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ACCOUNTING AND AUDITING PROCEDURES REQUIRED BT THE SECURITIES AND EXCHANGE COMMISSION IN THE PREPARATION- OF FINANCIAL STATEMENTS A Thesis Presented to the Faculty of the Department of Accounting The University of Southern California In Partial Fulfillment of the Requirements for the Degree Master of Business Administration ■by Conrad Mattson, Jr. June 1941 UMI Number: EP43154 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI EP43154 Published by ProQuest LLC (2014). Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106- 1346 T h i s thesis, w r i t t e n by .... u n d e r the d i r e c t i o n o f h . l s . F a c u l t y C o m m it te e , a n d a p p r o v e d by a l l its m e m b e r s , has been presented to a n d accepted by the C o u n c i l on G r a d u a t e S t u d y a n d Research in p a r t i a l f u l f i l l m ent o f the re q u ire m e n ts f o r the degree o f .i^STER..OF.. BUSINESS.. ADMIIIIST.M.TIQM... Secretary F a c u lty Com m ittee TABLE OF CONTENTS CHAPTER I II III PAGE BACKGROUND STND PURPOSE OF THE SECURITIES EXCHANGE A C T ............................................... 1 REGISTRATION STATEMENT REQUIREMENTS . . . . . . . . 5 EXAMINATION OF REGISTRATION STATEMENTS AND ISSUANCE OF "STOP ORDER1' El THE COMMISSION . . . IV V REGISTRATION STATEMENT FORMS ..................... 11 17 FINANCIAL STATEMENTS - PREPARATION AND AUDITING P R O C E D U R E ........................................ 28 Call l o a n s ................... 35 Notes and accounts r e c e i v a b l e ................... 35 Reserve for bad d e b t s ............................ 35 I n v e n t o r i e s ....................................... ' 35 Marketable s e c u r i t i e s .............. 37 Indebtedness of officers, directors, stockholders, and others, c u r r e n t ......... ’.................. 37 Indebtedness of subsidiary and/or affiliated ............................ 38 Unamortized debt discount and e x p e n s e ........... 38 Stock discount and e x p e n s e s ..................... 39 Prepaid expenses 39 companies, current ................................ Other deferred charges Subscribers to capital stock ................. ... ............. 40 40 iii CHAPTER PAGE Securities and subsidiary and/or affiliated c o m p a n i e s ................... * .................. 41 Other investment s e c u r i t i e s ................. -. . 42 . Indebtedness of subsidiary and/or affiliated companies, not c u r r e n t ........................... 44 Other i n v e s t m e n t s ................................. 45 Property, plant and equipment ........ . . . . . 45 Reserves for depreciation and depletion ........ 50 . . . . 52 Intangibles . . . . . ................... L i a b i l i t i e s ................... 55 Contingent l i a b i l i t i e s .............. 57 R e s e r v e s ........................ 62 Capital s t o c k ....................... 63 Surplus ................................... 64 Profit and loss and earnedsurplus accounting . . 67 Profit and. loss s t a t e m e n t .......................68 VI LIABILITIES AND RESPONSIBILITIES OF ACCOUNTANTS UNDER THE A C T ......................................72 BIBLIOGRAPHY . . .......... 8l CHAPTER I BACKGROUND AND PURPOSE OF THE SECURITIES EXCHANGE ACT1 The Securities Act of 1933 became law on May 27, 1933It was amended by the Securities Exchange Act June 6, 193^* The events leading up to the passage of Federal legislation relating to the sale of investment securities to supplement and strengthen State laws need but little explanation. Dis closures in financial circles subsequent to the stock market crash of 1929 shook public confidence to its very foundation. A considerable number of issues were found to have grossly misrepresented values and concealed essential facts -- often in fraudulent or criminal transactions. State laws failed to curb the distribution of unsound securities which deluged the markets. This was attributable to a number of factors which may be summarized as follows:2 a. Absence of protective legislation in certain States and inadequate legislation in b. others. Lack of uniformity in the laws of the various Willingness of victims to condone the offense or States. c. 1 Hereinafter referred to as the Act. 2 Hearing on Securities Act before Committee on InterState and Foreign Commerce, House of Representatives, 73rd Congress, 1st session, p. 99. accept a compromise. d. Evasions possible by conducting sales on an inter state basis. The lack of adequate protective lavs and the existence of too liberal corporation legislation in some jurisdictions not only furnished fertile fields for promoters and dealers, but, vhat is more important, offered the fraudulent promoter a legal haven from which to direct his operations in other States. The seriousness of this factor had been emphasized in numerous proceedings before the Courts. The varying requirements of the statutes of different States also_ interfered with the full effectiveness of State legislation. Each State naturally desired to attract capital and to persuade industries to locate within its borders. One of the greatest obstacles in the way of more effec tive enforcement of protective securities laws was the willing ness of victims to forego prosecution upon the promoter or dealer agreeing to refund part of the purchase price. It often happened, that, after a prosecuting attorney had prepared a satisfactory case against a fraudulent promoter or dealer, the prosecuting witness accepted a refund and the case failed for lack of sufficient evidence. Many States had endeavored to correct this evil by in cluding various regulations in their statutes, but it was well recognized that they were powerless in the matter of interstate transactions and that a supplemental Federal law was needed to stop this gap through which were being wasted so many millions of dollars of public savings that might otherwise have been diverted to substantial industrial development. Those who had given the subject more than casual-con sideration had long recognized the need for Federal legisla tion relating to the sale of investment securities. Immediately after the termination of the World War, and inspired by a deluge of fraudulent promoters and their success in exchanging the worth less securities of resourceless projects for Liberty Bonds and the public's savings, a number of bills were introduced in Congress, particularly between 1918 and 1921. None of them was ever reported out of the Congressional Committees. The introduction tovthe Act reads as follows: An act to provide full and fair disclosure of the character of securities sold in interstate and for eign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes. The period between the enactment of the law in 1933 and the amendments in 193^ developed considerable contention that indispensable financing could not proceed and that it was necessary to correct outstanding defects in the law in order to permit the ordinary conduct of flotations, without in any way eliminating the requirement that full and adequate infor mation concerning securities should be supplied to investors. Particularly emphatic was the expressed unwillingness of directors, officers, bankers, and accountants to accept the liabilities imposed. The amendments to the law which were signed by Presi dent Roosevelt on June 6, 1934 effected material aid in removing the bar raised by those who had criticized the Act as a serious hindrance to the flow of capital ordinarily assured by the distribution of securities. They did, however, little to ease the difficult task of compiling registration statements under all conditions where there is a public offer ing. Nor did they altogether remove the extreme penalties provided in the 1933 -Act in order to compel proper disclosures to investors, by issuers, officers, directors, underwriters, experts, and others. The administration of the Act was charged to the Federal Trade Commission in the period from May 27, 1933 to September 1, 1934, at which date the administration of the Act was turned over to the Securities and Exchange Commission.^ 5 Hereinafter referred to as the Commission. CHAPTER II REGISTRATION STATEMENT REQUIREMENTS The registration statement frequently referred to in the Act Is a document filed with the Commission setting out at length the information required to he furnished in connec tion with the Issuance of all securities, except those exempt by virtue of the provisions of the Act. Unless a registration statement is on file and is in full effect, it is unlawful for any person through any agency of interstate commerce or the mails, directly or Indirectly, to sell, offer for sale, offer to buy any security, or transport the same for delivery after sale. The registration Is not in effect until the twentieth day after the statement is filed during which the prescribed information is open to both public inspection and.Intensive review by the Commission to ascertain whether (a) sale of the security shall be permitted, (b) sale shall be delayed pending the filing of additional data, (c) the registration statement may be voluntarily withdrawn by the issuer, or (d) the security denied registration by the Co m mission. Even after a registration statement has been in effect, the sale of the security may be suspended by the Com mission if it shall find that the law has been violated In any material respect. The necessity for filing of the registration statement does not apply to this group of exempted securities: issued prior to July 27, 1933; those those issued hy governments or political subdivisions, railroads, banks, eleemosynary institutions, building and loan associations, trustees or r e ceivers in bankruptcy^ insurance policies; commercial paper; any issues up to $30,000 (subject to certain requirements), issues limited to $100,000 and sold for each; stock in trust and unincorporated associations; notes or bonds secured by first mortgages or deeds of trust on real estate; exchanges of securities under $100,000; certificates of deposit covering securities not in excess of $100,000; voting-trust certificates aggregating $100,000 or less; or fractional gas or oil interests not in excess of $100,000. The following transactions are likewise exempt from registration: ordinary trading transactions by a person other than an issuer, underwriter, or dealer; private offerings by an issuer; transactions by a dealer at least one year after the public offering of the securities in question; unsolicited brokers' transactions; exchange of securities exclusively with existing security holders where no commission is paid for their solicitation; exchanges with existing security holders, or creditors in connection with a reorganization under court supervision; and, sales by an issuer resident within a State only to persons resident within the same State. 