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The Development of Modern Financial Reporting Practices among American Manufacturing Corporations

Published online by Cambridge University Press:  24 July 2012

David F. Hawkins
David F. Hawkins*
Affiliation:
Assistant Professor of Business Administration, Harvard University
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Abstract

From nineteenth-century traditions of corporate secrecy, American manufacturers have moved slowly toward more public and credible financial disclosure practices. Professor Hawkins examines the variety of pressures from the business community, the accounting profession, the government, and the public which has impelled this movement and governed its direction and tempo.

Type
Research Article
Information
Business History Review , Volume 37 , Issue 3 , Autumn 1963 , pp. 135 - 168
Copyright
Copyright © The President and Fellows of Harvard College 1963

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References

1 Dewing, Arthur S., Corporate Promotions and Reorganizations (Cambridge, 1914), p. 12 Google Scholar.

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7 In contrast, beginning in 1844, the British Parliament passed a series of comprehensive statutes, called Companies Acts, which was designed to regulate the formation, management, and winding-up of public companies. Several of these acts prescribed minimum standards for financial disclosure to investors and called for an independent audit of these financial reports. The Directors Liability Act of 1890, which was construed as one of the Companies Acts, made directors under certain conditions liable to compensate persons damaged by false statements in prospectuses or other documents soliciting application for securities. Thus, by 1900, in Britain, the disclosure to investors of certain reliable financial information was mandatory under the threat of legal liability.

8 McLaren, Annual Reports, p. 5. On February 20, 1901, the board of directors of Westinghouse Electric and Manufacturing Company, issued a two-page report to a special meeting of the stockholders. The report contained no financial statements but did give the company's sales and total dividends, interest, and sinking-fund payments for 1898–1900.

9 In 1914, Arthur S. Dewing published a historical study of a number of the corporate reorganizations which had occurred between 1891 and 1913. One of his sources of information was the financial journals. Speaking of the reliability of the financial press in general, and the Commercial and Financial Chronicle in particular, Dewing said: “As a general rule, … the statements of the press comprise merely the facts made public through the publicity department of the corporation, or unreliable quotations and hearsays, – the ‘news’ upon which the stockmarket trader feeds. In some cases, there are covert attempts to influence the investing public by the insidious ‘write-up’ with which many financial papers prostitute their pages. Distinctly the most useful publication that we have is the Commercial and Financial Chronicle. Its accuracy is striking. Over and over again, the present writer has compared original reorganization plans and corporation reports with the Chronicle digests, and almost without exception no important error has been discovered. The files of the Chronicle too, are accessible to most people. …” Dewing, Corporate Promotions, p. 12.

10 Strangely, the American textile industry's performance with respect to financial disclosure during the nineteenth century appears to have grown worse as the century progressed. In 1850, the stockholder reports of textile firms in New England generally provided far more financial information than the Davol Mills report of 1899.

11 Preliminary Report of the Industrial Commission on Trusts and Industrial Combinations (Washington, 1900), p. 122 Google Scholar.

12 The New Jersey Corporations Agency was formed in 1895 for the purpose of furnishing corporations chartered in New Jersey, but operating out of state, with the necessary facilities for complying with the state's liberal incorporation laws. Mr. King's office represented several hundred such corporations including the Amalgamated Copper Company, the American Car and Foundry Company, the American Thread Company, the Pressed Steel Car Company, and the American Soda Fountain Company.

13 Preliminary Report of the Industrial Commission, pp. 1109–1110.

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16 For instance, Horack commented on the provision of a Michigan corporation law of 1899 relating to periodic statements to stockholders thus: “In the chapter on manufacturing corporations in the Statutes of Michigan section 15 reads, ‘… as often as once in each year a true statement of the accounts of said corporations shall be made and exhibited to the stockholders.’ How and when the statement is to be made is not mentioned; nor is any penalty attached for failure or refusal.” Ibid., p. 116.

17 See, for example, Meade, Edward S., “Lecture III – Initial Stages of Organization,” Corporation Finance (“Business 25”): Official Report of the Lectures in Full in 1908–09, Graduate School of Business Administration, Harvard University (Mimeographed, Boston, 1908), pp. 46 Google Scholar ff. Later, in the same lecture series, George O. May, a prominent public accountant, cast some doubt on the thoroughness of these investigations. He said: “I have had personal familiarity with [securities] which were accepted by bankers and by them offered to the public without adequate investigation and on a basis which was essentially unsound. …” “Lecture VIII – Flotation,” ibid., p. 118. These lectures are deposited in the Archives of the Harvard Graduate School of Business Administration, Boston, Mass.

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26 Preliminary Report of the Industrial Commission, p. 6. The Final Report of the Industrial Commission issued in 1902 repeats the above recommendations. In addition, it also contains a “supplementary statement” by Thomas W. Phillips, a Commission member. Mr. Phillips wanted the Commission to amplify its recommendations in the area of corporate publicity to provide for a government official to whom all corporations would submit audited annual reports containing a specified list of points on which data were to be provided. In addition, Phillips proposed this official be given a staff of examiners who would at irregular periods and without notice appear at the offices of each corporation to examine, verify, and report upon its books. The reports of the examiners were to be made public. Final Report of the Industrial Commission (Washington, 1902), pp. 669–73Google Scholar.

