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Associationalism, statism, and professional regulation: public accountants and the reform of the financial markets, 1896-1940.

Associationalism, Statism, and Professional Regulation: Public Accountants and the Reform of the Financial Markets, 1896-1940

The historiography of twentieth-century economic reform in America seems to confirm either one of two broad, but inherently dissimilar, interpretations. The first, pioneered by the Progressive historians and repeated by their liberal successors, depicted reform as part of the broader process of creating an activist state dedicated to the preservation of democratic values and the promotion of the general economic welfare. The plethora of regulatory agencies created during the first four decades of this century was viewed as a central element in containing the worrisome new economic forces brought about by industrialization and in assuring the promise of American democracy.1

1 Charles A. Beard, ed., A Century of Progress ([1932]; reprint, Freeport, N.Y., 1960); Vernon Louis Parrington, "Vernon Louis Parrington Recalls the Spirit of the Age,' in The Progressives, ed. Carl Resek (New York, 1960), 3-19. More recent examples of this tradition include Richard Hofstadter, The Age of Reform: From Bryan to F.D.R. (New York, 1956) and Arthur Schlesinger, Jr., The Age of Roosevelt, 3 vols. (Boston, 1956-60). See also the following commentators on Progressive historiography: Richard Hofstadter, The Progressive Historians: Turner, Beard and Parrington (Chicago, 1979); Arthur S. Link and Richard L. McCormick, Progressivism (Arlington Heights, Ill., 1983); and Arthur Mann, ed., The Progressive Era: Major Issues of Interpretation (Hinsdale, Ill., 1975).

Other historians, however, have been more interested in analyzing the results of the interplay of the pluralistic factors that helped shape reform, and they have reached markedly different conclusions about the significance of these developments. Although scholars following this approach are representative of various social outlooks, they have generally agreed about the important roles that special interest groups played in influencing the formulation of public policy. Their studies have often concluded that reform neither strengthened democracy nor ensured greater social equity. Instead, change was depicted as the result of a dialectic of competition and compromise among powerful interest groups.2

2 See Louis Galambos, America at Middle Age: A New History of the United States (New York, 1972); Ellis W. Hawley, "Herbert Hoover, the Commerce Secretariat and the Vision of the Associative State,' Journal of American History 61 (June 1974): 116-40; Morton Keller, "The Pluralist State: American Economic Regulation in Comparative Perspective, 1900-1930,' in Regulation in Perspective: Historical Essays, ed. Thomas K. McCraw (Cambridge, Mass., 1981); Jonathan Lurie, The Chicago Board of Trade, 1895-1905: The Dynamics of Self-Regulation (Urbana, Ill., 1979); Thomas K. McCraw, "With the Consent of the Governed: SEC's Formative Years,' Journal of Policy Analysis and Management 1:3 (1982): 341-70; and Robert K. Wiebe, The Segmented Society: An Introduction to the Meaning of America (New York, 1975). See also Gabriel Kolko, The Triumph of Conservatism: A Reinterpretation of American History (New York, 1963) for a markedly different conclusion about the significance of pluralism.

This study will consider these interpretations in light of the experience of the public accounting profession as it sought to secure a role for its expertise in the structure of national economic regulation during the first decades of the twentieth century. It will focus on the actions taken by leaders of two professional associations, the American Association of Public Accountants (AAPA), and its successor, the American Institute of Accountants (AIA), at two important junctures in the history of reform. The first involved the establishment of the Federal Reserve Board (FRB) and the Federal Trade Commission (FTC) under Woodrow Wilson's New Freedom; the second concerned the organization of the Securities and Exchange Commission (SEC) by Franklin D. Roosevelt's New Deal. In assessing these experiences, this article concentrates on identifying the changing circumstances and political contexts that gave rise first to an associationalist response and then, later, to a statist response to the problem of ordering the nation's financial markets.

The initial sections of this study examine two perceived failures in the progress of public accountancy that influenced its leaders' response to the New Freedom: the many deficiencies which they felt had weakened the contemporary structure of professional governance, and the factors that prevented the profession from obtaining a secure role in national economic regulation during the Wilson era. The next section of this article illustrates how these two problems and the perceived threats to professional autonomy associated with certain of the Wilsonian reforms motivated the profession's leaders to develop a new form of associationalism. The resultant reorganization of the accountancy profession on the eve of the First World War succeeded in deflecting government's attempt to broaden the scope of its regulatory authority and substituted a more tightly controlled form of associationalism that sought to protect the public interest. The next two sections of this study answer two related questions: Why did the new associationalism fail to meet the challenges of the 1920s? How did the later statist intervention on the part of the New Deal help accountants secure the regulatory roles that they had long pursued? The conclusion compares the accountants' experience with other contemporary efforts to regulate economic affairs and indicates in what ways these events support the pluralist or Progressive models.


The course of professional development in the years prior to the First World War was viewed with some dismay by many of public accountancy's most important leaders. Two major developments shaped the profession's governance during this period: the rise of state professional licensing, and the organization of the AAPA, a national federation of practitioner associations which sought both to promote and to order the new profession. These achievements left unresolved, from the perspective of many leaders, other important issues that created negative perceptions among business and government leaders about the credibility of the public accountants' claim to professional status.

New York's public accountancy licensing law, enacted in 1896, served as a model that was widely emulated by other states prior to the First World War. It set out a method for certifying practitioner competence but, unlike the more established professions of law or medicine, the New York law did not limit practice to license holders. Instead, it restricted the use of the profession's new title of competence, "Certified Public Accountant.' By 1915, thirty-nine states had granted legal recognition to the new profession.3

3 Ralph Lester Boyd, "A Study of CPA Legislation in the United States, 1896-1940' (Ph.D. diss., University of Illinois, 1941), 26-35, 46-70, 77-80, and 192-200.

The AAPA was a key institution in advancing public accountancy legislation during this period. Originally established in New York in 1887 as a national representative for the accounting profession, the AAPA played an important role in securing that state's path-breaking legislation. In 1905, it merged with several other state professional associations into a national federation. Adopting the AAPA name, the new federation tried to standardize the organization of the profession by encouraging practitioner groups in each state to adopt the New York state society bylaws and state licensing bill as national models.4

4 James Don Edwards, The History of Public Accountancy in the United States (East Lansing, Mich., 1960), 70-72; Gary J. Previts and Barbara D. Merino, A History of Accounting in America: An Historical Interpretation of the Cultural Significance of Accounting (New York, 1979), 142-44; Norman E. Webster, comp., The American Association of Public Accountants: Its First Twenty Years, 1886-1906 (New York, 1954), 291-96; George Wilkinson, "The Genesis of the CPA Movement,' The Certified Public Accountant 8 (Oct. 1928): 297-300, and Wilkinson, "Public Accountants in the States,' The Accountant, 12 Dec. 1903, 1508-10.

Besides advancing legislation, the federated AAPA served as a vehicle for promoting accord between two important factions which vied to dominate practice. Each was united on the basis of national identity and competed for leadership, particularly through their rival efforts in sponsoring state licensing legislation. The "American' faction was led by Charles Waldo Haskins, nephew of Ralph Waldo Emerson and co-founder of the prestigious firm of Haskins & Sells. This faction's power base was the New York State Society of Certified Public Accountants, the largest of the state professional organizations. The American faction's rivals were the British chartered accountants and their American allies, led by Arthur Lowes Dickinson of Price Waterhouse and Company. The power base of the British faction was centered first in the Illinois Society of Certified Public Accountants and, later, in the AAPA prior to its confederation.

The new federal structure adopted by the AAPA helped to moderate the competition between these factions by diffusing power broadly among its constituent associations. No single group had sufficient power to dominate this representative organization. Policy formulation required the concurrence of the majority of the constituent associations, which were anxious to preserve their autonomy.5

5 Paul J. Miranti, "From Conflict to Consensus: The American Institute of Accountants and the Professionalization of Public Accountancy, 1886-1940' (Ph.D. diss., Johns Hopkins University, 1985), chaps. 2 and 3; Previts and Merino, History of Accounting, 139-43. For practitioner backgrounds, see Cyclopedia of National Biography, s.v. "Charles W. Haskins'; William George Jordan, Charles Waldo Haskins: An American Pioneer in Accounting (New York, 1921). For Dickinson's background, see C. W. DeMond, Price Waterhouse and Company in America: A History of a Public Accounting Firm (New York, 1951), 47-49, 50-51; and also Thomas J. Burns and Edward N. Coffman, The Accounting Hall of Fame (Columbus, Ohio, 1967), 18-19.

