Knowledge that Transforms

The article presents a report on examination of accounting records of the American Accounting Association (AAA). Certified Public Accountants examined the balance sheet of the AAA as of December 31, 1951 and the related statements of income and expense and of changes in net worth for the General Fund and the Life Membership Fund for the year then ended. It was found that records have been kept very conservatively. Fixed assets also have been charged to expense when acquired. They found that their records have been kept very conservatively. Fixed assets also have been charged to expense when acquired. In their opinion, the accompanying balance sheet and statements of income and expense and of changes in net worth present fairly the financial position of the Association and the results of its operations for the year then ended, in conformity with generally accepted accounting principles. Office salaries, supplies, printing and other expenses applicable to the office of the Association, together with the audit fee, were apportioned between the General Fund and the Membership Fund on the basis of the approximate ratio of the income of each fund to the total income of both funds.

In a recent article accountant Hugh K. Stelson found the yield on a bond by use of a modified or improved correction formula, apparently published only a few years ago. The new formula is an extension of the long-known Newton's formula for finding the root of an equation by successive corrections to progressively closer. First point, The initial trial rate should meet two standards: it should be as close as possible to the true rate, and it should be a tabular rate, so that the labor of computing can be avoided. If a bond table is also available, use of the formula is still easier. The table should have a rate interval no larger than half percent. The benefits of an initial error no larger than .000625 lie not so much in the digits "625" as in the three zeros. For there is a rule of thumb for Newton's formula in one of his texts on the theory of equations to the effect that if h begins with k zeros, the computation should be carried to 2k decimal places. The foregoing discussion is applicable to short-term bonds, up to say 30 or 40 periods.

As a service to the forty-eight states and four territories which use the examinations prepared by the American Institute of Accountants the Institute will grade the candidate's papers and recommend grades to be granted there on by the local boards involved. Papers from some fifty-five hundred candidates were graded by the Educational Director's office in connection with a recent examination. The very weight and volume of this number of papers is imposing. The significance of the resultant grades to the candidates and to the profession of public accounting makes the grading process most important. The methods used to secure uniform and reliable results in this work will be of interest to those concerned with methods of testing and passing upon the qualifications of candidates for the CPA certificate. Under the grading system used by the Institute in Auditing, Theory and Law, where the grading is on a positive basis, it is impossible for the candidate to receive all the points his knowledge might justify if his answer is too brief. Relevant points, assigned some credit in the grading, may easily be omitted in short answers.

Reviews the book "An Introductory Survey of Business Management," by Gilbert W. Cooke and B.J. Pierce.

While there have been few spectacular happenings during the year 1950, steady progress is evident on all sides. There has been a substantial increase in the membership and the financial condition of the American Accounting Association continues to be satisfactory. The Association owns sufficient securities to enable it to survive a period of stress caused by war or other conditions. Nearly 500 members and guests attended the annual convention held at the University of Denver. This was one of the largest groups ever to attend a convention of the Association. The periodical "The Accounting Review," under the editorship of Frank P. Smith, has continued to serve instructors, students and practitioners with a series of significant and helpful articles, book reviews, solutions to Certified Public Accountant examination problems and news items of members of the Association. It has an impressive international reputation as a scholarly publication in the field of accounting. One of the greatest satisfactions received is from the splendid cooperation of committee members. Around one hundred and sixty members of the Association have contributed generously of their time in the conduct of its committee activities.

It is gratifying that the differences of opinion on the subject of Changing Concepts of Business Income have not taken the form of a conflict between the views of the practicing and the academic accountants. All the academic members of the Study Group, which issued the recent report under that title, joined with a two-thirds majority of the practicing members in approving the conclusions reached. The report of the Committee on Concepts and Standards of the Association, published in the January 1952, issue of the journal "The Accounting Review," follows much the same line as that of the Study Group but goes rather further on some points and not quite so far on others. There is also need to make dear to the public what financial statements, as now presented, do not provide, and to make up some of the deficiencies. The information needed is essentially of the same character as much on which accountants do now pass and of equally great importance. Not all accountants will be qualified to render the additional service needed, but neither are all of them qualified to cope with all the responsibilities now frequently assumed. Accounting, like law and medicine, must become a profession in which all practitioners must have a certain minimum of competence in every field, but few if any, will be equipped for every task the profession will offer.

In a recent article in the Journal of Accountancy, Professor David Thompson discussed the advantages of and the methods and procedures for making an accounting internship program for public accounting work. The author would like to expand upon it in two respects, first to describe a second method of handling a public accounting internship program for schools on a semester basis which has worked well at Pennsylvania State College, and second to show that the internship program should be used for all three fields into which accounting graduates may go, private or industrial and governmental as well as public accounting. There are one or two other features of the system which are perhaps worth mentioning. One is that the public accounting firms interview students during the spring semester of their junior year for internships starting the following January. All of cooperating firms have told that this was not too early, and such a plan does have several advantages. In the first place, the firms can interview the prospective interns at the same time as June graduates, thus making only one trip to the campus a year since public accounting firms are not normally interested in February graduates.

For some years auditors in the United States have been expressing opinions based on test-checks of the accounting records. Various authorities have seriously questioned the results of auditing tests commonly employed and attempts have been made to develop statistically sound standards of auditing to guide the auditor in making his inferences. The author of this paper suggests that the methods proposed in this article be used as a supplement to present auditing procedures. In situations in which the risk of error is relatively high, the auditor might well consider for his own protection the use of methods presented here. The typical practitioner of today is unknowingly introducing his personal bias into his samples. True enough, the auditor is sampling, but his methods are those of purposive sampling. It is fairly typical for him to select for testing two months' transactions out of the year. The auditor examines the transactions for existence or absence of error. No attempt is made to classify the errors as bad, very bad, and terrible. The only classification is in terms of dollars and more precisely, in terms of whether the error is material or immaterial. The concept of materiality is a subjective determination by the auditor based upon the relevant factors.

Internship programs have been widely used by the accounting departments of leading schools in this country to give their students some practical experience before they leave school. Students can apply this experience in their advanced course work and in choosing the field of accounting which they wish to enter upon graduation. These internship programs have also helped public accounting firms obtain temporary help of high caliber during their busy season and they have helped industrial and commercial concerns find capable people to handle special studies and to provide good vacation replacements. However, internship programs are educational devices and their value must be judged from the benefits which the students participating in such a program receive. The benefits to the employers and the administrative difficulties of the schools arc factors to be considered but must be given minor regard. Many factors which are impossible to predict affect the future of these programs. However, some people feel that, as in the field of medicine, there will come a day when a student must complete an internship period in accounting before being granted a degree. This day has arrived at one school and others are contemplating similar programs. It is certain that internship programs have become an important part of the accounting education of many students in this country. The members of the Committee on Internship Programs of the American Accounting Association feel that internship programs are of inestimable value to accounting students and wish to encourage the wider adoption of these programs throughout the country. As members of this committee and as individuals closely connected with internship programs, we stand ready to help others who wish to inaugurate internship programs. It is suggested that persons who are interested in these programs.

Reviews the book "Federal Income, Gift and Estate Taxes," by Jacob Rabkin and Mark H. Johnson.