The Continuing Debate Over Depreciation, Capital and Income (RLE Accounting)

Richard Brief

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781134606641
• Edition: 1
• Topic: Business
• Subtopic: Accounting
• Index: Business

Beginning with first principles, then discussing the origin and evolution of the debate over depreciation, capital and income, several related topics are addressed in this volume originally published in 1993. These include the allocation problem, interest rate approximations, issues concerning financial reporting and analysis and the meaning and economic impact of 'accounting error'. The underlying themes concern the importance of history and the need for an appreciation of basic concepts and relationships in accounting

Financial Reporting and Analysis

CPA SERVICES

CORPORATE FINANCIAL

REPORTING

AT THE TURN OF THE CENTURY

BY RICHARD P. BRIEF

RICHARD P. BRIEF, PhD, is professor of business statistics and accounting at New York University. A past president of the Academy of Accounting Historians, he was the American Accounting Association representative to the First International Symposium of Accounting Historians in Brussels in 1970. He is also the author and editor of numerous articles and books on accounting history, accounting tlieory, finance and economics, and has held several visiting professorships.

THE 1890S-1900S WAS A PERIOD IN WHICH Accounting thought and practice were in the takeoff stage of development in the United States. The first CPA law was passed by New York State in 1896, and almost all states followed suit in the next two decades.¹ Arthur Young & Company, F. W. Lafrentz, Haskins & Sells and Lybrand, Ross Bros. & Montgomery were founded before the turn of the century. Touche, Niven & Co. was formed in 1900, Price Waterhouse & Co. in 1901, Ernst & Ernst in 1903, and Arthur Andersen & Co. and Marwick, Mitchell & Co. were established about a decade later.² Several of these firms had much earlier British origins. Names now connected with major U.S. accounting firms, such as Cooper, Deloitte and Whinney, can be traced back to as early as 1845. Indeed, Parker recently observed that of the 16 men whose surnames are associated with the largest eight accounting firms of today, 10 began to practice in Great Britain during the 19th century.³

In 1923, A. C. Ernst protested council’s restrictions on advertising.

The turn of the century also was an era of the “Big Trust,” which was the subject of an investigation by the U.S. Industrial Commission. Companies already in business included such familiar names as American Telephone & Telegraph, American Can, DuPont, General Electric, International Paper, U.S. Steel and Westinghouse. The growth of capital markets paralleled economic growth as did the establishment of governmental bodies, for example, the Federal Reserve Board in 1913 and the Federal Trade Commission in 1915. Of special interest to accountants was the enactment of the corporation excise tax in 1909 and, a few years later, the personal income tax. Although government’s role had grown significantly in the 19th century, the economic environment was predominantly laissez-faire.

Even though railroads had been disclosing financial data for a half-century or so, the records for most companies were spotty. However, by 1900, the debate over the costs and benefits of financial reporting for industrials in the United States had begun.

The purpose of this article is to give readers a glimpse into the nature of this debate and to survey briefly and selectively financial reporting practices at the turn of the century.

THE DEBATE OVER FINANCIAL REPORTING The big corporations had many critics who called for improved reporting. Accountants also advocated better disclosure of financial records and emphasized the importance of an independent audit. The cover page of the January 12,1901, issue of Commerce, Accounts & Finance, a publication of the School of Commerce, Accounts & Finance at New York University, illustrates prevailing sentiment. Quoting in bold print from the Bible, John 3:19, the headline read: “Men loved darkness rather than light, for their deeds were evil.” The editorial, probably written by C. W. Haskins, who was dean and professor of both auditing and the history of accountancy as well as a founding partner of Haskins & Sells, elaborated on this theme as follows:

“… a public conscience … is shocked by corporate immorality.”

“The conspicuous lack of definite information in the reports of industrial corporations has created a feeling of suspicion on the part of the public, from which feeling such corporations are themselves the chief sufferers. The public does not understand why industrial corporations should not give to their affairs the same detailed publicity as is given by moneyed institutions and transportation companies. In taking this position the public is entirely right. Suspicion has already developed into antagonism, which is shown in the sentiment of the legislatures of the various states. If industrial corporations persist in preferring darkness to light, they will soon be compelled to do that which they ought to do voluntarily. Free, fair and full reports of industrial organizations should be founded upon thorough, independent audit of accounts by disinterested certified public accountants, whose signed certificates, to be published with the report, are a more nearly perfect guarantee of reliability than any other yet to be discovered.”

The same point was made several years later in the October 1906 issue of the Journal of Accountancy, which took the position that the demand for publicity “has proceeded from a public conscience which is shocked by corporate immorality. Publicity is asked for in order that the State may exercise the proper police control. Our sense of business immorality and justice would be protected. If, however, we are to have corporate control which looks toward efficiency and economy the intelligence necessary to such control must come to the administration through the accounts, and must be regularly produced to the investor in the form of authoritative reports.”

This editorial introduced a series in the Journal, written by Thomas Warner Mitchell, on corporation reports. The series was published until September 1907.

Others advocated more government intervention via a system of public auditing⁴:

“First, each corporation should be required to make periodical reports of its business, supplemented by other reports upon official demand, all verified by the oaths of certain of its officers. Second, official examiners should also be maintained, who should, at irregular periods and without notice, appear at the offices of each corporation and make rigid examinations of its affairs, using its books in the first instance but verifying the correctness thereof by every practicable method.”

On the other hand, some said that disclosure would have adverse economic consequences.⁵ “I cannot but regard corporate publicity of the kind and to the extent advocated by many as a certain and serious hindrance to effective competition. So far from accomplishing the purpose expected in this regard, its practical tendency, in my judgment, would be in the contrary direction. Just as the Sherman Anti-Trust law, which is based upon an economic fallacy, has indirectly aided the very results it was designed to prevent, so the compulsory disclosure of all corporate transactions would, as I believe, undermine the competition it was intended to support…. The enforcement of corporate publicity would be an added incentive to industrial combination.”

The argument against disclosure was put more bluntly in testimony before the Industrial Commission in 1899 by Henry 0. Havemeyer, president of the American Sugar Refining Company, in response to a question by Thomas Phillips, a commission member who was previously cited⁶:

“Phillips: You think, then, that when a corporation is chartered by the State, offers stock to the public, and is one in which the public is interested, that the public has no right to know what its earning power is or to subject them to any inspection whatever, that the people may not buy stock blindly?

“Havemeyer. Yes; that is my theory. Let the buyer beware; that covers the whole business. You cannot wet-nurse people from the time they are born until the day they ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Copyright Page
• Dedication
• Table of Contents
• Preface
• Acknowledgments
• Introduction
• First Principles
• The Debate over Depreciation, Capital and Income
• A Solution to the Allocation Problem
• Interest Rate Approximations
• Financial Reporting and Analysis
• Accounting Error