Abacus
Volume 44, Issue 1 pp. 109-135
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Multiple Dimensions of Accounting in the Development of GAAP

J. J. STAUNTON, 

J. J. STAUNTON

University of Sydney

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First published: 06 February 2008
https://doi.org/10.1111/j.1467-6281.2007.00251.x
Citations: 1

John Staunton ([email protected]) is a part-time Senior Lecturer in Accounting at The University of Sydney.

Staunton (2003) explored the multi-dimensional in the context of developing conceptual frameworks in accounting; his doctoral thesis ( Staunton, 2007) explores the issues over a longer time period than this article, and specifically in the context of accounting for liabilities.

Abstract

The phrase ‘accepted accounting principles’ underlying financial statements is a forerunner of today's accounting standards. Here, it is argued that history shows that the term ‘principles’ is often most vague in debates on the development of those standards. The reasons for and consequences of that vague use are varied and complex. This article provides insights not highlighted in earlier analyses of the periods reviewed. While debates like the rule- versus principle-based standards are set up as two-dimensional, the many dimensions of accounting often allow argument to be easily diverted. The debate/argument thus remains unresolved. For progress to be achieved in the establishment of accounting standards the many dimensions of accounting must be acknowledged and attempts to divert debate minimized. Those with a stake in the development of accounting standards need to consider the total scene of the related accounting. In a particular debate, dimensions under scrutiny must be stated, with any others in that total scene being acknowledged even if kept constant.

Canvassing historical literature up to the end of the 1960s reveals the range of the problems/debates found amongst various parties over time. It shows the many dimensions in which ‘accounting’ may be viewed. One of the two-dimensional-type debates is whether the development of accounting standards is to be ‘rule-based’ or ‘principle-based’.

Walker (1977, p. 78) concluded from his analysis of various U.K.-type Companies Acts over time that the evidence supported a claim of disclosure rules being established. Certainly, the idea of rule-based standards has a long history. But what does history tell of so-called principle-based standards?

More recently, Walker (2007, pp. 50–4) provided background to the use of the term ‘principle’ in technical discussion of accounting. He concludes (p. 54) that the term has indeed become a term of the art, being ‘loosely applied’ to general statements which

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    assist accountants when confronted with a question of what should be done in the compilation of reports, and

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    involve accountants’ use of professional judgment.

Use of the ‘general statements’ is found in support of professional (rather than governmental) regulation.

As regards ‘principle’, May (1943, p. 37) tells of a then (and arguably still found today)

not uncommon [ploy of] the accountant who had been unable to persuade his client to adapt the accounting treatment that he favored, to urge as a last resort that it was called for by ‘accounting principles’. Often he would have had difficulty in defining the ‘principle’ and saying how, why, and when it became one. But the method was effective, especially in dealing with those (of whom there were many) who regarded accounting as an esoteric but well established body of learning and chose to bow to its authority rather than display their ignorance of its rules. Obviously, the word ‘principle’ was an essential part of the technique; ‘convention’ would have been quite ineffective.

This anecdote extends to a range of debates found to this day in the development of ‘generally accepted accounting principles’ (GAAP)—from how the body of knowledge is to be established through the loose terminology often used to the behaviour of practitioners in dealing with clients. In turn, it warns those interested in the development of GAAP (and the more contemporary accounting standards) of how easy it is in argument of one point to be diverted (or to divert those in opposition) to another point.

This article provides background to the rise of accounting being based on conventions, selected consequences of that basis and attempts to make accounting ‘an esoteric but well established body of learning’. This story begins with the consequences for accounting of the rise of the joint stock company in England; next, those of its use in the United States of America are introduced; then, selected paradoxes requiring resolution are discussed; finally, some conclusions are drawn.

THE JOINT STOCK COMPANY UNDER GENERAL REGISTRATION

During the expansion of joint stock companies in the mid-nineteenth century in the Anglo-Saxon type countries, governance was in part to be within a context where publicity of the companies’ affairs was to be required in lieu of the granting under general registration provisions of limited liability. Financial reporting was discussed during times of company promotions, related speculation and following corporate failure (especially when failure was unexpected).

Debate occurred as to the potential for ‘publicity’ to expose corruption as well as provide investors with information selected to allow an assessment of risk and thus to facilitate the proper pricing of the investment. An interesting exchange occurred between one William Clay and his adversary named John McCulloch. The former argued for the limitation of liability of banks with two provisos:

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    firstly that the capital was fully paid up, and

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    secondly, the banks’ affairs were given publicity by the periodical publication of their accounts.

Clay's proposals were ‘limited liability; paid-up capital; perfect publicity’. McCulloch argued the first proviso fallacious and was most contemptuous of the idea of control via ‘perfect publicity’. McCulloch remained a staunch opponent of limited liability, arguing the principle of unlimited responsibilities was the basis for a solid banking system.

The proposition mooted was that the privilege of incorporation with limited liability demanded in return the obligation to provide publicly information on the state of the company and its capital. However, detailed requirements were lacking. This was reinforced in the Report of the Select Committee on Assurance Associations, which commented in 1853:

One of the chief securities contemplated by the Act of 1844 for the safety of the public is the duty imposed upon them to return annual balance sheets representing the state of their affairs . . . they are open to public inspection. But from the fact that the Act prescribed no form, and furnished the Registrar with no power to enforce a compliance with the spirit, or even with the letter of the law, it appears that this provision has been very imperfectly complied with in many cases, and in others altogether neglected; so that it cannot be said that it has afforded, in the majority of cases, either the information or the security which was intended. (Parliamentary Papers [1852–53], Vol. XXI, iii, cited in Hunt, 1936, p. 97, note 25. This lack of required details enforcement provisions is also noted by Edey, 1979, pp. 222–3)

However, McCulloch's view did not prevail, freeing joint-stock companies from the costly process of having to seek a special act or the like (Hein, 1978, p. 6) when raising capital for large-scale investments, thus playing a key role in the country's economic advance. Any publicity was to include a balance sheet which was to be audited. It was argued:

Periodical accounts, if honestly made and fairly audited, cannot fail to excite attention to the real state of a concern; and by means of improved remedies, parties to mismanagement may be made more amenable for acts of fraud and illegality. (Edey and Panitpakdi, 1978, p. 357; Edwards, 1980, p. 7)

In this regard, the spirit of the legislation remains remarkably similar to current provisions. Arguably, periodical accounting reports provide improved remedies against mismanagement, fraud and other illegalities. These views were incorporated into the Joint Stock Companies Act for 1844. The Act also introduced the phrase ‘full and fair’ as a standard to be met by those preparing the reports.

During this (and later) periods, the publication of any information, financial or otherwise, was jealously guarded by management. Indeed, shareholders were sometimes seen as being spies for competitors. However, within this general atmosphere, it was argued that a duty of some financial reporting was concomitant with the right to form joint stock companies (Hein, 1978, pp. 241, 245).

With several subsequent Acts and amendments, the 1900 U.K. Companies Act continued the pattern for subsequent legislation in the area of security regulation, one based arguably on a so-called philosophy of disclosure (Hawkins, 1962, p. 32). The approach was seen as being in contrast with the U.S.A. approach of supervision (Manley, 1976, p. 60). As met earlier, Walker (1977, p. 78) suggested the ‘philosophy of disclosure’ approach was at best an overstatement of the case. While suggested disclosure rules had been established, this did not evolve into a disclosure policy. Walker concluded from his analysis:

The history of British company law is hardly consistent with the claim that British governments espoused a ‘philosophy of disclosure’. A more plausible interpretation is that the legislature resisted demands for fuller corporate accountability and was sympathetic towards appeals for business privacy. (pp. 78–80)

Guidance on specifics of reporting was minimal. While the balance sheet remained the primary statement to be reported, reasons differed between the U.K. and the U.S.A. In the former, the report was seen as one of management's stewardship of the funds provided by shareholders. In U.S.A., the report was directed at bankers who provided much of the capital, emphasis being more on liquidity/solvency issues than those of profitability (Chatfield, 1977, p. 72).

