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Demonstrate that you have read the report of the Jennings Committee. Demonstrate that you understand the key points of the report. Clearly communicate your thoughts and ideas in a clear

Objectives

  1. Demonstrate that you have read the report of the Jennings Committee.
  2. Demonstrate that you understand the key points of the report.
  3. Clearly communicate your thoughts and ideas in a clear and concise manner.
  4. Practice your written communication skills including the ability to write persuasively in a document that is free of spelling and grammatical errors.

Assignments

The Jennings Committee, formally known as the Special Committee on Research Program was established in 1957 to evaluate accounting standard setting and to make recommendations for changing the process. Summarize the key recommendations of the Jennings Committee and form an opinion about the appropriateness of their recommendations. Support your opinion with a well reasoned argument. Your submission should be a 2-3 page paper, double-spaced. 

Accounting Historians Journal Accounting Historians Journal

Volume 28 Issue 2 December 2001 Article 6

2001

Work of the Special Committee on Research Program Work of the Special Committee on Research Program

Stephen A. Zeff

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Recommended Citation Recommended Citation Zeff, Stephen A. (2001) "Work of the Special Committee on Research Program," Accounting Historians Journal: Vol. 28 : Iss. 2 , Article 6. Available at: https://egrove.olemiss.edu/aah_journal/vol28/iss2/6

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Accounting Historians Journal Vol. 28, No. 2 December 2001

Stephen A. Zeff RICE UNIVERSITY

THE WORK OF THE SPECIAL COMMITTEE ON

RESEARCH PROGRAM

Abstract: This article begins by recounting the circumstances that led to the AICPA’s decision in 1957 to appoint a special committee to recommend a stronger research program to support the process of establishing accounting principles. It then proceeds to examine in depth the committee’s sometimes difficult deliberations that eventu- ally led to a unanimous report, in which it recommended the cre- ation of an Accounting Principles Board and an enlarged accounting research division within the Institute. In the course of the article, the author brings out the strong philosophical differences among several of the Big Eight accounting firms that had been impeding the work of the Committee on Accounting Procedure and that also intruded into the Special Committee’s deliberations.

INTRODUCTION

One of the major junctures in the process of establishing accounting principles in the United States occurred in 1957- 59.1 After almost 20 years of experience with the Committee on

Acknowledgments: I am grateful to Art Wyatt, George Catlett, Chuck Horngren, Oscar Gellein, Dick Brief, Tom Dyckman, Marc Epstein and Bob Mautz for comments on earlier drafts. Mautz is the lone surviving member of the Special Committee. They are not responsible, however, for the contents of this paper.

1Prior to the 1970s, what is today known as “standard setting” was charac- terized as the establishment of accounting principles. In 1970, the Institute of Chartered Accountants in England and Wales set up the Accounting Standards Steering Committee, which began issuing Statements of Standard Accounting Practice (in succession to Recommendations on Accounting Principles). In 1972, the American Institute of Certified Public Accountants created the Finan- cial Accounting Standards Board (in succession to the Accounting Principles Board), which began to issue Statements of Financial Accounting Standards. With the inception of these two new bodies, the term “standard setting” en- tered the profession’s vocabulary.

Submitted April 2001 Revised August 2001

Accepted October 2001 1

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Accounting Procedure,2 there was increasing criticism of the committee’s inability to secure agreement on the most difficult problems, including accounting for changing prices, business combinations, deferred taxes, and pensions. The leadership of the American Institute of Certified Public Accountants (Insti- tute, AICPA) believed that a new approach was needed, one that placed more emphasis on research into the fundamentals of accounting as a means of facilitating an agreement on particu- lars. In December 1957, the Institute created a blue ribbon panel known as the Special Committee on Research Program in order to recommend a new approach. The Committee’s report, which was issued nine months later, led to the establishment in the following year of the Accounting Principles Board (APB).

No previous study has reported on the deliberations of the Special Committee, which was composed of strong-willed lead- ers of the profession, including the outspoken managing part- ner of Arthur Andersen & Co., Leonard Spacek, who was the most vociferous critic of the Committee on Accounting Proce- dure. It is the objective of this article to relate the Special Committee’s deliberations in a way that brings out the strong philosophical differences among the members. As standard set- ting for financial reporting continues to evolve, both at the na- tional and international levels, a study of the deliberations lead- ing to the setting up to the predecessor of the Financial Accounting Standards Board may provide readers with an un- derstanding of the dynamics of change when moving from one regime to its successor.