27 Sears, “The American Businessman at the Turn of the Century,” p. 421.

28 Horack, Organization and Control of Industrial Corporations, p. 80.

29 Preliminary Report to Stockholders of United States Steel Corporation to be Submitted at the First Annual Meeting … January 10, 1902 [Hoboken, N. J., 1902]Google Scholar. Commenting on this report, the Commercial and Financial Chronicle stated: “… we wish to call attention … to a single feature that ought to be an example for every industrial company in the land … What we wish to emphasize is the impression a reading of the report will, we believe, have upon every unprejudiced mind; which is that the United States Steel Corporation has nothing to conceal. Each stockholder obviously is told everything the management knows about the investor's property. … This open, honest way of treating the public … must tend to put [this company's] … securities … in a far safer class for investment than those of so many other industrial companies which adopt a more secretive policy.” (February 1, 1902), p. 230. A modern review of this balance sheet expresses a somewhat different view: “When United States Steel Corporation was organized in 1902 it showed no goodwill or other intangibles in its balance sheet. Thus all its capitalization was ostensibly covered by its property account and working capital. Many years later, it was revealed that no less than $769 million of the plant account was a written-up item, popularly known as ‘water.’” Graham, Benjamin, Dodd, David L., and Cottle, Sidney, Security Analysis (4th ed., New York, 1962), p. 213 Google Scholar.

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43 “Report of the Committee Appointed Pursuant to House Resolutions 429 and 504 to Investigate the Concentration of Control of Money and Credit,” House Reports, 62 Cong., 3 Sess., No. 1593, p. 37.

44 At the time this announcement was made a census showed that of the 957 companies listed on the exchange 242 were already making quarterly reports, 79 were reporting semiannually, 339 issued annual statements, and 297 companies had no agreements with the exchange respecting the issuance of such statements. Many of this last group were transportation companies which were subject to the reporting requirements of the Interstate Commerce Commission, and utility companies which were under the authority (as to publicity) of the various state public service commissions. Ripley, Main Street and Wall Street, p. 187.

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51 See, for example, the following subcommittee reports presented in the respective Proceedings of the … Annual Convention of the Investment Bankers Association: “Report of Industrial Securities Committee,” 1920; “Report of the Business Practice Committee,” 1923; “Report of the Committee on Real Estate Securities,” 1923; “Report of the Special Committee on Circulars,” 1925; “Report of Public Service Securities Committee,” 1926; and “Report of Industrial Securities Committee,” 1927.

52 “Report of the Special Committee on Circulars,” 1925, p. 272.

53 “Report of the Business Practice Committee,” 1929, p. 294.

54 “Report of Industrial Securities Committee,” 1920, p. 153.

55 “Report of Committee on Ethics and Business Practice,” 1924, pp. 210–11.

56 “Report of Real Estate Securities Committee,” 1926, p. 248.

57 “Report of Industrial Securities Committee,” 1920, p. 166.

58 “Report of the Publicity Committee,” 1923, p. 302.

59 “Report of Industrial Securities Committee,” 1918, p. 96.

60 See, for example, “Stock Exchange Practices,” Senate Reports, 73 Cong., 2 Sess., No. 1455, pp. 100 ff.

61 The introduction of corporate income taxes not only spurred businessmen to keep better accounting records and take a more active interest in financial accounting, but also led directly to the adoption of certain valuation practices for corporate accounting. For instance, the acceptance of the “last in first out” method of valuing inventory for tax purposes resulted directly in its widespread adoption in industrial financial reports.

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65 Ibid., p. 101.

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96 James S. Schindler, “The Need for Accounting Theory and Standards: The Era of Asset Revaluations,” Paper presented at the American Accounting Association Convention, August 29, 1962.

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100 In 1957, the American Institute of Accountants changed its name to American Institute of Certified Public Accountants.

101 Special Message of March 29, 1933, as quoted in Roosevelt, Franklin D., On Our Way (New York, 1934), pp. 45–46 Google Scholar.

102 Public Law No. 22, 73 Cong., 1 Sess. (1933).

103 Littleton and Zimmerman, Accounting Theory, p. 100.

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105 U.S. Securities and Exchange Commission, Accounting Series Release No. 4 (Washington, 1938)Google Scholar.

106 American Institute of Accountants, Examination of Financial Statements (New York, 1936)Google Scholar, preface.

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109 See, for example, Cerf, Alan R., Corporate Reporting and Investment Decisions (Berkeley, 1961), esp. pp. 66–67 Google Scholar.

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111 The dissolution of the Committee on Accounting Procedure and the creation of the Accounting Principles Board did not lessen the authority of the Accounting Research Bulletins. These Bulletins were to remain in force until specifically cancelled by the Accounting Principles Board. As of December, 1962, none of the Bulletins had been cancelled. In addition, the Accounting Principles Board had issued one opinion of its own related to the accounting treatment of the revised depreciation lives permitted for tax purposes by the Internal Revenue Service in 1962. Also, the Accounting Principles Board's research staff had issued four research studies pertaining to the basic postulates of accounting, the principles of accounting, cash flow analysis and the funds statement, and leases. As yet, no action has been taken by the Board on the recommendations outlined in these studies.