The Sec Rules Historical Cost Accounting: 1934 to the 1970s

Accounting and Business ResearchVol. 37 Nbr. 3, January 2007

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From its founding in 1934 until 1972 the SEC, and especially its chief accountant, disapproved of most upward revaluations and general price-level restatements of fixed assets as well as depreciation charges based thereon. This article is a historical study of the evolution of the SEC's policy on upward revaluations and restatements of non-financial assets. It treats episodes prior to 1972 when the private-sector bodies that established accounting principles sought to gain a degree of acceptance for such revaluations and restatements but were consistently rebuffed by the SEC. The SEC reversed its policy on upward revaluations during the period from 1972 to the end of the 1970s. Throughout the article, the author endeavours to explain the factors that influenced the successive positions taken by the SEC.

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The Sec Rules Historical Cost Accounting: 1934 to the 1970s

It is well known that the United States has long been a bastion of predominantly historical cost accounting for inventories and fixed assets. Not so well known, however, is the fact that the US insistence on the use of historical cost accounting has emanated from the Securities and Exchange Commission (SEC) and has not always been a tenet held and advocated by leaders of the accountancy profession. It is the aim of this paper to trace the SEC's powerful influence over the predominance of historical cost accounting in the US from its founding in 1934 until the 1970s.

1. Early evolution of the SEC's position on historical cost

The SEC came into existence on 2 July 1934 and was charged with administering the Securities Act of 1933 and the Securities Exchange Act of 1934, the second of which established the SEC.1 This legislation empowered the SEC to set the rules and regulations to govern the reporting, accounting and disclosure of financial information by companies whose securities were quoted on any national securities exchange, including the contents of prospectuses and periodic filings with the Commission. The SEC created the position of chief accountant in the autumn of 1935, and after a short search it named Carman G. Blough, a certified public accountant and former academic and Wisconsin government employee who had joined the Commission's registration division in 1934, to the position on 1 December 1935 (Chatov, 1975:103; Cooper, 1980:22). He remained as chief accountant until May 1938, when he left the Commission. From 1944 to 1961, he served as the full-time director of research of the American Institute of Accountants (AIA, Institute).2

The person who effectively cemented the SEC's policy to insist upon historical accounting was Robert E. Healy (pronounced Haley). 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 sixyear, Congressionally mandated investigation into the market manipulations by public utility holding companies, with heavy emphasis on their use of dubious accounting practices during the 1920s. In the end, the record of the investigation accumulated to 95 volumes.

Healy had been a justice on the Vermont Supreme Court, and President Calvin Coolidge, a Vermonter himself, selected his fellow Republican to direct...

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