railroads all used to close at June 30. Now they have all shifted to December 31, June 30 is a much more natural time.

I would like to see introduced into the bill a provision which would help to distribute the work of auditing over the year. I think it would enormously increase the value of the audit to the investor. It would increase the efficiency of the audit. It would reduce the cost, and it would be indefinitely more convenient to all the regulating bodies and statistical people who have to study audited accounts when they come in, and under present conditions get them all in a bunch at the end of the first 2 or 3 months of the calendar year.

That is a very small and noncontentious suggestion, which I think would have very great practical consequences for good.

Senator KEAN. Would not it be just as well to have them all come in on the 1st of July as June 30?

Mr. MAY. If you could get them distributed. Of course, the ideal thing would be to have a quarter on the 31st of March, a quarter on the 30th of June, but you never could get that. But I think if you left some flexible provision in so that the regulating body could work it out as might seem to the general interest, that would be a very helpful measure which would have a general advantage quite apart from the provisions of this particular bill.

Mr. SAPERSTEIN. As the section now stands, Mr. May, there is no date fixed for the filing of those statements, and that matter is left to the discretion of the Commission.

Mr. MAY. I understood that it was fixed as far as quarterly audited statments were concerned.

Mr. SAPERSTEIN. It does not indicate upon what day. It says simply that they shall file with the exchange or the Commission in accordance with rules and regulations to be prescribed by the Commission and in such form and in such degree as the Commission may by rules and regulations prescribe in the public interest. That more or less leaves it for the Commission to indicate upon what dates these shall be filed, does it not?

Mr. MAY. Of course, if you require quarterly statements subject to the reservation that I have suggested before, and provided that once in each year, under regulations of the Commission, quarterly statements should be audited, that would satisfy us. I only want to suggest the idea. The exact form you take is a matter that is a simple matter of draftsmanship. That is the point I had on section

12.

My point on section 17 is on exactly the same ground. Quarterly statements particularly are very largely matters of judgment. If the investor is to get the benefit of that at all, he should get the reports promptly; and, that being so, I think it is not right or wise to impose a penalty for errors, either of judgment or of fact, in statements prepared under those conditions.

I would like to see the provisions of section 17 limited to misrepresentation in statements. I think, as a broad question of public policy, it is not wise to impose liabilities on the basis of errors of judgment or of fact, where the facts are not definitely known and where judgment necessarily has to be exercised in order to reach a conclusion. That is the suggestion that I have on section 17.

The CHAIRMAN. Most of these corporations make at least annual reports for their own benefit, do they not?

Mr. MAY. There should be an annual report, of course, sir. But I think, as a matter of fact, if I am not going too far afield, that a quarterly statement really is a part of what I may call the "paraphernalia of speculation" rather than the machinery of investment. It is a very striking thing. I do not think that there is any doubt that in Europe there are relatively more investors in securities and fewer speculators. The speculators do their speculating on the race track, and they have lotteries to a greater extent. It is a very significant thing that statements more frequently than annual are practically unknown in Europe.

When this question came up I cabled to my associates in London on this question and asked them how far quarterly statements were known in London. They said they did not know of any company that ever published a quarterly statement. One or two published half-yearly statements, but the great majority published them only annually.

I telegraphed to my associates on the continent of Europe and they said, "Neither we nor any of our friends whom we have consulted know anything of any corporations on the continent that publish statements more often than annually."

I do not think that is a mere coincidence. I think, as a matter of fact, a quarterly statement serves a useful purpose to the intelligent investors, and it is useful to the person who is stirring up speculation. I think, particularly, if you had audited quarterly statements you would be imposing a very heavy financial burden. The cost would be quite considerable. It would be practically on the investors in corporations for the benefit of speculators in securities, if it benefited anybody at all-which I do not imagine is quite the line that you are endeavoring to follow.

The English income tax is framed on a different theory from ours. Companies are taxed on the basis of the year ending within any calendar year. They choose their own most convenient dates; say, March, April, June, September, and October. Quite a lot stick to March.

