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of accounting. Uniformity of principles is vastly more important than superficial uniformity of form.

It should also be observed that, if public accountants are to have imposed upon them the heavy burden of responsibility set forth in section 17, there is a gross inequity in having a body which obviously does not, and cannot, have the background of professional training and experience in accounting essential to enable it to speak the last word on such a subject and the immediate first hand contact with new problems constantly arising, empowered to prescribe the form or manner in which the financial statements to be certified by the public accountant shall be prepared. Rigidity of form may be dangerous because it cannot in the very nature of the case forsee and prepare for the disclosure required with respect to new developments or situations having an important bearing upon the statement of the results of a company's operations or of its financial position. _ A sufficient, and at the same time more reasonable, requirement is that the Federal Trade Commission may call for the disclosure in the financial statements of any information which it deems essential to the completeness or clear understanding thereof.

In the final analysis, the problem of disseminating reliable financial information to investors is not dependent upon the application of uniform accounting methods or upon a rigid uniformity in form of the statements to be submitted to investors. Further, the introduction of uniform accounting methods or of uniform forms of financial statements will not solve the problem.

Accordingly, we believe it inappropriate and undesirable from the point of view of the investor that there be included in this bill a provision authorizing the Trade Commission to prescribe accounting forms and methods. We respectfully recommend the elimination of section 18 (b).

Representatives of the institute would be glad to enter into discussion of any of the questions raised herein. Respectfully submitted.

John L. CAREY,

Secretary American Institute of Accountants. NEW YORK. March 6, 1934.

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CONTROLLERS INSTITUE OF AMERICA,

New York City, March 8, 1934.
Hon. Sam RAYBURN,
Chairman Committee on Interstate and Foreign Commerce,

Washingion, D.C.
DEAR Mr. RAYBURN: The enclosed statement presents the views of the
Controllers Institute of America, with respect to the proposed measure known as
“National Securities Exchange Act of 1934”, and it is respectfully requested that
this statement be entered in the record of your committee's hearings on this
Very truly yours,

D. J. HENNESY, President.
STATEMENT OF COMMENT AND SUGGESTION TO THE SENATE OF THE UNITED STATES

COMMITTEE ON BANKING AND CURRENCY IN THE MATTER OF “NATIONAL
SECURITIES EXCHANGE Act of 1934", S-2693, FOR CONTROLLERS INSTITUTE
OF AMERICA BY EDWIN F. CHINLUND

New YORK, N.Y., March 5, 1934.
COMMITTEE ON BANKING AND CURRENCY,

United States Senate, Washington, D.C.: The Controllers Institute of America has considered the provisions of S. 2693 and H.R. 7852, to be known as the National Securities Exchange Act of 1934, and has requested me to submit this statement and to appear before you to present the views of the Controllers Institute on the bill.

The Controllers Institute is in sympathy with necessary actions taken to protect the investing public by the elimination of abuses in the security business, and to prevent abuses of credit caused by the diversion of credit into speculative channels to the injury of general business. This statement is principally confined to the accounting and financial aspects of the bill since those aspects are the ones in which our membership is primarily interested.

The membership of the Controllers Institute of America consists of over 300 controllers and other executives who are responsible for the accounting and finan.

cial policies of many of the corporations whose securities are listed on exchanges. This statement has the approval of our board of directors and based upon that approval and the many communications received from members, we feel safe in stating that it represents the opinion of the majority of our members even though we have not had time to obtain their vote.

In this connection it is appropriate to refer to the declaration of principles of the Controllers Institute of America, adopted shortly after foundation of the institute, which expresses our point of view on this subject and which, as will be seen, harmonizes with the avowed purposes of the bill.

“The Controllers Institute of America stands for the observance of the highest ethical standards in corporate accounting practice and in the preparation of reports of financial and operating conditions of corporations to their directiors, stockholders and other parties at interest, in such manner that all concerned may know the actual conditions insofar as such reports may assist in the determination thereof. To that end, the Controllers Institute of America offers its advice and assistance in connection with any movement which has for its purpose the establishment of better safeguards for the protection of the investor.'