New factors nevertheless emerged to divide accounting practitioners, and two major classes of practitioners soon became distinguishable. On one hand, an elite group of accountants were beginning to build large practices of national scope. Its members were primarily from the Northeast, and they shared well-established American backgrounds of several generations' duration. This group also included immigrant members of the prestigious Institute of Chartered Accountants (ICA) from England and Wales.

In addition to practice size and social background, the status of the accounting elite also stemmed from the caliber of their clients. During the late 1890s, opportunities for public accountants broadened, as well-known accounting firms were called upon by leading American bankers to certify the financial statements included in the prospectuses for the corporate securities they sold in London. As a consequence, the leading firms gradually took on railroads, the larger insurance companies, and the emerging center companies being formed through the industrial consolidations of this period as their most important clients.

The elite's status also derived from its members' virtuosity in performing research and proposing solutions to their clients' complex accounting problems. Their most prestigious clients were often leaders in the development of new technologies or innovative methods for managing business. The accountants had to be adept at formulating new procedures that gave accounting expression to their clients' technical or managerial innovations. One example of this achievement was Price Waterhouse's success in 1902 in advising the newly organized United States Steel Company, the nation's first billion-dollar corporation, on how to prepare financial statements that best reflected its extensive business.6

6 DeMond, Price Waterhouse, 10-12; Edwards, History of Public Accountancy, 77-78; Paul Grady, ed., Memoirs and Accounting Thought of George O. May (New York, 1962), chap. 2; Miranti, "From Conflict to Consensus,' 37-47; Previts and Merino, History of Accounting, 178-79.

The smaller firms, on the other hand, were much less specialized and under little pressure to use their professional skills in innovative ways. Nor did they have much opportunity to offer auditing services to their clients. These practitioners typically were generalists providing routine accounting services to small and uncomplicated businesses. Like that of their clients, the scope of their practices was generally local.

Many local practitioners were also from social backgrounds more varied and less prestigious than the elite's, who viewed them as drawn from the less progressive elements in American society. They included large numbers of American-born practitioners scattered throughout the small, agricultural communities of the South and West, where educational standards were not yet highly developed. They also included members of the "new' immigrant groups from southern and eastern Europe, whose unfamiliar cultural traditions were viewed skeptically by many of the elite.7

7 Boyd, "Study of CPAL Legislation,' 6-15; Edwards, History of Public Accountancy, 136-41; Miranti, "From Conflict to Consensus,' 232-34, 238-39. See also John Higham, Strangers in the Land: Patterns of American Nativism (New Brunswick, N.J., 1963), for discussion of nativist reaction to new immigration from southern and eastern Europe.

Because of their dissimilarities, these factions viewed the course of professional development differently. From the standpoint of many local practitioners, state licensing was a great success: it had helped them achieve status. They felt that in the future their professional associations should help them build their practices by increasing the awareness among small business operators of the useful services that accountants could provide.

The leaders of national firms were not as sanguine about the results of this first episode in profession-building. Many were concerned about the educational backgrounds of some practitioners and the unevenness in the quality of many states' certifying examinations. Some states, particularly in the South and West, had no educational requirements. It was even possible in a few jurisdictions to qualify for a license without any practical accounting experience. The elite leaders considered some state licensing examinations insufficient to assure a high level of practitioner competence, and they suspected that in a few states practitioners were being granted licenses as a result of their political connections and not on the basis of demonstrated professional competence. Finally, they noted that some licensing authorities were composed of people who were not even in the accounting profession.8

8 AAPA Minutes of Board of Trustees, New York, 10 April 1916, 1-63; AAPA Year Book of Annual Meeting, 1916 (New York, 1916), 108-16.

The elite also gradually came to view state regulation negatively because it threatened to limit their firms' access to local markets. Their problem with state regulation was similar to that faced by their larger clients with nationwide operations. Some states did not provide for reciprocal licensing of those certified in other jurisdictions. New York, for instance, a key state from the perspective of the elite, had no reciprocity provision in its law during this period. Chartered accountants and those certified in other states had to pass New York's own difficult licensing examination in order to advertise themselves as "certified public accountants' there. The danger also existed that at some future date legislation might be revised to limit practice to local licensees. Finally, the prospects of inducing the state societies to lobby for reciprocity diminished as many of these entities became controlled by local practitioners who feared the growing market dominance of the national firms.9

9 AAPA Minutes of Board of Trustees, New York, 10 April 1916, 44-46; Boyd, "Study of CPA Legislation,' 77-80, 192-200; Miranti, "From Conflict to Consensus,' 175.

Nor was the elite sympathetic to the notion that professional associations should be dedicated to the promotion of practitioner services among small businesses. Instead, they felt that competition for business was excessive and that the resultant price-cutting threatened to undermine the economic basis of practice. The practice-building techniques employed by some accountants, such as newspaper advertising or the engagement of professional salespeople, also distressed them. These modes of promotion, long proscribed by the older British profession of chartered accountancy, seemed to place accountancy on the plane of mere business, rather than that of the learned calling that the elite concieved it to be. Because of the AAPA's decentralized structure, its leaders had little control over member activities. Although a limited code of ethics had been established, its enforcement was relegated to the constituent state societies. Efforts to broaden the scope of the code to prohibit what the elite viewed as "unprofessional' techniques of promoting practice were blocked by the state associations.10

10 AAPA Year Book 1915, 81-85; and see also American Institute of Accountants, Annual Year Book, 1918 (New York, 1918), 100-101; AIA Year Book 1919, 75, 102; AIA Year Book 1920, 127; AIA Year Book 1921, 70-71; AIA Minutes of Council, 20 Sept. 1921, 39-85. See also Ernst & Ernst: A History of the Firm (Cleveland, Ohio, 1960), 3-6, 20-23, 36-40, 57-58; Miranti, "From Conflict to Consensus,' 137-41, 210-17; and Previts and Merino, History of Accounting, 205-11.

The elite was also concerned that the AAPA's lack of a strong central focus of authority might permit it to become a sounding board for opinions offensive to client groups or the advocate of controversial positions on public interest questions. Elite leaders tried to minimize this danger by taking an active interest in the affairs of the association's periodical, the Journal of Accountancy, but they were not always able to control its content. Prior to America's entry into the First World War, for example, many of the elite, who strongly identified with the Allied cause, were chagrined by the Journal's publication in 1915 of Elijah Sells's pacifist article outlining a plan for international peace and disarmament.11

11 Barbara D. Merino, "The Professionalization of Public Accountancy in America: A Comparative Analysis of the Contributions of Selected Practitioners, 1900-1925' (Ph. D. diss., University of Alabama, 1975), 115, 379-80, and 140nn 180-82, relating to Joseph Sterrett's involvement with the Journal of accountancy; Miranti, "From Conflict to Consensus,' 180-83; Elijah Watt Sells, "A Plan for Peace,' Journal of Accountancy 19 (Feb. 1915): 85-89. Also see in the same edition of the journal an editorial entitled, "A Practical Plan for Peace.'

The differences in outlook between local and national practitioners which made policy formulation so difficult in the AAPA were further exacerbated by the inclusion within its membership of representatives of allied professional groups. Accounting educators and accountants employed in industry had concerns different from those of the public accountants, and they were eager to see the AAPA develop programs relevant to their own professional interests. They were not very concerned about the matters that disturbed the leading practitioners.12

12 AAPA Year Book 1916, 108-16.

The elite wanted a new form of associationalism whose leaders had the power to correct the many deficiencies they perceived. They viewed the prestigious and successful ICA in Britain as a desirable model to emulate. Although Parliament had not provided the ICA with a monopoly over public accountancy, it did grant a charter empowering the ICA leadership to establish its own qualifying examinations and to order the activities of its members through the operation of a strong code of ethics.13 A more tightly controlled organization, the American leaders believed, could establish higher practitioner qualifications, support accounting research, curb competition, and keep out those deemed undersirable. The development of a new regulatory structure by the Wilson administration to order the nation's financial markets gave the elite leaders of the accounting profession their opportunity to implement these changes.