7 Section 6(a) of the Act gives the following provisions describing the registration statement: Any security may be registered with the Commission under the terms and conditions hereinafter provided, by filing a registration statement in triplicate, at least one of- which shall be signed by each issuer, its prin cipal executive officer or officers, its principal financial officer, its comptroller or principal accounting officer, and the majority of its board of directors or persons performing similar functions (or, if there is no board of directors or persons performing similar functions, by the majority of the persons or board having the power of management of the issuer), and in case the issuer is a foreign or territorial person by its duly authorized representative in the United States; except that when such registration statement relates to a security issued by a foreign government, or political subdivision thereof, it need be signed only by the underwriter of such security. Signatures of all such persons when written on the said registration statements shall be presumed to have been so written by authority of the person whose signature is so affixed and the burden of proof, in the event such authority shall be denied, shall be upon the party denying the same. The affixing of any signature without the authority of the purported signer shall constitute a violation of the title. A registration statement shall be deemed effective only as to the securities specified therein as proposed to be offered." Section 6(b) definitely prescribes the fees to be paid: At the time of filing a registration statement, the applicant shall pay to the Commission a fee of one one-hundredth of one percentum of the maximum aggregate price at which such securities are proposed to be offered, but in no case shall such fee be less than $25. The fees are payable in cash, United States postal money order, or certified bank checks made payable to the order of the Commission. Where securities are to be offered "at the market" the fee payable is to be based upon the price for which units of securities of the same class of the issuer were sold or would have been sold on a specified date within fifteen days prior to the filing of the registration statement. The Commission's forms contain specific instructions for the determination of the fees for registration of the various types of securities. Within ten days after the securities are actually offered to the public, the registrant is required to file with the Commission a statement of the actual price for which the security was offered, with an explanation of any difference between that and the price upon which the fee was based. Any intentional misstatement of the price at which the issue is proposed to be offered with a view to paying a smaller fee than the circumstances require may result in a stop order by the Commission under its power derived from Section 8 of the Act or in criminal prosecution under Section 24. Three copies of the registration statement, only one of which need contain the requisite signatures, must be fur nished the Commission. Knowledge of the date of filing the registration state ment is essential for the calculation of the date on which the statement becomes effective. The date of filing is the date on which the papers are actually received at the office of 9 the Commission at Washington D. C., provided that the proper fee has been paid and all requirements have been complied with, regarding the Act and the rules and regulations of the Commis sion with reference to filing. Section 6(c) defines the filing date as follows: The filing with the Commission of a registration statement, or of an amendment to a registration statement, shall be deemed to have taken place upon the receipt thereof, but the filing of a registration statement shall not be deemed to have taken place ■unless it is accompanied by a United States postal money order or a certified bank check or cash for the amount of the fee required under subsection (b) Where additional blocks of a security for which a registration statement is already in effect are to be offered, a separate registration statement for the new block must be filed. In this case, and in any other where an issuer has previously filed, registration statements, the exhibits, or parts thereof which are applicable to subsequent registrations the issuer may make, need not be set forth at length there after but may be incorporated into future registration state ments by specific reference. Any additional information necessary to make such exhibits complete may be added. However, if such inforporation by reference will, in the opinion of the Commission, cause confusion, It may be denied and the issuer required to repeat the exhibit or document in full. Registrants are required in their registration state ments to designate a person to receive notices and communications, and. to confer upon him the power (a) to amend the statement by changing the date of the proposed offering, (b) to with draw the registration statements or amendments made thereto, and (c) to consent to the entry of an order issued under Section 8(b), waiving notice and hearing. Such order will be understood to be without prejudice to the right of the registrant thereafter to have it vacated upon a showing that the registration statement as amended is no longer incomplete or inaccurate on its face in any material respect. Naming a person who is authorized to receive communica tions relative to the statement is considered a conferring of the foregoing powers on such person, unless there is an express denial to that effect in which event a separate a u thorization of an agency for those purposes must be made. CHAPTER III EXAMINATION OF REGISTRATION STATEMENTS AND ISSUANCE OF "STOP ORDER" BY THE COMMISSION Registration statements which are filed are examined by the Commission. If a statement is found on its face to be incomplete or inaccurate in a material respect, the Commission is empowered to issue an order preventing the statement from going into effect until it is amended to correct the defect. This order must be preceded by a verified notice at least ten days prior to the date it would ordinarily become effective and an opportunity must be given the registrant to be heard. If at any time, whether.before or after the effective date, it appears to the Commission that the registration state ment contains an untrue statement of a material fact, or if it fails to state any required material fact, or any fact required to make any statement therein not misleading, the Commission may notify the issuer and afford it a hearing on the matter within fifteen days after the notice. After the hearing, if it is still cnnvinced of the untruth or omission, the Commission may issue a stop order suspending the effec tiveness of the statement. The Commission's jurisdiction to issue a stop order under Section 8(a) is conditioned upon the existence of untrue statements with regard to, or omissions to state, material facts. But it has determined that, given such material deficiencies, the stop order may embrace in its terms other deficiencies which have been included in the notice to show cause and established as deficiencies. It may be noted that a stop order must be based on a misstatement or omission of a "fact" and not an opinion. But a prophecy known to be untrue as of the time it is made is to be regarded as an untrue statement of fact inasmuch as It misstates the mind of the person making the prophecy.1 In determining whether a material misstatement or omission has been made, the Commission has complete authority to make an examination of books and records, to examine w i t nesses under oath, and to require certification of the issuer* figures by accountants. Failure of the issuer or -underwriter to cooperate in this investigation or active obstruction on their part are grounds for the issuance of a stop order. Accountants will be interested to note various infrac tions which have thus far provoked the issuance of stop orders by the Commission. Among others are the following:^ Balance sheets and profit and loss statements not certified to by an independent public or certified accountant. Failure to furnish particular exhibits. Failure to state the remuneration paid to each director 1 Federal Trade Commission v. Howard. March 21, 1934. Opinion dated 2 Securities and Exchange Commission Release No. 1340, pp. 81 -85 . 13 Failure to file a prospectus. Presence of inconsistent dates (the date set for the pro posed offering being earlier than that possible because of the waiting period). Failure to record that the registrant was prohibited from selling its stock in a particular State. Failure to reconcile and tie in the prospectus with the data in the registration statement. Unauthorized use of a person's name as a director. Failure to reply to query as to material contracts that a commitment for a loan to carry out a reorganization had been obtained. Failure to set out contract to remunerate depository for services. Failure to list as an underwriter a person who had an o p tion to purchase an entire issue of 200,000 shares. Statement that stock was to be given away, when in fact it was subject to assessment (which constituted a sale). Registration effected for only 600,000 shares when in fact subscriptions for 1,600,000’ shares were accepted. Failure to state sinking-fund provisions in connection with an issue of bonds secured by a mortgage, and omission to state that the funded debt constituted a prior lien on the property subject to the mortgage. 14 Answering "none" to question in registration statement as to nature and extent of the interest of every new director and principal officer in any property acquired or proposed to be acquired. The answer was held to ‘be too indefinite as not indicating whether it referred to the officials or their interests. Answering "none" to question as to business connections between issuer and depositaries, when in fact depository had previously acted as such for one of the controlling companies. Answering that there was no underwriter (in the case of a call for deposits) when the fact was that the registrant had received substantial profits in the original distribution of the securities now called for deposit and had received fuether substantial profits in acting as a reorganization committee for the bonds it had originally distributed. Failure to state that others were seeking deposit of the same securities in answer to question to that effect. Failure to state the relationship between the members of the issuer and the depositary. Statement in a prospectus that the cash to be returned to the depositors would exceed that to non-d.epositors. While this was in the nature of an opinion or prophecy, rather than the statement of a present untrue fact, since the president of the company held little hope that there would be any cash to distribute to anybody, it was deemed to be an untrue 15 statement of fact. Failure to state that the registrant was obligated to pay certain fees in connection with the call for deposits. Failure to state that suit for appointment of a receiver was pending in response to a question if there were pending or threatened legal proceedings which might materially affect the securities called for deposit. Even if this were not known at the time the statement was filed, it should have been amended, before the effective date, to include it. When the Commission is satisfied that there have been errors or omissions in the statement, the registrant has the option of filing amendments to rectify the errors or omissions or it may refuse to do so. In the event of such refusal, the Commission is empowered to issue a stop order pursuant to Section 8(b) and (d). Section 9 of the Act provides for a court review if a registrant believes that any such order is unjustified. If the registrant is unwilling to amend or does not wish to have the order reviewed, he may request permission of the Commission to withdraw the registration statement. This consent will be granted by the Commission only if it considers it proper after giving due regard to the public interest and the protec tion of investors. In the latter event, the papers remain in the Commission’s files but are marked to indicate that they have been withdrawn with the consent of the Commission. The 16 fee -will not be returned.3 A registrant may waive the notice and hearing to which he is entitled under Section 8(b) and (d) and may consent, to the entry of an order requiring him to amend the statement. The order will be vacated when the Commission is satisfied that the registration statement as amended is no longer in complete or inaccurate on its face. 3 Federal Trade Commission Rule adopted September 22,1933* CHAPTER IV REGISTRATION STATEMENT FORMS Special forms have been created by the Commission for the use of the following: A-l Ordinary issuers without any history as to earnings and. operations. A -2 Ordinary issues of seasoned corporations with a history of earnings, dividends and operations. C-l Unincorporated trusts (not having a board of direc tors or persons performing similar functions) of the fixed or restrieted-management type having a depositor or sponsor. D-l Certificates of deposit to be used in anticipation of or in connection with a plan of reorganization or adjustment. E-l Seuurities to be issued pursuant to a plan for r e adjustment or reorganization. F-l Voting trust certificates. G-l Producing oil and gas royalty interests. G-2 Non-producing oil and gas royalty interests. As form A -2 is by far the most important and serves best as an illustration of requirements of the Act, it will be analyzed in detail in a subsequent chapter. Requirements under the other types of forms will be set forth briefly. Form C-l. The type of investment trust that is incor porated and has a board of directors, or persons performing 18 similar functions, and is not of the fixed or restrictedmanagement type with a depositor or sponsor, presents its data on form A -2. The unincorporated group is required to use form C -1. The information to he supplied to the Commission by such investment trusts permits the detailed exposition of data fully describing the trust, the trustees, the depositor, and the sponsor. Briefly summarized the requirements are as follows: A complete description of the instrument creating the trust; the securities issued or to be issued; the securities or property in the trust; the provisions, limitations and conditions under which the estate is to be managed and ter minated; the relationships of the certificate holders, the trustees, sponsor and depositor to each other and the estate, etc., as to liens. (If more than twenty-five per cent of the total assets of the trust are in securities of the issuer or a related company, then a schedule comparable to Registration Form A -2 is to be supplied' to the Commission. Copies of the certified balance sheet and income statements of the trust are to be inserted). Full information as to the qualifications of the ' trustee; initial fee; continuing charges; removal, resigna tion, appointment of successors, duties and responsibilities. 