The author possesses a file of the minutes of the Special Committee’s meetings, together with correspondence among the members, and most of the contents of this article, including

2From 1939 to 1957, the Committee on Accounting Procedure issued 48 numbered Accounting Research Bulletins, of which eight were reports pre- pared by the Committee (or Subcommittee) on Terminology between 1940 and 1949. Bulletin No. 43, issued in 1953, was a restatement and revision of the previous 40 Bulletins dealing with accounting principles. In the same year, the Committee on Terminology issued a review and résumé of the eight Bulletins dealing with terminology. For all of the Bulletins and reports of the Committee on Terminology issued between 1953 and 1959, see Accounting Research and Terminology Bulletins, Final Edition [1961]. For all of the Bulletins issued be- tween 1939 and 1952, see Zeff and Moonitz [1984, vol. I]. When, as will be brought out in this article, the Special Committee on Research Program rec- ommended the establishment of an Accounting Principles Board, it was in- tended that the board replace both the Committee on Accounting Procedure and the Committee on Terminology. The work of the Committee on Terminol- ogy will not be treated in this article, as it was noncontroversial.

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143Zeff: The Work of the Special Committee on Research Program

several quotations, are derived from this file.3 This article begins with a discussion of the events and developments that collectively precipitated the creation of the committee and con- tinues by turning to the Committee’s sometimes tense delibera- tions and exchanges of correspondence that led to its report filed in September 1958. It ends with the appointment of the members of the new APB, which itself was not devoid of con- troversy.

CREATION OF THE COMMITTEE4

The Special Committee on Research Program was estab- lished in December 1957 as a direct consequence of a major address given two months earlier by Alvin R. Jennings, the managing partner of the Big Eight firm, Lybrand, Ross Bros. & Montgomery (LRB&M), at the Institute’s annual meeting held in New Orleans. Jennings was the incoming president of the Institute. In his address, “Present-Day Challenges in Financial Reporting” [1958a], he gave voice to a growing unease among leaders in the profession with the functioning of the Committee on Accounting Procedure (CAP), which had been issuing a se- ries of Accounting Research Bulletins since its establishment in 1938/39. In particular, he was critical of the committee for sometimes acting too quickly under pressure and of “the diffi- culty which exists in reversing positions previously taken” [ibid., p. 33].

Jennings expressed disappointment that the effort by the Institute’s research staff to develop a “procedural method” for obtaining the views of industry spokesmen had not succeeded.5

Some of the fault, he said, “rests largely upon a failure of indus- try to acknowledge in any major sense its own obligations, and a disposition to interpret leadership by the Institute as an indi- cation of willingness to assume full responsibility” [ibid., p. 31]. For its part, the Controllers Institute of America (shortly to be

3I am immensely grateful to the late Leonard Spacek for providing me with this file in 1970, which may be the only survivng record of the Committee’s minutes and correspondence. I am also grateful to Price Waterhouse and Deloitte Haskins + Sells (as they were then known) for supplying additional files of correspondence in 1981.

4The discussion in this section draws in part on Zeff [1972, pp. 129-171] and Zeff [1984, pp. 459-462].

5Curiously, the managing director of the Controllers Institute has written that, in January 1957, there were “several signs of a growing closer relation- ship between the two Institutes” [Haase, 1971, p. 176].

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renamed the Financial Executives Institute) complained from time to time that its members were not being adequately con- sulted. The Institute’s executive committee, however, had never appointed any industry representatives to the CAP. Its 21 mem- bers were drawn from the ranks of public accounting practitio- ners (including representatives from all of the major firms) and from two to four academics. All of the committee members had to be Certified Public Accountants. This was an era when lead- ers of the Institute regarded CPAs in industry as having “left the profession.”6

Jennings proposed that the Institute consider setting up a small, full-time research organization whose function “gener- ally should be to carry on continuous examination and re-ex- amination of basic accounting assumptions and to develop au- thoritative statements for the guidance of both industry and our profession” [ibid., p. 32]. To Jennings, a practitioner, “Develop- ment of accounting principles should be regarded as in the nature of pure research,” and it was needed to keep up with “the economic and social changes which affect accounting and financial reporting” [ibid.]. To him, staffing the research orga- nization meant, ideally, finding “five or six Carman Bloughs”7

