Maureen H. Berry, Editor
UNIVERSITY OF ILLINOIS
DOCTORAL RESEARCH
Three themes run through this selection of recent dissertations in accounting and economic history: flows of investment capital, the effects of income tax regulations on the financing of selected areas of the economy, and the effects of public policy on the accounting profession and accounting practice. The first and second themes are linked through their focus on investment decisions, while the impact of public policy on the private sector relates the second to the third. Consequently, it is the pervasive effect of public policy on accounting-related issues which underlies all these research studies.
Flows of investment capital were the concern of Neal, Pierson Doti, and Updike. Neal looked into bond refunding, comparing the practices of public utilities and industrial firms. Pierson Doti’s field was the supply of financial capital by the state banks in California, while Updike examined the functioning of yet another capital market: the non-reserve city national banks. The supply of capital funds to the agricultural sector was the main topic in Updike’s thesis and farming was also central to Holland’s study — in particular, the effects of Federal taxation on a section of the Georgia egg industry. Strefeler, too, was concerned about public policy as administered through taxation: specifically, the effect the 1969 Tax Reform Act has had on donations of ordinary income property. Regulatory bodies are, of course, another mechanism through which public policy shapes private decisions. Roberts’ study of the development of audit criteria by the public accounting profession details the strong influence on the auditing process of the courts and the Securities and Exchange Commission. The final study, by Moseley, reminds us how far public policy went to meet perceived needs for stronger accounting criteria, in this case control over public contract costing, when Congress established the Cost Ac-counting Standards Board.
The Evolution of Accounting Thought and Practices Related to Bond Refunding (Michigan State University, 1971, 231 pp.; 32/12,
1. To review developments in accounting thought related to bond refunding.
2. To compare practices and analyze size relationship between refunding-related costs, earnings, and dividends of public utility and non-regulated industrial firms.
3. To determine inferable support for alternative accounting procedures from recent models of accounting theory.
4. To investigate the question of whether different procedures may be justified for public utilities than for nonregulated firms.
Historically, the accounting literature has been divided between those who advocate the immediate write-off of bond refunding costs as refunding losses and the proponents of various write-off deferral methods on the grounds that such costs are applicable to periods which benefit from interest savings. Through questionnaires and the use of annual reports, Neal examined the bond refunding accounting practices of a sample of public utilities and industrial firms for the periods 1936-1945 and 1956-1965. During the first period, public utilities made use of deferred write-off methods more than immediate write-offs, but there was an increase in the use of immediate write-offs in the second period. A majority of the industrial firms, on the other hand, used the immediate write-off approach in both periods. Neal found, that for the first period at least, the public utilities which deferred write-offs tended to have larger amounts of bond refunding expenses in relation to retained earnings and net income than for industrial firms or those public utilities using the immediate write-off approach. Further examination, involving correlations between bond refunding costs and dividends, led Neal to infer a relationship between the relative size of these costs and the use of gradual write-off procedures used by public utilities in the first period.
In addition, Neal described, illustrated, and analyzed the Hen-riksen model which calls for the use of current values for bonds outstanding as well as bond interest at market rates. His study showed that the American Accounting Association’s current cost model yields results which agree with Henriksen’s approach. Neal’s recommendations include the following: that data reported externally by public utilities should conform to data used for rate setting purposes; that further consideration should be given to the use of
1 Dissertation Abstracts International volume and page references.
current costs for rate setting and financial reporting; and that further research should be performed concerning users’ opinions as to the predictive assistance provided by data which is based on alternative approaches to accounting for debt.
Banking in California: Some Evidence on Structure, 1878-1905 (University of California, Riverside, 1978, 197 pp.; 39/2, p. 1018-A) by Lynne Margaret Pierson Doti. Pierson Doti’s thesis was that insufficient attention has been paid to the contribution of state banks to nineteenth century financial history in the United States, even though they outnumbered the national banks which have received most research attention. The main reason for this neglect has been the difficulty of obtaining data about state banks whereas Comptroller of the Currency reports are available for the national banks. Information is available, however, from the California Board of Bank Commissioners and Pierson Doti used their reports to compile data on the financial industry in California for the period 1878-1905. Because California placed little legal restriction on banking at that time, Pierson Doti assumed that a competitive environment prevailed and she performed various tests concerning the effects on capital mobility of such factors as information and transportation costs. The limited data available showed similarity of interest rates.