Certainly, disclosure rules were found under various Acts and related case law, but these guidelines still lacked underlying reasoning other than qualitative standards (like ‘true and correct’). What was established were to be known as conventions. What remained unchanged was the perceived need by managers for secrecy surrounding financial affairs (Previts and Merino, 1998, p. 117).

While in previous times periodic calculations of a firm's profit were of little interest to owners who were closely concerned with the firm's operations (Yamey, 1979, p. 231), introduced into accounting thought was the economic notion of ‘capital’ assets and a related distinction between capital and income. Consequences followed for the calculation of income (Littleton, 1933, p. 213), accounting problems arising as particular statutes would not define ‘income’. A series of legal court decisions were required to resolve these problems—a series of conventions emerged.

In his review of the development of accounting conventions in company reporting, Yamey (1979, p. 231) concluded, ‘Much less interest has been shown in the principles, conventions or practices underlying the preparation of accounting statements of profits and financial condition presented to shareholders’. He suggests (p. 234) this occurred within a context of the calculation of profit which was, at that time, simply an element of the balance sheet (among capital, assets and liabilities). Indeed, he argues that calculation dominated the accounting scene even though, in the U.K. and elsewhere, the publication of a profit and loss statement would not be made compulsory for some time. The conventions were to meet two requirements: (a) delimit profit to that available as dividends to shareholders, and (b) provide an index for shareholders of the profitability of continuing entities (Yamey, 1979, p. 239).

The conventions covered both profit and asset issues, with little consideration of liabilities. The liquidity of a company was linked to changes in the net current assets of the firm, such changes being only included in the profit calculation if realized by actual sales. Similar arguments were used to exclude changes in the value of fixed assets. Another convention was to exclude any unusual, non-current or irregular items from the profit calculation which might distort the index of performance and so misinform shareholders. As regards assets, the reporting of the going concern value of fixed assets and the use of the lower of cost or market value in reporting inventory provided illustrations (Yamey, 1979, pp. 235–6). These conventions would provide those who prepared the reports with wide discretion.

Management's actions were in part conditioned by a belief that caveat emptor applied in commercial transactions and that information about the affairs of industrial corporations, being essentially private relationships, was no business of stockholders, investors and consumers, let alone workers. They had no right to expect ‘full and fair’ disclosure of corporate affairs. Drawing on the quid pro quo for incorporation, critics, on the other hand, sought publicity of both financial and non-financial information to protect various groups (Hawkins, 1962, pp. 124–5). However, any convention was only challenged when particular problems faced in application required a legal case for their resolution.

However, the scene changed dramatically with the rise of the holding company in U.S.A.

INVESTORS IN THE CONGLOMERATES

The laissez-faire policies in U.S.A. during 1884–96, as summarized by Sobel (1965, p. 126), saw ‘greater social and economic concentrations develop than at any other time in the nation's history’. Walker (1978, pp. 123–4) notes that around this time some U.S. states legislated to lift ‘statutory restrictions on inter-corporate shareholdings’—offering hope of ‘evading the anti-trust legislation’.

Dealing with issues of economic and social discontent was considered by some to be beyond the scope of government. Farmers were in relative decline, workers in an industrial society faced growing problems and big business was expanding. Special interest groups were formed, some becoming quite powerful, and included professional accounting groups (Previts and Merino, 1998, p. 105). Some business groups would form pools to discourage competition and price cutting, thus maximizing profits.

When pools in the railroad industry were declared illegal, at first a trust formula was used (Sobel, 1965, pp. 126–8, 177). The trust method became more potent after the passage in 1889 of a statute in the state of New Jersey permitted one corporation to hold shares in another corporation—a practice previously considered grossly improper, being sanctioned only rarely by special legislation. After a holding corporation was established in New Jersey, various other companies were taken over by issuing shares in the holding corporation, leading to the establishment of a group, perhaps big enough to capture the national market. By 1892, large companies were publishing consolidated statements (Hein, 1978, p. 273).

Various financiers used the corporate form of organization to create extremely large and formidable conglomerates (Littleton, 1933, p. 9; Sobel, 1965, pp. 128–9; Previts and Merino, 1998, pp. 107–8). The work of people such as Poor, Moody and Dun sought to provide stakeholders in general, and shareholders in particular, with data on those organizations (Sobel, 1965, pp. 131–2, 175–7). However, whether the set of conventions underlying that data was known to all parties was questionable. Further, questions to arise included which party was to develop that set.

To some in business (like the financier J. P. Morgan), ‘character’ and like qualities would provide answers. While being questioned under a government investigation, he referred to phrases like ‘the thing to do’ and ‘it would be better’, arguing that training and heritage, when based on trust and honour, led to people like him being best equipped to run the nation's financial affairs (Sobel, 1965, p. 199; Jackson, 1984).

Some in the now established accounting profession followed a similar line of reasoning. May (1936, p. 12) saw any problems being resolved by personal qualities as ‘the accountant must be a man of high character’. Further reference (pp. 15, 23) is made to the ‘high-minded accountant’. The idea that training and heritage produced people who could and would exercise necessary control based on trust was to be raised in debates on the control of the securities market and the related development of accounting principles.

Well before the Great Crash, the Great Depression and the New Deal (which included the ‘Truth in Securities’ legislation), major questioning of the publicly provided information about corporations had occurred. Ripley (1926, pp. 167–70) sought improved financial information about corporate affairs for a variety of reasons:

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    it was part of the publicity which was a ‘governor’ of big business,

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    employees needed it for bargaining purposes,

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    investor advisors required it, and

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    it was necessary for an effective and efficient market in securities.

He complained,

How ridiculous that public partners in this enterprise, consulting banking experts, should have to be advised that such an official income account ‘does not by any means give a clear picture of the annual earning power’ or that ‘the balance sheet by no means discloses the true value of a company's fixed assets’. It approaches public scandal that corporations of such importance should thus play fast and loose, not only with the public, but with those whose capital is really invested in the business. (p. 181)

Ripley's main theme was the need for better information to be included in accounting reports, as seen in his various laments which included: ‘To the uninitiated, as we shall soon see in detail, they may tell too much that is not so, or too little of what they ought to tell’ (1926, p. 164); ‘Stockholders are entitled to adequate information, and the state and the public have a right to the same privilege’ (p. 165). His ‘detail’ (p. 171) included a case in which a loss of $421,000 was presented in the financial reports, by a feat of accounting legerdemain, as a profit of $459,000. This figure compared favourably with the trend of profits for the corporation for the previous two years. He commented (p. 198): ‘All these, moreover, are certified to by a highly reputable firm of accountants. Being only an economist, I confess utter inability to unravel it.’

In his writings, Ripley (1926) continually stressed the artificial nature of the corporate form of organization from which accounting reports were sought. He argued that while, for purposes of reasoning and analysis, a corporation could be seen as completely distinguishable from its members, this way of thinking led to various abuses of power, including the lack of quality information on those organizations.

In discussing the quality of information needed, his 1926 work reintroduced an analogy hotly debated over time. Noone (1910, p. 241) and Bentley (1911, p. 50) had claimed a balance sheet as a snapshot or picture of financial condition.Ripley (1926, p. 171) too claimed that the balance sheet, in disclosing the condition of the company at a point in time, provided an instantaneous photograph of that condition. The income account showed the course of affairs over a period of time and both were essential for a complete accountability.

Rather surprisingly, given his later acceptance of the ‘art’ of conventional accounting rather than the ‘scientific’ approach of (say) a Chambers, Littleton (1933, p. 161) also then used a photographic film analogy for movements over time. (Here it is of a toboggan on a slide.) However, he does suggest that a ‘cutting and editing and reassembly’ is required—more along the line of argument of May (1936, pp. 49ff.), who was certainly at odds with such a description of a balance sheet. Instead he argued that the general public must understand that a balance sheet should be viewed as an instantaneous picture only in part, as some parts were historical and others purely conventional.

