Knowledge that Transforms

The West German Parliament in 1950 re-established a central German Audit Court (Rechnungshof), traditionally one of the most respected and useful institutions in the entire German governmental structure. This body and its work are not without interest to American accountants and students of government who, witnessing an astronomical growth in Federal expenditures and taxes, are today concerned with methods which might improve accountability to the U.S. Congress of the Federal departments and agencies for their million and billion-dollar programs. In fact, the main purpose of this article is to describe and appraise the work of the Rechnungshof in order to discover whether any features of this old established continental institution might possibly be adapted to the work of the U. S. General Accounting Office. The word adapted is used advisedly because of the difference in traditions and in governmental structure. Both the German and the U. S. Federal governments have much to learn from the experience of the Public Accounts Committee of the British House of Common. A serious gap in both governments is the absence within the parliament or Congress of a full-time, well staffed committee for the permanent and uninterrupted business of studying efficiency in government operations.

Reviews two books. " Defense Without Inflation," by Albert G. Hart; "Financing Defense," by Albert G. Hart and E. Cary Brown.

The differences between taxable and business income are so numerous and important that the two concepts must be regarded as essentially different. These differences are in part "legalistic" and in part administrative, but more importantly they reflect basic differences in the objectives of the determination of taxable income and of business income. The divergencies are not likely to be resolved. Therefore it becomes necessary to abandon the postulate that taxable income should be determined "in accordance with the taxpayer's regular method of accounting." Attempts to maintain a fictional identity of the two concepts can only lead to political determination of business income, as tax pressures are too powerful to be resisted by accounting principle otherwise determined. Taxable income must be recognized as different from business income; accountants should resist efforts to prostitute accounting principles to tax ads; accountants' reports must be determined independently of tax considerations. Reports should include reconciliations of taxable and accounting income and necessary supplementary records should be maintained. Practicing accountants must carefully insulate' their position of independence in preparation of certified statements from the position of advocacy sometimes assumed in tax matters. Recognition of the basic differences in concepts, and differentiation of the two types of professional practice, are required for the maintenance of public confidence in accounting statements and accountants' reports.

Reviews the book "Introduction to Business," 2nd ed., by Raymond E. Glos and Harold A. Baker.

Reviews the book "Selected Readings in Accounting and Auditing," edited by Mary E. Murphy.

Reviews the book "Auditing Principles and Procedure," by Arthur W. Holmes.

One of the more unsettled areas in accounting theory is the treatment of the return to various equity-holders for the use of their capital. There is disagreement on the question of which of these distributions are costs to the firm using the capital and which are to be included as income to the firm. Disagreement also exists on the question of how to account for interest that is generally considered to be cost. These two areas of disagreement prompted the writing of this paper. But no unqualified solutions are suggested. Two general methods of handling interest on creditors' equities are advocated incurrent literature: (1) treatment of interest as an expense, and (2) handling it as a distribution of income. The first treatment exhibits the interest accruing during the period on the income statement as a cost of doing business, an overall and indirect kind of expense in the period of its accrual. This method is accepted by that group of accountants who take the point of view of the owners of business enterprises.

The present generation of taxpayers not only has practically all the forms of taxation known to the ancients but have to deal with new and spectacular taxes designed to produce the revenue necessary to carry on the greatest activities ever undertaken by any government. War and defense expenditures have required the imposition of taxes of dramatic proportions. The most important of these war-developed taxes has been the excess profits tax. This tax was used during the First World War and existed from 1917 to 1920. When peace returned to the country it was promptly repealed as an unnecessary peacetime tax and remained off the statute books until the imminence of war in 1940 brought it back. It remained apart of the U.S. Internal Revenue Code throughout the years 1940 to 1945. When peace again returned to the nation it was promptly repealed. The important principle of the excess profits tax is the exemption from excess profits taxation of the earning capacity of the corporation prior to the advent of the national emergency. It does not attempt to tax any profit, abnormal though it may be, so long as the profit is not due to the expanded economy as a result of the national defense effort.

Reviews the book "Shirtsleeve Economics, a Common Sense Survey," by William A. Paton.

British accountants have made an important contribution to the Commonwealth, in recent years, as a result of the Labor Party's plan to nationalize 20% of the economy. This section included the Bank of England and seven major industries-civil aviation, cables and wireless, coal, electricity, gas, cotton and transportation. In each of the fields named, public corporations were set up to operate the enterprises concerned in the national interest. Parliament placed the entire responsibility for operation of the coal industry upon the National Coal Board with no reference to divisions or areas, but area boards were appointed in the gas and electricity industries and in the transport field a number of executives were appointed to serve as the Transport Commission's agents. Compensation was not on a uniform basis. For the Bank of England and Cables and Wireless PLC, for instance, it was established on the basis of net maintainable revenue; for railways, air transport and electricity it was set on stock exchange quotations at stated dates and for collieries, on a global amount fixed by a tribunal.