
charging OMB with preparing a government-wide financial
management plan and pilot projects for various departments and
agencies to prepare audited financial statements. While the
entire Department of Defense was not included in this pilot
project, both the Army and Air Force were required to prepare
and submit financial statements by March 1993. The Congress
followed up with the GMRA, which expanded the requirement for
audited financial statements to most federal agencies – which
brings us to today.
As we begin audits of the SBAs for each Military Service, it is
worth remembering that financial accountability and government
reporting have been a part of mankind for thousands of years.
Many of the controls we rely on today were developed by our
ancestors to accomplish the very same objective. Our task now
is to show the Congress and the American people that, like Mr.
Robert Norris, we have kept good accounts. We have an exciting
opportunity to write the final chapter for this story.
The author recommends The Reckoning – Financial
Accountability and the Rise and Fall of Nations by Jacob Soll for
those who want to learn more about the history and impact of
accounting and financial reporting.
5
Size of national economies is based on Gross Domestic Product (GDP) statistics reported by the Organization for Economic Cooperation and Development in 2013. U.S. GDP
was $16.8 trillion, China was $16.7 trillion, and European Union was $15.5 trillion.
Doug Bennett, CDFM is the PDAS for
Financial Management, Air Force.
He assumed this position in the
September 2014. Prior to his current
assignment, he was the Deputy
Assistant Secretary, Financial
Operations USAF.
Doug Bennett, CDFM
