of the Office of the Chief Accountant, and of the Chief Accountant of the Division of Corporation Finance and his staff, saves registrants and their representatives both time and expense.

Many specific accounting and auditing problems arise as a result of the examination of financial statements required to be filed with the Commission. Where examination reveals that the rules and regulations of the Commission have not been complied with or that applicable generally accepted accounting principles have not been adhered to, the examining division usually notifies the registrant by an informal letter of comment. These letters of comment and the correspondence or conferences that follow continue to be a most convenient and satisfactory method of effecting corrections and improvements in financial statements, both to registrants and to the Commission's staff. Where particularly difficult or novel questions arise which cannot be settled by the accounting staff of the divisions and by the Chief Accountant, they are referred to the Commission for consideration and decision. By these administrative procedures the Commission deals with many accounting questions.

Inquiries in ever-increasing volume as to the propriety of particular accounting practices come from accountants and from companies not presently subject to any of the acts administered by the Commission who wish to have the benefit of the Commission's views and thus utilize and apply the Commission's experience to the facts of their own case. Teachers of accounting and their students also use the public files and confer with the staff in the study of accounting problems.

Shortly before the opening of the year under report the Commission amended rule 2-01 of regulation S-X relating to the independence of accountants certifying financial statements filed with the Commission for the purpose of giving formal recognition to administrative practices which have been in the process of development for some time. The revision makes no material change in the policy set forth in prior decisions of the Commission and in published opinions of the Chief Accountant.

In the revision of this rule the Commission has recognized the impact of mergers and the growth of corporations through widespread affiliations. The emphasis in the rule has been changed to make it clear that where relationships described in the rule exist the Commission will find that an accountant is in fact not independent with respect to the company involved, but in those instances where lack of independence is not established the Commission will make no finding with respect to the accountant's independence.

A few months after the revision of rule 2-01 of regulation S-X mentioned above, the Commission announced the publication of an additional release in its Accounting Series dealing with independence

of accountants.20 In connection with the revision of rule 2-01 practicing accountants had indicated that an interpretative release similar to Accounting Series Release No. 47 would be a helpful guide to the profession. This new release, which summarizes previously unpublished rulings on independence in the Commission's experience under rule 2-01 since the publication of Accounting Series Release No. 47 on January 25, 1944, together with prior releases and Commission decisions reflects the development of policy regarding the practice of accountants before the Commission over a period of some 25 years. In Accounting Series Release No. 47 it was stated that it was not feasible to present adequately in summarized form the circumstances existing in particular cases in which it was determined not to question an accountant's independence. The growth of the accounting profession since 1944 and the number of inquiries received from public accountants unfamiliar with the rules suggested the need for publication of rulings in this category. In view of this development it was determined to review the administrative rulings in this area and to state briefly in the new release the relationships which existed in select cases where an accountant was not denied the right to certify the financial statements because under the circumstances it was concluded that the independence of the accountant was not prejudiced. During the fiscal year the Commission issued its Findings, Opinion and Order in a proceeding instituted under rule II (e) of its rules of practice against Bollt and Shapiro, Theodore Bollt and Bernard L. Shapiro. The Commission found that the respondents had failed to comply with rules and regulations of the Commission and with generally accepted accounting standards, and had engaged in improper and unethical professional conduct. Specifically, the Commission found that where a partner of an accountant certifying the financial statement in a registration statement pursuant to the Securities Act of 1933 is the principal officer and controlling stockholder of the registrant, the certifying accountant is not independent with respect to the registrant. The Commission concluded that where the partner in the firm of certified public accountants who was the principal officer and controlling stockholder of the company which filed a registration statement with the Commission caused the other partner to certify registrant's financial statements as an independent public accountant knowing that the certifying partner was not qualified to furnish an independent certification and sought to conceal the partnership relationship, the privilege of practicing before the Commission should be denied to the firm and the partner controlling the registrant until they obtain the prior approval of the Commission to practice before it in the future. The Commission further concluded

"Accounting Series Release No. 81, Dec. 11, 1958. Accounting Series Release No. 82, Jan. 28, 1959.

that the privilege of practicing before the Commission of the certifying accountant should be suspended for 30 days.

During the year the conflicting views of public utilities, public accountants, and regulatory agencies with respect to accounting for deferred taxes reached a stage requiring formal public review by the Commission. The matter arose because the effect of section 167 (liberalized depreciation) and section 168 (accelerated amortization) of the Internal Revenue Code of 1954 is to permit the tax-free recovery from operations of capital invested in a plant at a faster rate than would be possible by depreciation methods previously permitted for income tax purposes 22 and because there is a lack of uniformity in the related accounting regulations issued by the several state utility commissions. A tax deferral is recorded when liberalized and accelerated methods of depreciation and amortization are adopted for tax purposes and straight line methods are followed on the books. Most public utility companies have classified the resulting accumulated balance sheet credits to reserves or deferred credits or other nonequity accounts. Others have classified the accumulated amounts as a part of restricted earned surplus in the equity capital section of the balance sheets, while a few others, although identifying them as restricted earned surplus, have not included them in the equity section of the balance sheet. Still other utility companies have not employed deferred tax accounting but have followed what has been called the "flow-through" method and have shown in the income statement normal depreciation charges and the actual current income tax provision without provision for future income taxes.