Ripley would have no part of such views, especially the ‘limitations of accounts’ mantra. Instead, he maintained that it was ridiculous for non-accountants to be advised that an official income account did not at all provide a ‘clear picture’ of annual earnings nor did the balance sheet disclose the ‘true value’ of the non-current assets of the corporation. He criticized,

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    accumulation of undisclosed resources in secret reserves,

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    overloading of operating expenses with contingencies which had an offsetting effect on either assets or liabilities,

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    manipulation of depreciation,

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    manipulation of the monetary amounts of inventory,

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    manipulation of goodwill, and

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    other conservative reporting practices.

These criticisms appear in Berle and Means’ (1932) classic. And to some, these 1920s criticisms would seem rather modern (Briloff, 1972, 1976, 1982; Chambers, 1973; Clarke et al., 1997, 2003; Clarke and Dean, 2007).

Debate continued that a position statement differed from the phrase used in conventional accounting—the balance sheet. May (1943, p. 14), was of course aware of the difference. His preferences led to a conventional accounting balance sheet. Even at that time, debates and related tensions continued as Fitch (1923, pp. 1–2) and Bennett (1928, p. 428) argued instead for a financial position statement. This resonates with the switching of ‘balance sheet’ and ‘position’ phrases in the 1990s and the new millennium.

As did business in general, the accounting profession (represented by the American Institute of Accountants) objected to any proposals for federal government intervention (Previts and Merino, 1998, pp. 186–7). Its committee to deal with federal legislation included May, now senior partner of Price Waterhouse (Hunt, 1936, pp. v–vi; Chatov, 1975, pp. 49–50). He later assumed a role of consultant/advisor/link between the profession and other bodies like the NYSE. May was instrumental in establishing conventional accounting, becoming a key spokesperson for the practitioner wing of the profession. He proposed the universal adoption of what he perceived as disclosure standards as set forth in contemporary U.K. Companies Acts. Then members of the AIA would be able to render a higher service to the community. However, he did not want this through legislation but through cooperation with bodies like the NYSE or Investment Bankers Association of America.

THE AIA-NYSE ALLIANCE

With criticisms continuing, pressure mounted for some federal regulation. However, attempts were made for reform by the AIA and the NYSE (Editorial, 1930, p. 242; Chatov, 1975, p. 19). Of special concern was that different corporations could use a variety of accounting practices (May, 1943, p. 41) to reflect similar transactions in their reporting. Hoxsey (1930) questioned whether the conventions underlying accounting had kept up with changes. As a result, the Special Committee on Co-Operation with Stock Exchanges was appointed with May as chair (Zeff, 1979, pp. 208–9). A search for comparability among corporate reporting was prominent.

The May Committee provided the foundations on which later work on so-called accounting principles was based. Professional accounting bodies became involved in the development of what was to be termed ‘accepted accounting principles’. May's Committee reported in 1932. Its findings were:

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    a balance sheet is not a statement of current factual data,

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    the primacy of the income calculation is emphasized,

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    principles of accounting are interchangeable with the practices and methods used by accountants,

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    corporations had the right to select detailed methods of accounting deemed by them to be best adapted to the requirements of their business with the proviso that methods of accounting included conservatism, the idea of a going concern and consistent use of those methods over time, and

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    an overriding theme that the public was to be educated to accept these ideas as well as the nature of resulting accounting reports and their limitations.

Much trust was required from other stakeholders to be placed on the ‘professional status’ of the accountant. May (1936, p. 115) was able to claim,

Most investors realize today that balance sheets and income statements are largely the reflection of individual judgments, and that their value is therefore to a large extent dependent on the competence and honesty of the persons exercising the necessary judgment.

One might easily agree with the statement if judgments were based on solid foundations of accounting—one derived within commercial settings. However, the foundations were to some made of sand.

‘TRUTH IN SECURITIES’ LEGISLATION

The aftermath of the Great Crash included a major economic depression (Galbraith, 1971; Chatov, 1975, p. 22). Attacks on big business by various groups (liberals, progressives, socialists and communists) grew stronger in the chaos. Management had few and inadequate answers to the critics who demanded social and corporate reform. Protection was sought from perceived corporate abuses not only for investors and consumers but also for employees and small businesspersons.

In the 1932 campaigns, Hoover's policies included self-regulation, but with the proviso that if found lacking, new legislation to prevent abuses would follow. F.D. Roosevelt's (FDR) policies included the protection of the investing public by the requirement of ‘truth in securities’ dealings based on ‘true information’ being filed with government. General and vague statements were to be made clear by FDR if and when elected (Sobel, 1965, pp. 284–5). FDR's election followed in 1932.

Earlier in 1932, a Senate Committee inquiry was set up, paradoxically by the Republican controlled house. Ironically, the investigation's findings were not as expected. The investigation found fraud, duplicity and other excesses (involving the use of holding companies among the electricity, gas and water utilities). The scene was set for action to reform and control by legislation. The philosophy based on caveat emptor with limited disclosures, used so successfully by operators on Wall Street in the past and which had underpinned U.K. finance during the nineteenth and early part of the twentieth centuries, was seriously challenged (Hawkins, 1962, pp. 388–95; Sobel, 1965, p. 286; Chatov, 1975, pp. 30–31).

Ripley gave testimony but now had further and more recent abuses to support his 1920s argument for compulsory publicity. He argued that corporate financial reports for industrial concerns required legislation as found in other areas like railroads, a suggestion made over time (Bentley, 1912a, 1912b). Instead of the system based on secrecy previously used, a trustee-type relationship was suggested as the basis for reforms with legal backing. Arguably, the link with the U.K. regulation was now at an apex (Hawkins, 1962, pp. 394–6, 409; Chatov, 1975, pp. 33–4).

Issues raised regarding accounting were considered by FDR's reformers. Their views were incorporated into the Securities Act of 1933 (which gave sweeping powers to the FTC), then later the Securities and Exchange Act of 1934 (which transferred those FTC powers to the new Securities and Exchange Commission) and the Tennessee Valley Authority Act.

The establishment of the SEC and its effects has been the subject of numerous articles and books over the years. Chatov (1975) provides one of the more controversial instances. While Zeff (1976) in a review wrote of his major misgivings over the argument, research methods and conclusions reached, Chatov does provide some challenging propositions which attained credibility after several large unexpected corporate collapses and other financial market practices revealed in various investigations in the 1970s and beyond.

In a less controversial overview, de Bedts, (1964, p. viii) found the SEC not anti-business but established as a social control. Tensions were certainly heightened by its emergence. However, as is often the case, some debates were at cross-purposes. The fight of the reformers against fraud and corruption was sidetracked into being against ‘bigness’. The attempt of the reformers to revitalize capitalism was sidetracked, being seen by some as seeking its destruction (Sobel, 1965, pp. 298–9).

FDR and his reformers sought to re-establish the idea that those who managed corporations using ‘other people's money’ were to act as trustees. The onus of providing the whole truth of affairs of those corporations would be placed on that management. This conflicted with the caveat emptor principle underlying interrelationships found on Wall Street. While in earlier times such a suggestion was seen as a flagrant interference of government in business, now it was accepted as a minimal requirement (Sobel, 1965, pp. 293–4).

The views of those who sought legislation to protect investors were given support by evidence and analyses in Berle and Means (1932). Berle, a former student of Ripley and now a professor of law, became a member of FDR's ‘brain trust’ assembled to advise the President on how recovery from the depression would best be carried out and how a recurrence might be prevented.

From an analysis of the concentration of economic power in a relatively small number of large corporations in the period 1915–30, Berle and Means (1932, p. 304) had shown how the dispersion of stock ownership enabled management to control corporate reporting, finances and the distribution of earnings. They criticized the inadequacy of information given to investors and pointed out methods of accounting manipulation to show abnormal profits.

In opposition to the use of legislation, May's suggested method to overcome problems in the reporting was the use of capable accountants of a high degree of integrity. However, Berle and Means (1932, p. 310) argued, since rules of accounting were not yet even partially recognized, that the lack of agreement among accountants was a key reason for the failure of the law to recognize accounting standards. Accountants lacked a unifying theory. However, they certainly saw the potential of accounting reports and their external audit by a professional accountant as key control devices. Their ‘list’ of disagreements (pp. 310–11) among accountants (which would later be described as ‘creative’ accounting practices or more recently ‘earnings management’) certainly has a modern look.

