The Journal of Accountancy Published monthly under the auspices of The EDITOR JOSEPH FRENCH JOHNSON ASSOCIATE EDITOR W. H. LOUGH, Jr. SUBSCRIPTION PRICE-$3.00 a year; single numbers, 25 cents; post paid to any address in the United States. Foreign subscriptions, including those in the Dominion of Canada, $3.50 a year; single copies, 30 cents. THE JOURNAL is published by the Accountancy Publishing Company, at Thirty-two Waverly Place, New York City. Secretary and Treasurer, THOMAS CULLEN ROBERTS. EDITORIAL. Government Control of Corporations. Seldom does an after-dinner audience have the luck to listen to an address so sane in substance and so chaste in style as that delivered by Mr. Sells January 10 at the Annual Dinner of the New Jersey Society of Certified Public Accountants. The address, which was published in full in the January issue of THE JOURNAL, has been re-published in hundreds of newspapers in all parts of the country and has been made the text of innumerable editorials. During the last three or four years there has been a wearisome lot of talk about predatory wealth and the exploitation of the common people by the very rich. The results of the insurance investigations two years ago seemed to justify this talk. Railroads have been found guilty of violating the law against rebates. The Standard Oil Company has been fined $29,000,000 because of repeated violation of the law. President Roosevelt has given the people the impression that practically all the managers of great business corporations not only consider themselves above the law, but are constantly violating it. So loud and persistent has this talk been that the average man has come to the conclusion that graft is now more common in business than it ever was in politics. It is against views and conclusions of this sort that Mr. Sells raises his voice. In his address he makes three points very clearly. He contends first that private business is more efficiently managed than public business. His second contention is that private business affairs are more honestly conducted than public affairs. Finally, he argues that the government regulation of railroad corporations has proved a positive injury to the United States. We doubt if anyone not holding a political job will question the accuracy of Mr. Sells' statement that private business is better managed than public. Most public officials are in the first instance politicians. They owe their positions to their political ability and usefulness, and not to their business ability. This is not saying that all our public servants are incompetent as business men, but simply that such of them as are competent are exceptions in office and not the rule. Unfortunately, men who can succeed in business do not seek public office unless they are dishonest and see in office-holding a lever for the increase of their private business transactions and profits. The notion that public officials can manage business better than private citizens is the fundamental dogma of socialism, yet it has been proved erroneous by the experience of men ever since the beginning of history. Just at present many people may be inclined to question Mr. Sells' view with regard to the integrity of our business men, yet in the long run we believe his view will be pronounced the sane and accurate one. No man familiar with the history of American politics, and with the methods which almost everywhere win political success, can doubt for a moment that commercial ethics in the United States is on a higher plane than political ethics. The chief asset of the modern business man, especially in the United States, is the reputation for integrity and square dealing. Without credit he cannot succeed and without character he cannot get credit. This fact will probably be granted by many men who nevertheless contend that our great captains of industry and finance, having got control of millions of money, are able by sheer force of accumulated capital to consummate deals which strangle competition, defraud the small investor and rob the plain people. Against this view Mr. Sells declares that in his opinion, judging by what his eyes have seen, "it is the unassailable truth that almost any one of the men who stand at the head of our great business institutions is far more competent to run the government, and would run it more economically, more wisely and more honestly than any of those who are running governments." As for incompetency and dishonesty, he gives us his deliberate estimate that “there is less than 10 per cent. of both among men in the management of corporations generally and at least 90 per cent. of of both among public office-holders." We are inclined to believe that this estimate is near the truth. The road which leads to the highest business success is one on which a dishonest man cannot easily keep his footing. In the very beginning he must win the confidence of those ahead of him, for he cannot get on without their help. He must get the confidence of bankers, for he needs the support of their credit and he must win the confidence of those struggling along with him or he never will be chosen to be their leader. In almost all cases our great captains of industry and finance have earned their right to leadership by long years of intelligent and faithful service in the ranks. Just as our musicians, our preachers, and our teachers are those whom nature has best fitted for their callings, so are our bank presidents, our railroad presidents and our corporation managers, as a rule, the very best men that society can find to do the work which they do. There is a world of difference between government control and government management of corporations. One may admit that government officials would not manage our railroads as efficiently or as honestly as they are now managed, and yet believe that private management of those corporations should be subject to considerable regulation by law. It is true, as Mr. Sells points out, that transportation