19 Detailed description of the depositor; its directors or partners; their relation to the trust; the securities in it; underwriter of any of the securities; their duties and responsibilities and the method of assigning their rights and obligations. (Certified balance sheet of the depositor is to be attached). When the sponsor is other than the depositor, the same type of information is required of it. The exhibits required (in addition to the financial statements) are complete copies of the trust agreements, the indentures, the certificates, the consent of experts to the use of statements within the report, together with all other pertinent contracts that will fully describe the issue. Form D-l. In registering certificates of deposit used in anticipation of or in connection with a plan of reorganiza tion or readjustment, form D-l is to be usdd. If a plan of r e organization or readjustment is proposed at the time the call for deposits is to be made, parts I and II of form D-l are to be filed at the same time. If no such plan is submitted to the security holders, part I is filed alone. Part II is an amendment of part I and as such becomes effective on such date as the Commission may determine, having due regard to the public interest and the protection of investors. It is important to notice that the term "issuer," in the case of certificates of deposit, signifies the person or 20 persons proposing to call for deposit the securities of an oroginal issuer. Sometimes the term "original issuer" is used in connection with certificates of deposit. That phrase designates the person or persons who issued the securities which are solicited for deposit. Briefly summarized, the information called for in form D-l is as follows: A description of the original issuer and its business, directors, and officers; stock and funded debt; the classes of securities to be called for deposit; legal proceedings pending; the underwriters; the persons soliciting the deposit and the available financial information describing it. The description of the committee; its employees and agents; their interest in the original issuer; their qualifi cations and the restrictions and limitations upon their business; and a statement as to why the deposit of securities is desired. Analysis of the provisions to disclose liabilities upon all parties; method of accepting deposits and the extensions; voting and borrowing privileges; termination; fees; expenses; and the bonds and all collateral agreements to effect the plan. Statement of the connection between the depository and the issuer, and the committee; and analysis of the provisions of the deposit agreement to disclose duties, responsibilities, compensation and liabilities. 21 Exhibits required are: the deposit agreement; the form of the certificate of deposit; circulars used in solicit ing the deposit; all pertinent agreements, etc.; and the list of persons to whom it is intended to make the call for deposits. Form E-l. This form is intended for use in reorganiza tions, but its use is considerably broadened by the definition of reorganizations to include all readjustments, exchanges, mergers, and consolidations and by the adoption of the form to cover the issuance of securities including contracts of guaranty. Consideration of the applicability of form E-l requires an understanding of the terms used by the Commission. "The Term1' reorganization" includes any transaction involving: (a) the acquisition of assets of a person, directly or indi rectly^ ’partly or wholly, in consideration of securities dis tributed or to be distributed as a part of the same transaction directly or indirectly to holders of securities issued by such person or secured by assets of such person, whether as a liquidating dividend or otherwise; (b) a readjustment by m o d i fication of the terms of securities by agreement, or (c) a r e adjustment by the exchange of securities by the issuer thereof for others of its securities; or (d) the exchange of securities by the issuer thereof for securities of another issuer; or (e) a statutory merger or cnnsolidation.1 1 Federal Trade Commission Rule effective May 16,193^. 22 A ’’sale" Is defined as taking place: (a) when an opportunity to assent to or to dissent or withdraw from a plan or agreement for reorganization is given on such terms that a person so assenting or failing to dissent or withdraw within' a limited time will he hound, as far as he personally is con cerned, to accept such securities, unless .at the same time he retains or Is given a right subsequently to withdraw which Is conditioned, if at all, only upon his payment of not more than his proportionate part of the expenses of reorganization, and (h) if the plan or agreement referred to is submitted by, or with the authority of, the issuer of such seaurities.^ Use of form E-l is prescribed to register reorganization securities under all conditions, even though such securities are to be held by voting trustees and are to be represented by voting-trust certificates, if such voting-trust certificates are Issued or sold to the public (including in such term any substantial class of security hplders, or their representatives). A brief indication of the type of information sought through form E-}. follows: A description of the character, business, subsidiaries, or parents, of the issuer of the securities. The features of the reorganization plan and the details with respect to each class of security holders, creditors, etc.; 2 Federal Trade Commission Buie effective May 16, 193^* a full analysis of the capital structure prior to and after completion of the reorganization plan. A description of the officers, stockholders, voting trustees, counsel, underwriters, committees; their compensa tion, qualifications, and relation to the registrant, prede cessors, or issuers; the expenses of the reorganization; the cash to be obtained, from sales; its purpose; the usual de scription of the method of disposing securities to all parties; unusual contracts; legal proceedings; denials by States of rights to issue securities, etc. When securities registered are based upon real estate, the following is required: The native of the interest, the general use of the property, its occupancy, furnishings and equipment liens, taxes; balance sheet on a date ninety days prior to registration. The sales price at which securities of the vendor were traded on organized exchanges; full description of the securi ties; certified balance sheet ninety days prior to acquisition of property or if securities are acquired, ninety days prior to registration; and certified profit and loss and surplus statements for three preceeding years. Exhibits, other than financial, required are: Certifi cates of incorporation or all papers pertaining to organization latest annual report; certified orders of State regulatory bodies; indentures and agreements pertaining to securities or 24 other properties; the deposit agreement and plan; and the prospectus. Form F-l. form, when-: The Commission requires completion of this (a) an opportunity to assent to or to dissent or withdraw from a plan or agreement for reorganization is given on such terms that a person so assenting or failing to dissent or withdraw within a limited time will he bound, so far as he personally is concerned, to accept voting trust certificates, unless at the same time he retains or is given a right sub sequently to withdraw which is conditioned, if at all, only upon his payment of his proportionate part of the expenses of reorganization, and (b) if the plan or agreement referred to is submitted by, or with the authority of, the issuer of the voting trust certificates.3 The data required in the registration statement for voting-trust certificates includes a full description of the issuer, the trustees, and the terms of trust agreement, par ticularly detailed to show the relationships of the trustees to the organization; statement of their interest in and employment in the organization; number and description of securities to be held in trust; an analysis of the principal provisions of the agreement as to termination, removal, suc cession, and liability of trustees; liability of any depository; 3 Federal Trade Commission Rule effective March 14,1934. 25 limitations upon the trustees; voting powers of the trustees; methods in which the trustees vote; ability of trustees to trade in the certificates registered or in the securities of the corporation; compensation of the trustees and the deposi tory; methods of distributing dividends; and statement of any denials by government bodies of the right to sell securities issued by the trust. There are required, as exhibits, copies of the trust agreement and any certificates to be issued under it and any pertinent contracts or indentures that bear upon it. Wo provision is made for the filing of any financial statements. Forms G-l and G-2. Fractional undivided producing oil or gas royalties or rights are required to be registered on form G-l. The Commission has emphasized that the word "rights" is sufficiently broad to require registration of interests which are regarded as giving ownership of the oil or gas in place as well as to interests which merely afford the owner the right to produce oil or gas. However, the Act applies only to "fractional" interests; consequently the transfer of the whole interest in any tract of land, though under the terms of the lease the holder may be entitled only to a position of the production, is not considered the transfer of a security so as to require registration. The registration statement calls for a description of the registrant as to form of organization, and the details of the tract of land which is underlain by the gas or oil wells. In addition, the records of previous production as well as future possibilities must be outlined. Descriptions of the outlets for disposition of the product, details of the lease under which the royalty owners are to receive payments, r e cognition of validity of the offeror's title to the products, material contracts, liability to taxes, and denials of the right to sell securities must all be fully disclosed. -Among the exhibits required is a plat of the tract and the surrounding area to a distance of at least one-half mile from all sides, showing the approximate locations and spacings, and the depths of all producing, previously producing, and drilling oil or gas welHs and of all dry wells. Fractional undivided non-producing oil and gas royalty interests are to be registered on form G-2. A non-producing royalty interest means any royalty interest not included in the definition of "producing royalty interests" under form G-l. The registration statement is concerned with the customary description of the registrant, size and price of the fractional interests to be created, and analysis of the physical proper ties of the tract of land to which the interests apply. This mu^bbe supplemented with detailed information concerning the nearest oil or gas producing tract within an area of two miles, relative to its physical characteristics, present p r o ductivity, and future prospects. 