The reformers’ views created tensions, especially among business leaders in general and accountants in particular. As might be expected, attacks on reforming legislation came from various areas. Arguably, AIA was in crisis-management mode. It acted as a pressure group more concerned with implications for its members, especially those in practice, regarding

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    degree of liability for negligence faced by accountants, and

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    prescription of form and content of financial statements.

In 1934, this liability was modified (Edwards, 1960, p. 157) and administration passed from the Federal Trade Commission as originally proposed to the SEC. However, the potential of financial statements prescribed by a government body continued to create tensions among most accountants.

The May Committee's approach and results would meet the various threats faced by the profession (Carey, 1969, pp. 47–8). Practitioners spearheaded the attack on the SEC's powers to develop AAP to guide reporting practices by corporations. The dilemma was obvious to May (1943, pp. 58–9), who would attack the New Deal reforms. The Securities Act to him was not the result of judicious inquiry and dispassionate legislative consideration. Instead, it was passed under the pressure of public indignation and investigations lacking in judicial quality. He questioned the claims of the promoters of the law, arguing representations of many were no better than the ones complained of. His views supported control via personal qualities. Others would of course disagree. De Bedts (1964, pp. 204–5) commented on the scene favourably. Controls were required and the New Deal/SEC would provide them over corporate and financial dealings.

Interestingly, even May (1943, p. 59) saw some benefits for the profession, but to him at substantial costs. The law gave legal recognition to the function of the independent public accountant but also gave a non-expert body—the SEC—powers over the profession. From a pecuniary point of view, the effect on accountants was favourable but professional status was impaired. To May (1943, p. 50), controls in accounting were to be resolved at the ‘professional’ level rather than as part of regulatory reforms.

May was in a position to reinforce the ideas of the NYSE–AIA self-regulatory approach rather than the potential SEC-uniformity approach. He argued that enhanced ‘professional accountant’ status (1943, p. 65) would draw into that body more men of high quality than under regulation it was likely to attract. Once again the theme met was that the values of the accountant were able to overcome any deficiencies in the actual accounting process or its output. That being the case, there was little, if any, need for regulation by the State.

Others were not so sure, preferring some regulation. De Bedts (1964, p. 28) argued that the time of reform via legislation had come. Various stakeholders had read and appeared to accept the lessons from investigations which found corruption, mismanagement and lack of action from groups which might be expected to provide protection.

While in favour of the extension of protection to be afforded investors, to May investors would be protected by professional developments rather than legal regulation. He would continue with familiar themes:

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    the primacy of the income account,

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    financial reports were not statements of fact and had limitations,

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    the competence and integrity of those who prepare accounts in general and of accountants in particular are key factors, and

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    the public was to be educated to accept these ideas.

At best, such proposals may be seen as defensive of the position in which accountants and their profession found themselves. Investors were at fault, as they believed that financial reports dealt with factual and current data whereas the reports, and the related audit reports, included opinions and non-current data based on conventions. It is possible to be extremely critical of such arguments as being simply psychological attempts to avoid responsibility for the promotion of at best confusing and at worst outright misleading financial statements.

The May Committee was reformulated in 1938 (Zeff, 1972, p. 134; Chatov, 1975, pp. 133–7) as the Committee on Accounting Procedure (CAP) in response to claims that officers of the SEC were generally dissatisfied with the work on AAP. A case of practitioner dominance and control over accounting reports and underlying principles had emerged. However, that is not to suggest that some (academics like Ripley then and Chambers later) did not directly or indirectly influence the reporting process. The Ripley argument would be labelled ‘academic’; that of May as ‘practitioner’. Under the latter, a series of ‘conventions’ to be developed by practitioners followed. Tensions remained, as found in an exchange between Peloubet (1935a) and Kelley (1935) as to what was a balance sheet and what was its role.

Kelley (1935, p. 52) followed the view that the balance sheet was an instantaneous photograph of the business, although apparently thinking this analogy could be taken too far. While it may be dangerous to infer too much from Kelley's reasoning, the terminology used may be seen as a little ahead of its time as he strongly argued that ‘value’ and ‘price’ were distinct (though related) concepts. While Peloubet (1935b) questioned the logic of Kelley's reasoning, it is interesting to note that Peloubet too uses terminology (e.g., past or present cost, market price or value) beyond that found in AAP of that time.

However, arguably the best summary is that of MacNeal (1939/1962, p. 57). While sympathetic to and defensive of the profession and practitioner accountants, within the context of the discovery of a further scandal regarding in part the publicly available information of a large corporation, he concluded:

But so far as the public was concerned, McKesson and Robbins was no Kreuger case. The public had been so enchanted by the role of the match king as an international swindler, and so agog at all the ramifications, that it didn't get around to placing blame. But there was no public enchantment about McKesson and Robbins. Coster had none of Kreuger's glamor; in the public eye he was a dirty little crook who had got away with a gigantic swindle. This time Wall Street was not involved in the public resentment that welled up. The accountants were. Millions of dollars’ worth of drugs that could be weighed and measured and felt, turned out to be fiction. For the first time, the great uninitiated public asked questions it had never asked before. What occupied the time of the public accountants who got fat sums for auditing? What was an audit for if it didn't protect the investor? And what, for that matter, was public accounting?

Perhaps accountants and their profession were spared having to provide answers to the questions posed by MacNeal as World War II intervened and the times would demonstrate that the great corporations and their (primarily internal) accounting requirements were indispensable to the military effort. Little legislation of concern to those in the accounting profession followed. Indeed, the fourth SEC Commissioner (Frank from 1940) would argue cooperation among groups was far better than competition in areas like standard setting. Fortuitously, war orders from the U.K. and Europe would help the U.S.A. economy recover (Sobel, 1965, pp. 308–10).

The previously met May Committees (and their underlying themes) were successful in part to thwart government intervention in formulating AAP. They were to protect the accounting profession in general and the practitioner in particular, while taking a step forward in developing AAP and clarification of auditors’ responsibilities via negotiations with NYSE. However, to Chatov (1975, p. 132) they represented the abrogating by SEC of the responsibility to determine AAP. To MacNeal (1939/1962, p. 69), his underlying criticisms of accounting were often misinterpreted—to him the observed problems of practice were intellectual, not moral.

However, as illustrated by May (1943, p. 42), the practitioner wing of the accounting profession, under his guidance, provided accounting with a function having an implicit input-oriented direction. Under this input-oriented process, the calculation of profit for a reporting period was the key issue. This involved a series of steps. First, the amount of revenue for that period was recognized usually at the point of sale (in either a cash or credit transaction). Second, expenses for that period were recognized under a matching process in two ways. If an expense could be seen as contributing to the revenue as recognized, it was included in the calculation of profit. If an expense could be seen as applying to a particular period, it too was included in the calculation of profit. There were exceptions to these rules which included various mining (especially gold) and agricultural ventures as well as construction over a number of periods of long-term assets.

The rules led to deferred credits and deferred debits which were to be carried forward on the balance sheet at the end of that period as liabilities or assets and affected the calculation of profit in future periods, resulting in a balance sheet which would present a view of the financial position only by chance. This in turn would allow some, including MacNeal (1939) and later Chambers (various), to question the idea of ‘truth’ in financial statements.

Arguments continued on whether a balance sheet was a true statement of condition as of a specific date. Perhaps, it was argued, it produced only a half truth as a result of over-conservatism. It had been suggested more than a decade earlier that accountants be censured severely or legally punished for being found guilty of over-conservatism as they were for over-optimism or carelessness (Bennett, 1928, p. 428). May played a key counter part in various debates during those years. His influence was all pervasive until the early 1970s.

Ideas still prevail in some groups that AAP are formulated based on what is done followed by a rationale later of why it was done that way. While some in the academic wing of the profession were more concerned with the why, the practitioner wing (mainly via the May legacy) ensured that financial reporting became a process of cost allocation based on the matching of revenues and expenses to current and future periods. This was achieved via the use of ‘conventions’ which in turn led to the ‘principles’ at the theme level and the ‘principles’ at the rules level—conventional accounting.