13 Edgar Jones, Accountancy and the British Economy, 1840-1980: The Evolution of Ernst & Whinney (London, 1981), 19-37, 51-57, 67-73, 111-16.


A second concern that conditioned the elite's reaction to the New Freedom was their early failure to secure any substantial role in the emerging structure of national economic regulation. Many accountants believed that their special skills could be particularly useful to government. The analysis of accounting data would aid decision making and thus help enhance the efficiency of government operations. Moreover, accountants had the requisite training and experience to provide guidance on efforts to standardize accounting data and thereby make it comprehensible. Finally, they were also skilled auditors who could verify the reliability of economic information on which important decisions were based.

The accountants' efforts were most successful when they provided their services to enhance the efficiency of government operations, and they made valuable contributions during this period. The firm of Haskins & Sells had developed accounting systems for the Treasury Department (1895) as well as for many municipalities, including Chicago (1901) and Atlanta (1903). In 1908 a special committee of the AAPA served as a consultant to the Keep Commission in its efforts to develop accounting and budgetary systems for the new agencies organized by the administration of Theodore Roosevelt, including the Bureau of Corporations, the Forest Service, the Geological Survey, the Isthmian Canal Commission, and the Reclamation Service. In the same year, Price Waterhouse also had established a cost accounting system for the Post Office Department. The William Taft administration's Committee on Economy and Efficiency included among its advisors Joseph E. Sterrett of Price Waterhouse and Elijah Sells. Accountants were also instrumental in convincing the Internal Revenue Service (IRS) in 1913 to allow the use of the accrual basis of accounting as well as the cash basis that was originally proposed.14

14 AAPA Year Book 1907, 29-31; AAPA Year Book 1908, 90-91 and 146-58; Burns and Coffman, Accounting Hall of Fame, 76-77 for Sterrett biography; DeMond, Price Waterhouse, 85-86; "A Federal Income Tax,' Journal of Accountancy 15 (Jan. 1913): 60; Charles W. Haskins and Elijah W. Sells, Report on the Methods of Accounting of the City of Chicago (New York, 1901); Jordan, Haskins, 15-49.

Less satisfying, however, were efforts to develop opportunities for accountants as standardizers and verifiers of financial data. Although many large firms were audited by independent public accountants, this was not the result of any government requirement. It arose, as noted above, from a sensitivity on the part of American bankers to the requirements of the London financial market. After the insurance scandals in New York in 1906, an AAPA committee jointly chaired by Arthur Dickinson and Elijah Sells unsuccessfully lobbied state insurance commissions in both New York and Massachusetts to require independent audits of companies in their jurisdictions. The following year Dickinson was again frustrated in his attempts to convince the Interstate Commerce Commission (ICC) to require the nation's railroads to file statements audited by independent accountants.15

15 AAPY Year Book 1906, 110-11; AAPA Year Book 1907, 12; John L. Carey, The Rise of the Public Accounting Profession, 2 vols. (New York, 1969-70), 1:57-60; Grady, George O. May, 29.

These efforts were unsuccessful because of the commitment of key government officials to Continental rather than British notions of industrial regulation. At the ICC, for instance, Chief Statistician Henry Carter Adams, holder of the first doctorate granted by Johns Hopkins and professor of economics at the University of Michigan, had been favorably impressed by reporting practices pioneered in Prussia. As a student in Berlin in 1878, Adams had participated in a seminar on economic statistics led by Ernst Engel, chief of the Prussian Statistical Bureau. Prussian railroads made periodic reports using forms and following uniform accounting methods prescribed by government. Regulatory agencies could verify this reported data through the investigations conducted by their staff of field agents. Carter followed this example at the ICC; so did the insurance regulators in New York.16

16 Dictionary of American Biography, s.v. "Henry Carter Adams'; Joseph Dorfman, "Henry Carter Adams: The Harmonizer of Liberty and Reform,' in Relations of the State to Industrial Action, and Economics and Jurisprudence, ed. Joseph Dorfman (New York, 1954), 11. See also ICC, Twentieth Annual Report of the Statistics of Railways (Washington, D.C., 1909), 9-21, for details of accounting reports brought about by the Hepburn Act. See ICC, Twenty-Fifth Annual Report (Washington, D.C., 1912), 7-19, for an example of the work of this agency's Division of Inquiry. For the insurance industry, see the following: R. C. Buley, The Equitable Life Assurance Society of the United States, 2 vols. (New York, 1967), 1: 539-698; Morton Keller, The Life Insurance Enterprise, 1885-1910: A Study of the Limits of Power (Cambridge, Mass., 1963), 245-64; and John A. Garraty, Right Hand Man: The Life of George W. Perkins (New York, 1957), 163-86.

Many public accountants rejected the government's standardization effort because it was based on what they believed was the specious notion that industrial accounting should follow uniform methods which, they felt, would make accounting expression too rigid. They conceived of accounting essentially as an art whose utility depended upon the expert opinion of the master practitioner. Even companies operating in the same industry, they felt, were not identical; accounting expression had to remain flexible to reflect the uniqueness of individual enterprises. Flexibility was also necessary to allow accounting to accommodate the innovations driving America's economy.

Client groups objected to uniform accounting as well as to audits by government agents. This resistance was first apparent among the railroads. Some were concerned that uniform accounting would lower reported earnings and their companies' standings in the financial markets; others feared that it might provide proprietary information to competitors. Many railroad leaders were concerned about the worrisome implications of the access ICC field agents had to their companies' business records.17

17 For criticism of uniform accounting, see George O. May, "Nature of Accounting,' in Twenty-Five Years of Accounting Responsibility, ed. B. C. Hunt (New York, 1936), 2: 305-18; A. L. Dickinson, Accounting Practice and Procedure (New York, 1913), 31-33, for need of practitioner judgment in accounting; and also the comments of Homer A. Dunn of Haskins & Sells in AAPA Year Book 1908, 166-67. And see discussions in Previts and Merino, History of Accounting, 185-90 and in Barbara D. Merino and T. Coe, "Uniformity in Accounting: An Historical Perspective,' Journal of Accountancy 145 (Aug. 1978): 62-69.

Thus, on the eve of the Wilson administration's efforts to broaden the scope of government's economic regulation, many elite accountants were anxious to see change. They were negative about the course of professional development. They were dissatisfied with their role in the contemporary structure of corporate governance. The Wilsonian reforms brought these matters to a head and encouraged a radical reorganization of the profession that strengthened the elite's power and developed what they believed was a more viable form of associationalism.


The establishment of the Federal Reserve Board and the Federal Trade Commission by the Wilson administration brought about circumstances that motivated the AAPA's elite leaders to develop new strategies and structures for ordering public accountancy. Although its leaders tracked the legislative developments that gave birth to these new agencies, the events that most influenced them occurred after the legislation was enacted and the details of administration were being worked out. Because it was a loose-knit federation made up of over a dozen associations, the AAPA had difficulty in forming a consensus about the emerging legislation. Initially, it did little beyond sending representatives to Washington to meet with government officials and gather information about the progress of legislation. Otherwise, it seemed content to follow the lead of the United States Chamber of Commerce, of which it was a member.

The first reform proposal that affected public accountancy grew out of the FRB's efforts to assure the liquidity of the commercial paper that it discounted for member banks. The regulators wanted member banks to present for discount paper whose quality had been evaluated on the basis of an objective analysis of financial condition rather than through subjective judgments about the borrower's character. To provide assurance that lending officers analyzed reliable data in forming their credit judgments, the FRB wanted borrower statements certified by public accountants.18

18 See the following articles published in the Journal of Accountancy: "Certificates of Borrower Statements' 18 (Aug. 1914): 128-29; F. G. Colby, "Borrowers Certified Statements as a Basis for National Currency' 18 (Dec. 1914): 418-26; Charles S. Hamlin, "The Federal Reserve Act' 22 (Nov. 1916): 329-37. See also Henry P. Willis, The Federal Reserve System: Legislation, Organization and Operation (New York, 1923), 905-11.