27 With respect to the property to which the interests that are sought to he registered apply, the statement calls for data concerning transportation- facilities, encumbrances such as mortgages, deeds of trust and liens, details of the lease, and an enumeration of the deductions to which the royalties payable are subject. Included among the exhibits are a plat of the tract and the surrounding area encompassing the producing wells mentioned above, a legal opinion as to the validity of the title to the tract, specimens of the instrument to be used to transfer or convey the royalty rights or interests and copies of denials by governmental regulatory bodies of the right to sell securities. I CHAPTER V FINANCIAL STATEMENTS - PREPARATION AND AUDITING PROCEDURE The Commission has distributed the form required to he completed in describing the financial condition and results of the operations of an issuer by virtue of its general power to establish rules and specifications where statements are deemed appropriate in the public interest and under the two following sections of Schedule A of the law. . . . a balance sheet as of a date not more than ninety days prior to the date of filing of the regis tration statement showing all the assets of the issuer, the nature and cost thereof, whenever determinable, in such detail and in such form as the Commission shall describe. All the liabilities of the issuer in such detail and such form as the Commission shall prescribe including surplus of the issuer showing how and from what sources such surplus was created, all as of a date not more than ninety days prior to the- filing of the registration statement. If such statement be not certified by an independent public or certified accountant, in addition to the balance sheet required to be submitted under this schedule, a similar detailed balance sheet of the assets and liabilities of the issuer, certified by an independent public or certified accountant, of a date not more than one year prior to the filing of the registration statement, shall be submitted;. . . .! . . . a profit and loss statement of the issuer showing earnings and income, the nature and source thereof, and the expenses and fixed charges in such detail and such form as the Commission shall prescribe for the latest fiscal year for which such statement is available and for the two preceeding fiscal years, year by year, or, if such issuer has been in business for less than three years, then for such time as the issuer has been in actual business, year by year. 1 Securities Exchange Act, 193^* Paragraph 25. 29 If the date of the filing of the registration statement is now more than six months after the close of the last fiscal year, a statement from such closing date to the latest practicable date. Such statement shall show what the practice of the issuer has been during the three years or lesser period as to the character of the charges, dividends or other distributions made against its various surplus accounts and as to depreciation and maintenance charges, in such detail and form as the Commission shall prescribe, and if stock dividends or avails from the sale of rights have been credited to income, they shall be shown separately with a statement of the basis upon which the credit is computed. Such statement shall also differentiate between any recur ring and nonrecurring income and between any invest ment and operating income. Such statement shall be certified by an independent public or certified accountant; . . . .2 Three kinds of registration statements require financial statements: (1) the ordinary issuance of securities, (2) those of investment trusts, and (3) those used in case of r e organizations. In each instance the Commission has stipulated forms to be used and supplementary schedules to be completed. The following balance sheet accounts which must be analyzed and full information aubmitted give an idea as to the scope of the accountant's work: Assets Current Assets Cash, on demand Cash, time deposits Call loans 2 Ibid., paragraph 26. 30 Notes and Accounts receivable: Notes receivable (customers) Not yet due Past due Accounts receivable (customers) Not yet due Past due Other notes receivable Other accounts receivable Total notes and accounts receivable Less reserve for doubtful notes and accounts receivable Net notes and accounts receivable Inventories Materials and unfinished goods Finished goods Other current assets Marketable securities Indebtedness of officers, directors, stockholders,etc. Indebtedness of subsidiaries and affiliates, current Total current assets Deferred Assets Unamortized debt discount and expense Stock discount and expense Prepaid expenses Other deferred charges (specify) Total deferred charges Other assets subscribers to capital stock Other (specify) Investments Securities of subsidiary and/or affiliated companies Other investment securities Indebtedness of subsidiary and/or affiliated companies not current Other (specify) Total investments Fixed assets Property, plant, and equipment Less reserves for depreciation and depletion Net Intangibles Franchises Patents and trade-marks Goodwill Organization expense Other (specify) Total intangible Less reserves for depreciation and amortization Net intangibles Total assets Liabilities, capital, and surplus Current liabilities Notes payable (trade) Accounts payable (trade) Notes payable (bank) Serial bond or mortgage installments falling due within one year Accounts and notes payable to officers, stockholders, or employees Accounts and notes payable to subsidiary and/or affiliated companies, current Accounts due others Accrued liabilities Other current liabilities Total current liabilities Long-term debt (less in treasury) Bonds Mortgages Notes Indebtedness to subsidiary and/or affiliated companies not current Other (specify) Total long-term debt 33 Capital stock (less stock in treasury) Preferred Common Other (specify) Total capital stock Reserves (specify) Surplus Paid-in surplus Capital surplus Unrealized appreciation arising from revaluation of capital assets Proportion of undistributed profits and/or surplus of subsidiaries (if accrued on books of issuer) Earned surplus (or deficit) Total surplus Total liabilities, capital, and surplus It is necessary to give supplementary information for most of the above items. In order for the accountant to accede to the requirements of the Commission in the prepara tion of the necessary financial statements, a very detailed audit of the books of the issuer would appear to be essential. A break-down of requirements concerning balance sheet items follows: 34 Cash Cash Is divided Into two parts: Cash on demand Cash, time deposits The definiteness of these suggests precise treatment of these elements that are normally included in the cash of a going concern In a statement of this character, in view of the liabilities imposed upon the accountant. tions advisable Some of the precau are:^ 1. Unqualified certification of fluids by depositories. 2. Elimination from the account of vouchers that may normally be included in cash. 3. Removal of stamps and foreign funds to some position lower on the balance sheet. 4. Study of the elements in transit, particularly those that arise from related companies. 5. Personal verification of funds in branch offices instead of reliance upon certificates. 6. Exclusion of funds in closed banks regardless of possible liquidation. 7. Detailed study of the collectibility of demand or time deposits in country banks. 3 Form A -2 Instruction Book, pp. 26-28. 35 Call Loans. Whether normal auditing practice of procuring confirmations is sufficient is a problem here. Undoubtedly the auditor should be responsible for the ascertain ment of the collectibility of a call loan by a reasonable study of the position of the borrower. Notes and Accounts receivable. Aside from ordinary audit procedure in the examination of notes and accounts r e ceivable, it is reasonable to assume that, in order effectively to state the accuracy of the accounts, the auditor is charged with the obligation of confirming the propriety of balances held. It is obviously essential that any discounted, pledged, or assigned accounts be properly referred to and that receivables resulting from consignments or pre-dating of any character be specifically identified. Reserve for bad debts. The issuer is required to state in a separate schedule whether in its judgment all notes and accounts receivable known to be uncollectible have been charged off and whether adequate reserves have been provided for doubtful notes and accounts. Inventories. A supplementary schedule is called for in which the basis used in the valuation of inventories is to be expressed. When inventories contain profits resulting from sales by affiliated interests, accurate or approximate 36 amount of such profits should he indicated. The handling of the inventories should be in a manner which will completely assure the auditor that the inventories have been properly taken and priced. This probably entails the discarding of the normal practice of obtaining certificates as toperformance -- regardless of the responsibility of the individuals. It becomes fairly evident that the auditor is here charged with: 1. Definite knowledge that the inventory has been properly taken under his own supervision. 2. Providing that the basis used for pricing as stated in the issuer’s certificate is consistent throughout the e n tire inventory or that differences are adequately noted; and that the basis is carefully defined in order that problems of pricing work in process, raw materials in a rising market,, duties, transit, charges, insurance, trade or cash discounts, etc., may be carefully cohered. 3. Make certain that hypothecated materials are plainly revealed. 4. Seeing to-it that materials consigned to others are priced on a basis consistent with the balance of the inventory, giving due weight to allowances for losses, damages, and expenses of possible returns; that materials received on consignment are specifically excluded tod that post-dated, or goods in transit are carefully ear-marked. 37 5- Taking care that in pricing inactive or dead stock, obsolete or damaged goods, broken lots, repossessed merchandise, bases sufficiently conservative to be approved are employed. Marketable Securities. These are defined to be only securities temporarily held for resale. Those held primarily for investment purposes are to be taken up in one of the sub sequent groups. A separate schedule is required in which (a) basis -of valuation is to be stated, and (b) the market value of each security is to be stated. Normal auditing procedure would require: 1. Ascertaining whether there is any hypothecation of securities. 2. Physically counting the securities or securing unquestioned verification that such securities are legitimately in the hands of others. 3. Determining the completeness of the securities as to registration and coupons. 4. Fully proving title. 5. Adequately separating or commenting upon securities which are pledged as part of sinking or trustee funds. 