In September 1958 a public utility subsidiary of a registered holding company filed with the Commission a registration statement under the Securities Act of 1933 and a declaration under the Public Utility Holding Company Act of 1935 with respect to the proposed issue and sale of first mortgage bonds at competitive bidding. In the financial statements submitted by the registrant company, which are also subject to the accounting jurisdiction of the Federal Power Commission,23 the balance sheet carried the accumulated credits arising from the use of deferred tax accounting in respect of both liberalized depreciation and accelerated amortization as restricted earned surplus and stated them as a part of the equity capital of the company. The Commission's staff questioned the classification in light of Order No.

22 That this was the intent of these sections of the Code is disclosed by the Report of the House Committee on Ways and Means and Report of the Senate Committee on Finance. See H. Rep. No. 1337 (83d Cong., 2d Sess.), p. 24, and Sen. Rep. No. 1622 (83d Cong2d Sess.), p. 26.

23 Federal Power Commission Orders No. 203 and No. 204 do not make mandatory the use of deferred tax accounting for financial accounting purposes by those companies which elect to deduct liberalized depreciation or accelerated amortization in their income tax returns. Rather they provide that where the company does employ deferred tax accounting, the balance sheet credit shall be classified in a new account (Account No. 266) entitled "Accumulated Deferred Taxes on Income."

204 of the Federal Power Commission. It should be noted that an order of a state regulatory commission to which this company is subject as to a minor portion of its utility operations authorized a restricted earned surplus classification. The state commission having jurisdiction over the company's major distributing facilities had recently issued an order directing the company to transfer the accumulated credits from restricted earned surplus to a reserve account. The company initiated an appeal from this order.23a

Rule 28 promulgated by this Commission under the 1935 Act prohibits a registered holding company or a subsidiary thereof from distributing to its security holders, or publishing, financial statements which are inconsistent with the book accounts of such company or with financial statements filed by it with the Commission. One of the considerations raised by the staff of the Commission in the above described case was whether the applicability of Order No. 204 of the Federal Power Commission to the registrant rendered the publishing any financial statements inconsistent therewith violative of the provisions of rule 28.

In view of the controversial nature of the subject matter and its importance to many registrants, the Commission permitted the registration statement to become effective and the securities to be sold on the basis of full disclosure in footnotes to the financial statements of the different positions taken by the several regulatory agencies concerned with this company's affairs.

As a result of this case, the substantial amounts involved in the industry, and in consideration of differences of opinion as to the proper interpretation of Accounting Research Bulletin No. 44 (Revised),25 the Commission issued on December 30, 1958, a "Notice of Intention to Announce Interpretation of Administrative Policy."26 The notice proposed that any financial statement which designates as earned surplus or its equivalent or includes as a part of equity capital (even though accompanied by words of limitation such as "restricted" or "appropriated") the accumulated credit arising from deferred tax accounting in respect of liberalized depreciation or accelerated amortization would be presumed by the Commission "to be misleading or

Later, on September 8, 1959, the State commission issued a supplemental order amending its earlier order to permit each utility subject to its jurisdiction to elect to follow either the reserve or the restricted retained income treatment for accumulated deferred

taxes.

"Federal Power Commission statistics indicate that as of Dec. 31, 1957, the aggregate amount of accumulated balance sheet credits attributable to both liberalized depreciation and accelerated amortization in respect of electric utility companies and natural gas and pipe line companies is $792,755,000.

The import of this bulletin, issued in July 1958 by the Committee on Accounting Procedure of the American Institute of Certified Public Accountants, has since been clarified by a statement of that Committee that: "A provision in recognition of the deferral of income taxes, being required for the proper determination of net income, should not at the same time result in a credit to earned surplus or to any other account included in the stockholder's equity section of the balance sheet".

"Securities Act Release No. 4010, Dec. 30, 1958.

inaccurate despite disclosures contained in the certificate of the accountant or in footnotes to the statements provided the matters involved are material.” 27

Many comments were received in response to the Commission's invitation for views and comments. These views have been analyzed and summarized. Public hearings on the proposed policy statement were held before the full Commission on April 8 and 10, 1959, and the Commission has the matter under advisement.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND INTER-AMERICAN DEVELOPMENT BANK

Section 15 of the Bretton Woods Agreements Act, as amended, exempts from registration under both the Securities Act of 1933 and the Securities Exchange Act of 1934 securities issued or guaranteed as to both principal and interest by the International Bank for Reconstruction and Development. The bank is required to file with the Commission such annual and other reports with respect to such securities as the Commission shall determine to be appropriate in view of the special character of the bank and its operations and necessary in the public interest or for the protection of investors. The Commission has, pursuant to the above authority, adopted rules requiring the bank to file quarterly reports and also to file copies of each annual report of the bank to its board of governors. The bank is also required to file reports with the Commission in advance of any distribution in the United States of its primary obligations. The Commission, acting in consultation with the National Advisory Council on International Monetary and Financial Problems, is authorized to suspend the exemption at any time as to any or all securities issued or guaranteed by the bank during the period of such suspension.

By virtue of Public Law 86-147, approved August 7, 1959, which authorizes United States participation in the new Inter-American Development Bank, a similar exemption has been provided for certain securities which may be issued by the new bank. The Commission is considering appropriate rules and regulations with respect to the new bank of the character presently in effect with respect to the International Bank.

The International Bank for Reconstruction and Development sold in the United States during the fiscal year only one issue of its primary obligations, in the amount of $100 million, of which $4,300,000 was for delayed delivery. At the end of the fiscal year the total funded debt of the bank was approximately the equivalent of $1.9 billion, of which $1.6 billion was payable in United States dollars. At the same time the subscribed capital stock of the Bank aggregated $9.6 billion of which $7.6 billion constituted the uncalled portion of the subscriptions.

27 Accounting Series Release No. 4 (1938).