SCIENTIFIC REASONING AND THE ACADEMIC WING

The original capture of the accounting standard setting process was not of course without debate within the profession. Earlier debate concerned the accounting for the liability for bonds in which Sprague (1906, p. 294) objected to May's (1906a) making a distinction in practice which seemed unfounded and unsupported by facts. Sprague did not argue the points at length, although May (1906b, p. 32) later argued ‘practical difficulties’ outweigh Sprague's ‘logical consistency’ in establishing accounting principles.

Over the following years, tensions arose between underlying theory and application. Gaa (1944, p. 272) for one argued that for some years, the American Accounting Association, AIA and a few individuals had tried to formulate statements of AAP that could be generally accepted—but none had been. As well, both theory and application were individually beset with tensions. To Gaa, a coherent and consistent system of accounting standards may be constructed only if it is built around the function which accounting serves. This was to be a critical element in systems like Chambers’ 1950s–60s CoCoA and the Conceptual Frameworks projects of the 1970s-to-date.

As regards one study, the AAA's 1941 Revision, May (1945, p. 134) was critical. He questioned the disclosure presentation methods, especially the use of footnotes to the financial statements. He did agree (p. 135) with the earlier 1936 Statement's claim that accounting is a process of allocation, not of valuation, but with reservations. One was the omission of ‘tentative’ in the title. He held other general reservations (p. 136). After some damning with faint praise, he found

  • •

    the Revision premature and defective by ignoring recent work done (for example by CAP) on accounting;

  • •

    difficulties with the terminology used; and

  • •

    implications for the FIFO-LIFO debate.

Of course, the last remains irresolvable under conventional accounting where two contrary conventions are found. Other reservations, about which May had strong opinions, were issues which were simply being recycled. These included:

  • •

    Was the body of AAP to be rigid or flexible?

  • •

    Were AAP to be uniform, objective and well understood or conventional, requiring outsiders to be educated?

  • •

    What were the potential uses of financial statements and related purposes (or functions)?

  • •

    Are single-purpose financial statements achievable?

Indeed, May (1945, p. 138) would conclude, ‘I expressed doubt whether any single form of statement could serve these purposes even reasonably well’.

On the other hand, Husband (1942, p. 283) was more supportive. He sought refinements in particular areas like the links between the fundamental task and related principles. As regards the fundamental task, after quoting various writers (including MacNeal and May) on the use of accounting information, Husband (p. 292) made various interdisciplinary-type comments, noting their message for accounting in the generic sense. The narrow stewardship-type function, where conventional accounting did have a function, was under attack. Husband (1942, p. 293, emphasis added) argued other functions might be met if tasks and principles were better linked:

Take your pick, O Reader, and go your way rejoicing for ‘you are right if you think you are’. Personally, it is my opinion that historical accounting is a sine qua non of business procedure and that all efforts to improve it are worthy of commendation. To a considerable extent, historical accounting meets the requirements of income-tax procedure; it keeps proper records of the relations between the business and its customers and creditors; to a considerable extent it accounts for the manner in which hired servants perform the duties of their stewardship; it depicts the success or failure of original owners. I should like to see accounting expand its serviceability, however, by broadening the scope of the activities. By so doing I believe that it can become truly worthy of the Committee's assumption that it is of prime economic and social significance. (p. 293, emphasis added)

The often unstructured debates had several consequences. One was a blurring of any distinction between financial and economic. To some they became synonyms. Another was the inclusion in corporate financial reporting in some way of non-financial information. Both consequences would certainly broaden the function and contents of financial statements. In contrast, Chambers saw a need to be quite concise and distinctive, based on, as Mathews states, ‘a rigorous conceptual framework and measurement system’. As well, Chambers had developed rigorous views on the function of accounting and its interface with economics, finance and management. His conceptual framework of accounting was to be found in the domain of commerce.*

Input into various debates was also provided over time by other academics like Canning. He was most intrigued by the theory (or lack thereof) underlying accounting. In 1929, he criticized (p. 3) the growing tendency to discuss formats of reports as though they were end-products in their own right. To him, they were instead the basis on which decisions of policy were made. He also took issue with textbooks of the time, finding them largely manuals of procedure whereas systematic analysis would seem a better approach. He did caution, however (pp. 45–6), that the texts seemed to differ from practice.

As noted by Chambers (1979) and Zeff (2000), in discussing ‘income’Canning (1929, Ch 8, p. 143 et seq.) relied on Fisher's treatise (1906). This concept of economic income is seen as something absolutely real even though dealing with future events. Here a balance sheet shows the businessmen's future prospects. Future returns are known and discounted to present values. Notably, Canning (p. 91) did use the words ‘objective’ and ‘subjective’ when talking about ‘income’ as seen by the accountant and the economist.

Some of Canning's ideas were similar to those of Chambers. Two features which Chambers admired were the use of rigorous definitions and the specification of rules of measurement and summation. Others were contrary to those underlying CoCoA, especially the past and present emphasis of Chambers. He would argue that while any claim an asset is ‘a storage of service’ or ‘a collection of future benefits’ may explain why a person buys an asset, it does not explain what is bought. Chambers’ definition of an asset would also emphasize the means idea within the context of a presentation of contemporary financial position. Canning's contribution to the literature highlighted implicitly key differences between accounting and economics. Arguably, the latter is more to do with business behaviour while the former, to Chambers, provided information for use in that behaviour.

On the other hand, Littleton (1933, p. 160) had argued that profit calculation was no longer a simple computation. He gave two reasons: it was a complex calculation often suited to management's purposes and no longer did ‘value exchanges’ dominate, as other effects (like deferred debits and credits) were incorporated.

May (1936, pp. 405–6) too reviewed Canning's work, questioning Canning's stated relationship between accounting and economics and argued that accounting was ‘a tool of business’. May was especially critical of ‘physic income’; to him, income was ‘essentially a money concept’. Elsewhere he would criticize Canning for what May saw as misconceptions of the function of accounting (May, 1936, pp. 305–6), a point he made in deflecting criticism of accounting.

During his debate with Littleton on the structure of accounting, Chambers (1956, p. 584) wrote of ‘accounting’ as a generic term—not the technical one seen in the commercial world as the province of conventional or financial accounting. Ideas of distinct (though interrelated at higher levels of abstraction) types of data were introduced. A mixing of distinct areas of interest has led to problems in accounting reports at both the underlying reasoning/policy and the application levels. Debates result from given multiple (and sometimes conflicting) objectives at both levels. These species with distinct features may be classified as conventional accounting, differing from financial. In turn, this may be a subset of economic which in turn is a subset of the social species.

CONCLUDING REMARKS

This brief history has revealed that May's approach based on conventions gained prominence and its consequences persist. Debate continues on where emphasis should be placed. To some, undue significance is given to the balance sheet (today's statement of financial position) and too little to the surplus and income account (today's financial performance statement). To others, the balance sheet remains of secondary importance to a stockholder mainly interested in earning power and dividend probabilities. Values (rather than prices) from both a production and a security viewpoint are what many state are required. Dilemmas faced by those interested in the development of accounting standards continue to be, as Sterling (1975, p. 3) lamented, irresolvable:

We accountants do not resolve issues, we abandon them. I do not mean to imply that we ignore issues. Quite the contrary, we debate them long and loud. However, the debate, instead of coming to a resolution, continues until another issue comes along that is more current and more controversial, and then we forget the former issue.

These dilemmas reveal the many dimensions of ‘accounting’. While the main thrust of this work began with a two-dimensional-type debate, others canvassed include:

  • •

    technical or non-technical discourse,

  • •

    quantitative or qualitative methods,

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    scientific or artistic discipline,

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    academic or practitioner influence,

  • •

    accountability or decision-usefulness, and

  • •

    ethical/moral or technical issues.

Still other debates are of a three-dimensional-type, including

  • •

    past, present or future time frames, and

  • •

    triple line reporting.

