has already been enacted into law. But as trying to show you why a balance sheet cannot be accepted at its face value, I want to talk about the matter of write-ups. We have found in our utilities investigation what a write-up is. In its simplest and purest form it is this: The management of the corporation having an investment account on its books, or having a fixed capital account on its books comes along some day and just marks out the cost of the investment, or fixed capital, from their books and substitutes for it somebody's idea of what it is worth. Sometimes it was written up to the market value, the market value having been made by stock-market manipulations. We have one instance in this record of ours where a man rode for 2 days on horseback over a property, looked it over and made some figures on the back of an envelop, and then using those figures wrote up the capital account $63,000,000; but, that is not the only instance. The record is full of it. I have little compilation here covering the state of our record up to some time last summer, where the total write-up and investment, and fixed capital accounts show at $1,159,000,000, which does not include $4,902,291.62 by Utilities Power & Light Corporation of Chicago. Now, when these write-ups occur and fixed capital or investment accounts are written up in this fashion (and this happens more often in holding companies than in operating companies, because where there are good State commissions, they do not stand for it, where they are alert) those write-ups are reflected on the liability side of the balance sheet. That is, against some of those write-ups, stock will be issued or additional values assigned on the books to stock that has already been issued. In the balance sheet, that will go to the public, a retirement reserve will be created on the liability side out of a write-up, or a depreciation reserve, which actually does not provide any reserve for depreciation at all. It is just a bookkeeping figure that will not enable the corporation to replace its property when it is worn out. But, more than that, and more often, we find these write-ups are placed in the surplus accounts. They are used to create a surplus account that is shown to the public in the balance sheet. Now, are we to accept, or is the Commission to accept, those balance sheets and those income statements at their face value with no right to go behind them or no right to tell us how much of this is cost, how much is write-up, how much is inflation, how much is capitalized discount, which they ought to be amortizing out of their earnings; or whether they are paying dividends out of capital, or paying them out of surplus? If you give me the right to value as I please, one important asset of a corporation, I can distribute all of the rest of the capital of the corporation in the form of dividends, and still show a balance in the surplus account. I would be glad to leave this with the committee. It shows the total of these write-ups. The CHAIRMAN. Very well. (The paper above referred to is as follows:) Appreciation (write-ups) developed by Federal Trade Commission in its inquiry under Senate Resolution 83, 70th Congress, 1st session American Gas & Electric Co. (S.Doc. 92, Electric Bond & Share Co. group: 1 399, 201, 827. 39 Electric Bond & Share Čo. (S.Doc. 92, vol. 23-24, p. 49) American Power & Light Co. (S. Doc. 92, vol. 23-24, p. 1096): Kansas Gas & Electric Co.... $2, 547, 542. 24 8, 160, 000. 00 Co. Minnesota Power & Light Co. Florida Power & Light Co---- 35, 000, 000. 00 National Power & Light Co. (S. Doc. 92, vol. 25, p. 630): Ap- Electric Power & Light Corporation (S.Doc. 92, vol. 23– Middle West Utilities Co. (pt. 38).. Standard Gas & Electric Co. (pt. 36) New England Power Association (S.Doc. 92, vol. 31-32, The North American Co. (S.Doc. 92, vol. 33–34, p. 759) - New England Power Co. (S. Doc. 92, vol. 31-32, p. 511) W. B. Foshay Co., and subsidiarys (S.Doc. 92, vol. 25, pp. 299 and 300) Southeastern Power & Light Co. (S.Doc. 92, pt. 27): Alabama Power Co. (pt. 30, p. 258). Mississippi Power Co. (pt. 27, p. 215) -- Southern Fuel Co. (pt. 27, p. 215). $6, 392, 241. 73 4,389, 679. 75 12, 724, 558. 75 26, 898, 275. 47 1, 799, 000. 