[ibid., p. 33]. It should consult widely and solicit informed views from interested parties, including industry, the account- ing profession, the teaching profession, and representative of regulatory bodies. The cost of the research organization should be shared “in equitable proportions” by industry and the profes- sion. Probably his most controversial suggestion was that the basic ideas contained in the statements issued by the research organization should be presented to the Institute’s Council for

6The Institute was slow to bring non-practicing members into positions of importance, let alone leadership. It was not until 1998 that its first elected chairperson came from outside of public accounting. By contrast, the Cana- dian Institute of Chartered Accountants and the Institute of Chartered Accoun- tants in England and Wales named their first president from outside of public accounting in 1945 and 1968, respectively.

7Carman G. Blough was a onetime accounting academic, the first SEC chief accountant (1935-38), a manager and partner in Arthur Andersen & Co., an early member of the Committee on Accounting Procedure (1938-42), and the Institute’s full-time director of research since 1944. As director, he super- vised a small research staff, which serviced the CAP and also many other Institute committees, and, since 1947, he wrote a monthly column in The Journal of Accountancy in which he dispensed his wisdom and views on ac- counting and auditing issues of interest to practitioners of all stripes. Through his column, he acquired a towering reputation as the ultimate authority on such matters [Moonitz, 1982].

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145Zeff: The Work of the Special Committee on Research Program

approval or rejection, and that any bulletins approved by a two- thirds majority of Council “should be considered binding upon members of our Institute” [ibid., p. 32].

Jennings had issued the challenge. He was aware of the desire by the Securities and Exchange Commission (SEC) that the CAP make progress in adopting “definite rules” [King, 1951, p. 43], and he also was sensitive to the series of hard-hitting speeches by Leonard Spacek, the managing partner of Arthur Andersen & Co., in which he charged that financial statements were misleading because they reflect “the application of anti- quated accounting principles” [1956a, p. 1] and do not reflect the “true impact of business transactions” [1956b, p. 10]. Spacek also argued that comparability was impaired by the use of alternative accounting principles, and that the profession and the Institute had abdicated their responsibility to the pub- lic by not addressing these problems.8 In a speech made in January 1957, Spacek argued that “The profession has not ex- hibited the independence and ability which the public is en- titled to expect” [Spacek, 1957a, p. 24]. In the words of John L. Carey, the Institute’s long-time executive director, Spacek ac- cused the CAP of:

yielding to industry pressure on an important principle without public discussion. He criticized the committee also for failing to issue bulletins in the face of substan- tial internal dissent. Finally he impugned the motives of members of a special committee of the Institute ap- pointed to investigate and report on divergencies be- tween generally accepted principles of accounting and the accounting practices prescribed for railroads by the Interstate Commerce Commission [Carey, 1970, p. 77].

Spacek’s criticism of the behavior of the two Institute commit- tees was reported in the press, and his criticism of railroad accounting practices triggered a Congressional hearing [Rail- road Accounting Procedures, 1957].

It was unheard of for a major figure in the accounting profession to direct public criticism at the profession or the Institute, and the leaders of the Institute were shocked.9 The

8For most of Spacek’s collected speeches from that period, see A Search for Fairness [1969, pp. 1-59]. For a further discussion of Spacek’s series of critical speeches, see Carey [1970, pp. 74-80] and Previts and Merino [1998, pp. 310- 311].

9Interview with George R. Catlett, retired partner in Arthur Andersen & Co., October 21, 1999. Catlett was a longtime close colleague of Spacek’s in the home office of Arthur Andersen & Co.

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Institute’s executive committee, with the evident support of Carey, immediately authorized President Marquis Eaton to take the extreme step of appointing a special committee to investi- gate Spacek’s accusations. The special committee completed its inquiry with dispatch, and in its report dated April 17, 1957, a scant six weeks after its appointment, it found that the Institute committees had not yielded to improper influences [Report of Special Committee, 1957]. If Spacek earlier had little confi- dence in the leadership of the Institute, by the Spring of 1957 he had become embittered toward the Institute. In a letter to the Institute, Spacek took exception to the special committee’s conduct of its investigation as well as with the reasoning in its report [Spacek, 1957b].