We submit the following as to the accounting and financial features of the bill:

The provision of section 12, which provides for the filing of quarterly balance sheets and income accounts, and further provides that such balance sheets and income accounts shall be certified by independent auditors, is, in our opinion, too burdensome to business and is unnecessary to secure the protection to investors for which the law is intended. The present listing requirements of the New York Stock Exchange provide that corporations shall publish an annual balance sheet and income account, and quarterly income accounts. The variation of balance sheet items during a quarter is usually not great enough to justify spending the investors' money to set up the elaborate accounting machinery necessary to prepare a balance sheet sufficiently accurate to permit the officers of the corporation to assume responsibility for its correctness. Furthermore, quarterly audits would multiply the cost of the present annual audits and would be too heavy a burden for the corporation to bear. It is well recognized in accounting and business circles that quarterly statements of many corporations, although reasonably correct, are based upon estimates to a larger degree than annual statements, and therefore without greatly elaborating the present_accounting methods they cannot be as accurate as the annual statements. Furthermore, if a corporation were to publish a certified quarterly balance sheet, it would be necessary in many cases to take physical inventories quarterly whereas now physical inventories are, in most cases, only taken once a year.

What the investor requires mainly to pass judgment on his investment, is the trend of earnings, and most corporations whose securities are listed on the New York Stock Exchange are meeting this requirement by issuing quarterly income accounts. It is true that some corporations are not submitting quarterly reports because their agreements with the exchange were made before the exchange instituted the provision making this a requirement for new listings. However, the efforts of the exchange through its committee on stock list have been devoted for a long time to having corporations agree voluntarily to modifications of their listing agreements, so as to provide for quarterly earnings reports.

In this connection it should be pointed out that when the New York Stock Exchange made the publication of quarterly earnings statements a listing requirement, it was found that in certain industries quarterly statements were wholly misleading by reason of wide seasonal variations. Furthermore, in some cases it was found to be impossible to ascertain with any reasonable degree of accuracy certain basic data necessary for the preparation of such statements. In such cases, the stock exchange decided to permit the publication quarterly of earnings statements covering the 12 months' period immediately preceding such publication, instead of 3 months' figures, thus eliminating the seasonal factor.

We suggest, therefore, that 12 months' earnings statements, published four times yearly, be permitted in place of quarterly statements where the latter would be misleading to the investing public. We suggest also that permission be granted to publish semiannual earnings statements in cases where it appears that such statements present the picture more fairly than quarterly statements. Furthermore, in cases where it is obvious that an investment policy can be determined most satisfactorily from annual statements, such annual statements should be permitted.

The point we wish to make is that greater flexibility should be permitted, to conform to the diversity of conditions found in the various industries. It is our considered opinion that the appropriate earnings statements, as prescribed above, issued with the necessary qualifications as to approximation, should become a requirement, that the publication of certified balance sheets quarterly is unnecessary and much too costly, and that the present practice of annual balance sheets is preferable.

The provision as to monthly reports of sales or gross earnings is probably not to onerous for some corporations, although for others it would be very impractical. If a regulatory bill should be passed by Congress, the provision for monthly reports should be flexible enough to authorize the Federal Trade Commission to waive this requirement in justifiable cases.

The provision of section 11 covering registration requirements, which provides that the Federal Trade Commission may modify the rules and regulations for the information to be filed with it before or at registration, together with the penalty provisions of section 17 (a), which apply if the information is "false or misleading in respect of any matter sufficiently important to influence the judgment of an average investor”, may easily work out to be an invitation to unscrupulous traders to attempt to profit unjustly. Such tradere might trade recklessly in any security in whose registration statement the slightest flaw may be detected, on the assumption that if a profit is made, well and good, while if the speculative transaction results in a loss, such loss may be recovered from the officers, directors, or accountants of the issuing corporation. It is even possible, as the bill is written, for damages to be assessed much in excess of the loss actually sustained.

The possibility of slight clerical errors among the thousands of figures and statements which must be contained in the voluminous reports required under this bill is so great as to raise serious question as to whether or not any corporation official or public accountant of responsibility coula run the risk of possible penalties.