Senator KEAN. Michaelmas is the usual date, is it not?

Mr. MAY. The 25th of March used to be the beginning of the year in England.

Senator KEAN. A great many of them have Michaelmas.

Mr. SAPERSTEIN. It was suggested by the previous witness that one of the dangers inherent in section 12 was that the information. contained in these statements might be appropriated by competitors in this country or in foreign countries. Is there anything in your experience that would lend color to that suggestion?

Mr. MAY. Of course there is a certain weight in that always, but I think, generally speaking, that is a little too much weight attached to that. That has been a ground of opposition in England to the publication of any results. I think business men are naturally secretive. Of course the point has merit. I do not think you should require information in too great detail. I would not attach very great importance to it, and I do think that when a corporation tries to get the benefit of greater liquidity for its securities by creating a

market for them, it has got to pay some price for it; and reasona publicity is part of the price.

The CHAIRMAN. What are your objections to a uniform systen

Mr. MAY. That is a subject that I have given a great dea thought to. The fact of the matter is that accounting, espe inistral accounting, is essentially a matter of judgment, and yo aLnot put judgment in strait-jackets.

In the second place, uniformity, if I may say so, is illusory; it s not exist. Take the railroads and regulated corporations geen and you will see a manual an inch thick, containing detailed spa tions as to where everything from a toothpick to a locomotive sta be charged: but then you will find that the large maintenane n counts and the large loss and damage accounts, and so on. are dis tributed over the year or more than a year on the basis of a buis estimate, and they do not represent actual expenditures at all. S that you do not get the uniformity and you do not get the detailed accuracy that you think you do.

Take a large matter like depreciation. The variation in practie under a uniform classification is notoriously wide. The only safe thing is this: You have got to rely on judgment, and judgment ough to be attended by responsibility for the consequences that ensue. If you have uniform accounting it has got to be prescribed by some body on the basis of general principles, and without any knowledge of the specific cases to which it will be applied. Rules are laid down by people who have no responsibility for the consequences that ensue, either legal or moral. That is one of my great objections to it. My other objection is that uniformity means a uniformly low standard. That is necessarily so. You cannot compel anybody to be conservative. Laws can only lay down minimum standards. I: requires recognition of moral and ethical responsibilities to get anything higher than that; and I have no doubt in the world that the result of the regulation of railroads and public utilities has been to make their accounting less conservative than that of business corporations generally. I think any accountant who has studied the subject would agree with that view. Certainly that is true in my own experience with railroad accounts and business corporations which I audit. I think it is bound to be so. You would get a superficial uniformity which is not real. People are misled; the general public are misled into thinking that accounts are uniform and that the accounts of different companies are in fact strictly comparable when, as a matter of fact, they are not.

The CHAIRMAN. I would like to have you illustrate that. I can get your general view, but if you will illustrate it, it will make it a little clearer. I do not think I quite understand it unless you can illustrate it.

Mr. May. When I first started in the practice of accounting in New York, nearly 40 years ago, nearly all the railroads, when they laid down heavier rails in the place of lighter ones, charge the whole cost of the rails into operating expenses. Now they are required to show the excess weight of the old rails over the previous rails in capital. That is theoretically defensible, but it is practically unwise, in my judgment. All the way through the distinction of what shall be

harged to capital and what shall be charged to expenses, which is he fundamental question of all accounting, the whole tendency of egulated accounting has been to throw things into capital instead f throwing them into expenses.

Senator KEAN. Would you not think that charging the difference etween a light rail and a heavy rail to capital, since the rates of the ailroads are based on their capital, is against the public interest? Mr. MAY. You touch the point. In the case of regulating bodies, f course, it ties into the whole question of regulation, and I agree with you, Senator, that it is an indispensable adjunct of the system f regulation, but nevertheless that particular effect of it I think is nfortunate, even if it is inevitable. When you get into general usiness you do not have the same considerations of rates based on apital structure, and I think only the unfortunate consequences would persist and the benefits would not be derived. That is my iew of it. I have given the subject a great many years of thought. Senator KEAN. In other words, the piling up of capital in public tilities and in the railroads makes the capital so high that they can go to the commissions and demand higher rates than they otherwise vould be able to charge?

