Robert E. Healy’s Lasting Mark on Our Profession
-By Guest blogger, John D Rossi III, CPA
Accounting standards in the United States have traditionally been based on historical cost. Not so well known, however, is that the use of historical cost accounting can be traced to the Securities and Exchange Commission (SEC), and that it has not always been advocated by the accounting profession.
In the early 20th century, accountants had significant latitude in selecting accounting practices and policies. The use of “current values” or “appraised values” for assets was common. During this period, balance sheets often included upward revaluations of long-term assets, such as property, plant, equipment, and intangible assets.
As a result of abuses, President Franklin Roosevelt signed into law the Securities Act of 1933, which regulated the public offering of securities; the Securities Exchange Act of 1934, which regulated stock markets; and the Public Utility Holding Company Act of 1935 (PUHCA), which regulated the utility industry. The reform effort was spearheaded by the newly created SEC as part a congressionally mandated investigation into market manipulations by public utility holding companies, with an emphasis on questionable accounting practices.
The person who advocated the SEC’s adoption of historical accounting standards nearly 70 years ago was Robert E. Healy. Prior to becoming one of the five founding SEC commissioners in 1934, Healy had been chief counsel of the Federal Trade Commission (FTC) from 1928 to 1934 and directed the FTC’s six-year, congressionally mandated investigation into the market manipulations by public utility holding companies, which centered on the use of “current values” and “appraised values” during the 1920s.
In the aftermath of the Great Depression, there was a general move toward more “conservative” accounting. This included a move away from the use of “current values” and “appraised values.” The use of historic cost accounting was strongly supported by Healy. Healy participated in the business practices investigations that uncovered widespread use of asset write-ups, which the FTC viewed as arbitrary.
Healy identified the problem to be an existing mentality that one could “capitalize practically everything except the furnace ashes in the basement,” and he became an uncompromising advocate of historical cost accounting and public utility reform. He was livid at the asset value write-ups that companies had been booking. In testimony to a Congressional committee in April 1934, he said, “The purpose of bookkeeping and accounting was to make a historical record of events.”
In a speech before the American Accounting Association on Dec. 27, 1937, Healy put forward his belief on the purpose of accounting: “The purpose of accounting is to account – not to present opinions of value.” This is not to say that current assets should not be carried at the lower of cost or market, or that the setting up of proper reserves does not require professional judgments. It’s that cost is usually certain.
The capital entrusted to management can usually be ascertained. Finding what has been done with that capital can be ascertained through accounting. The steward must account for the talents entrusted to management. “Accounting means the making of a historical record of financial events. Valuation is a very different matter,” he said. Healy did not imply that there are no circumstances under which unrealized losses or gains should be recognized on books of account. Unrealized gains should not be entered upon accounts until the probability or certainty of the permanence of the gain can be well established. “I believe that good accounting should observe this principle,” he stated.
In 1936, the SEC received academic support for its historical cost position when the American Accounting Association’s executive committee, led by association president Eric L. Kohler, published A Tentative Statement of Accounting Principles Affecting Corporate Reports, which strongly endorsed original cost for physical assets. The SEC’s chief accountant said in 1937 that he agreed with the statement, and four years later the Association published a monograph written by two members of its 1936 executive committee, William A. Paton and A. C. Littleton. The monograph contained a conceptual rationale for the use of historical cost accounting.
During Healy’s tenure, the SEC strongly endorsed historic cost accounting and moved to curtail the use of “appraised values.” By 1940, the practice of the upward revaluation of fixed assets, a practice that had been commonplace in the late 1920s, was virtually extinct from financial reporting in the United States. Healy’s views would guide a generation of leaders at the SEC through the early 1970s. Healy, who served longer than anyone as an SEC commissioner (12 years), died in office in 1946.
“Those who cannot remember the past are condemned to repeat it.” This saying appears in many different forms, but the earliest version is probably that of the poet and philosopher George Santayana. So, will the accounting profession learn from Healy and his efforts or are we condemned to repeat our past mistakes?