The central bankers, however, had misgivings about the qualifications of some public accountants. Leading New York note brokers had conveyed to the FRB officials their concerns about the competence and good reputation of some contemporary practitioners. This negative perception may also have been encouraged by the elite accountants through their contacts in Washington--particularly with Frederic Delano, vice-chairman of the FRB, and Chairman Joseph E. Davies and Commissioner Edwin N. Hurley of the FTC. To minimize the danger of relying on the work of practitioners lacking either competence or integrity, the FRB in 1915 planned under its proposed "Circular Thirteen' to evaluate the credentials of all accountants who wished to practice before it. Those found satisfactory were to be signified "zone experts,' and their work could be accepted by member banks.19

19 See the following articles in the Journal of Accountancy: Charles A. Peple, "Statements of Borrowers from the Viewpoint of the Federal Reserve Bank' 21 (June 1916): 410-23; and "Registration of Accountants' 23 (Aug. 1917): 185-89. See also Carey, Rise of the Public Accounting Profession, 1: 129-34; Cyclopedia of National Biography, s.v. "Frederic Delano,' "Edwin N. Hurley,' and "Joseph E. Davies.' For the rejection of statement certification by the FRB, see Willis, Federal Reserve, 905-19, 936-37.

This FRB proposal encouraged the adoption of a second regulatory initiative being considered by the FTC: the mandating of uniform accounting for manufacturing and merchandising enterprises. Liberal reformers close to the Wilson administration, such as attorneys Samuel Untermyer and Louis D. Brandeis, who had been active in the Pujo Commission's investigation of the "money trust,' favored the passage of legislation mandating financial reporting by these enterprises. As in the earlier case of the railroads, accounting information was thought vital to provide the economic insights necessary for effective regulation. Brandeis recognized the importance of financial disclosure, and, initially, counseled the administration to press for legislation requiring industry to provide it. Besides benefiting regulators, uniform accounting, it was thought, would also serve the practical purpose of making financial statements more comprehensible to credit analysts and investors.20

20 Louis D. Brandeis, Other People's Money and How the Bankers Use It ([1913-14]; reprint, New York, 1967); Arthur S. Link, Wilson: The New Freedom (Princeton, N.J., 1958), 202, 219; and Thomas K. McCraw, Prophets of Regulation: Charles Francis Adams, Louis D. Brandeis, James M. Landis, Alfred E. Kahn (Cambridge, Mass., 1984), 114-18. See also Dictionary of American Biography, s.v. "Louis Dembitz Brandeis' and "Samuel Untermyer.'

Although the AAPA supported the FRB's statement certification proposal, it did not favor either the zone expert or uniform accounting plans. Members feared that federal regulation of practitioners would undermine professional autonomy. Instead of professional people regulating themselves, politicians with little concern for or understanding of professional accounting matters would control decisions. The accountants opposed uniform accounting both because it lacked flexibility and because they believed that many businesses did not have internal accounting systems adequate to ensure the timely preparation of financial statements.

Besides accountants and businesspeople, farmers also opposed the primary requirements of Circular Thirteen. Their political representatives justified the farmers' opposition with arguments similar to those advanced by the accountants. Few farmers, they pointed out, kept elaborate books of account. The preparation of financial statements was not a common practice in agriculture and requiring it for credit purposes was considered too expensive and overly burdensome.21

21 AAPA Trustees' Minutes, 18 Sept. 1916, 108-30; FTC, Annual Report 1916 (Washington, D.C., 1916), 14-18; and Parker, Federal Reserve, 909-19.

The leaders of the Wilson administration subsequently decided not to press for the reforms embodied in the original version of Circular Thirteen because of the changing political imperatives associated with the approaching presidential election and the public's growing concerns about foreign affairs. During its first three years in power, the administration had expended much of its political capital in achieving the primary legislative objectives of the New Freedom. Opposition, as we have seen in the reactions of accountants, businessmen, and farmers to the FRB's plans, was beginning to mount against certain salient aspects of these reforms. The need to build political support for the nearing 1916 presidential campaign seemed to serve as a strong incentive for the administration to forgo its desire to widen the scope of regulation and, instead, to concentrate on establishing better relationships with important business groups. Furthermore, new public concerns about neutrality and military preparedness resulting from the expanding European war began to supplant economic regulation as a national political issue.

A similar change at the FTC was also prompted by Louis Brandeis, Wilson's chief economic advisor prior to his appointment to the Supreme Court in 1916. Recognizing the need to build support for the approaching presidential campaign, Brandeis advised the FTC's leaders to dedicate a greater proportion of their limited resources to develop politically popular programs to aid small businessmen, who formed an important constituency for the Democratic Party. As a consequence, the FTC's direction with respect to accounting changed radically. The thrust toward uniform financial accounting, which could have helped regulators monitor trends in industrial concentration and thus assisted in antitrust enforcement, was laid aside as too divisive. New emphasis was placed on advancing cost accounting projects that sought to help small business operators determine the costs of the products and services they sold.22

22 Link, Wilson: The New Freedom, chaps. 13 and 14; McCraw, Prophets of Regulation, 118-35.

The higher priority proposed for cost accounting found strong support within the FTC, particularly from Chairman Davies and Commissioner Hurley. They believed that inadequate cost information was a major cause of small business failure, and they strongly advocated programs designed to provide guidance to small business operators on the development of cost accounting systems. They also felt that uniform financial accounting was not feasible until many more companies, both large and small, developed effective product cost systems. The FTC's leaders were supported in this view by Robert H. Montgomery of the firm of Lybrand, Ross Bros. & Montgomery and by other members of the AAPA's Committee on Federal Legislation. The drive for better cost information also appealed to other FTC bureaucrats, who felt that such information could be useful in controlling price inflation.23

23 AAPA Year Book 1916, 107-8; G. C. Davis, "The Federal Trade Commission: Promise and Practice, 1900-1929' (Ph. D. diss., University of Illinois, 1969), chaps. 6-8; FTC, Annual Report 1916, 14-18, and Annual Report 1917, 21-23; Grady, George O. May, 36-37.

The new emphasis on cost accounting and the desire to draw closer to the AAPA may also have reflected a growing perception within the FTC of the need for the cooperation and support of business groups to prepare for possible future involvement in the European war. A few months later, American industry was drawn into a massive mobilization effort, and a vast network of industrial associations played key roles in implementing the policies established by the War Industries Board (WIB) during the coming conflict. Indeed, as early as 1916 the AAPA had already formed a special committee to serve the Naval Consulting Board, which presaged the association's later involvement with the WIB.24

24 Carey, Rise of the Public Accounting Profession, 1: 141; and Robert D. Cuff, The War Industries Board: Business-Government Relations during World War I (Baltimore, Md., 1979).

The AAPA accommodated their activities to these policy changes at the FRB and the FTC in two ways. First, they donated their expertise to help the two agencies achieve their redefined objectives. They contributed the publication, "Approved Methods of Preparing Balance Sheet Statements,' written by John C. Scobie of Price Waterhouse, to the FRB in 1917. This FRB bulletin, which the accountants periodically updated, presented standard formats of financial statements for a commercial or industrial enterprise. The Association's Committee on Relations with Credit Men also prepared bulletins that sought to educate businessmen and bankers about the benefits of having accountants certify their financial statements. Another AAPA committee helped prepare for the FTC the cost accounting guides that Davies and Hurley desired. This series included guides for lithographers, typesetters, pipe manufacturers, paper and pulp processors, chair manufacturers, and retail merchants.25

25 For credit men, see AAPA Year Book 1914, 234 35; and AAPA Year Book 1915, 211-12. See also "Uniform Accounting,' Journal of Accountancy 22 (June 1917): 410-33; AAPA Year Book 1916, 107-8; Carey, Rise of the Public Accounting Profession, 1: 132-35; Grady, George O. May, 36; and Previts and Merino, History of Accounting, 187-90.

The second response was a decision reached by the elite leaders of accountancy to reorder the national organization. The FRB's concerns about practitioner competence had motivated Joseph Sterrett in 1915 to propose the formation of the Special Committee on the Form of Organization of the Association. Its mission was to develop a plan to improve the profession's quality by restructuring the AAPA into a more tightly controlled entity, thereby dissuading the government from its proposed encroachment on professional prerogatives. This committee completed the formulation of its plan before it became clear that the zone expert proposal would fail; yet, even after this threat was removed, the elite implemented the planned reorganization in order to control more tightly the progress of professional affairs.

