Why did accounting and reporting practices in the U.S. prior to 1930 not meet the needs of shareholder investors?
What will be an ideal response?
ANSWER:
In the United States prior to 1930, accounting was unregulated and accounting practices and procedures were considered confidential. This resulted in a lack of uniformity in accounting practices among companies, both from year to year and within the same industry. Also, the American public did not invest large sums in private corporations until the 1920s, when private corporations were expanding, and both they and government leaders encouraged the public to invest in stock. Before that time, banks and other creditors were the primary users of financial information, resulting in an emphasis on a company’s debt-paying ability. When individuals began investing in corporate stock, financial reporting lagged behind and continued to be prepared primarily for the needs of creditors. It wasn’t until the stock market crash of 1929 that shareholders began to question whether accounting and reporting practices were adequate to assess investments.
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