Multi-dimensional debates on the influences of interdisciplinary studies on ‘accounting’ may provide the context. Being well versed in his discipline of accounting and related professional practice, Chambers for one spent much effort studying developments in other disciplines and professions. It in some ways seems strange that his CoCoA—a challenge to the traditions of the May legacy—is now challenged as too traditional in its lack of the use of models and formulae evident in dealings in financial markets. Of course, debate becomes unnecessarily complex as data are mixed from distinct time periods and by the function of accounting moving among distinct disciplinary levels.

Debates unfortunately seem to follow the recycling process which Sterling (1979) identified several decades ago: ‘Accountants anticipated the ecology movement by some years; instead of disposing of issues, we recycle them’ (p. 4). This article has provided insights by demonstrating that for progress to be achieved in the establishment of accounting standards, the many dimensions of accounting must be acknowledged and attempts to divert debate minimized.

Footnotes

  • 2 Hicks (1942, p. 90) writes, ‘The great change in the English law . . . was brought about by a series of Company Acts (culminating in the Act of 1862), which made it easy to form Joint Stock Companies with Limited Liability’.
  • 3 McCulloch (quoted in Hunt, 1936, p. 70): ‘It astonishes us that anyone living in London and having intercourse with practical men, should have been found to lay the least stress on the publication of balance sheets, or accounts of assets and obligations. They are worse than worthless, being eminently calculated to deceive and mislead. [To effect the plan leaves] it to the honour of the parties; that is by allowing each bank to report as to its own credit and solvency! It is difficult to suppose that Mr Clay can be serious [as] even though the parties were perfectly honest, the publication of a balance sheet would be good for nothing’.
  • 4 Of this standard, West (2003, p. 4) comments: ‘However, a general qualitative standard does not of itself ensure the serviceability of financial reports. That outcome can only be achieved when the technical practices required to be applied to satisfy the standard have been specified and enforced and professional acumen is evident’.
  • 5 Yamey (1979, pp. 233–4) writes: ‘The calculation of periodic profits was subordinated to the need to have complete information in the ledger, even where this involved an obvious over-statement of profits and of the “value” of the asset in question . . . The profit-and-loss account in early accounting seems to have been the rag-bag into which unwanted account balances were cleared, either at regular intervals or irregularly at the whim of the accountant, or when particular accounts or the ledger itself was full. The clearing process relieved the ledger of many accounts, the contents or balances of which were no longer of administrative interest to the accountant or owner. This left the accounts of assets and liabilities in the ledger, since these were necessary for administration and control.’
  • 6 The distinction had already been met in the area of trust accounting where an estate was to be shared among life-tenants and remainder-persons. This accounting required a distinction between corpus and income. This is of course a diversion in argument here.
  • 7 An illustration here was the treatment afforded preliminary formation costs of the company.
  • 8 Some management groups were reported to being not averse to varying the maintenance expenditure and depreciation charges to the income calculation in times of good or bad current earnings (Littleton, 1933, p. 234).
  • 9 Walker (1978, p. 122, footnote omitted): ‘The railroad industry was at times fiercely competitive—with corporations striving to defeat competition and subsequently maintain a monopolistic situation. Attempts at exploitation in these situations were responded to by state regulatory action—and later in 1887 by the passage of the federal Interstate Commerce Act.’
  • 10  Walker (1978, p. 124, footnote omitted) writes: ‘Regardless of whether the new Jersey enactments were a calculated stand against “the hysteria of the times”, a sophisticated attempt to aid business interests or simply a crude effort to garner the revenues obtainable from corporate registrations, the extension of corporate powers in this direction offered hope of evading the anti-trust legislation’.
  • 11  May (1936, p. 40), writing in 1926, referred to ‘a somewhat undignified competition for new incorporations’ by that state.
  • 12 Arnold (1937, p. 193) commented: ‘Laws against monopoly and restraint of trade were easily evaded in the fairyland where men pretended that organizations were men who owned property. Nothing in the Middle Ages compares for sheer fantasy with the holding company, or with modern security manipulation by which control of large organizations may be obtained without investment risk. Equally fantastic was the notion that a corporation had the rights of a citizen of the state which incorporated it.’
  • 13 In one exchange, Untermeyer, chief counsel for the Committee, suggested to Morgan ‘that profit was the mainspring of his system’.
    ‘“No, sir,” Morgan objected emphatically. “The first thing is character”’.
    [Untermeyer asked]‘Before money or property?’
    [JP replied]‘Before money or anything else’ (Sobel, 1968, p. 325; Jackson, 1984, p. 307).
  • 14 May (1937, p. 15) continued to comment on issues like etiquette influencing formal accounting matters, referring to his ‘being retained as a consultant by the body which, thanks very largely to the efforts of my good friend, Mr Hoxsey, has come to be recognized as unquestionably the greatest non-professional authority on the etiquette of financial accounting, the New York Stock Exchange’.
  • 15 Grady (1962, p. 57) suggested a fundamental change in the 1930s by NYSE in its attitude toward listed companies was undoubtedly partly a result of Ripley's argument dealing with publicity in corporation accounts.
  • 16 These references were found via Chambers (1995). Perhaps rather surprisingly, Garnsey (1928, pp. 36–7) used the same analogy.
  • 17 Merino and Coe (1978, p. 66): ‘The profession had been genuinely shocked, if not horrified, by Ripley's assertion in the twenties that the “balance sheet is an instantaneous photograph of the condition of a company”’. Rather it was suggested that the use of opinion and judgment (Montgomery, 1927, p. 253) made the claim absurd.
  • 18 In the 1950s, a spirited debate occurred between Littleton (1956) and Chambers (1957) on this matter. Further discussion is found in Staunton (1979, p. 111; 1982, pp. 10–11) and the Chambers Collection (USA P202, Box 24, #8371). For information on the latter, see Dean et al. (2006).
  • 19 May (1943, p. 14): ‘When concepts of income come to be considered, one will be presented which views income as an increase in net worth, and another, which regards it as the gain from the use of capital and labor. The first of these contemplates a process of enumeration and subtraction; the second an analytical process.
    ‘In applying the first concept, income is measured from comparative balance sheets, and the income account merely supplements the determination by an analysis of its origin. Where the second concept is used, the income account discloses the amount of income, and the balance sheet shows what has become of it.’
  • 20 Carey (1969, p. 38) writes, ‘Following the Hoxsey speech in 1930 the Institute also hastily created a special committee on accounting procedure to consider “a number of technical questions that had been raised” . . . In the light of hindsight, it seems clear that fragmented efforts to solve difficult problems through different committees were doomed to failure. There was no agreement as yet on a basic philosophy—a conceptual framework within which each specific problem could be dealt with consistently.’ This is also discussed in some depth by Hawkins (1962, pp. 415–25), who concluded the action was too little, too late. Perhaps he might have added ‘uncoordinated’.
  • 21  The report is reproduced in various publications, including May (1943, pp. 72–85).
  • 22 This quotation too appears in various publications, including the May Committee report (May, 1943, pp. 75–6).
  • 23 Hawkins (1962, p. 385) commented, ‘As the “new era of prosperity” became the “great depression”, the attack on big business and its attendant demand for greater corporate publicity was reopened with new vigor. The misery of the depression, and the financial chicanery revealed at the hearings on stock exchange practices conducted by the Senate Committee on Banking and Currency during 1932 and 1933, led to a widespread public desire for economic and social reform; the critics knew what reforms were necessary and the public were again sympathetic to the critics’ proposals.’
  • 24 Interestingly, recourse to ‘truth’ would be relied on again in the new millennium reforms of the Sarbanes-Oxley Act.
  • 25 One finding was that a marketing person on behalf of some groups had sent cheques to financial analysts and journalists of leading papers for favourable comments (Sobel, 1965, pp. 285–6).
  • 26  Certainly the findings from the investigations into the Kreuger & Toll case (Vallance, 1955, pp. 155–66; Hawkins, 1962, pp. 397–8) and the Insull case (Vallance, 1955, pp. 167–79; Hawkins, 1962, pp. 398–400) supported the case for major reform.
  • 27 De Bedts (1964, p. viii, emphasis added): ‘as a vital part of the New Deal's pragmatic experimental evolution, with its Progressivism more antifraud and anticorruption than antibigness. The conclusion was reached that the SEC furnished an outstanding demonstration of the New Deal's intent to revitalize American capitalism rather than seek its destruction. This successfully consolidated agency brought about both acceptance and expansion of some of the New Deal's most enduring reforms, replacing improper financial practices with standards of ethical conduct. Not only did this regulatory agency furnish the answer to the protection of the investor, but through the SEC the New Deal accomplished the necessary democratization and social control of the world of finance.’