6. Substantiating cost. Indebtedness of officers, directors, stockholders, and others, current. There is to be reported here the current indebtedness from each officer, stockholder, and persons 38 directly or indirectly controlling or controlled by the issuer, and persons under direct or indirect common control with the issuer. In addition, a supplementary schedule reporting the names and amounts of indebtedness from each of the foregoing is to be submitted when such debts to the issuer are in excess of $20,000. , The shhedule is to state the purpose of the debt, rate of interest received thereon, and a brief description of the collateral securing the indebtedness, if any, held by the issuer. ■If the item is not of a current nature, it is to be included under "Other Assets." Verification of these debts should follow the course of procedure discussed in connection with other current r e ceivables - - a definite confirmation of the balances, the ascertainment of liens against them, and their fair valuation. Indebtedness of subsidiary and/or affiliated companies, current. The accountant bears the obligation of examining the subsidiary to ascertain the accuracy, collectibility, and fair value of the accounts. Unamortized debt discount and expense. Under this title a schedule is required stating the amounts of unamortized debt discount and the expense applicable to each issue for which costs are being amortized, the dates of the issues, the maturities of the obligations, and the methods used in amor tizing such discounts and expense. Failure of the amortization 39 to conform to accepted principles would require some statement of the position of the auditor. Stock discount and expenses. While no schedule requires that the content of this deferred charge he indicated, it is presumed that any auditor certifying to a balance sheet with an item upon it that covered the discount and expenses in the issuance of the company’s own stock would adequately explain the reasons for the maintenance of the account and would ascertain its legality. It is suggested in the case of reorganizations that discounts should always he shown as a deficit or deduction from capital, as the circumstances require, if they exceed ten per cent of the par value of the shares of stock to which they apply. Prepaid expenses. It is interesting to observe the careful segregation in the balance sheet of deferred assets and prepaid expenses despite the variance in accounting prac tice. No schedule of these assets is called for, but the issuer and the auditor are fairly charged with observing that there are included within them only those accounts, falling within that type of unabsorbed costs, which have a fair market value and tangible existence (such as prepaid rent, unexpired insurance, prepaid interest, and similar items). Both the issuer and the auditor bear the responsibility of including 40 such accounts at their fair going value. Other deferred charges. A supplementary schedule is required in which all deferred charges are to he set forth and explained and provisions for amortization detailed and discussed. Current practice normally includes within this group deferred debts -- such as moving costs, experimental expenses, unabsorbed advertising, promotional expenses properly chargeable to succeeding periods. The schedule raises the presumption that the auditor and the issuer will agree as to the propriety of the deferral and the reasonableness of the provisions of the amortization. If the auditor cannot approve the continued maintenance of the balances or any part of them under existing operating conditions, his responsibility to the public necessitates unmistakable exceptions in the certifica tion. * Subscribers to Capital stock. Here again the auditor faces the necessity of verifying unpaid balances by correspon dence with subscribers shown upon corporate records to have obligations incurred by reason of their desire to acquire capital stock of the Issuer. In addition, despite the cus tomary practice of stating such items at book value, there is a problem as to the responsibility of an auditor in the ascer tainment of whether or not sufficient reserves should be created to reduce the balances shown to a fair statement of 41 their value. Securities of subsidiary and/or affiliated companies. A schedule of the holdings of the issuer in such securities is required stating the name of subsidiary and affiliated companies and containing for each security: 1. A brief description showing the number of shares of stock, and the principal amount of bonds, notes, etc., he2d; the total shares of stock and principal amount of bonds, notes, etc., outstanding; the ratio of each security held to amount outstanding. 2. The ledger value, the cost, the difference between the cost and ledger value, if any; an explanation of the difference between cost and ledger value, if any; and the accounts with the respective amounts in which such differences are now reflected. 3. When such securities were acquired from affiliated interests, a statement showing the respective costs to the issuer and to each such affiliate, a brief description of the transaction involved and the nature of the considerations given or received in each.case. 4. When such securities have been pledged to secure mortgages, notes, or any other indebtedness, a brief statement of the facts with regard to such pledges. 5. When the practice of the issuer is to accrue on its 42 books a portion of the undistributed earnings of its subsi diaries, a statement of the amount and a schedule showing the names of the subsidiaries and the amount of earnings accrued with respect to each. Aside from the normal and usual routine of: 1. Ascertaining whether there is any hypothecation of securities. 2. Physically counting the securities or securing unquestioned verification that such securities are legiti mately in the hands of others. 3. Determining the completeness of securities as to registration and coupons. 4. Fully proving title. 5. Adequately separating or commenting upon any secur ities which are pledged as part of sinkins or trustee funds. 6. Substantiating cost for the issuer of all members df the affiliated group. The accountant must not shirk his responsibility of ascertaining a fair market value of the securities unless it is possible to qualify the certificate - - a n unusual step in the statement of related securities. Other investment securities. The registration statement attempts a careful distinction between marketable securities, securities of subsidiary and/or affiliated companies, "other investment securities," and "other investments." The last two are presumably composed of securities of those companies which are not "effectively" controlled and which in the regular course of business cannot and may not be readily and quickly converted into cash. A division of this group _into classes affords an opportunity to divide securities of related or associated companies from the type that are in no sense concerned with the business of the issuer -- except possibly as customers. A supplementary schedule is required for the first of this group, which will show for each security with an aggregate cost equal to ten per cent of the total cost of the investment: 1. Brief description 2. Number of shares of stock held 3. Principal amount of bonds, notes, etc., held 4. Cost 5. Ledger value 6. Market value at dates of balance sheets or nearest available date thereto, giving dates. The others may be described as miscellaneous securities without further detail and only their combined total cost and market value need be shown. When securities have been a c quired from affiliated interests, a statement of costs to the issuer and to its affiliate, a brief description of the transac 44 tion involved, and the nature of the consideration given or received in each case are also required in addition to a state ment of amounts of and all pertinent facts with regard to such securities as have been pledged to secure mortgages, notes, and. other indebtedness. The problem of ascertaining that the values expressed within this statement represent the reasonable worth of the securities is obviously present here. Indebtedness of subsidiary and/or affiliated companies, Not current. The registration statement requires a statement showing the following: 1. Name of debtor corporations 2. Amounts due therefrom 3. Brief description of the purpose of the creatinn of the indebtedness 4. Statement as to whether collateral is held by the issuer to secure said indebtedness and the nature thereof 5. Rate of interest receivable on indebtedness. It is quite-evident that the accountant must adequately examine the records of subsidiary and affiliated companies directly or indirectly controlled by the issuer or under direct or indirect common control with the issuer in order to reasonably satisfy himself as to the accuracy, collectibility 45 and fairness of the issuer's value referred to under this title. Other investments. The registration statement does not require an analysis of these miscellaneous securities hut the principles described in the discussion of the securi ties of subsidiaries above seems to apply thoroughly to this group. Property, plant, and equipment. A supplementary schedule is required to be included in the registration statement to show the following analysis for each of the major classifications of the property, plant, and equipment accounts from the time of organization of the issuer or if that is not practical, beginning with January 1, 1922. 1. Ledger value of each of the major classifications 2. Cost to issuer 3. Profits to affiliated interests included therein (if any). If profits of this nature are included in fixed assets, full details, including a brief description of the property, the name of the affiliated interests from whom acquired and the cost of the property to such affiliated interests, are required. 4. Unrealized appreciation or write down resulting from revaluations, reorganizations, mergers, or otherwise. If any such appreciation or write down is included or excluded in fixed assets, a statement is to he submitted showing the nature of the transaction giving rise to them, including (a) in the case of appraisals: dates of appraisals, the basis thereof, the name of the appraiser, and a comparison of the previous ledger value and appraised value of the property, and (b) in the case of mergers, consolidations, reorganizations, etc., a comparison of the recorded values on the books of the respective vendors and vendees. 5. Bond discount, commissions, and expense (if any) included therein other than that properly allocable thereto for the construction period. 6. Stock discount, commissions, and expense, if included. This schedule is not to include intangible items such as franchises, patenst, and trade-marks, goodwill, organiza tion expenses, etc. If any important item of the property, plant, or equipment of the issuer has been definitely abandoned and not written off, the value of the property within the fore going schedule (or an estimate if the amount is not known) is to be stated. 47 Issuers owning raining, oil, and similar businesses which have incurred expenditures in development, stripping, drilling, and costs of similar nature, which are included in the cost of property, plant, and equipment are specifi cally required to set forth in a separate schedule the nature and amounts of such elements and the basis for their ex tinguishment. Obviously, completion of this analysis together with detailed explanations of differences between their cost and ledger values will materially aid the issuer in assigning the reason for the valuation of the property, plant, and equipment upon the balance sheet. Yet, the schedules do not begin to cover the obligations of the auditor to establish title and value. The Commission has taken the position that accountants whose experiences do not qualify them as appraisers of the particular property included in the registrant's balance sheet should neither assign values to such properties nor certify to the accuracy of the valuations placed on such properties. That is the job of the appraiser, not the accountant.4 Greidinger, B. B . , Accounting Requirements of the S.E.C. (New York: The Ronald Press', 1939) P* iBl. 7 Assuming that there are to be no qualifications as to the property, the accountant is probably charged with quali fying or ascertaining: 1. That title to all of these assets is unmistakably clear upon the records in county or State offices recording such facts, 2. That the public record of liens, such as mortgages, judgments, taxes, assessments, etc., is properly reflected in other parts of the statements, 3. That all deeds and other instruments of title are in possession of the issuer and agree with the public records, 4. That the land and building purchase accounts follow the ordinary definition of such assets and contain generally the cost of abstracts, appraisals, plots and surveys, examination and registration of title fees, conveyancer's and notary fees, contract price, legal fees, commissions paid to brokers, assessments for public improvements which add to value of property, the cost of wrecking old buildings on property, and finally, the cost of real improvements to the land, insurance, taxes, and interest during construction. 