00 Louisville Gas & Electric Co. (Byllesby group) (pt. 37)- - - - Electric Power & Light Co. subsidiaries (pt. 23-24, p. 1228) (Electric Bond & Arkansas Power & Light Co.......... Share group): Louisiana Power & Light Co.. Mississippi Power & Light Co.. Washington Water Power Co. (pt. 29, pp. 92 and 97).. National Power & Light Co. (pt. 25, p. 629) (old company)__ 1 Assets "written down" $441,387,724.00 on Dec. 25, 1931. Appreciation (write-ups) developed by Federal Trade Commission in its inquiry under Senate Resolution 83, 70th Congress, 1st session-Continued Oklahoma Gas & Electric Co. (pt. 36) (Byllesby group). Pacific Power & Light Co. (pt. 35). Tide Water Power Co. (pt. 44) (Insull group) Carolina Power & Light Co. (vol. 26, p. 90) (Electric Bond United Public Service Co. (Thompson Ross & Co.). National Light Heat & Power Co (pt. 44) . Profits on sales to affiliated companies (pt. 40, p. 369). Utah Power & Light Co. (pt. 45). Metropolitan Edison Co. (pt. 50, exhibit 5260). Central Public Service Corporation (pt. 52, exhibit 5322, Columbia Gas & Electric Co. (exhibit 5193, p. 41, pt. Ohio Fuel Corporation (exhibit 5193, p. 61, pt. 47). Columbia Corporation (exhibit 5201, p. 96, pt. 47). -----{ The Manufacturers Light & Heat Co. (exhibit 5215, p. The Manufacturers Light & Heat Co. (exhibit 5215, p. United Fuel Gas Co. (exhibit 5236, p. 26, pt. 49) . Huntington Gas Co. (exhibit 5238, p. 29, pt. 49) New England Gas & Electric Association (exhibit 5218, New England Gas & Electric Association (exhibit 5218, Worcester Gas Light Co. (exhibit 5218, p. 79, pt. 48). Cape & Vineyard Electric Co. (exhibit 5218, p. 190, New Hampshire Gas & Electric Co. (exhibit 5218, p. Derry Electric Co. (exhibit 5218, p. 372, pt. 48) . Adirondack Power & Light Corporation (exhibit 5412, Total. Utilities Power & Light Corporation (exhibit 5346-A, $3, 263, 560. 16 2, 521, 063. 35 5, 679, 427. 66 5, 000, 000, 00 9, 692, 314 99 2, 714, 967. 75 22, 414, 833. 79 6, 818, 940. 16 8,082, 104. 00 5, 721, 247. 00 1, 841, 550. 68 3, 487, 442. 61 4, 214, 285. 36 34, 320, 046, 00 25, 890, 525. 26 10, 894, 101. 45 420, 687. 50 8, 238, 400. 00 2, 374, 407. 86 354, 500, 00 366, 521. 60 2 10, 899, 734. 11 2, 619, 930. 40 39, 751, 228. 66 9, 264, 350 46 2,257, 629. 21 122, 135. 64 9, 476, 149. 66 5, 831, 833. 30 10, 394, 824. 11 4,344, 822. 37 473, 975. 96 957, 753. 63 139, 987. 36 17, 284, 353. 53 2, 444, 154. 24 8, 692, 835 65 2, 531, 037. 67 235, 926. 20 1, 159, 914, 276 74 4, 902, 291. 62 2 Excess of book value over par value of stocks of subsidiary companies whose properties were taken over Mr. MARLAND. May I interrupt you? Mr. HEALY. Yes. Mr. MARLAND. Would it not be advisable to have all of these statements require them to show what part of the surplus was earned? Mr. HEALY. Yes, sir. Mr. MARLAND. And what was written up by appreciation? Mr. HEALY. I think it would be extremely valuable and quite necessary, and it is exactly the thing the Commission should be allowed to do. Let me show you the balance sheet of the Columbia Gas & Electric Corporation, consolidated balance sheet of that corporation, and its surplus. That shows a figure for assets of $609,000,000, and when you get over to the surplus account, you do not find the surplus divided. You just find surplus $44,000,000. Now, that surplus has write-ups in it. Some of them give them the high-sounding name of appreciations. That surplus is in part a reflection of those write-ups in the fixed capital account. Let us look at the property account, asset side: $609,000,000. According to the best figure that we can make, $84,000,000 of that is write-up, but the consolidated balance sheet does not disclose it. Nor does it disclose the content or make-up of that surplus account. And these certified public accountants-they certify to these balance sheets, that Mr. MARLAND. As to that, would it be wise that they be required to show in the capital account, so much cost? Mr. HEALY. Yes, sir. Mr. MARLAND. So much appreciation? Mr. HEALY. Yes, sir; I believe it would. And I think that it is very remarkable that in the case of two or three large companies that have been studied by the Commission the management cannot tell, and the books of the corporations do not show, actual original cost of the properties. Now, I am not, as I have said, an expert accountant-but I have always supposed that the purpose of bookkeeping and accounting was to make a historical record of events; that if a corporation took in so much money, it made a record of it and