Under the reorganization plan adopted in September 1916, a new organization was formed, initially called the Institute of Accountants in the United States of America and later shortened to the American Institute of Accountants (AIA). Unlike the old AAPA, the new body was not a federation, and it no longer included the state professional societies as subsidiaries. Power was concentrated in the hands of a central executive committee dominated by representatives of the larger firms. These leaders strengthened their control in the following years by expanding the scope of the association's code of professional ethics. Accountants who were AAPA members as of September 1916 continued as members of the AIA. A state CPA license, however, no longer guaranteed admission into the new organization. In 1917, the AIA developed its own qualifying examination and other criteria for admission, and it also limited membership exclusively to practitioners. The influence of accounting educators and industrial accountants was eliminated by allowing these groups only associate status.26

26 AAPA Year Book 1915, 147-50, 207; AAPA Year Book 1916, 41-43, 108-16; Carey, Rise of the Public Accounting Profession, 1: 122-26.

The elite's valuable contributions to the war effort created a favorable impression among leaders in government and business about the usefulness of accountants' specialized services and the program of associationalism they sponsored. During the First World War, the AAPA aided the national defense by creating committees to help the War Department develop accounting systems for cantonments and the WIB develop methods for accounting for cost-plus procurement contracts. Several professional leaders also served in key wartime positions: George O. May of Price Waterhouse on the War Loan Staff of the Treasury, his partner Joseph Sterrett at the Excess Profits Review Board, Charles S. Ludlam of Haskins & Sells as the American representative to the Inter-Allied Transactions Committee, and Robert Montgomery at the WIB.27

27 AIA Year Book 1918, 112-13; Grady, George O. May, 36-37.

The experience of the 1920s would reveal, however, that many of these gains were illusory. The new associationalism left unanswered too many questions that became increasingly important with the return to peace. It failed to establish a mechanism for standardizing financial accounting and thus did not alleviate the public's confusion about the securities markets. It failed also to define adequately the relationship between the accountants and the investing public whom they ultimately served. Finally, this reordering alienated a large portion of the new profession by defining the boundaries of the community of competent practitioners too narrowly. As a consequence, a powerful rival group emerged to challenge the AIA's leadership, and the profession was again weakened by internecine competition.


The structure of governance that the elite had fashioned to ward off the threat of federal encroachment on the profession's autonomy achieved only limited success after 1916. One of the AIA's most notable accomplishments was its effort to raise admission standards for the profession. By 1929, the majority of state licensing boards had adopted the AIA's uniform certifying examination. The Institute also encouraged many states to adopt more stringent educational and experience requirements. In addition, it established a valuable technical library as well as bibliographic and publishing services for accountancy and tax.28

28 See AIA Year Book 1917, 132 and 147 for establishment of the research library; Year Book 1920, 114-15, for states participating in uniform licensing examination; and in that and in that same number, 132-33, for discussion of new bibliographic service. For contemporary discussions of broadening the scope of ethics rules, see AIA Year Book 1920, 118-19; and Year Book 1921, 70-74. See also "Ethics,' The Certified Public Accountant 1 (March 1920): 20; and Miranti, "From Conflict to Consensus,' 210-17.

The elite leaders, however, underestimated the negative consequences brought about by the reorganization, which was viewed by many state-certified practitioners as a threat to their professional status. Many local practitioners also feared the power that the AIA's expanded code of ethics granted to its elite leaders. The new rules aimed at curbing market competition were viewed as attempts by the elite to secure their market dominance. Nor was the association's heavy emphasis on accounting research appealing to accountants whose practices typically were limited to routine and uncomplicated services. As a consequence, large numbers of local practitioners (and even some of the elite) joined a rival association, the American Society of Certified Public Accountants (ASCPA), formed in 1922.29

29 "The Aims of the Society,' The Certified Public Accounant 3 (Jan. 1920):1-5; and Carey, Rise of the Public Accounting Profession, 1: 230-34, 325-27.

The emergence of this rival group diminished the political influence of the AIA and confused the public as to the proper source of authority in public accountancy. The loss of leadership became evident during the early 1920s when the elite association abandoned its plan for securing a congressional charter establishing it as the profession's sole certifying agency in place of the state licensing boards.30 More serious was the inability of the profession's elite leaders to standardize financial accounting. Both these issues became increasingly critical during the postwar stock market boom. Innovative modes of financing and organizing business had created a host of accounting problems whose solutions had been left to the discretion of practitioners and their clients. Important accounting questions--such as measuring the income of public utility holding companies, valuing shareholder's equity where no par value stock was issued, and the proper methods of depreciating capital assets--were answered in different and often inconsistent ways. This lack of standardization reinforced an increasingly negative public perception of the adequacy of corporate financial reporting.

30 AIA Council Minutes, 10 April 1922, 11; and Miranti, "From Conflict to Consensus,' 183-86, 241-42.

During this period the most outspoken critics of the public accountants were commercial bankers and college educators. Commercial lending officers, working through their professional association, the Robert Morris Associates, formed a special committee in 1922 to co-operate with the AIA to address their many mutual concerns about accounting practice.31 More damaging to the good image of the profession were the sharp criticisms of educators. Eric L. Kohler, a practitioner-educator teaching at Northwestern, called on his fellow educatiors in a series of editorials beginning during the late 1920s in the Accounting Review (the official publication of the American Association of University Instructors in Accounting) to undertake research directed at establishing financial accounting standards.32 Unlike Kohler's criticisms, which were directed at a sophisticated audience of educators, the attacks of William Z. Ripley of Harvard University probably had a greater public impact. In his articles, which appeared during 1926 in the Atlantic Monthly, and were later collected in a book, Wall Street and Main Street, he detailed his criticisms of contemporary accounting. His insinuation that some accountants were condoning dubious accounting practices through the issuance of favorable audit reports was particularly damaging.33

31 AIA Year Book 1923, 167-70.

32 E. L. Kohler, "A Nervous Profession,' Accounting Review 9 (Dec. 1934): 4; R. K. Mautz and G. J. Previts, "Eric Kohler: An Accounting Original,' in Eric Louis Kohler: Accounting's Man of Principles (Reston, Va., 1979), 20-25; Stephen A. Zeff, American Accounting Association: Its First Fifty Years (Evanston, Ill., 1966), 30-35.

33 W. Z. Ripley, Main Street and Wall Street (Boston, 1936), 132-34, 151-52. For reaction of public accountants, see G. O. May, "Liability of Accountants,' reprint of letter to the editor of the New York Times, 27 April 1916, in May, Twenty-Five Years, 1: 49-52; and also "Corporate Publicity and the Auditor,' an address presented at the AIA's annual meeting, 22 Sept. 1926, reprinted in ibid., 53-59.

These criticisms were telling because they focused on a serious weakness in contemporary practice--the vulnerability of practitioners to client pressure. Accountants had little leverage to countervail against the improprieties of overly aggressive clients. Concerned accountants could, of course, always elect to resign from engagements with clients who employed dubious accounting to mislead the public, but only the most established practitioners could afford to follow this economically damaging course. Some accountants tried to address the dilemma by resorting to the questionable expedient of providing ambiguous, qualifying language in their certification statements, a practice that also ultimately undermined public confidence.

In addition, practitioners were also unable to establish any institutional focus for the development of financial accounting standards. Part of the difficulty was the aforementioned opposition of clients and the reluctance of practitioners to accept rigid rules. Disagreement was widespread about what underlying principles were "generally accepted.' An AIA committee chaired by Arthur Andersen, for example, tried unsuccessfully for three years to form a consensus on the proper accounting for "earned surplus.'34 Furthermore, it was impossible for the AIA to establish creditable standards as long as the growing ASCPA refused to accept its leadership. Indeed, a danger existed that the rival association might ally itself with accounting educators to develop accounting standards and thus undercut the AIA's efforts. Practitioners also had to secure a base of authority that would enable them to compel clients to adhere to any standards that accountants might promulgate. One solution, proposed by Ripley and disturbing to many accountants, was an increase in the regulatory powers of the FTC.