5- That the Building Construction account follows the ordinary definition and contains generally the cost of permits, licenses; costs of wreck ing old buildings (less salvage); expense in removing tenants from premises; legal, archi tectural, and engineer's fees; cost of testing piers, foundations; labor, materials and supplies; contract work, insurance, taxes, and interest during construetion, 6. That equipment costs follow the normal definition and contain only contract costs, installation, and freight charges, 7. That assets of record are actually in possession or control of the issuer and that all assets which have been dismantled, destroyed, trans ferred out, sold, or otherwise disposed of are excluded from the record or reported upon. This will undoubtedly require the unusual step of listing the physical assets and inspecting them. 8. That unless an appraisal has been had of the property, and unless full expression of the source and figures in the appraisal is had by issuer so that it may be adequately referred to by the accountant, a reasonable survey of 50 assets by appraisers employed by the accountant ascertains that the balance sheet sets forth a fair statement of going value. Reserves for depreciation and depletion. An explana tion of the rules followed by the issuer in the computation of the amount charged off for depreciation or depletion is to be submitted. It is to be in a form which will show separately the amounts and classes of property subject to depreciation and depletion, the rates of depreciation or d e pletion used, the pertinent facts upon which the rates are based and a comparison of depreciation and depletion claimed to have been sustained for the purpose of Federal income taxes and the amounts accrued through charges to income and/or surplus. This information is to be submitted for each year for which Federal income tax returns have been filed. While this process enables a full expression of all pertinent facts, it does not relieve the accountant of the burden of: 1. Determining if the rates of depreciation are adequate, by an examination of the rates used in comparable business and by a detailed study of operating conditions that increase or decrease normal depreciation. 2. Satisfying himself that the reserve in the 51 ' aggregate and in its detail is adequate as a measure of the loss for "both (a) wear and tear, and (b) obsolescence and inadequacy. 5. Stating exceptions to the process if that is found necessary. Where the rates of depreciation used for period of the report are substantially different from those used in the preceding accounting periods, such change will undoubtedly affect proper comparisons of the present accounting period with the preceding accounting period. In order for a company to show either increased or decreased earnings, it can simply change its rates of depreciation from year to year so as to accomplish its ends. Where the rates of depreciation applied for the accounting period of the report submitted are different from the rates applied for the prior accounting periods, then that fact is required to be disclosed together with details of the differences.5 The Commission is definite in its instructions to accountants regarding changes in accounting methods. If any change in accounting principle or practice has been made during the period covered by the profit and loss statements and such change substantially affects proper comparison with the preceding accounting period, give the necessary explanation 5 Ibid., p. 212. 52 in a note attached to the appropriate balance sheet or profit and loss statement.^ Intangibles. The balance sheet divides intangibles into franchises, patents and trade-marks, good-will, organiza tion expenses, and other intangibles. In addition it requires, through a supplementary schedule, a brief description of the nature of each class of Intangibles; a comparative statement statement of the cost and ledger value of each class since January 1, 1922, and a complete explanation of the differences, if any. If there are organization expenses capitalized or deferred here, a statement is required beginning with January 1, 1922, of the nature and amount of each class of such costs. While earnest application to schedules of this type does seem to permit a complete analysis of the method in which the intangibles have been built up, they omit all opportunity for an explanation of a value ascribed. Here, therefore, if other experts cannot be relied upon to express a basis which may be referred to by an accountant in his certificate, it is essential that the Issuer and accountant express an attitude toward the values or permit the assumption by the reader that they approve the basis as fair.7 The obligation of ascertaining that equitable title 7 Form A -2 Instruction Book, p. 36 . to 53 intangibles lies with the issuer brings many problems when reports of other experts independent of the issuer are now available. If that is assumed, it is probably necessary that the auditor: 1. Determine by active inspection through his own staff or counsel that all franchises, patents, trade-marks, goodwill, and other intangibles have been legally assigned to the issuer and registered in the Patent Office or other public offices applicable. 2. Thoroughly investigate the status of actions which have been or will be started against the issuer for patent infringements or denial of ownership of intangibles. 3. Determine that intangibles if expressed at cost include only the fair cost of the elements as they are ordinarily approved and particu larly do not encompass such elements as the legal and incidental expenses incurred in O defending the issuer’s title and interest. In addition to the analysis of intangibles, the regis tration statement requires an indication of the methods used 8 In the matter of LaLuz Mining Corporation, 1 S.E.C. 19, Pile Ho. 2-1223, October 4, 1935, p. 236 . 5^ in creating any reserve for their depreciation or amortiza tion. It is to state the basis of providing the reserve and the rates of depreciation or amortization used for each class of intangible beginning with January 1, 1922. It Is presumed, of course, that there are directed principally to patents and trade-marks. The auditor is charged with ascertaining that the method of amortization fairly distributes the cost over the period from the date of the statement to the termination of their legal life, unless: 1. Such patents have been superseded by other patents or have no further commercial value, in which instances, of course, the accountant is fairly charged with the necessity of referring to that fact or eliminating the ele ments from his statement. 2. There is a reasonable basis for failure to amortize successful patents In that the monopolistic condition established by the patent has become perpetuated in the form of goodwill, in which event a definite statement of the condition is essential. In addition, it should be recognized that, unless this schedule fully covers the amortization of terminable franchises during the period of the grant (regardless of the 55 possibility of renewal) any other intangible and the periodical elimination of (subject to exhaustion) over the determinable period, the' accountant is charged with eliciting reference to them in his certificate or this schedule.9 Liabilities. Current liabilities to be detailed upon the balance sheet are: Notes payable (trade) Accounts payable (trade) Notes payable (banks) Serial bond or mortgage installments falling due within one year Accounts and notes payable to officers, stock holders, or employees Accounts and notes payable to subsidiary and/or affiliated companies, current Accounts due others Accrued liabilities Other current liabilities Supplementary schedules are required only in the case of the accounts and notes payable to officers, stockholders, and employees showing: 9 In the matter of Snow Point Mining Company, 1 S.E.C. 55, File No. 201522, March 14, 1956. p. 516. 56 1. The names and amounts of accounts and notes payable in excess of $20,000 each to each officer, director, stockholder, and person directly or indirectly controlling or controlled by the issuer and persons under direct or i n direct common control with the issuer. 2. The purpose thereof. 3. The rate of interest paid thereon 4. A brief description of the collateral (if any) given by the issuer to secure the indebtedness. In the case of current debts to subsidiary or affiliated companies, the following information is called for: 1. Name of creditor corporations 2. Amounts due thereto 3. Brief description of the purpose of the creation of the indebtedness 4. Statement as to whether collateral was given by the issuer securing said indebtedness and the nature thereof 5. .Rate of interest payable on indebtedness. The balance sheet requires a statement of long-term debt (any obligations due after a year from the date of the balance sheet) divided into the following classifications: 57 1. Bonds 2. Mortgages 3. Notes 4. Others (specify) 5. Indebtedness to subsidiary and/or affiliated companies, not current In addition, the registration statement calls for an analysis beginning January 1, 1922, with respect to the first four of the foregoing obligations, of the following informa tion: 1. Brief discription 2. Nature and amounts of consideration received 3. Discounts suffered 4. Commissions paid and to whom 5. Purpose of issue 6 . Methods employed in disposition 7. ofsecurities Details of sales through subsidiary and/or affiliated companies. In the case of non-current debts to subsidiary or affiliated companies, the same information is called for as in the case when indebtedness is of a current nature. Contingent liabilities. The material contingent lia bilities of the issuer are naturally required to be stated 58 in full. The obligation of the auditor will force statement in extreme detail of every commitment that has any possibility of becoming a direct liability. Some illustrations of that type are published by the Commission. These and other normal contingent worth full consideration, and which, when present, undoubtedly require comment, are as follows 1. Discounted acceptances - bank or trade 2. Discounted drafts 3. Indorsements of unrelated commercial paper 4. Notes receivable discounted 5. Customer's notes sold or otherwise trans ferred for value 6 . Accomodation indorsements 7. Advances received on sight drafts with bills of lading attached 8 . Agreements to purchase securities 9. Assignment or hypothecation of receivables without full release of liability 10. Current mortgage liability of subsidiary company on properties acquired 11. Failure to redeem portion of preferred stock on date stipulated 10 Form A -2 Instruction Book, p. 63 . 59 12. Foreign exchange purchased for future delivery commitments 13. Necessity of converting stobk into bonds of the c ompany 14. Guarantor of accounts of others 15* Guaranties of bonds and mortgages 16. Payments required under employees’ pension agreements 17. Guarantor of interest on bonds of other companies 18. Guarantor of contracts of other companies 19. Guarantor of rental agreements of affiliated, and subsidiary companies 20. Indorser of notes of subsidiary and affiliated companies 21. Guaranties of price maintenance 22. Claims by customers or others for damages, imperfections, delays, short shipments, etc. 23. Lawsuits threatened, pending, or adjudicated in lower courts against the company for infringements of patents, copyrights, etc., claims for damages by officers, employees, for compensation, etc. 24. Unfavorable leases 25. Unfilled contracts which in the judgment of the management may adversely affect the issuer 26. Commitments In excess of current market prices, which in the judgment of the management may adversely affect the issuer 27. Agreements for guaranteeing product, quality, service, and suitability 28. Agreements for return of containers of products 29 . Unaudited Federal or State tax returns 30. Unpaid portion of stock owned bpt not paid for In full 31. Agreement to subscribe to capital of subsi diaries or others 32. Amount of cumulative preferred dividends accrued but not yet declared! and the amount of arrears per share 33* Possible penalties in excess of profits upon construction projects or other activity r e quired to be 'completed in a specified time 34. The default of sinking fund Installments r e quired by the deed of trust applicable to bonded indebtedness. 