The Institute’s leadership was determined to take the report of the special committee even further. It then proposed to Council that the Institute expel Spacek from membership, but the effort failed [Spacek, 1989, pp. 242-243]. Thereupon, the Institute apparently led an unsuccessful effort to get at Spacek through the Illinois Society of Certified Public Accountants [ibid., pp. 243-244]. For his part, Spacek threatened to pull Arthur Andersen & Co. out of the Institute [ibid., p. 237]. He viewed Carey as an apologist for permissiveness on accounting principles [ibid., pp. 38-39], which he also associated with sev- eral of the Big Eight firms based in New York City. For his part, Jennings responded to Spacek’s public accusations by asserting in his address that “Criticisms which suggest that the profes- sion on any widescale basis has lost its independence . . . are baseless” [Jennings, 1958a, p. 33]. The Institute’s leadership wanted to rein in Spacek, and this may have been a major factor behind Jennings’ call for a new approach.

But Spacek continued his crusade. In an August 1957 speech to the American Accounting Association (AAA), he advo- cated establishment of a “court of accounting principles” within the Institute, which was also reported in the press. In that speech, he contended that “Our present American Institute Bul- letin method is seriously lacking as to the reasoning and the criteria on which the opinions are based” [Spacek, 1957c, p. 34]. Spacek believed that the [legal] case method should be used so that “not only the accounting profession, but also in- dustry, government, teachers, and students will know the views that prevail [on accounting principles] and why they prevail” [ibid.]. More important, he argued, “We now have no satisfac- tory method of challenging what are presently regarded as ac- cepted principles of accounting” as well as determining which

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147Zeff: The Work of the Special Committee on Research Program

new principles should be adopted and which alternative prin- ciples should be eliminated [ibid.]. As criteria for making such determinations, he believed it was essential that premises and objectives be developed and agreed upon.

Another factor that might explain Jennings’ proposal was the increasing belief that the AAA, a body composed primarily of accounting academics, had been stealing the Institute’s thun- der in establishing accounting principles [see Storey, 1964, pp. 40-52]. In 1936, 1941 and 1948, the AAA had published a series of statements of accounting principles [Accounting and Report- ing Standards, 1957], which the SEC’s chief accountant would sometimes cite as authoritative support in his speeches and in his section in the Commission’s annual report to the Congress [see, e.g., Blough, 1937, p. 30; Werntz, 1946, p. 35; King, 1948, pp. 52-53; Zeff and Moonitz, 1984, vol. II, pp. 202, 252]. The AAA’s 1940 monograph by Professors W. A. Paton and A. C. Littleton, An Introduction to Corporate Accounting Standards, which was issued as an elaboration of the 1936 statement, was widely quoted and cited by practitioners and used by account- ing academics in their university courses. The AAA published a series of eight “supplementary” principles statements on spe- cific accounting topics between 1951 and 1955, and in 1957 it issued a revision of its 1948 statement. William W. Werntz, the current chairman of the CAP, lauded the 1957 statement in an article in The Journal of Accountancy and contrasted the series of “integrated” AAA principles statements with the output of his own committee, which, he wrote, had “chosen to express its views only on certain aspects of accounting as the occasion presented itself” [Werntz, 1958, p. 33]. The CAP had several times decided against developing and publishing a statement of fundamental accounting principles, and instead, composed mostly of practical men, preferred to take up accounting issues as they became pressing.

In 1955 and 1956, moreover, the AAA had published three research studies on price-level changes and financial statements [Jones 1955, 1956; Mason, 1956], which attempted to get to the heart of the theoretical and practical problems of recognizing the effects of inflation in financial statements. This subject was one on which the CAP was unwilling to issue a Bulletin in the mid-1950s, once the antipathy of the SEC’s accounting staff toward such reform had become known [Zeff, 1972, pp. 155- 157, 165-166; and see below].

Even George O. May, the former senior partner of Price Waterhouse & Co. and the lion of the profession, expressed the

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belief in 1958 that the Institute had been falling behind the AAA:

The American Accounting Association from the time of its first pronouncement has sought to relate specific provisions to a broad concept. It would seem that the Institute must successfully undertake a similar task before it can claim with reason to be either the leading authority or one of the leading authorities upon the subject [Grady, 1962b, p. 278].