34 AIA Year Book 1927, 169-71.

Confronted by these constraints, George O. May began in 1926 to develop a strategy to address the public's concerns about financial reporting. In this effort he first joined with other leaders in business, government, and education interested in sponsoring research aimed at identifying solutions to these problems in the Committee on Corporate Relations of the Social Science Research Council (SSRC). May had become active in this organization as a consequence of his friendship with Edwin F. Gay, dean of the Harvard Business School.35 As chairman of this committee, May helped to define the objectives of research designed to assess the implications for America of the increased public ownership of investment securities. This project also drew him closer to William Ripley, who had been designated by the Rockefeller Foundation as the administrator of its grant supporting the project. Attorney Adolf A. Berle, who taught part-time at Columbia University Law School, and Gardiner C. Means, a graduate student in economics at Harvard, conducted the study; their findings were published in 1931 under the title, The Modern Corporation and Private Property.36

35 Grady, George O. May, 57-74, 47-50; Dictionary of American biography, s.v. "Edwin F. Gay'; Herbert Heaton, A Scholar in Action: Edwin F. Gay (Cambridge, Mass., 1952),

36 Beatrice B. Berle and Travis B. Jacobs, eds., Navigating the Rapids, 1918-1971: From the Papers of Adolph A. Berle (New York, 1973), 20-21; Adolph A. Berle and Gardiner C. Means, The Modern Corporation and Private Property ([1932]; revised ed., New York, 1968).

Although the membership of the SSRC committee originally included many who favored a more active role for government in regulating the financial markets, it gradually changed to one dominated by those who favored an associationalist solution. Besides Ripley, Isaiah L. Sharfman, professor of economics at George Washington University, favored a greater government role. Ripley left the committee, however, as a consequence of serious injuries he sustained in a 1927 automobile accident in New York City. He was replaced that year by another educator, James C. Bonbright, professor of finance at Columbia University, who also favored greater government activism.37

37 See Cyclopedia of National Biography, s.v., "Isaiah L. Sharfman.' Sharfman worked for H. C. Adams after he left the ICC and helped to reorganize the Chinese railroad system. See Who's Who in America, vol. 18, s.v. "James C. Bonbright.' Bonbright, a protege of Felix Frankfurter, was appointed a member of the Power Authority of the State of New York in 1931 by Governor Franklin D. Roosevelt. See Frank Freidel, Franklin D. Roosevelt: The Triumph (Boston, 1956), 102-17.

Those who seemed not to favor broadening government's role became a majority by 1928. All were friends or professional associates of the chairman, George O. May. They were united, largely as a result of their war experience, in the belief that private institutions were the appropriate vehicles for solving society's most serious problems. Most had either served on or had close contacts with associational committees involved in military mobilization during the war. Waddill Catchings of Goldman, Sachs had been the chairman of the War Committee of the U.S. Chamber of Commerce; Henry G. Dalton of Pickland, Mathers & Company had served on the Steel Committee of the WIB; and attorney Nicholas Kelley had worked with May on the War Loan Staff of the Treasury.38

38 See Grady, George O. May, 37-38, 44 for Nicholas Kelley. See also Who's Who in America, vol. 15, s.v. "Waddill Catchings'; vol. 18, s.v. "James C. Bonbright' and "Henry G. Dalton'; and vol. 24, "Nicholas Kelley.'

Although the work of Berle and Means is probably best remembered for its analysis of wealth distribution in America in the 1920s and the implications of the growing separation of ownership and control in the modern corporation, they also stressed the need for more objective financial information to assure the equitable and efficient functioning of the financial markets. Their book argued that the groups primarily responsible for adequate financial disclosure were investment bankers, in the flotation of new securities, and corporate directors and managers, in the secondary sale of "seasoned' securities. To ensure that these groups operated in the public interest, the authors called for increased regulatory powers for the New York Stock Exchange (NYSE). Specifically, they cited the necessity of requiring large public companies to file audited financial statements and of mandating some accounting principles to prevent the most flagrant abuses plaguing contemporary financial reporting. Public accountants were also identified as key agents in ensuring the efficient functioning of these regulatory mechanisms. In addition to statement certification, they would also advise the NYSE about accounting matters.39

39 Berle and Means, The Modern Corporation, 264-85.

Given the outlook of the steering committee's members, it is not surprising that the study they sponsored did not envision any significant regulatory role for the federal government. Besides the NYSE, the only other institution thought relevant to the reform of the financial markets ws the legal system. Aggrieved investors, it was suggested, might seek redress in the courts from a firm's investment bankers, directors, or management either under a common law suit for fraud or for violation of the disclosure requirements of a particular state's "blue skies' laws regulating the sale of securities.40

40 Ibid., 271-77, and Parrish, Securities Regulation, 5-36 for limitations of "blue skies' laws.

It was this vision of market governance that May and his AIA colleagues tried to implement. In 1926, the AIA made an initial overture to the NYSE for the joint development of minimal disclosure standards for listed companies. The stock exchange's leadership (reluctant, it seems, to alienate the boards of directors of listed companies) initially rebuffed the AIA. Rigorous requirements might have induced some companies to delist their securities and register at other exchanges which were not so demanding. Instead, the NYSE merely engaged May's firm to act as special accounting advisors to its own Committee on the Stock List.41

41 Carey, Rise of the Public Accounting Profession, 1:163-64; Parrish, Securities Regulation, 35-41.

These proposals were revived, however, after the Great Crash. In 1931, the NYSE began to require listed companies to file annually certified financial statements. During October 1933, the NYSE also accepted the AIA's pamphlet entitled, "Audits of Corporate Accounts,' which promulgated five accounting principles and also presented a standardized accountant's report.42

42 AIA Year Book 1934, 275-76, and 276-79.

Events, however, soon outstripped these efforts to fashion a structure for corporate governance. During its first "Hundred Days' in office, the Roosevelt administration initiated legislative proposals to restore confidence in the depressed financial and commodity markets. Foremost among these efforts was the passage of the Securities Act of 1933, which regulated the issuance of new securities.43 The AIA's alliance with the NYSE became irrelevant as the new legislation progressed through Congress. Reluctantly, its leaders shifted the focus of their activism to Washington.

43 Parrish, Securities Regulation, 47-72.


In the congressional hearings that led to the formulation of the Securities Act of 1933, the AIA played no public role. Its executive director, John Lansing Carey, attributed this silence to a fear that the association might be subjected to hostile questioning by Congress in light of the negative findings of the Senate Banking and Currency Committee's investigation of stock exchange practices, headed by Ferdinand Pecora, and the collapse of the Krueger and Toll empire. Public advocacy also ran the risk of embarrassing the AIA's contemporaneous efforts to form a structure for governance with the NYSE. Finally, any public position taken by the AIA might be refuted by the rival ASCPA, thus revealing the extent of the profession's divisions.44

44 Carey, Rise of the Public Accounting Profession, 1:182-84; see also letter to G. O. May from Lewis Ashman, 19 Dec. 1934, in file "AIA's Special Committee on Development of Accounting Principles, 1934 (1),' in G. O. May Papers, Price Waterhouse & Co., New York. For a description of the Senate Banking and Currency Committee's investigation, see Arthur M. Schlesinger, The Coming of the New Deal (Boston, 1958), chap. 27. For a recent summary of the collapse of the Ivar Krueger international match manufacturing enterprise, see Dale L. Flesher and Tony A. K. Flesher, "Ivar Krueger's Contribution to U.S. Financial Reporting,' Accounting

Review 61 (July 1986): 421-34.

Although the AIA did not actively participate in the hearings, its leaders doubtless concurred with much of Ripley's testimony before the Senate Banking and Currency Committee about the direction reform should follow. He testified that the panic resulted largely from the insufficiency of financial information available to investors. The public's ignorance of the true state of corporate affairs created opportunities for pool operators to manipulate prices and unscrupulous promoters to float overvalued securities. In his view, the crisis might have been avoided had more companies emulated the excellent financial reporting of Price Waterhouse's premier client, the United States Steel Company. Finally, he urged the committee to follow the recommendations in the recently published The Modern Corporation and Private Property in developing regulatory legislation.45

45 U.S., Congress, Senate Committee on Banking and Currency, Hearings on Stock Exchange Practices, Pts. 1-6, 1932-1933, 875-92. May also testified later at this hearing, providing details about the Swedish Match bankruptcy, 1259-74.