and agriculture in the United States have lagged behind certain other important industries, but it is by no means certain that the development of these industries has been retarded by unwise or excessive regulation. In the seventies and eighties this country built railroads far in advance of the demand. It was natural, therefore, that the construction of new mileage in the nineties should decline. In the same way, during the first seventy years of the last century this country devoted the greater part of its energy to the extractive industries. Agriculture was the backbone of our economic organization. But within the last two generations, partly because of the profitable home market, partly because of our great natural resources in iron and coal, and largely because of the expansion of our railway systems, manufacturing industries have leapt forward at a pace which has thrown the farmer into the background. It will not be at all surprising if during the next thirty years the pendulum takes an opposite swing and brings the farmer once more to the front as a wealth producer. Whether or no the Interstate Commerce Act of 1887 was a mistake and has worked injury, is certainly a debatable question. That act created a federal railroad commission which had a long tail but no sting. For many years it enjoyed the privilege of rendering opinions, but it had no power to enforce them. The act also prohibited pooling and forbade the exaction of a higher rate for a long haul than for a short haul. Impartial students of the railroad business have almost unanimously condemned the anti-pooling clause of the Interstate Commerce Law. That clause, more than any other one thing, has doubtless been responsible for the vast assembling of railroad capital into the hands of a few men, which has been the conspicuous feature of railroad finance in recent years. Since destructive rate wars, injuring both shippers and stockholders, could not be prevented by "gentlemen's agreements," and since the law forbade railroads to pool their receipts, joint ownership became inevitable as the only practical solution of the problem. There are many good reasons for believing that the public in the long run will be benefited, that rates will be steadier and lower and the service of railroads better, because of the fact that competing lines of road, in spite of and without open violation of the anti-trust law, are coming under the control of men disposed to work in harmony with one another. There are two kinds of corporation regulation, one wise and the other foolish. It is folly for Congress or for state legislatures to prescribe the rates that railroads shall charge. We believe it also to be folly to prescribe the methods or limit the amounts of their capitalization. These are matters which can best be regulated by the natural laws of business and finance. Nevertheless, our railroad managers have the power, and sometimes they exercise it, to make or unmake communities, to build up one city at the expense of another, to divert net income into the treasuries of barnacle companies at the expense of the small stockholders, and to humbug the small investor by the concealment of facts or by the juggling of accounts. Such being the case, it will be impossible to convince the American people that the railways should go unregulated. The public demand regulation, and it is the duty of Congress to see that the regulation provided is wise, scientific and effective. The underlying principle of such regulation must be fair play for the railroad as well as fair play for the public. Accountancy in Other Countries. We have recently received the formal report of the 1907 Convention of the New Zealand Accountants' and Auditors' Association. The report is especially interesting to American accountants because it indicates how similar are the problems with which the profession all over the world is confronted. Many of the resolutions and speeches, indeed, with a few verbal changes could be readily applied to American conditions. New Zealand accountants, as the following resolution shows, are considering the same question of regulated fees which has been agitated in The American Association of Public Accountants: RESOLVED, That it be a recommendation to the ordinary general meeting that the question of formulating a scale of fees for public accountants be referred to the various local centres for consideration. The following resolutions, which exceed in their scope and severity anything that has been seriously proposed in this country in connection with corporation accounts and auditing, will also be found interesting: RESOLVED (a), That the Government be requested to amend the Companies Act, 1903, so as to provide that in cases of voluntary liquidation of a company the final accounts shall be certified to by an accountant who shall be a member of a recognized accountants' society. (b) That the Government be requested to amend the Companies Act, 1903, so as to provide that in cases of the proposed voluntary liquidation of a company having no uncalled capital, and where it is apparent the assets will not be sufficient to discharge the creditors' claims, the liquidators under such voluntary liquidation shall be appointed by or at the direction of the creditors, and not by shareholders without consideration of creditors' interests, as at present. (c) That the Government be requested to introduce a short bill providing for the compulsory audit of the books and accounts of all registered public companies by an accountant who shall be a member of a recognized accountants' society. RESOLVED, That the Government be requested to amend the Companies Act, 1903, in order to provide for the imposition of a specific penalty upon directors of a public company registered under this Act, should they at any meeting called for the purpose of receiving an audited statement of accounts refuse or neglect to read or have read at such meetings the auditor's report relating to such accounts. |