One can therefore understand why Jennings placed emphasis on “pure research,” by which he meant “continuous examina- tion and re-examination of basic accounting assumptions. . .” [Jennings, 1958a, p. 32; see also Jennings, 1958b].

But perhaps the most compelling reason for a change of approach was the persistent unwillingness of the CAP to make difficult choices on controversial topics. The committee mem- bers were apparently loathe to declare that certain accounting practices that had achieved a degree of acceptance were no longer includible among “generally accepted accounting prin- ciples” (GAAP), which was the profession’s code terminology for proper practice. Even though the opinions expressed in the CAP’s Accounting Research Bulletins were not binding on members of the Institute10 (which was, after all, a voluntary association of CPAs licensed by the states), the committee knew that the SEC’s accounting staff was inclined to enforce compli- ance with its opinions. But, as Carey wrote, “except as the SEC or the New York Stock Exchange insisted on compliance, indi- vidual companies and auditors were at liberty to deviate if they chose to assume the burden of justifying their departure” [1970, p. 88]. Although housed within the Institute, the CAP was effec- tively a creation inspired by the SEC, whose chief accountant had made it clear in 1937 that the accounting profession should take the initiative “to develop uniformity of procedure,” lest the Commission do so itself [Blough, 1938, p. 190].

In the 1940s and especially in the 1950s, it became evident that three fundamental differences among the members mili-

10Accounting Research Bulletin No. 43 [Committee on Accounting Proce- dure, 1953, p. 9] stated rather ominously that “the burden of justifying depar- ture from accepted procedures, to the extent that they are evidenced in com- mittee opinions, must be assumed by those who adopt another treatment.” An almost identical caveat, but omitting the passage set off in commas, appeared in most of the other Bulletins.

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tated against agreement within the CAP. There was a profound difference between several of the major firms over whether a desirable goal was eventual “uniformity” of practice among companies, or instead a diversity of practice that would allow company managements to choose the accounting methods that, in their view, most suit their circumstances [see Carey, 1970, p. 88]. This was the “uniformity” v. “flexibility” debate that verita- bly exploded into the literature in the early and middle 1960s [see, e.g., “Uniformity in Financial Accounting,” 1965].11 Arthur Andersen & Co. (AA), which had a significant client base in the regulated public utility field [Spacek, 1989, pp. 8-9], was the foremost advocate of “uniformity” [ibid., pp. 38-43; Carey, 1970, p. 127], while Price Waterhouse & Co. (PW) and Haskins & Sells (H&S) were the two leading defenders of flexibility. The latter two firms believed that the choice of accounting methods should be tailored to the circumstances of individual corpora- tions [see, e.g., May, 1943, pp. 183, 251; Kracke, 1947; Gellein, 1957, p. 91; Powell, 1964, pp. 40-41; Bevis, 1965, pp. 21-22; Keller, 1965, p. 648].

The second fundamental difference turned on the authority that the CAP possessed to impose significant changes on ac- counting practice. There was a philosophical split among the major firms over the committee’s proper role in “forcing” a narrowing of accounting alternatives, as opposed to a more “empirical” approach of cataloguing generally accepted prac- tices. AA wanted there to be a strong hand to change practice,12

while PW and H&S did not see that as being within the committee’s province [see Devore, 1958, p. 122; Powell, 1964, p. 40], as will be seen below. The views of the other major firms were less diametrically opposed. This issue, together with the debate over uniformity v. flexibility, were undercurrents that periodically surfaced in the phrasing of qualified assents or dis- sents in several of the CAP’s more controversial Bulletins.

The third fundamental difference was over the primacy of conventional historical cost versus current value accounting or general price-level accounting in the financial statements, espe- cially as regards the measurement of depreciation expense. Views within the CAP on conventional historical cost account-

11For an editorial and four articles on the subject, see the April 1961 issue of The Journal of Accountancy.

12Spacek advocated a “court of accounting principles” because he viewed the CAP as not being up to the task [Spacek, 1957c].

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ing13 versus general price-level accounting or a form of current value accounting were disparate, and the few efforts within the committee to advance the cause of current value accounting were rebuffed by the SEC, which was an arch defender of con- ventional historical cost accounting in the determination of net income [see, e.g., Zeff, 1972, pp. 155-157; Walker, 1992]. Of the major firms, AA was the principal advocate of general price- level accounting or c

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