61 From the foregoing it is evident that the auditor must make a full and detailed analysis of all contingent liabilities in order to give complete expression to any such items. Form A -2 contains the following: . . . As to matters set forth herein which rest peculiarly in the knowledge of the person whose statement is furnished and are not reflected by its books and records, the accountant may make such ex ception as accord with the circumstances. As to matters required . . . to be set forth other than (obligations of the person whose statement is fur nished as a party secondarily liable which are not shown in the balance sheet) . . . there shall be stated only those matters which, in the view of the circumstances of the particular person whose state ment is furnished, are consequential; matters which, in the view of the circumstances of the particular person whose statement is furnished, are of an ordinary nature are not to be set f o r t h . H One might reasonably summarize the procedure required of an auditor in proving debt (in addition to that pursued in normal accounting and auditing practice) to include at least: 1. Thorough audit of the records of subsidiary and/or affiliated interests. 2. Unquestioned confirmation statements . giving the complete information concerning liabilities, and the assets pledged there under. 11 Form A -2 Instruction Book. 3. Examination of the public records to ascertain the full record of debt. 4. Examination by counsel of all indentures, of'the deeds of trust, mortgages, etc., in order that full expression of the liabilities may be had. 5. Examination by counsel as to whether any of the indebtedness exceeds any statutory, charter, by-law or deed-of-trust, sinking-fund, etc., provision limiting the corporate indebtedness. 6. Determining the accuracy by direct and personal confirmation of all trustees1 accounting as to bonds and notes under their supervision. Reserves. A supplementary schedule is required setting forth with regard to each reserve: 1. Brief description of the nature 2. How formed, whether through charges to income, earned surplus, or otherwise 3. Summary of the credits to each reserve and. the details 4. Whether funds have been set aside to provide for the objects for which the reserve was created 5. If contingent, the nature of the contingency 63 expected to arise; and the method by which determination has been made of the amounts accrued to the reserve. There are to be included here all segregations of past or current profits or surplus which are not for: 1. Depreciation and depletion of fixed assets 2. Depreciation and amortization of intangibles 3. Depreciation of investments 4. Provision for doubtful accounts and notes Capital stock. The registration statement requires a schedule for each class of stock authorized and/or issued containing the following: 1. Brief description 2. Par value per share 3. If no.par value, give the stated or assigned value per share 4. Number of shares authorized with dates 5. Number of shares nominally issued 6. Number of shares reacquired and in treasury In addition, for the period beginning January 1, 1922, the following information is required: 1. Net number of shares actually outstanding 2. Nature and amounts of consideration 3. Commissions paid and to whom received 4. Expenses of issue 5. Net proceeds of issue 6. Purpose of issue 7. Methods employed in dispositionoof stock 8. Details of any sales of stock, made through a subsidiary and/or affiliated company Outstanding stock under the Commission’s rules excludes that in the treasury but includes the stock pledged and out standing. Treasury stock is to be shown as a deduction from outstanding issues. Certainly schedules of this type (properly reconciled with existing book values of the capital accounts) permit a full disclosure of all matters regarding the issuance of capital and the valuation placed upon them on the company's records. Whether, in addition, the auditor is reasonably charged with the necessity of procuring opinion of counsel as to the validity of the stock issued in accordance with the certificate of incorporation, the by-laws, and the minutes is a problem to be settled in each case. For the auditor, too, there is a question of the certificate as to issued stock that can be secured from registrars and transfer agents if a,dequate examination cannot be made of the corporate records. Surplus. The surplus accounts are to be stated so as to show the record of: 65 1. Paid-in surplus 2. Capital surplus 3. Unrealized appreciation arising from revaluation of capital assets 4. Paid-in excess of the Earned surplus (or deficit) surplus is to include here notmore than proceeds from the the par or stated value thereof. the sale ofcapital stocks over Here also are to be included surpluses arising from recapitalization of business. Foreign elements sometimes called paid-in surplus, particularly donated surplus or that resulting from appreciation of properties, are to be stated elsewhere. Capital surplus is not defined but, by both elimination and good practice, it must be presumed to exclude paid-in surplus, that surplus arising from unrealized appreciation of capital assets and the surplus resulting from profits. Obviously, therefore, it excludes surplus secured from such sources as the sale of capital stokk at a premium but may include that resulting from other dealings in a corporation’s own stock, or donated stock, and transfers from the capital accounts upon reduction of stated or par values, etc. The instructions make no attempt to define for the reader the distinction between capital surplus and paid-in surplus. However, where the surplus created represents the excess of the amount received over the par or stated value 66 of the company’s capital stock, such excess is paid-in surplus and should he so labeled in the balance s h e e t . H The surplus arising from revaluation of capital assets is to include the surplus resulting from the revaluation of capital assets through unrealized appreciations or write downs incident to revaluations, reorganizations, mergers, or otherwise. This will, in part at least, correspond to the data required by the Commission in the analysis of the property, plant, and equipment accounts. The undistributed profits of subsidiaries permit segregation of the undistributed profits of subsidiaries as a separate element when the accounting procedure of an organization permits their accrual upon its records. Earned surplus is the balance of net profits after deducting the distribution to stockholders and the transfers to any of the foregoing capital or reserve accounts. Schedules analyzing the surplus are required: 1. Capital surplus - a statement of the nature and amounts of items in the account, including donated surplus, discount on capital stock reacquired, and any other elements not properly included in the other specific surplus accounts. 2. Unrealized appreciation, etc., a schedule of the accounts and their respective amounts in 3-1 Greidinger, op. cit., p. 285 . 67 this item as a result of revaluations, etc. 3. Undistributed profits of subsidiaries a schedule of the amounts so included which were not distributed by the subsidiaries as dividends or otherwise actually received by the issuer. In addition the issuer is speci fically directed to state the amount of any surplus of subsidiaries at the dates of a c quisition by the issuer. 4. Earned surplus - aside from a detailed analysis of the account for at least three years, a statement is to be furnished bf the respective amounts, if any, included in earned surplus of stock dividends and stock rights, in excess of the net profits derived from subsequent sales of these and the basis for any such inclusion. Profit and loss and earned surplus accounting. Profit and loss and earned surplus statements are to be furnished for the last three years of existence. If the date of filing the registration statement is more than six months after the close of the last fiscal year, an additional schedule is required to the latest practicable date. In addition supplemental schedules analyzing some of the elements are to be submitted. 68 The form adopted for the profit and loss and surplus statement, with an indication of additional detail which is made a part of the registration statement, is as follows:12 PROFIT AND LOSS STATEMENT Income from Trading, Manufacturing, or Extracting Gross Sales (less returns and allowances) - a schedule is to he furnished of the major classes of gross sales segregating sales to affiliated interests (as defined in the balance sheet). Cost of Goods Sold (exclusive of expenses specifi cally set forth below) - if intercompany profits are included in this item, statement of the approximate amount is to be made if unable to report the exact amount thereof. GROSS PROFIT Selling, General, and Administrative expenses Provision for Doubtful Accounts Maintenance and Repairs Rents and Royalties (classified in a separate schedule) Other Expenses (classified in a separate schedule) Taxes (other than Federal or State Income Tax). Provision for Depreciation and Depletion Total cost of Goods sold and Expenses Gross Income from Trading, Manufacturing, or Extracting Operating Income Other than Trading, Manufacturing, or Extracting Operating Revenues - the major sources of operating revenues and the amounts thereof are to be stated 12 This is the form prescribed for ordinary registra tions (A-2). 69 General and Administrative Expenses Maintenance and Repairs Rents and Royalties (classified in a separate schedule) Commissions and fees - a statement indicating to whom fees were paid for management, engineering, underwriting, financial, and other supervisory services, respective amounts thereof, and the basis for such charges is required Other operating Expenses Taxes (other than Federal or State Income Tax) Provision for Depreciation and Depletion Total Expenses Gross Income other than trading, manufacturing, or extracting Total Operating Income Income from other than Operations Dividends received from subsidiary and/or affiliated companies - an itemized statement is required of dividends received from each class of stock of each subsidiary and/or affiliated company, the annual rate or amounts received per share, the amount received in stock and cash or in any other way. In case of dividends received in stock, the basis of valuation employed in recording receipts thereof is to be explained, the corresponding amounts at which stock dividends were charged against surplus of the issuing company, and the class of surplus so charged Dividends received from others - if stock dividends are included, the companies from which said dividends were received are to be named, the amounts stated, and the basis fo valuation employed in recording receipt indicated. Interest received on long-term debt of subsidiary and/or affiliated companies Interest received bn long-term debt of others Interest received on notes and accounts of subsidiary and/or affiliated companies Interest received from other sources (classified in a separate schedule) Commissions and Pees received - a statement indicating from whom fees were received for management, engineering, underwriting, financial, and other supervisory services, the respective amounts thereof and the basis for such charges is required Profit on sales of securities Miscellaneous other income (classified in a separate schedule) Expenses in connection with income from other than operations (detailed in a separate schedule) Net Income from other sources than Operation Non-recurring Income Non-recurring income - a brief description of the amounts included in this item is required. In cases of income derived from sales of securi ties, properties, etc., to subsidiary and/or affiliated companies, the cost to the issuer, the consideration and nature thereof received, and the profit recorded is to be shown in a schedule. If profits or losses from thes sale of capital stock received as dividends or the sale of rights are included, the basis of computing the amounts thereof is to be set forth Non-recurring Expenses and/or Deductions (specified in detail as above) Net Non-recurring Income and Expense Total Gross Income . Deductions from Gross Income Interest on long-term debt Interest on notes and accounts payable to subsidiary and/or affiliated companies Amortization of debt discount and expense Other deductions (specify) Total Deductions Net income before Federal and State Income Taxes Federal and State Income Taxes Net Income 71 EARNED SURPLUS Balance beginning of period Net Income as above Total Dividends paid On preferred stock In cash In stock On common stocks In cash In stock Total dividends paid Net Other credits to earned surplus (specify in detail) Total credits to earned surplus Other charges to earned surplus (specify in detail) Total other charges to earned surplus Balance in earned surplus at end of year. CHAPTER VI LIABILITIES AND RESPONSIBILITIES OF ACCOUNTANTS UNDER THE ACT The Act renders any person whose profession gives authority to a statement made by him, and who has with his consent been named as having prepared or certified any part of the registration statement, liable to any person acquiring a security for any misstatement or omission in the part of the registration statement prepared or certified by him.l Since the presence of the consent in the registration state ment may be waived by permission of the Commission, in such case actual consent to the use of the report must be shown.2 A brief analysis of the liabilities of accountants under the Act Is as follows: 1. Their obligations t© purchasers are confined to losses resulting from material untruths or omissions in their portion of the data in the registration statement.