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deducted. It could be no injustice to the investors to require them to acknowledge that the plant they had operated for some years could not turn out the same service at the same cost for the same remaining period of time as an identical new plant, and any other basis of return would not be just to the public paying for the service. It appears that this case has never come up for court decision, so it cannot be stated here what final adjustment of rates was made.

Thirdly, there may be utilities which in the past, because of ignorance or for some other cause, have not through earnings provided for depreciation and yet have paid only a fair return to the investors on the amount of capital actually invested in the business. The Knoxville decision is perfectly clear in such a case, holding that if a company “fails to perform this plain duty and to exact sufficient returns to keep the investment unimpaired

the fault is its own.” Therefore, even in this case the depreciation must be deducted to determine the amount entitled to a return, though it is barely possible in such a case that the equity of the procedure may be questioned.

Fourthly, there may be utilities which in the past have been prohibited by the local authority from collecting the proper provision for depreciation, and, in addition, have paid only a fair return upon the amount actually invested in the enterprise. This condition was found to exist in the case of the Contra Costa Water Company of Oakland, California. In the report of Judge H. M. Wright, standing master in chancery in the district court of the United States for the northern district of California, second division, on Contra Costa Water Company v. City of Oakland, some 20.2 per cent. of the original cost of the plant, and amounting to $1,011,000.00, was deducted for depreciation in conformity with the Knoxville decision, yet Judge Wright himself said that this amount "in justice should have been repaid to the company by the community as it accrued.” Here is a case where undoubtedly the Knoxville and similar decisions work injustice, but otherwise these decisions may be considered as justly protecting the rights of the public, and as not working unfairly to the public service companies, because the plant which has been in use for a number of years, uider even approximately similar conditions, cannot

give the same service, at the same cost, for the same remaining time as an identical plant new.

CONCLUSION In conclusion, it should be pointed out that, in the case of all the problems discussed in this paper, the prevailing practice is in accordance with the modern accepted principles of good accounting. Wherever any variation from these principles has occurred, whether in the case of the interstate commerce commission and internal revenue bureau in regard to the basis on which depreciation shall be computed, and as to what shall be done in case of capital loss arising from sudden and unforeseen obsolescence, or in the case of courts and commissions regarding the handling of depreciation in the determination of the capital investment entitled to a return in rate-making, these seeming violations of principle have come about because it was expedient and sensible to do what has been done. The importance to the accountant of understanding these problems is obvious. Almost every accountant has become an expert in the regulations of the internal revenue bureau; many are entirely familiar with the classifications of the interstate commerce commission; and some have studied thoroughly this growing problem of rate regulation. No one would suggest that accountants alone can or will solve this problem of valuation for rate-making purposes, but it is the accountant who best realizes the fundamental relation between the balance-sheet and the income statement, and that it is entirely unjust to the public to permit the inclusion of the depreciation cost in the income statement but to exclude its result from the balance-sheet. If capital outlay has expired to such an extent that it must be paid for by and collected from users of the service through the rates charged, and therefore becomes an element in the statement of income for the period, there is no logical reason why that expiration of capital should not be reflected in the valuation of the assets on the balance-sheet. Accountants must acquaint themselves with the economic and legal factors involved, and, in addition, must bring to bear upon the problem the technical knowledge of their profession. There are those who contend that public policy demands violating many of the principles of economics and accounting and the overturning of court decisions, but they have


failed utterly to show in any concrete or reasonable way why their "public policy" should prevail. We hesitate to say that this is simply camouflage to obtain a desired goal. Accounting is based on facts, and accountants must not only uncover and assemble these facts, but must interpret them and use them in the interest and for the protection and welfare of the public.

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The American Institute of Accountants*

By Carl H. Nau

It is a pleasure to be privileged to address this first regional meeting held under the auspices of The American Institute of Accountants of this section of the country.

The subject which has been assigned to me is The American Institute of Accountants; and since there are accountants in attendance upon this meeting who are not members of the American Institute, it would seem to be fitting briefly-very briefly-to sketch a history of the movement toward solidarity of the accounting profession in this country, leading up to the organization of The American Institute of Accountants which is now its chief exponent.

The men who are familiar with the early history of this movement will pardon me if I address myself for the moment especially to the men who may not be so well informed concerning the early efforts to organize and create a professional body out of the comparatively few and scattered practitioners in this country.

The American Association of Public Accountants was formed in 1887. While its membership was in part composed of practitioners in different parts of the country, it was almost, if not quite, an organization of accountants practising in New York. In 1896 the first so-called C. P. A. law was adopted by the state of New York. This pioneer piece of legislation was doubtless the result of the efforts made by the members of the original American Association of Public Accountants. The next state to adopt C. P. A. legislation was Pennsylvania in 1899. In 1900 Maryland and in 1901 California passed C. P. A. laws, and in 1903 both Illinois and Washington adopted similar legislation. These were the pioneer states in the C. P. A. movement.

In the meantime a few state societies of public accountants had been formed, and in 1904, the year of the world's fair, a congress of public accountants was called to meet in St. Louis. This meeting was attended not only by members of the profession from

* An address delivered at the regional meeting of the American Institute of Account. ants, Chicago, November 19, 1920.

different states of this country, but by representatives from British and Canadian societies.

A short time prior to the congress of public accountants held in St. Louis in 1904 a federation of the several state societies of public accountants was formed. There were now in existence two organized bodies of professional accountants, whose membership was not confined to practitioners of a single state.

This condition, however, continued for a short time only, until it was succeeded by an amalgamation of the federation of state societies with the American Association of Public Accountants. The constitution and plan of organization of the American association was changed, and while it had a class of membership consisting of some of the original individual members, known as fellows-at-large, it nevertheless became substantially a federation of the state societies of public accountants whose qualifications for membership complied with the standards set by the American association.

It was during this period that the so-called C. P. A. movement obtained its greatest impetus, with the result that at present every state in the union but one has passed some kind of C. P. A. law. The C. P. A. laws of some states were good; there were others that were not so good; and some were so bad that the American Association of Public Accountants refused to recognize certificates granted under the laws of those states as qualifications for membership in the association.

In the course of time it became apparent that if the profession desired to achieve its proper status in the business community, it could not rely on accomplishing this result by means of state legislation alone. Doubtless the C. P. A. movement has been a powerful instrument for progress in the early development of the profession in this country, but it must be admitted that it contained some inherent weaknesses.

Accountancy is not a local profession, but is nation-wide, even world-wide, in its scope; and as time went on the need for national standards instead of local state standards became more and more apparent. With forty-seven different standards—some good; some indifferent; some positively bad—the mere designation C. P. A. became almost meaningless. In a few states, such as Illinois and New York, the machinery of examination and the

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