  • 28  Berle (1954, p. 169) would later recall a debate with the late Professor Dodd, of Harvard Law School, who argued that corporate powers were held in trust for the entire community. Berle had argued these powers were held in trust for shareholders. He concluded that (at least for the time being) Dodd's contention had won. The essence of this debate is also discussed by Hawkins (1962, pp. 409–14). It continues to present times as the debates like that of whether or not philanthropic actions of companies are legitimate uses of corporate funds.
  • 29 Not all were impressed with the ‘brain trust’ employed by Roosevelt in the early days of the Depression, which was to split in all directions on doctrinal points. Arnold (1937, p. 117) commented: ‘The brain trust fell into disrepute and became a political liability rather than an asset . . . The thinking men of the country were all busy thinking and the more they thought, the more mixed up they became. No one could fit the social organization which he saw before him into the organization of his dreams.’Sobel (1965, p. 289) suggested many on Wall Street ‘feared some of the “bright young men” who surrounded the President’.
  • 30 Arguably, Berle and Means (1932) was a blueprint for the Securities Acts. The authors gave credit to Ripley in the preface in recognition of his pioneering work in the area (Hawkins, 1962, p. 386; Carey, 1969, p. 39).
  • 31 De Bedts (1964, pp. 46–7) comments: ‘The accumulation of the evidence of arrogant misuse of depositors’ funds, of blatant financial privilege for the favored few, and the complete absence of any regard for the fiduciary responsibility that financial leaders yet claimed as their chief distinction were anger-provoking material common to all. No one could attend the Pecora Investigation, nor could the public follow the hearings in the press, without being convinced beyond all doubt that financial leaders and spokesmen thought of themselves as distinct from the rest of the nation. Their sovereign command of finance was, quite clearly, being invaded by an unduly inquisitive and rather insubordinate Federal government . . . The investment bankers who pleaded before Congressional committees for some amelioration of the bill's restrictions found they had been damned out of the mouths of their own fellows.’
  • 32 Edwards (1960, p. 156) writes: ‘The passage [in 1933] of the Securities Act somewhat disturbed the profession both because of what the public accountants considered an unreasonable degree of liability imposed upon them, and because it was feared that the enormous power conferred originally on the Federal Trade Commission, which included the power to prescribe forms of financial statements, might not be wisely administered.’
  • 33 This argument is consistent with Carey's (1969, p. 45) writing of a memorandum submitted by the AIA when the 1934 Act was under consideration by Congress. In the memorandum, objection was taken to the liability provisions of the proposed legislation. As well, the proposal that a quarterly report be certified by independent public accountants was questioned. The Institute also challenged the power given to the SEC to prescribe uniform accounting for industry. It was pointed out (rather facetiously perhaps) that attempted uniformity in the accounting of public utilities and railroads had not resulted in more dependable financial statements in those industries. Rather, greater advances in accounting had occurred in unregulated companies.
  • 34 De Bedts (1964, pp. 204–5): ‘As a political achievement the SEC owed no debt to expediency. Its genealogy was abundantly evident. It incorporated the Progressives’ concern with moral values into the practical reform framework of the New Deal to produce an agency embodying most successfully the lasting values of both eras. In principle and in method, it had carried to a successful conclusion the efforts of those who, concerned with the dominant role of financial and corporate power, had seen their attempts of the previous three decades dismissed by an economy and a Congress dedicated to just such hegemony. A great market crash and its consequent revelations enlisted in the support of a new administration a broad public sentiment against the existence of separate and privileged standards of morality for the corporate and financial world.’
  • 35 May (1943, p. 71) lamented: ‘If 1918 saw the authority of the accounting body in America at a peak, the years 1933 and 1934 saw it at a low point. It may well be that its rise was too rapid to be altogether healthy, and that it can now re-establish itself on a sounder basis. It cannot, however, do so unless it can regain the professional ground of which the Securities Act of 1933 deprived it.’
  • 36 May argued (1943, pp. 64–5): ‘Looking to the future, I am convinced that the grant of power to the Federal Trade Commission, and later to the Securities and Exchange Commission, to control the accounting of general business corporations whose securities are listed, was not in the public interest. It seems to me to have been the more unnecessary since an alternative procedure, more in harmony with the American system of checks and balances and more likely to prove efficacious, was ready to hand.’
  • 37 May (1943, p. 50): ‘There will always remain . . . questions which can be rightly decided only by good judgment and regard for business morality.’
  • 38  In the context of professions May (1943, pp. 70–1) wrote: ‘The development of such a profession has a social value. Its existence, together with the high prestige and authority of the upper branches of the English Civil Service, has made the approach to business questions much less legalistic in England than in America.
    ‘Here, the legal profession early assumed a dominant position in the business life of the community, and the position thus created has tended to perpetuate itself. The fact that admission to the bar opens the road in so many directions naturally draws into the profession a large proportion of the best brains of the country and makes more difficult the development of an independent profession which might usefully take over a part of its functions. Only in comparatively recent years have any considerable number of college graduates of more than average qualifications entered the accounting profession. . . . Intimate contact with outstanding members of both professions here and in England convinces me that the habit of mind that accounting experience develops, with its emphasis on essentials and willingness to disregard form, is a valuable corrective to the legal mode of thought.’
  • 39  De Bedts (1964, p. 28): ‘The nation had time to reflect on the crash of fiscal empires and the resulting rubble of corrupt financial foundations. It could more readily glimpse a Congress that was determined to sidetrack serious efforts at reform in the issuance of securities, and a national leader whose occasional threats of regulation of the exchanges were obviously belied by his expressed political philosophy and the more frequent entreaties he addressed to the perpetrators. The New York Stock Exchange mirrored only too plainly the light regard in which it held political efforts at regulation. Its rule changes were chiefly innocuous ones and, in any event, were clearly devised from a viewpoint of protection for its own members rather than for the investing public or the national economic welfare.’
  • 40  A summary is provided by Chatov (1975, pp. 10–11) who writes of these times: ‘The . . . accounting profession, . . . the practitioners especially . . . spearheaded the attack on the SEC's powers in the years immediately following passage of the Securities Exchange Act of 1934. They threatened, cajoled, and balked the SEC over the issue of authority for developing generally accepted accounting principles. Once they succeeded in obtaining it, they administered that function exclusively for a generation until forced to share it with other private groups in the early 1970s. They remain a potent force, probably holding more prestige and power than any other group in [setting] corporate financial standards.’ Chatov (pp. 147–52) includes a section titled ‘The Freezing Out of Academe’.
  • 41 Interestingly, Chambers was to use a similar distinction, hoping to avoid confusion within a decision-making context. Sterling argued in a similar manner.
  • 42 MacNeal (1939/1962, p. 57): ‘In December 1938 the fantastic manipulation . . . was disclosed. The profession was chagrined; another large fraud had not been detected until it was too late. Accountants generally were critical of Price, Waterhouse and Company, the fine old firm through whose fingers the criminal slipped, yet they were also sympathetic for the good reason that while every accountant exercises all his vigilance to discover fraud, he knows that fraud on the grand will always exist and not every crook can be caught. Coster was another Kreuger, they argued. It might have happened to any of them.’
  • 43 On 21 January 1934 the Institute published a pamphlet entitled Audits of Corporate Accounts (Zeff, 1972, p. 125).
  • 44 MacNeal (1939/1962, p. 69): ‘The main problem is intellectual, not moral. The accounting profession is not corrupt . . . The real difficulty lies in the sophistry, illogic and untruth of present accounting principles, which produce figures deceiving accountants, businessmen and the public alike.’