The support of the Roosevelt administration for a bill embodying many of the Berle and Means recommendations also explains the accountants' quiescence as Congress framed the first of the two securities acts. The Thompson bill, regulating the issuance of new securities, was drafted by former FTC chairman Huston Thompson. It was promoted by presidential advisor Raymond Moley, a colleague of both Berle and Montgomery at Columbia University. This act sought to protect the public interest by mandating greater financial disclosure; it also held underwriters, directors, and corporate officers primarily responsible for the adequacy of financial reporting.46

46 Parrish, Securities Regulation, 48-51, 65-67.

The AIA maintained a low profile as this bill moved through Congress. Its involvement was limited to the discreet lobbying of its legal representative J. Harry Covington, law partner of George Rublee and the rising Dean Acheson, and the personal attorney of Woodrow Wilson's widow. Only Colonel Arthur H. Carter, managing partner of the firm of Haskins & Sells, AIA, appeared before the Senate Banking Committee on 30 March 1933, as a representative of the New York State Society of Certified Public Accountants. While he praised the Thompson bill, he urged the committee to include a requirement that the financial statements be audited by public accountants--not by a new class of federal agent.47

47 Carey, Rise of the Public Accounting Profession, 1: 183-84; and Cyclopedia of National Biography, s.v. "J. Harry Covington'; quoted in Carey, Rise of the Public Accounting Profession, 1:182-90.

Though favored by the elite, the Thompson bill was not enacted. The provisions assigning civil liabilities exclusively to promoters, directors, and officers were opposed by investment bankers and other business groups. By 5 April 1933, opposition had become so intense that Chairman Sam Rayburn of the House Committee on Interstate and Foreign Commerce advised Moley that the Thompson bill would have to be modified before it could pass. To remedy this impasse, Moley approached Felix Frankfurter of Harvard University Law School and a former advisor to Roosevelt when he was governor of New York, to draft a more acceptable act.

Frankfurter had been skeptical of much of the legislation of the Hundred Days. His reservations about such agencies as the National Recovery Administration (NRA) and the Agricultural Adjustment Administration (AAA) were rooted partly in constitutional concerns and partly in the question of whether it was prudent in a pluralistic society to encourage close relationships between government and industry. What he and his former law students--Thomas J. Corcoran, Benjamin Cohen, and James M. Landis--embodied in their draft legislation during April 1933 was a more sophisticated conception of the roles and responsibilities of professions serving the financial markets.

Their revision was based on the premise that the issuance of new securities was a complex process requiring the joint efforts of many types of experts. Consequently, it was both logical and equitable to hold each of these interdependent groups liable for the performance of its special tasks. Unlike the Thompson bill, which held only directors, officers, and promoters liable for inadequate disclosure, the new Frankfurter doctrine extended liability to experts whose work affected the information contained in the securities registration statement. Specialists such as accountants, attorneys, engineers, and appraisers were made subject to civil, and possibly also criminal, penalties for their malpractice.48

48 Parrish, Securities Regulation, 53-67.

This bill made public accountants more vulnerable to investor litigation. A purchaser who experienced a loss could sue an accountant who certified financial statements that either contained a material misstatement of fact or omitted a material fact. Plaintiffs did not have to prove that their losses resulted from placing reliance on the financial statements or that practitioner negiligence or fraud was involved. More disturbing was the onerous requirement, unlike that of the common law, that expert defendants had, in effect, to prove their innocence. To escape liability the practitioner had to prove either that the plaintiff's loss resulted from causes other than the false statements, or that the audit engagement had been conducted with "due diligence.'49

49 Securities Act of 1933, An Act of May 27, 1933, 48 Stat. 74.

This change in legislative direction caught the public accountants by surprise. On 10 April, the Frankfurter bill was presented to Congress. By widening the scope of liability, it lessened the opposition of investment bankers and business groups. The continued public pressure for action helped to assure the rapid passage of the revised legislation. On 27 May, it was signed into law.50

50 Parrish, Securities Regulation, 66-70.

Not surprisingly, the accountants were outraged. George O. May captured their feelings in his observation:

I cannot believe that a law is just, or can long be maintained in effect, which deliberately contemplates the possibility that a purchaser may recover from a person from whom he has not bought, in respect of a statement which at the time of his purchase he had not read, contained in a document which he did not then know to exist, a sum which is not to be measured by injury resulting from falsity in such statement. Yet, under the Securities Act as it stands, once a material misstatement or omission is proved, it is no defense to show that the plaintiff had no knowledge of the statement in question or of the document in which it was contained, or that the fall in value of the security which he has purchased is due, not to the misstatement or omission complained of, but to quite different causes, such as the natural progress of invention, or even fire or earthquake. The Securities Act not only abandons the old rule that the burden of proof is on the plaintiff, but the doctrine f contributory negligence and the seemingly sound theory that there should be some relation between the injury caused and the sum to be recovered.51

51 May, Twenty-Five Years, 2:69; see also Dickinson, Accounting Practice and Procedure, 230-31 for thoughts of May's partner about the liability of public accountants.


This seemingly radical legislation succeeded in Congress largely because of the pressures felt by political leaders during the Hundred Days for effective solutions to a problem that affected the livelihoods of millions of Americans. It was a direct response to the Great Crash and the subsequent Depression. Like other professional groups closely asociated in the public's mind with the operation of the financial markets, accountancy's prestige was badly tarnished by these events. They provided the justification for the sort of statist intervention that many practitioners had long abjured.

Earlier efforts to regulate accountancy had failed, in contrast, because little public concern about the activities of these specialists had existed. Accountants had been invisible people whose roles the public poorly understood. The criticism that did arise came from other specialists --notebrokers, bankers, and, later, educators. As a consequence, the regulation of accountancy was not a primary objective of legislation but, rather, a secondary one that could be deferred in favor of political priorities more important to the Wilson administration. Finally, the elite's positive contributions during the war reinforced a widely held notion that associationalism represented an effective means for ordering the financial markets.

The accountants soon responded to the New Deal by trying--unsuccessfully --to control the new regulatory framework it was erecting. The creation in 1934 of the Securities and Exchange Commission (SEC) to regulate the financial markets under the Continuous Disclosure Act, the companion legislation to the Truth in Securities Act, raised the hopes of some of accountancy's leaders. This act transferred authority for regulating accounting away from the FTC, an agency about which some client groups may have been concerned because of its antitrust enforcement responsibilities. Two important SEC members, Chairman Joseph P. Kennedy and Commissioner James M. Landis, seemed sympathetic to the position of the public accountants. An AIA committee, in fact, helped the SEC establish much of the administrative framework for regulation.

The resultant era of good feeling, however, was of short duration. The securities acts placed regulators and accountants in adversarial positions which ultimately militated against the formation of cordial relationships. The legislation also threatened professional autonomy by empowering the regulatory agency to establish professional standards for accounting, auditing, and ethics. Tensions increased further after 1935 with the SEC's issuance of its first "stop orders' rejecting the deficient filings of prospective registrants.52

52 Carey, Rise of the Public Accounting Profession, 1:197-98; McCraw, Prophets of Regulation, 169-92; McCraw, "Consent of the Governed,' 341-70; Miranti, "From Conflict to Consensus,' chaps. 15-16; Parrish, Securities Regulation, 200-206; Albert J. Watson, "Practice under the Securities Acts,' Journal of Accountancy 59 (June 1935): 445.

The SEC's encroachment, however, induced the AIA's leaders to develop a new structure and strategy to increase the profession's political leverage. In 1937, the AIA agreed to a merger with the rival ASCPA. It also drew closer to the state professional societies by involving them in the selection of the members of its ruling council. Members of the AIA further amplified their influence by working more closely with leaders of allied professional groups, especially the American Association of Accountants, the representative organization of accounting educators, and the Controllers' Institute, the forerunner of the modernday Financial Executives' Institute.53

53 Carey, Rise of the Public Accounting Profession, 1: 178, 313; Miranti, "From Conflict to Consensus,' chaps. 15-16.

In addition to strengthening the AIA politically, the new unity within the profession and with allied groups enhanced the legitimacy of the AIA's efforts to reassert its authority through the promulgation of professional standards. Committees were established to formulate standards for financial accounting (1938) and auditing (1939). The code of ethics was also broadened with the addition of new rules of independence that defined practitioners' responsibilities to the public more precisely. By 1940, this new strategy had begun to succeed. The SEC supported the AIA's new efforts to set professional standards.54

54 Carey, Rise of the Public Accounting Profession, 2: 12-16, 33-35, 38-41, 60-65; Miranti, "From Conflict to Consensus,' 298-307.