^ 2. Damages may be minimized by showing that the whole or part of the loss resulted from other than the untruth or omission.^ 1 Section 11(a); Par. 9-7 2 Pars. 5*19 ^ Par. 9.7 ^ Par. 9.22 9.7 73 3. The purchaser need not have knowledge of their certification or have relied upon it in anyway.5 4. There is no escape from liability by the employ ment of irresponsible dummies as parties to a registration statement.6 5. The remedies of a purchaser in an action under the Federal law are in addition to those accorded to them under common law and State statutes.7 6. Suit must be commenced in the case of an untruth ful statement or omission in a registration statement, within one year after discovery of the untruth or omission, or from the date, when in the exercise of reasonable diligence it should have been discovered, and in no event later than three years after the public offering of the security.8 7. An attempted waiver by the purchaser of his right to proceed against an expert for an untruthful statement or omission is ineffectual.9 8. Every expert liable for a misstatement or omission, unless guilty of a fraudulent misrepresentation in the 5 Par. 9.4 6 Par. 10.4 7 Par. 9-33 8 Par. 9-34 9 Par. 9*39 74 registration statement filed, for a particular security, is responsible jointly and. severally with all other persons rendered liable under the Act to any purchaser of such security. Each person so held liable may demand that the others against whom liability attaches under the Act, share in his costs and damages.-*-® The defenses to an action against the accountant or other expert based upon misstatements or omissions in the registration statement are: 1. at the The purchaser's knowledge of the truth oromission time of acquisition of a security. 2. The existence of an earning statement covering a year beginning after the effective date of registration and acquisition by the purchaser in reliance upon that statement.12 3. The reliance upon a rule or regulation ofthe Commission.13 4. The severance of relations with the issue or attempted severance with expert. I1*' 10 Par. 9.26 11 Par. 9.10 12 Par. 9.12 13 Par. 9-13 I1*- Par. 9.14 due notice to the Commission by the 75 5. The taking effect of a registration statement without knowledge of the expert, followed by a severance or attempted severance and due notice to the Commission and the public .3-5 6. Reasonably grounded belief in the truth of and absence of omissions in report after reasonable investigation, (in the case of accountants this means that his statements or reports represent the application of accepted accounting procedure to the facts disclosed in the investigation).3-6 7. The report or certificate was used without his consent. 3-7 8. The extracts or copies of his reports were not fair representations of the originals.3-8 9. Reliance upon that part of the registration state ment prepared by other experts or upon that part of the registration statement purporting to be a copy of a public document.3-9 The problems confronting accountants and other experts who are open to liability to the investing public for matters 3-5 Par. 9.15 16 par. 9.16 17 par. 9.18 18 Par. 9.17 19 Par. 9*19 inaccurately reported upon "by them involve a number of elements, particularly the extent of the examination, quali fications of statements made, and the indemnification that may be secured.. The Act effects no change in current prac tice as to the work of those designated as experts. It does, however, add liabilities beyond those ordinarily understood to adhere to the client - practitioner relationship. It imposes3upon experts the necessity of rendering their services in such a manner that not only the client but any investor will be able to allege that any part of their rreport is u n true or omits material facts which should have been stated to effect a full disclosure in the report. It bases liability, as far as experts are concerned, upon (l) Statements prepared after reasonable investigation but so framed as to be m i s leading; (2) Statements that are misleading since they were prepared without reasonable investigation. It is not essential that the expert be proved reckless, incompetent, or in collusion with the issuer. He may be liable for failing to extend his examination far enough before rendering his report or for misleading statements prepared by an honest but erring subordinate. Under such conditions the accountant should refrain from the acceptance of engagements unless every opportunity is given to make a detailed examination, with little of the customary restrictions as to time and fees. Self-protection 77 demands that accountants have a thorough understanding of the nature and use to be made of the report, and an agree ment with the issuer that is to be cited in full within any registration statement. Working papers used on the engage ment should be carefully preserved and should effectively state the basis for preparation of the report - the books or sources used, the officers or employees of the issuer or others consulted, and the name of the subordinate preparing the paper. Accurate time reports to establish "reasonable care" are essential. The statements, certificates, and supplementary schedules prepared for the report, will bear considerable rechecking for headings, clarity, and amplification, with the fact borne in mind that the investor is not expected to be familiar with legal, accounting, or appraisal practices, and that abridgment, verbosity, and ambiguity are all likely to be condemned. By far the most important part of the report is the certificate. There is no prohibition in the statutory p r o visions regarding the behavior of an expert which denies himthe right to refuse to' certify to matters beyond his knowledge or the restrictions of his engagement. On the contrary, both the Regulations of the Commission and the forms issued by them for use in registration, fairly bristle with the cordial invitation for the expert -- more particularly the accountant - 78 to divulge all of the extraneous considerations that prevent his unequivocal certification of the facts presented. Many investors will regard these qualifications as the most i m portant sources of information within the registration state ment . If it, is assumed that a report definitely indicates the source of its information, an expert can successfully defend an action "by showing that he had no reasonable ground to believe and did not believe that there was any untruth or omission in the report of another expert or in a statement purporting to be that of a public official.19 If an expert satisfied himself as to the knowledge and skill of another expert upon whose statement or report he relied, qualifying his report by reference to such other expert, and does not actually know or have any suspicions of an untruth or omission on the part of such other expert, he has satisfied the statute and can successfully defend the action. If, for instance, an attorney, acting as an expert in connection with the r e gistration statement, is responsible for a statement that certain property, title to which may be in litigation, belongs to the issuer, an accountant may fairly indicate that he has relied upon this statement or opinion and certify, with comments, to the correctness of a balance sheet including 19 Par. 9*19 this property as an asset. It is not essential that the opinion of the attorney he reviewed by the accountant, as he may reasonably rely upon the conclusion. It is only in those cases where he actually believes or has reason to believe that the attorney is in error that he is not entitled to rely upon the statement. Obviously an expert may be on safer ground when he makes no Inquiry into the basis for the facts or opinions of another expert than when he attempts to review the details giving rise to the statement of a fact or opinion, because in the latter case he may discover informa tion which, though not definitely conclusive, may raise doubts in his mind as to the correctness of the other expert’s statements. The Act does not insist upon this type of check ing and it would seem advisable to avoid it wherever reasonably possible. It is difficult to draw a line sufficiently clear to indicate where the functions of an accountant stop and those of an attorney or appraiser begin. The principle of reliance of one expert upon another's statements brings up the ques tion of the respective limitations of the several professions. It would seem logical that, should an expert slightly over step his functions and state a fact or opinion which properly should have come from another expert, reliance upon such a statement should be an effective defense because it is generally recognized that the different professions overlap. But one expert may not rely upon the opinion of another when it is clear beyond any doubt that the latter has overreached the bounds of his profession in advancing a statement. B I B L I O G R A P H Y BIBLIOGRAPHY A ..Books Greidinger, Bernard B., Accounting Requirements of the S .B.C. New York City: The Ronald Press’^ 1939 • Stevens, W. Mackenzie, Financial Organlza11on and Administra tion. New York: The American Book Company, 1934• B. Periodicals "Accounting and the S.E.C." No. 3. September, 1937* The Accounting Review, Vol. 12, "Accounting and the S.E.C." No. 4. December, 1937* The Accounting Review, Vol. 12, "Accounting and the S.E.C." No. 1. March, 1938. The Accounting Review, Vol. 13, Blough, Carman G., "The Relationship of the Securities and Exchange Commission to the Accountants," Journal of Accountancy, Vol. 63, No. 1. January 1937 Matthews, George C., "Accounting in the Regulation of Security Sales," Accounting Review, Vol. 13, No. 3, September, 1938 Robinson, Leland Rex., "Are Present Forms of Financial State ments Satisfactory?" J ournal of Accountancy, Vol. 62, No. 6, December, 1936. Werntz, William W . , "Some Problems as to Parent Companies," J ournal of Accountancy, Vol. 67, No. 6, June, 1939* The following data made available by the Securities and Exchange Commission Acts, Rules and Regulations; Securities Act of 1933 as amended. Securities Exchange Act of 1934 and amendments. Securities and Exchange Coihmiss'ion, General Rules and Regulations under the Securities Exchange Act of 1934. 82 Form and Instruction Books: Form A -2 for Corporations. Instruction Book for Form A -2 Formal Decisions: Securities and Exchange Commission, Decisions, Vol. 1, J u l y 2, 1934 - December 31, 1936. Washington, D.C.: Government Printing Office, 1938.