Mr. MAY. That is one phase of it, Senator. But of course the lements on which the rates are based are (1) return on capital, ind (2) the actual expenses incurred. At the same time it increases he amount they get by way of return on capital, it decreases the mount they get as operating expenses.

I think it is getting rather far afield, but I would be glad to pursue it, if it would be of interest.

Senator KEAN. I think it would be interesting.

The CHAIRMAN. Very well.

Mr. MAY. The system of regulation has inevitably tended to bring about that result, coupled with the theory of valuation which has practically prevailed in the Supreme Court decisions. The position has been like this. When a public utility or a railroad, or whatever it might be, put in its claim for its rate base it added a whole lot of expenses, like overhead expenses, which in ordinary practice are charged off into expenses, and it took off only what was called observed depreciation. Now, regulating bodies were in this position, that being forced to accept that by the Supreme Court decisions, if they at the same time allowed these companies to charge the same kind of expense into operating expenses and to charge off larger depreciation, they would be making the public pay twice, and therefore, as they could not prevent them from going into capital, because of the Supreme Court decisions, they said, “All right, you must take it out of expenses "-which was the only alternative left to them, and the result has been, as I say quite confidently, that the accounting of public utilities and regulated corporations generally is less conservative than that of business corporations; and it is because I am not convinced of the benefit of regulation, and uniform accounting would bring everybody down to the standard of the lowest, which is the standard which can be logically established to be the minimum-the fear of that is why I am opposed to uniform accounting. Of course it would make things much simpler for us.

Senator KEAN. If they charge it off in operating expenses, thr is one charge-off for that year. When they put it into cap account it goes on forever?

Mr. MAY. That is true.

Senator KEAN. Therefore it is a continual charge against the public?

Mr. MAY. That is true

The CHAIRMAN. Are you discussing section 18?

Mr. MAY. That is the section that gives the power to presen uniform accounting. That is what I was coming to next.

I think those are the points that I wished to deal with. ani! wanted to come down rather than to make a prepared stateme because this is a subject that is much better developed by questions and I thought if there were any questions that you wished to an I would like to answer them, because my only object is be helpf I am not here in the interest of anybody. So far as the accounti profession is concerned, your bill would apparently create a lot additional work, so I would not be popular in the profession if came down here and opposed it too strongly, perhaps. But I have tried to look at the public interest.

Mr. SAPERSTEIN Is it your suggestion that section 18 (b) be elininated altogether?

Mr. MAY. I think so. As I understand, the Department of Co merce is at this time, through a very able committee, studying the whole question of uniform accounting. It is a very large subject and it does not seem to me to be directly relevant to the main purpos of this bill. I think it is a subject that would be better studied t its merits and dealt with, if at all, in that way, on the basis of the results of a study such as the Department of Commerce is no making. That would be my view of the matter.

The CHAIRMAN. If we had a uniform system, it would be much simpler for the accountants, would it not?

Mr. MAY. Yes; but the real value of accounting is a matter informed and independent objective judgment. If you are going to just follow mechanical rules you can get into very, very disastrous situations by doing so. I think anybody who has had any practical experience will say that.

Senator KEAN. It would be physically impossible, almost, wol it not, with many of these large companies dealing all over the world, to make inventories every quarter?

Mr. MAY. In the case of some of these companies it would b» absolutely prohibitive.

Senator KEAN. For instance, take the Bell Telephone Co. I think j

you audit them, do you not?

Mr. MAY. No; we do not.

Senator KEAN. Do you audit the Steel Co.?

Mr. MAY. Yes. That is not so difficult. We happen to be s cussing the question with the Standard Oil Co. of New Jersey jus now in regard to what an annual audit might cost.

Senator KEAN. What kind of a figure did you give them, if I

may ask?

Mr. MAY. I told them it was so enormous that we could not make any commitment. But I should say an annual audit of the Standari