The provision of section 11 as to audit of balance sheets and profit-and-lose statements for proceeding years does not specify the number of preceding years. It would seem to the Controllers Insitute that if specific control of registration of securities is to be undertaken by the Government, it should be done either under much more clearly defined rules and regulations, incorporated into the law, which can only be done after adequate time to study the question or left to the discretion of the regulating commission.

Under section 11 for all securities now listed on exchanges, a registration state ment as defined by that section and as further amplified by rules and regulations of the commission must be filed prior to October 1, 1934. Such registration statements include certificates of audit by independent public accountants. Therefore, not only would it be necessary for audits to be made of previously unaudited companies but also new audit certificates would be required of companies at present audited, all to be filed prior to October 1, 1934. This large number of audits could not possibly be completed prior to that date by the public accountin profession of this country

As now written, the bill would include all railroads which desire listing on an exchange for one or more of their securities. This includes most of the class I railroads, which number about 180. To complete audits of all of these extensive properties by October 1, even if the work were commenced today, would be a physical impossibility.

An alternative method of accomplishing the purposes of the law would be to have the regulatory body supervise the actions and policies of the listing committees of the exchanges and the general requirements for listing within maximum limits to be stated in the law. Thus the Commission would not be given the burden of detailed approval of each individual listing. This procedure would also remove the possibility of investors assuming endorsement of soundness of issues by the Federal Trade Commission if the Commission does not disapprove the listing within the 30 days specified in the bill.

The Controllers Institute wishes to express its concern over the serious situation in which each corporation's directors and executive officers will be plaoud if this bill becomes law. They will have to decide whether to comply with the law in order to secure listing and have marketability for their corporation's securities or to suffer loss of listing to avoid incurring the excessive expense and terrific liabilities imposed by the law. Officials have already been placed in the position of having to decide whether to incur the serious obligations required by the Securities Act of 1933 in order to secure new financing or even refunding In most cases, however, it has been possible to postpone decision on this question by delaying new expenditures, with the resulting harmful effect on business recovery and unemployment, in the hope and expectation that the Securities Act would be modified in the near future.

In the legislation now proposed the situation is much more serious since a decision will have to be made immediately on passage of the bill in order to complete the tremendous amount of work required for securities to remain listed on October 1, 1934. Should it be decided that either the cost, the liability involved in complying with the listing requirements, or the difficulties arising from the undefined future regulation is too great, the only recourse would be to permit the corporation's securities to become unlisted, thus driving trading in the securities into a bootleg market which this law would probably create. The results thereof would be:

(a) The investor would be unable to borrow on his security.

(6) If obliged to sell, the investor could do so only on a market in which a wide spread would very likely exist between the bid and asked prices.

(c) The corporation would find it extremely difficult to finance, even if the obstacles raised by the Securities Act of 1933 could be overcome.

(d) The National Government and the States in which exchanges are located would lose large tax receipts.

(e) Business recovery would be retarded.

Section 18, subsections (a), (b), and (e) in particular, granting special powers to the Federal Trade Commission also directly affect corporations. These powers are expressed in such a broad way that the cost and volume of the information might be excessive. The broad powers granted would compel corporations to use such accounting methods and prepare such reports as may be demanded, although they might not meet the needs of the directors and officers of corporations in the regular mangement of the business. Duplicate records and reports would therefore be necessary. The methods to be prescribed for the valuation of assets, determination of recurring and nonrecurring income, etc., also are placed under the jurisdiction of the Federal Trade Commission and would take the operation of business matters out of the hands of those professionally expert who have responsibility of performance. Subsection (e) also gives the Federal Trade Commission power to require corporations to bring their corporate records for secret investigation "from any place in the United States or any State at any designated place of hearing”. On account of the great volume of records which might be involved this hardly seems practical.

The Controllers Institute believes that the methods of accounting are internal matters for the controllers of each corporation to prescribe, based upon recognized accounting principles and practices designed to meet the particular requirements of the business, and that the accounting methods and the accounts resulting from them should be approved by independent public accountants auditing the corporation's accounts. We believe that if it is to be the policy of the Federal Government to regulate all corporations such regulation should be confined to major principles and not detail.

