A number of papers in the March 1940 issue of the journal The Accounting Review, dealing with Federal accounting and auditing, have been prepared by persons familiar with practices now being followed and are both descriptive and critical in character. These papers will furnish a background for accountants who desire to know something about Federal accounting procedures, and it is hoped that they may in some degree crystallize the broad criticisms which have frequently been leveled at theories of Federal fiscal responsibility: many of which have been inherited from the days of intellectual Alexander Hamilton. The Budget and Accounting Act of 1921 placed the responsibility for the accounting systems of the government in the hands of a Comptroller General who as head of the United States General Accounting Office was made independent of current administrations. But the U.S. Congress neglected to provide adequate machinery to control the activities of the Comptroller. Under existing law, it may be worth noting that the person accountable for expenditures of Federal departments is not even the administrator but the lowly "disbursing officer," an employee of the administrator charged with the duty of paying obligations incurred by others.

The report of the Committee on Auditing Procedure of the American Institute of Accountants has been revised. The changes have to do with the alteration of the proposed procedures relating to receivables and inventories, whereby physical tests and verification by correspondence have been cut down to practically the same level as called for by previous practice. It might not be unexpected, following the McKesson and Robbins disclosures, that accountants, seeking protection, should amplify their responsibilities in an unnatural degree and reach a somewhat hysterical conclusion from which time alone would have made them recede. The professional criticism was that participating in inventory counts might give the accountant the appearance of appraiser; that tests, fully as acceptable as circularization, are available for determining the existence and propriety of receivables. Except for inserting the reference to a detailed audit, the changes were textual and the same remarks can be applied to the new certificate. The certificate is defective in that it is designed to protect the accountant rather than to give information to those who rely on the information which financial statements are supposed to reveal.

The article presents some tentative propositions underlying consolidated reports. Consolidated financial statements, like other human institutions, have enjoyed varying degrees of popularity. From obscure beginnings they rose to a position of eminence in the financial world and were quite generally regarded as the only acceptable means by which the financial data of related business organizations could be presented to creditors, stockholders, income-tax authorities, and the public. Both the strength and the weakness of a consolidated statement lie in its ability to disclose summary information about a number of related enterprises, with a fine disregard for legal entities. Separate financial statements of individual subsidiaries must be submitted to outside stockholders if they are to be given any idea of the significance of their equities, consolidated statements mean nothing to them except insofar as a controlled profit lies in assets not yet disposed of to the public. Conditions may make one or more types of combined financial statements desirable in the published report of a controlling company. These are the overall consolidated statements, group statements of all the subsidiaries or of natural divisions of subsidiaries, and consolidating or grouping statements.

The Federal income tax chart for 1936 has been devised as an aid in visualizing the effect of the rates of income and excess-profits tax applicable to corporations for fiscal periods ending after November 20, 1936. A new declared value for capital stock and surplus is to be made as at June 30, 1936 and because the rates of excess-profits tax have been increased from 5 percent to 6 percent, the minimum amount at which such value should be declared warrants careful study. Each $1,000 of declared value will be taxed at $1.40, a failure to declare the necessary minimum means an excess-profits tax at $6 or $152 for each $11 ,000 deficiency of declared value. The chart defines the various brackets in which the possible combinations of income and adjusted declared value will fall. In each bracket appears a formula from which the computation of the total tax may be made. Vertical lines represent adjusted declared values in thousands of dollars, the ratios of net income to adjusted declared values.

Definition in its popular sense is the process of delimiting a concept or thing with the object of establishing that usage for a word or phrase, which has significance common to all persons. Definition is also popularly understood to be the expression through which the limits of the concept or thing are set up. Without definition, or with more than a single definition in common use, situations frequently arise where no exact medium of communication exists. Probably every person has had the experience of participating in protracted disputatious only to discover in the end that he and his opponent had been talking different languages. Within the realm of logic, definition has as its purpose the determination of the qualities of universals. Hence it may be said that the necessity of a common language and the necessity of building up an adequate background for the introduction of logical principles place upon one as accountants the burden of exploring thoroughly the requirements of good definition.

The article focuses on standards for accounting. A good deal has been said recently about standards for accountants. The book Financial Reports for Colleges and Universities reflects probably the first attempt in the history of accounting to produce a coordinated, closely integrated textbook of standards, not withstanding the fact that it covers a specialized field. But what about the hundreds of uniform systems of accounts that have been produced since pioneering in railway accounting? That's a fair question. There have been many uniform systems of accounts put out by our public-service commissions, the I. C. C., and a pretty good number of trade associations. Most of them have dwelt extensively on account classifications and how and what to debit and credit. Most of them include provisions for some sort of financial statements. At this stage in the development of accounting, it would be difficult to frame definitions that everybody would agree to. It's the courageous effort to lay down a reasonable set of standards that is needed.

The Joint Committee on Preparation for the Accounting Profession was established early in 1931 under the auspices of the American Association of University Instructors in Accounting and the American Society of Certified Public Accountants (CPA) with the hope that a means might be found of coordinating more closely the practicing and teaching professions of accounting through a study of some of their more urgent problems; the Committee was charged with the immediate responsibility of reviewing the requirements of the profession reflected in state CPA examinations. Since the first meeting of the Committee, the advice of a good many accounting instructors and professional accountants has been sought; from these conversations have arisen the conclusions not only that a study of examinations is dependent on the larger problem of preparatory training that must precede professional life, but also that preparatory training is itself dependent on the existence of adequately defined and reasonably developed professional standards.

Reviews the book "Federal Income Taxation," by Joseph J. Klein.

This article focuses on the author's view about earned surplus. The author says that the general course of the reasoning which led to the final definition will prove to be of even greater interest than the expected applications of the definition. The Committee on the Definition of Earned Surplus, reappointed hopefully each year by the president of the organization American Institute of Accountants, faced a task of no mean proportions. First was the obstacle that many common terms in use in the world of business, especially terms appearing on financial statements, have no fixed meaning, and can be made intelligible only through the aid of explanatory phrases. Second was the apathy, if not the actual resistance of business itself, toward more exact usages. The astonishing growth of interrelations between business enterprises has prevented the precise formulation of the scientific truths that are presumed to underlie the various manifestations of economic endeavor. Third was the multiplicity of state laws and court decisions bearing on the questions of dividends and maintenance of capital.

In these days of business dissection and analysis, much emphasis has been put on the inferences leading from the financial position of a given enterprise in relation to its past records and to the achievements of similarly situated organizations. It is also true that comparisons of balance sheets are vital to significant financial and operating ratios and to the determination of credit indices and cyclic trends. But the lack of uniform balance sheets and uniform principles has hampered the progress of the analysts and has made more than one of them qualify his published results with such remarks as "one wishes the sources of financial data could be called reliable" or, more directly, "the reader will appreciate that the information which can be derived from published balance sheets leaves much to be desired." Most accountants have limited their excursions into the field of valuation to attempts to decide for themselves-and perhaps others-whether inventories should be valued at cost, cost of reproduction, market price, and even selling price, whether receivables may appear at present values on the balance sheet, whether bond discount must be retired on a straight-line or investment basis, whether it is proper to write off depreciation on the equal installment or sinking fund plan, whether cash discounts to customers reduce sales or increase selling or financial expenses, and so on.