  • 45 May (1943, p. 42): ‘In the correspondence the Committee had used the words “rules,”“methods,”“conventions,” and “principles” interchangeably. The word “methods” was being used in the suggested form of report in another sense; the word “rules” implied the existence of a ruling body which did not exist; the word “convention” was regarded as not appropriate for popular use and in the opinion of some would not convey an adequate impression of the authority of the precepts by which the accounts were judged.’
  • 46 May (1936, p. 114) could conclude: ‘Out of this necessity has grown up a body of conventions, based partly on theoretical and partly on practical considerations, which form the basis for the determination of income and the preparation of balance sheets today.’
  • 47 May (1936, p. 117) concluded: ‘therefore the income account is usually far more important than the balance sheet. In point of fact, the changes in the balance sheets from year to year are usually more significant than the balance sheets themselves.
    ‘The development of accounting conventions has, consciously or unconsciously, been in the main based on an acceptance of this proposition. As a rule, the first objective has been to secure a proper charge or credit to the income account for the year, and in general the presumption has been that once this is achieved the residual amount of the expenditure or the receipt could properly find its place in the balance sheet at the close of the period.’
  • 48 May (1906a, p. 32) replied: ‘as regards his broader contention that absolutely no distinction should be made in practice between the treatment of premiums, and the treatment of discounts, I can only refer to the arguments and the statement of practical difficulties given in my paper which appear to me to make such a distinction necessary. It is true that making a distinction involves some inconsistency, but accountancy is full of similar inconsistencies.’
  • 49 Gaa (1944, p. 272) concluded, ‘Even though accounting theory is in a confused condition, it is far better organized than the rules of contemporary practice’.
  • 50 Knight (1955, p. 268) succinctly summarizes the tensions underlying any criticisms (and perhaps related accounting tensions): ‘What makes economic reviewing (and all criticism, and discussion) difficult is that writers and teachers of standing do not agree on the ABC's of their subject, the definition of their “science” and its elementary concepts, and the statement of its first principles . . . But one cannot appraise ideas without judging men—making “odorous comparisons”. For, in judging another one is implicitly judging oneself, and must leave it to the “gentle reader” to judge where the judgment falls. A reviewer must point out “errors” and try to find their roots, not for the sake of controversy but for the sake of “the cause”, of truth, in this case of education in economics—beginning with mutual education of the educators.’
  • 51 May (1945, p. 134): ‘The advocacy of stereotyped even though inappropriate methods of presentation, accompanied by footnotes in which the really illuminating information is embodied, was to my mind a serious defect’.
  • 52 May (1945, p. 136): ‘The omission of the word “tentative” from the description of the second statement seems to me to have been unwise. I regret, also, that the Association in its revised Statement of 1941 discarded the word “allocation”.’
  • 53  May (1945, p. 136): ‘I regard A Tentative Statement . . . issued by the Association in 1936, as a valuable contribution to the creation of an orderly body of accounting thought, though there are many views expressed in it with which I am unable to agree. Frankly, I regard the more definitive Statement of 1941 as premature and defective in that it largely ignored developments in accounting between 1936 and 1941. I have found the language of different parts of that statement inconsistent and the meaning in some cases far from clear. Both supporters and opponents of the “cost or market” basis for stating inventories have claimed support from it for their respective views, and I have never been quite able to decide which claim was the better founded. [Footnote: cf. Financial Accounting, p. 180].’
  • 54 Husband (1942, p. 283): ‘The revised statement . . . is a decided improvement over the statement of principles previously published in June 1936. Nevertheless, it still contains spots where further burnishing would appear to contribute both to desirable refinement and to greater harmony between the principles and the fundamental thesis upon which they are based . . . An attempt will be made, rather, to point out and emphasize inconsistencies in the principles and to consider the use of terms that may be misleading when used in connection with the task that historical accounting is designed to accomplish.’
  • 55  Husband (1942, p. 292): ‘Keynes holds that one of the causes of the maladjusted economic conditions existing in the world from 1929 on rests in the fact that businessmen are accounting minded rather than truly socially minded’ (emphasis added).
  • *  [Editor's note: Best illustrated in R. J. Chambers: Foundations of Accounting, Deakin University Press, 1991; and ‘Ends, Ways, Means and Conceptual Frameworks’, Abacus, September 1976.]
  • 56 Mathews, (1982, p. 177) writes, ‘Despite my considerable respect for his earlier work, it was not until 1961 that I came to full realization that Chambers was an intellectual giant, who was in the process of transforming accounting from a technical set of arbitrary rules into a rigorous conceptual framework and measurement system’.
  • 57 Canning was Professor of Economics, Leland Stanford Junior University. For an account of his contribution see Chambers (1979) and Zeff (2000).
  • 58 Canning (1929, p. iii): ‘The related problem of making the work of the professional accountant more fully intelligible to those in other branches of learning suggested itself. Both my previous training and interest in economics and the free, but somewhat indiscriminating, use of accountants’ statistics that economists were then making led me to undertake a comprehensive study of accounting theory and practice from the point of view of the professional student of economics. This book reports a major part of the results of that study.’
  • 59 Canning (1929, pp. 45–6): ‘Many an economist and statistician, in reading the accounting texts, must have been aware of a great mass of unsupported assertion, inconsequential argument, apparent statistical inconsistency, and lack of homogeneity and completeness. But any one who has the patience to find out for himself what accountants actually do and who will reflect upon what he finds, will discover that modern accounting practice is, on the whole, sounder than that which has been written about it. Apparently those who have really created accepted modern procedure have not been notably given to writing about it. In many an instance the writers would do well to consider the statistical effects of what the accountants do rather than to invent conjectural reasons for their procedures.’
  • 60 Canning (1929, p. 91): ‘The ultimate concern of the economist is with the subjective appreciation of income; objective valuations of income are to him indexes of that appreciation. The accountant is not, as an accountant, concerned with subjective appreciations at all.’
  • 61 Chambers (1979, p. 765): ‘Two features of The Economics of Accountancy deserve special notice, for they have a general bearing on theory and practice. The first is the attempt to define rigorously the terms used in exposition and argument. All valid argument depends on specified definitions. Vague or loose definition leads to inconclusion. . . . The second is the specification of the rules relating to the “merging by summation or otherwise” of “individual measures”.’
  • 62 Chambers (1979, p. 774): ‘That search [for better standards and theory] has been befogged by confusion of the different but complementary roles of past information, present facts, and future prospects in the decision-making process. The linkage between accounting and economics cannot be properly established unless those roles are specified. Past values or prices and presently observed values or prices are necessary for the determination of past results and present position; presently observed values or prices and calculated net present values of future alternatives are necessary for the exploration of the feasibility and desirability of future alternatives. None of the three kinds of “values” is a substitute for the other. Had the distinct functions of all three been identified by Canning, as a prelude to “the economics of accountancy,” there may have been, by now, a more disciplined attack on that part of accounting which concerns itself with statements of past results and present position from time to time.’
  • 63 Canning (1929, p. 20) did comment, ‘But to include in the statements, e.g., the balance sheet, mere expectancies, would be to introduce items the value of which is highly speculative among items the value of which can be measured with much greater reliability’.
  • 64 Chambers (1956, p. 584): ‘The . . . use of the unqualified term accounting . . . may not be misleading to those who are preoccupied with business accounting. We have long been accustomed to the use of accounting in the limited sense of business accounting. But why? Accounting is a generic term; several species, each having distinctive features, are recognized even by the novice. Each of these species of accounting has its peculiar form because it serves its own specific purpose.’
  • 65 Chambers (1983, pp. 466–7): ‘The history of every trade and profession has been marked by a long period of practice based on tradition, on trust by the present generation in the wisdom of the rules of thumb, conventions and doctrines of its forebears. In many fields, however, progressively superior knowledge and skill, new levels of excellence, have emerged, when the traditional wisdom has come seriously under question.’

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