The two countries of the world in which it is generally recognized that accounting has had the greatest development are England and the United States. The procedure under which this improvement in correct presentation of balance sheets and income accounts has been developed has been by selection of trained expert accountants as financial officers of companies, supplemented by an annual audit of the methods and accounting principles put into effect by such officers by independent public accountants. The intimate knowledge of the particular type of business and the kind of transactions it carries on, necessary to determine proper accounting policies for such business, requires detailed and recurring investigation which, in our opinion, no regulatory body could undertake and carry out as a substitute for the well developed procedure now in existence. Anyone who has made a study of the development of the presentation of corporate financial statements is convinced that its entire history shows an improvement in the direction of conservative and accurate statements of financial position and earnings.

The foregoing covers the principal difficulties which would arise from the accounting features of the proposed bill. There are other objections to the bill which have been covered by previous witnesses such as:

(1) The deflationary effect of the ineligibility of unlisted securities and the margin requirements.

(2) The indefinite and almost unlimited control of corporate activities placed in the Federal Trade Commission.

(3) The possibilities of driving the security business into the hands of security bootleggers by the heavy restrictions placed on exchange members.

(4) The difficulties arising from liability of directors, officers, accountants, and others under the provisions of section 17.

Section 13 of the bill relating to proxies imposes an undue burden and an excessive cost which must be borne in the last analysis by the stockholders. It should be pointed out that in the vast majority of cases proxies are solicited only to insure à quorum so that necessary corporate business may be transacted at annual meetings thereby saving stockholders expense and time of attending meetings.

Reform of certain phases of the security business is necessary. Reform is always necessary in a dynamic Nation like ours. The only question is how to reform without creating more evils than are remedied.

We feel that the greater benefits to the American people can be secured through a continuation of the evolutionary process of reform through education-education of the public, of security dealers and brokers, and issuing corporations rather than by such a process as is represented by this bill as written. Distinct progress along constructive lines has been made by the development of local blue-sky regulation, by the activities of better business bureaus and similar organizations, through the initiative of the leading organized security exchanges, and through the growth of a more public-spirited point of view on the part of the leading corporations, especially since their securities have become distributed so widely among the general public. To interrupt the evolution of reform through education and public opinion by suddenly setting up stringent reguletions impossible of enforcement without driving the security business underground, would result in a set-back to the real progress which has been made so far. The Controllers Institute therefore respectfully recommends deferment of regulation of the securities business until a more thorough study of the subject has been made. The Securities Act of 1933 insofar as it covers issues which would be listed, duplicates to a large extent the listing requirements of the National Securities Exchange Act.

We believe that many of the provisions in the proposed bill, if enacted into law at the present time, would counteract to a large extent much of the moral and economic benefit that has resulted from the aggressive leadership provided by the present administration and much of the legislation passed since March 4, 1933.

It is also our opinion that the Securities Act of 1933 in its present form is a definite deterrent to economic recovery and to the flow of private capital in industry, and unless substantially modified is bound to bring many serious evils in its wake. This in our opinion is equally true of the National Securities Exchange Act reviewed by this statement, and we believe, therefore, that not only should the proposed law not be passed, but that it would be wise legislation to make drastic revisions of the Securities Act of 1933. Since such revisions can probably not be worked out quickly, it would in our opinion be desirable to repeal that law now and in lieu of both of those acts, appoint a commission for the purpose of studying the question thoroughly and reporting to the next session of Congress with proposed legislation to accomplish such reforms as might appear advisable after such study. As a suggestion, the make-up of such a commission of study in addition to representatives of the legislative authority and appropriate Government departments, might well include men selected from the stock exchanges, investment banking business, banks, insurance companies, legal profession, public accounting profession, and corporate executive and accounting officers. It is worth noting that the Federal Reserve Act, our most important piece of financial legislation, as finally enacted in December 1913, effecting a vast improvement in our whole banking and currency system, was incubated and perfected only over a period of several years.

We are very appreciative of the courtesy extended to us in permitting us to be heard on our reactions to the bill as presented. We offer to place our services at the posal of the committee for any elaboration of the above or any study which it desires to obtain. Respectfully submitted.

CONTROLLERS INSTITUTE OF AMERICA,

By EDWIN F. CHiNLUND.
Approved by the Board of Directors:

DANIEL J. HENNESSY, President.
ARTHUR R. TUCKER, Secretary.

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