Although many accountants voiced dissatisfaction, the new lawyer-defined roles brought about by the New Deal offered substantial advantages to the profession. The new regulations, in effect, served as an endorsement of accountants' permanent role in the structure of corporate governance. They had been accepted as integral elements necessary for the efficient functioning of the financial markets. The AIA was also recognized by the SEC as the valid representative of the profession. Furthermore, the sanctions in the securities acts gave practitioners the leverage they needed to contain unscrupulous clients who might wish to mislead the public through the issuance of false financial statements. The beginnings of financial accounting standardization helped too, by limiting the opportunities for such clients to employ dubious reporting practices.

Accountancy's success contrasted favorably with the other associationalist experiment of the Hundred Days, the creation of the National Recovery Administration. The Blue Eagle failed, in part, because it operated through an administrative apparatus that became complex and unwieldy. The SEC, on the other hand, remained small by utilizing effectively the existing associationalist frameworks to carry out its policies. The NRA's regulatory activities also aggravated tensions within the industries it regulated; the SEC's action, on the other hand, contributed to the building of practitioner unity. Finally, the NRA failed because it tried to stabilize prices by means that had long been rejected in American constitutional history. The Supreme Court ruled that its efforts to limit competition were in violation of the antitrust statutes. The SEC, on the other hand, extended government power not to restrain market competition, but rather to enhance probity. By so doing, it helped restore public confidence and thereby strengthened the functioning of the market system.55

55 Keller, "The Pluralist State,' 92-94.

The SEC's regulation of accountancy also differed markedly from the conceptions developed earlier at the Interstate Commerce Commission. Unlike the ICC, the SEC drew in the public accountants as key elements in its structure of governance. The SEC also generally deferred to the accountants' own efforts to standardize financial accounting and exercised sparingly its power to intervene in these matters. The accounting standards that the AIA prepared with the concurrence of the SEC were formulated through discussion and debate among practitioners; they allowed greater flexibility in application than the rigid rules prescribed earlier by the ICC. The different choices made by the SEC were, no doubt, partly influenced by the growing size of the profession. When the ICC mandated uniform accounting in 1907, there were only about eight hundred accountants certified in America. By 1933, however, their number had increased to over seventeen thousand. Furthermore, by operating through existing institutional structures, the New Deal helped to defuse some of the political opposition its reform efforts might have engendered. Opposition did eventually emerge, as we have seen, but only after the legislative framework of reform was well in place.56

56 Figures on certified accountants estimated from tables in Edwards, History of Public Accountancy, 362-63. See Previts and Merino, History of Public Accounting, 260-78, for a discussion of the changes in accounting.

The decision to center the regulation of accountancy in the Securities and Exchange Commission rather than the Federal Reserve Board seems to have been guided by several factors. The notion that financial accounting represented an important safeguard for the investing public was a major theme in Berle and Means' famous study. They argued that disclosure was particularly important in the sale of new securities issues in order to protect the public against the deceptions of dishonest promoters. It was this emphasis that helped to shape the outlooks of those responsible for drafting the securities acts. The Roosevelt administration may also have preferred to lodge this authority in a new agency whose senior posts were staffed with its appointees. The FRB probably seemed a poor choice, since its cadre of career bureaucrats, on which the administration would have to rely for the enforcement of some of its most important new legislation, included many people enlisted by previous Republican regimes.

Although the SEC seemed a fulfillment of the plans of the earlier Wilsonian reformers at the FTC, it differed in one important respect. The proposed financial reporting requirements of the FTC were conceived partly as tools to help monitor industrial concentration. In this regard the FTC's mission was an extension of the efforts of the Bureau of Corporations and the ICC to combat monopoly. It was probably the FTC's close identification with antitrust enforcement that created political opposition to its regulation of financial reporting for industry and commerce. It seemed more appropriate to vest this function in the SEC, whose primary purpose was the protection of investor interests.

What, then, does this experience indicate about the validity of the Progressive and pluralist models in explaining the nature of reform in America?

The public accountants' experience suggests that the connections between professionalization and political reform may have been more tenuous than the Progressive historians have suggested. Many scholars of this school equated the rise of professionalism with the rise of political and social reform movements. The new professions were depicted as the natural allies of reform leaders in the battle to promote progress, efficiency, and civic virtue in American society. This study suggests that, though these movements seemed to develop in tandem, it is inaccurate to say that they were derived from similar concerns about society. Indeed, the accountants operated either in support of or in opposition to political reform depending on the circumstances. Instead of political ideology, the accountants were primarily interested in the pursuit of the opportunity to secure a safe and profitable place for their expertise in the new industrial society. They sought their opportunities by forming temporary alliances with groups of all political hues--liberals, conservatives, Democrats, and Republicans.

The experience of the public accountants seems to confirm the pluralist model in several respects. A new type of federalism emerged that was based not on the three branches of government but, rather, grew out of the interactions of professional organizations, bureaucratic agencies, and Congress. The new system crafted by the astute draftsmen of the securities acts divided power between statist and associationalist bodies. The line of demarcation between these two groups was not precisely set but depended largely on public perceptions. The scope of the profession's self-regulatory authority depended on how clearly it was perceived as effectively protecting the public interest. Failure provided the political incentive for congressional inquiry and invited renewed encroachment by regulatory agencies on the profession's autonomy.

The new regulatory structure in which Frankfurter and his colleagues enmeshed the accountants was very much concerned with the preservation of liberty. The countervailing powers of each element in the tripartite structure of governance acted to prevent regulation from stultifying the market's operation. This regulatory framework, like the Classical notion of concordia discors, sought to achieve harmony by balancing the powers of elements often in conflict. The result was a system that provided much-needed definitions of individual responsibilities without imperiling individual initiative.

This experience seems to affirm the pluralist model in a second context as well. The new associationalism that emerged in response to the New Deal's policies was effective in helping a large and diverse profession develop new institutions of value in forming a consensus among its practitioners. The recognition of the need for professional unity in a society sensitive to the pressures of large and cohesive organizations also encouraged a new spirit of compromise and cooperation among the profession's many factions. Unity enhanced the legitimacy of the profession's new efforts to solve the technical, political, and ethical problems that it confronted. A new emphasis on function also displaced the old concerns about clientele, nature of practice, and social origins. This experience provided accounting professionals with a new understanding of themselves and of the social milieu in which they operated. In the years ahead, public accountants would build on the foundations constructed during the cooperative effort in the years prior to the Second World War.


Held as part of the Louisiana Purchase Exposition in St. Louis, the meeting brought together many of the accounting elite. George Wilkinson of Barrow, Wade Guthrie & Co. is at the left end of the first row; beside him is Robert H. Montgomery of Lybrand, Ross Bros. & Montgomery; at center (with cigar) is Arthur Lowes Dickinson of Price Waterhouse. Joseph E, Sterrett is second from the left in the third row, and George O. May is at the far right of that row; both were with Price Waterhouse. (Photograph courtesy of the American Institute of Certified Public Accountants, from their library, New York City.)


A nephew of Ralph Waldo Emerson and cofounder of the firm of Haskins & Sells, Charles Haskins led the "American' faction in the first decades of the twentieth century. He was active in securing the passage of New York state's pioneering regulations for public accountants. (Photograph courtesy of Deloitte, Haskins & Sells, from the firm's library in New York City.)


With his partner, Elijah Sells provided many accounting services to the federal government and was also active in advocating use of professional accountants by government at all levels, as well as by insurance companies and other large corporations. (Photograph courtesy of Deloitte, Haskins & Sells, from the firm's library in New York City.)
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Author:Miranti, Paul J., Jr.
Publication:Business History Review
Date:Sep 22, 1986
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