However, since information about interest charged on loans was available only for the year 1879, she examined interest charged to depositors. Comparisons were made between banks both on a regional basis as well as contrasting banks in rural and urban areas. None of these studies showed any consistent significant differences. Another approach taken was to study capital flows with respect to real estate loans. Almost all of the financial institutions in all counties engages in real estate lending and there was heavy dependence on lenders located geographically distant from the property. Another matter of interest was the extent of interbank deposits and amounts of paid-up capital. There was no difference in the tendency to acquire interbank deposits between rural and urban banks and the state banks had sufficient capital to become national banks.
Pierson Doti concluded that there was a competitive capital market in California during that period and, while certain counties in Southern California may have been isolated, capital appeared to flow within the state. This study has interest for those looking for causal relationships between economic change and structural and behavioral characteristics of the financial industry.
The National Banks and American Economic Development, 1870-1900 (State University of New York at Stony Brook, 1977, 187 pp.; 38/9, p. 5629-A) by Helen Hill Updike. Keeping in the same period, but turning to the national level, the focus is on the agricultural sector which was both the largest in the American economy and the most important component of the nation’s export base. To evaluate how well this sector’s capital needs were met and, thus, how the growth of the U.S. economy was affected, Updike studied the functioning of one of agriculture’s most significant and available capital markets — the non-reserve city national banks — for the period 1870-1900. Those who felt that the working capital of the agricultural community were not being met at that time point to the fact that rural bankers had monopoly power and higher earnings because of usury laws and the way in which the national banking system operated. They also claimed that the rural bankers preferred speculation and enterprise loans in the cities.
To test the validity of these assertions, Updike ran regressions which showed no “measurable association” between bankers’ earnings and usury laws or bank balances. It was also determined that city banks were not interested in making loans to country banks, presumably because of the higher probability of rural bankruptcies. An analysis of the types of assets owned by country banks showed a considerable variety in lending patterns. Generally, the smaller country national bank systems tended to hold more securities and to engage in sizeable lending to state banks, while the larger such systems owed fewer securities, made chattel mortgages to farmers, as well as crop liens, and also made loans to out of state city national banks which were not in the central reserve system. Thus, the agricultural sector received funds from the national banks through the loans made by the larger rural national banks and indirectly as a result of loans made by the smaller rural national banks to the state banks. As agriculture declined in profitability, the country national banks decreased their lending to state banks and increased their investments in the securities of urban sector entities. These changes in portfolio composition show that the national bank system functioned to make loans available and Updike concludes that “criticism of country banks’ response to the capital needs of agriculture may more appropriately focus on the terms of those exchanges.”
An Investigation of Federal Farm Income Taxation: Its Development with Attention to Congressional Intent and its Effects on the
Georgia Egg Industry (University of Georgia, 1978, 225pp.; 39/3, p.1675-A) by Michael Lynn Holland. This study encompassed both a review of the historical development of Federal taxation laws and regulations with respect to farming as well as a focus on their effects on a section of the egg industry in Georgia.
The first significant event in farm taxation and regulation history occurred in 1915, when the Treasury decided to permit farms to use cash-based accounting. At that time, possible tax avoidance benefits were minimal because of low tax rates and the absence of specific capital gains treatment. By World War II, however, the situation changed. Because of the increased tax rates, the potential for deferring taxes offered by cash-based accounting, as well as the 1942 enactment of Section 1231 whose provisions were extended to depreciable livestock by the Albright and Bennett cases. This loophole of cash-based accounting provisions has persisted, despite the Internal Revenue Service’s efforts to remedy the problem, because of Congressional support of the farm lobby’s approach that such provisions provide tax incentives.
Holland identified three specific practices in the Georgia egg industry: “internal production volume increases attributed to cash method accounting, deferral of tax liabilities through deduction of prepaid feed, and production increases caused by nonfarmer investors seeking a tax sheltered investment.” Certain egg industry firms in Georgia, one set using cash-based accounting versus a second set using the accrual basis, were studied to determine whether there were statistically significant differences between them in firm behavior and organization with respect to the three selected areas. To control for differences in size, each set of firms was stratified into small — Range I — groups and larger — Range II — groups.
