Knowledge that Transforms

Abstract The article presents information on accounting theory and its current problems. Accountants who have been concerned with a more precise phrasing of accounting theory have attempted to formulate standards by which the bulk of accounting procedures may be guided. A consistent framework of standards is needed to serve as a basis for judgment in constructing and interpreting financial statements. Accounting standards should be systematic and coherent, impartial and impersonal and in harmony with observable, objective conditions. The responsibilities of the profession have increased, so has the profession's independence. If it should be emphasized, which is perhaps not necessary: (1) that the reporting of periodic income should include, as a regular element, charges to provide for the payment of refunds or additional costs of a period and (2) that full reliance upon the genuineness of the need for the charge and the honesty and accuracy of the estimate would be given if a certified public accountant subscribed to the figures, then the independence of the accountant would be further strengthened and the usefulness of this reporting improved. The acceptance of such a position by writers on theory would have an important secondary result in that it would provide a better integration of auditing practice and accounting theory.

Abstract The article highlights the role and function of internal auditors. The author discusses fundamental factors which have caused industry to promote internal auditing to a key position in the general scheme of internal control. During 1940s, various management aspects were handled by different employees of the firm. Industrial management adopted these and many other new techniques to combat certain basic shortcomings in big business enterprise. With its origin in the accounting field, internal auditing derives its distinctive position in the sphere of managerial control from a series of peculiar characteristics which are not common to other staff departments within the organization or to public accounting staffs. In other words, these qualities make internal auditing a tool for the management in establishing and maintaining enlightened internal control. The first of these inherent characteristics is prejudice, partiality, bias, or loyalty. Compared with the public accountant, the internal auditor is partial toward the company under audit because his client is his employer.

Abstract In support of the theory of renegotiation, the author has mentioned a concept which was not developed last year. It has been a great many years since the theory was developed that the government had the right to regulate and fix the prices of services of public utilities, that is,of businesses which are vested with a public interest. Under that theory, innkeepers and common carriers were regulated a century and a half ago. More recently, the railroad, electric, gas, telephone, telegraph, warehouse, bus and other businesses have been regulated. In wartime, there is virtually a state of monopoly because the government needs everybody's services so badly that competition does not exist. It needs the product of every plant and must have it at whatever price. Certainly the government and the well-being of the public are sufficiently dependent upon the results of the production of war material that it cannot be said that such production is not vested with a public interest. The Revenue Act of 1943, after four rather complete and comprehensive Congressional investigations of renegotiation, substantially amended the Renegotiation. Act.

Abstract Everyone is more or less reconciled to the prospect of a relatively large Federal budget in years ahead. No one expects that taxes will be greatly reduced immediately even if and when the happy day comes which sees free spenders kicked out of seats of authority. But the burden of taxes is not to be described merely in terms of the amount of money collected. The total burden includes the cost of compliance on the part of taxpayers and administrative costs incurred by the government. In constructing a system of taxation a serious effort should be made to minimize this additional burden, the taxpayer should be separated from his money with the least possible bedeviling, harassment, and expense. The system, however, could hardly be worse if deliberately designed to maximize the direct and indirect cost of compliance, and to produce gross inequities to boot. No one is in a position to estimate in dollars the amount of the annual burden which represents a total loss to the national economy in the form of excessive compliance cost, but that this unnecessary load is a serious matter can not be questioned.

Abstract The article presents information on encumbrance accounting for industry. As soon as purchase orders or contracts are signed, the resulting obligations should be entered at once as encumbrances of the funds and appropriation affected. This is one of the principles laid down for municipal accounting by the National Committee. But it is just as appropriate for all organizations characteristics which make this kind of accounting desirable. The principle has been generally accepted both in theory and in practice, and has been recognized in laws governing this type of accounting. Inspection of published reports of municipalities shows that the principle is used in their accounts in many cases. The laws of several states show a recognition of the principle. For purposes of control and information, and to avoid possible personal liability, it is important that the records be left with full disclosure at all times of the free unexpended, unencumbered balance of appropriations. To assure that this information will be available, it should be made part of the permanent record. If industrial and commercial businesses had such information available as part of the permanent record it would be helpful and valuable in many instances to managers, directors, stockholders, bankers and others.

Abstract The article presents information on some problems of labor union auditing. Organized labor has traditionally regarded criticism of its financial machinery as an attempt on the part of employer groups to weaken its influence and bargaining power. The unions believe that much of the criticism has not been of a constructive nature and has emanated from those whose economic interests were, prior to the present war emergency and the resultant cooperation between labor and management, opposed to their own. Along with this has gone a hesitancy to engage independent auditors who, because their work is closely connected with business enterprises, have been associated in the thinking of labor union members with employers who may have done everything in their power to discourage or destroy organization among their employees. Many unions that engage independent public accountants require that audits be made monthly. In some cases the audits are made by a board of trustees selected by the union membership at regular elections or by special auditing committees elected each time an audit is required.

Abstract Reviews two books on accounting. "Dickinson Lectures in Accounting," by George O. May, Laurence Halsey and William A. Paton; "Improvement in Financial Accounts," by George O. May.

Abstract In recording of transactions and preparation of periodical statements, accountants are supposed to be governed by accounting principles and accountants' certificates which usually include an expression to the effect that the statements have been prepared in accordance with generally accepted accounting principles. And yet there is nowhere a compilation or code of accounting principles. Accountants' reports provide ample evidence that accounting is not controlled by a body of principles which result in uniformity of procedure and treatment. In the first place, many rules and procedures of accounting are not of a fundamental nature. In the second place, principles, principles cannot be established in accounting by experimentation or by authoritative pronouncements. In the third place, it is not desirable that accounting procedures should be reduced to a rigid uniformity by any detailed statement of conventions and rules. Accountancy must meet varying requirements of different businesses operating under differing conditions and must be prepared to adjust itself to changes in the economic system.

Abstract Reviews the book "The Position of the Public Accountant in Relation to Business and Government in Great Britain," by Laurence Halsey.

Abstract A study of authorities in the U.S. and Great Britain leaves much to be desired as regards the exact procedure to be followed in incorporating the results of foreign branch transactions on the books of the home office. It is evident that several variants in procedure are possible. The simplest arrangement for recording branch and home office relationships is the use of one account current in each record The home office Branch Current account will show in domestic currency the amount of the home office investment in the branch and the Home Office Current account in the branch ledger will show the home office proprietorship or residual liability of the branch to the home office stated in foreign currency. The credit balance in the Home Office Current account represents net assets whose various debit balances may have arisen under various exchange conditions and been converted into terms of domestic currency at various rates. Substitution of the balance of the Branch Current account for the balance of the Home Office Current account would be easier and more effective than conversion of the balance of the latter account.