if it paid out so much money, it made a record of that, and when you get corporate accounting to a point where you cannot tell the original cost of property, I think things have come to a bad pass. As to the corporation I referred to with the $63,000,000 write-up, I find, on looking at my memorandum, the write-up was really $66,000,000. It was the Appalachian Electric Power Co. In the case of the Minnesota Power & Light Co., the property with a ledger value of $17,000,000 were entered on the books of a new company controlled by the same management at $38,000,000, a write-up of $21,000,000, or 126 percent. Another write-up was made on that, which brought the total write-up to more than $27,000,000. The Minnesota Power & Light Co. had certain lands and water rights that had not been developed, which were held for future development. They were not earning the company a penny. In fact, the company had the burden of carrying them, and they put a valuation on that property, and they proceeded to compute interest on it. They added the interest to their fixed capital and land account, and showed this interest in an income statement; not only showed it on their books, but they included it in a statement they made to a trustee under a bond indenture, relating to the right to take down additional bonds against that income. The Florida Power & Light Co.: Certain companies were consolidated to form that company. The constituent companies carried their property on their books at $26,000,000. The went on the books of the Florida company at $58,000,000, a write-up of $30,000000, or 103 percent increase. This Central Public Service Corporation that I have spoken of before, which was adjudicated a bankrupt on the 8th of March 1933, during the time that that stock was being supported on the market by manipulation and the price made on the market and while they were selling the stocks throughout the country, there was a deficit in the earned surplus of the company; but they had a capital surplus and paid in surplus; paid in surplus being established out of the money that the investors paid into the corporation; but it was all reported to the public in one lump sum. And I have many instances of these write-ups. Take the case of the Arkansas Natural Gas Corporation. A write-up was recorded of over $5,600,000. Take the case of the Associated Gas & Electric Co. In their published balance sheet you will find surplus reported in one item. You will find no explanation of the fixed capital, but our records at the Commission indicate that there are write-ups of a very large sum in the figures at which their properties are recorded. Now, I have brought with me a mimeographed summary of the reports presented by our examiners on the Cities Service Securities Co. and the Associated Gas & Electric Securities Co. which I would like to leave with the committee. Let me give you another illustration of a surplus account, and how part of it was created. The Associated Gas & Electric Co. was a New York corporation. It was selling class A stock. Under its charter, and under the New York laws, if it sold a share of class A stock to you or me at $50 a share, it was required to set up that $50 in the capital stock account. This is what they did. They created a subsidiary corporation, which they fully owned, 100 percent, Associated Gas & Electric Securities Co. They issued the class A stock to the securities company at $35 a share. The securities company sold it to the public at prices above that; sometimes $50 and sometimes $60 a share. When they sold at $50 a share, the securities company recorded a profit of $15 a share, and carried that to a surplus account from which they subsequently paid a dividend of some $20,000.000. That went to another associated company, which in turn paid it over to the Associate Gas & Electric Co., which carried it into its capital plus account, so that by that device they made a disposition the actual consideration received for those shares that would have been possible had they not used that subsidiary corporation. e reason I speak of this in this connection is that, if that comhose stock is traded in on the various curb exchanges, were e a statement here of its surplus, or file a statement with the ster itself of its surplus, in the same form that it is published uite, the Commission nor the investors-neither the Com |