With respect to increases in internal production volume, no significant differences were found between the two sets of firms either between sets or between stratified groups. However, significant increases in production level were found between the two stratified groups within the cash-based accounting set, in comparison with their counterparts in the other set, “in periods of high egg prices and in the tax year immediately following these periods.” Hence it was concluded that this over-production was primarily due to cash accounting. A significant difference between the two sets also established that the cash accounting firms used prepaid feed deductions to defer income taxes. Only with respect to the tax shelter aspect were no significant differences evident. Holland chose form of business organization as an indicator of the incidence of outside investors but did not find that this factor contributed signifi-cantly to excess egg production.
The Impact of the Tax Reform Act of 1969 Upon Charitable Con-tributions of Ordinary Income Property (The University of Arizona, 1977, 205pp.; 38/11 , p.6790-A) by John Martin Strefeler. Strefeler’s dissertation examined the effect of the Tax Reform Act of 1969 on the donation of ordinary income property. Prior to the 1969 Act, a donor could take a deduction for the fair market value of such property, whereas the deduction was, by the 1969 Act, restricted to the donor’s adjusted basis. Strefeler was interested in how this change affected ordinary income property donations as well as in determining what was the Congressional intent of the change and how such intent could be met by other alternative tax approaches. Historical analysis showed that the Congressional intent had been to provide an incentive for such donations, under the basic assumptions that philanthropic organizations should be supported and that this could best be done through the tax system. The potential for abuse of such intent was removed by the 1969 Act through its provisions which abolished: preferential treatment of property and service donations; vertical inequities; and possible profit to the donor through taking a tax deduction based on fair market value while avoiding tax on unrecognized income.
To evaluate whether the results of the 1969 Act were consistent with intended public policy, empirical evidence was gathered through two mail surveys. One was sent to artists, art museums, government archives, and university libraries, while the other was directed to university foundations. Inquiries were also made) of selected politicians. Analysis showed that the Act had resulted in a decrease in donations of works of art by the creating artist, as well as contributions by literary figures, because of income tax con-siderations. The Act appeared to have had little impact, however, on donations of political papers where personal prestige appeared to play a more influential role than tax considerations.
Strefeler suggests that a tax credit, based upon fair market value, would be the appropriate way to restore the incentive to donate artistic creations, thereby reaffirming the Congressional intent which the 1969 Act evidently thwarted.
Evolution of Financial Audit Criteria with Emphasis on Selected Legal and Regulatory Influences 191 7-1972 (The University of Santa Clara, 1978, 39/2, p. 949-A) by Ray Roberts. Roberts examined the development by the public accounting profession of criteria governing the auditing process and the attest function during the period 1917-72. This review primarily consisted of a library search which was not confined to materials on the audit function but also included the legal literature, covered the 1933 and 1934 Federal Securities Acts, and data concerning the Securities and Exchange Commission and pertinent court decisions. The thesis includes a tabular presentation, in chronological sequence, of the criteria which originated in the period under review, together with the re-lated circumstances.
The author concluded that the impetus for major improvements in audit criteria came, for the most part, from outside the pro-fession has focused in parochial fashion on its own needs, and those of its clients, rather than on a wider public interest. To broaden this focus, while retaining the attest function within the private sector, Roberts suggests a number of remedial measures. These include: mandatory peer reviews of practice; a zero-base budget type of examination of the audit process and its underlying assumptions; and a certification process, Institute-directed, for those CPAs specializing in auditing.
An Historical Analysis of the Events Leading to the Establishment of the Cost Accounting Standards Board (Oklahoma State University, 1976, 324pp.; 38/9, p.5551-A) by Owen Bernard Moseley. This study used a combination of analytical methods, including genetic, Hempelian, and Collingwood methodology and Hester’s historical storytelling method, to analyze the events leading up to the establishment of the Cost Accounting Standards Board (CASB) in 1970. Concentrating mainly on the Congressional Record, as well as public hearings, congressional reports, and the General Accounting Office’s (GAO) feasibility study, Moseley traced events from the late 1950s to determine the various factors: economic, social, and political which affected Congress’s decision.
This analysis showed that Admiral Rickover, with the support of Representative Patman, played a key role as far as influencing Congress was concerned, plus the fact that those who argued against cost accounting standards were perceived as having a vested interest. As Moseley points out: “The mood of Congress was such that it was a question of proving that cost accounting standards were feasible and needed but a question of proving that they were not feasible and were not needed.” Congress, then, placed more confidence in the proponents of the proposal than in its opponents. Moseley’s objective in carrying out this project was to shed light on some of the contributing factors to legislation affecting accounting practice in the hope that increased understanding of the surrounding circumstances might provide help and guidance to those involved in any future decisions of this nature.
