Securities and Exchange Commission Historical Society

The Richard C. Adkerson Gallery on the SEC Role in Accounting Standards Setting

Origins of the Relationship

Disclosure or Correction?

“Practices such as these menace the welfare of capitalism. Those responsible for them should take heed lest in winning too many such battles they lose the war. Many of you have had similar experiences where the accountant’s objection is met by the corporation’s lawyer who is called in to say that the law permits that to which the accountant objects. The lawyer swallows or cooks up what the accountant gags over.”

- December 27, 1937 Robert E. Healy, The Next Step in Accounting

As the SEC began reviewing registration statements, the Commissioners soon found themselves bogged down in accounting issues. Commissioner Healy reported that accounting problems caused the most serious differences of opinion among the Commission.

Despite the absence of a body of well-established accounting principles, the SEC staff challenged accounting practices they considered inaccurate or misleading.  In many instances, the companies made the corrections requested by the SEC, avoiding formal proceedings or public releases. However, the Commissioners occasionally were faced with accounting practices that registrants were reluctant to change.

A recurring issue was the practice of increasing assets to current reproduction or appraisal value with commensurate increases in reserves or equity (“surplus”) accounts. Expenses that should have reduced earnings were then charged against those surplus accounts.

Asset revaluations traced back at least to the prior century, when in 1898 William Jennings Bryan persuaded the Supreme Court to allow public utilities to use fair value to achieve a fair return in fixing rates. The Commission believed that recording reproduction estimates in the financial statements was a misapplication of a decision made for rate-base purposes.

A prominent revaluation case was Northern States Power Company in 1934.(7) The facts about the write-up and expense charges to surplus were fully disclosed, and the auditor “certified” the financial statements “subject to” the comments about the revaluation accounting. Before the registration statement became effective, the auditor amended the language to clarify disapproval, saying “except for” comments about revaluation accounting. (8)

The SEC Commissioners all thought that Northern States’ practice was incorrect. But the securities laws were disclosure laws; could a presentation they believed to be wrong be accepted if fully disclosed, particularly if the Commission had not previously stated that the practice was incorrect?  At what point would accounting presentations that were in effect untrue – though disclosed – amount to violations of the statute?

Time after time, the Commissioners voted three-to-two in favor of disclosure, but pressed Chief Accountant Carman Blough to develop and promulgate accounting rules. Blough convinced the Commission that he lacked the staff and time to perform the research necessary to formulate broad accounting standards. However, he was authorized to issue releases interpreting accounting matters to “contribute to the development” of uniform standards.  In January 1937, Accounting Series Release No. 1 addressed the Northern States Power practice, stating that losses properly chargeable against income should not be charged to capital surplus.

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(7) November 21, 1934 SEC Securities Release No. 254: Northern States Power Co.

(8) Chief Accountant Carman Bough expressed the SEC's concern over the clarity of accountant's opinion qualifications in November 1937 Accountant’s Certificates. The Auditing Standards Board later required that GAAP qualifications be introduced by "except for."

Related Museum Resources


May 27, 1933
document pdf (Government Records)
July 6, 1933
document pdf (Courtesy of David Ratner)
May 1934
document pdf (Courtesy of the Library of Congress)
June 6, 1934
document pdf (Government Records)
document pdf (with permission of the John F. Kennedy Library Foundation)
June 30, 1935
image pdf (Government Records)
September 1935
transcript pdf (with permission of the John F. Kennedy Library Foundation)
June 30, 1936
image pdf (Government Records)
March 2, 1937
document pdf (Courtesy of the National Archives)
March 5, 1937
document pdf (Courtesy of the National Archives)
June 16, 1939
transcript pdf (Courtesy of Stephen Zeff)
January 10, 1941
transcript pdf (Courtesy of the American Institute of Certified Public Accountants)
March 21, 1957
image pdf (Courtesy of Ann Wallace)
March 22, 1957
transcript pdf (Courtesy of Ann Wallace)
March 1978
image pdf (Courtesy of the American Institute of Certified Public Accountants)
June 2004
document pdf (prepared for the museum by Karl Smeltzer)
January 2020
transcript pdf (Courtesy of Gary J. Previts)

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