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APRIL 14, 1947 firm of millions of dollars and had manipulated accounts so as-to conceal -his thefts, But in 1938 Price, Waterhouse had declared to the stockholders that the firm’s accounts “fairly present, in ac- cordance with accepted principles of accounting .. . the position of the com- bined companies. . . .” This is, actually, no reflection on the honesty or bright- ness of the Price, Waterhouse ac- countants. It merely dramatizes just how little the auditor’s certification may mean on the annual report you got in the mail this morning. Who's right? ND how much should you rely on the glowing statement in which -the company’s president invariably damns- government interference with business, but always promises—even in spite of such interference—to turn up a good profit next year? On that touchy sub- ject, Arthur Stone Dewing, one-time professor at the Harvard Business School, writes in his classic Financial Policy of Corporations: ‘Financial lit- erature abounds with well authenticated cases in which the same directors, who were outwardly seeking to support the company’s credit by persistent reassur- ances to the stockholder, were at the very same time selling their own shares’ , and even hastening the inevitable catas- trophe by selling stock short.” Fortu- mately for your peace of mind, though, the. most flagrant examples of such prac- tices belong to the days before Franklin , D. Roosevelt and the New Deal. So much for Dr, Finney’s warning that “some men are liars.” But outright dishonesty is not the major obstacle in the path of an eager annual-report reader. Of much more concern is the cau- tion that even honest men differ widely on accounting practices. The varying techniques make presentation of figures to suit the purpose at hand sur- prisingly easy. This appears most clearly when a corporation wants to develop two different figures for two different purposes. In 1940, for example, Western Union, in order to show a high profit to its stockhold- ers, told them in the main body-of-its annual - report that only, $8.2 million had to be set aside for depreciation. In the less well read tax section of the same re- port, however, Western Union admitted it had reported a depre- ciation reserve of more than $11 million to the government in ‘order.to lessen taxable income. The contradictory fig- - ures were developed by equally legiti- mate accounting practices. Only Western Union knows which, if either, figure was correct. Or take the case of Amerada Petro- leum, a small but definitely blue-chip , oil company. Its.annual report is a thing of beauty, and—on second glance— of wonder, It lists splendid earnings and handsome profits. The company has not missed a dividend since 1922; and TRY FIGURING IT OUT FOR YOURSELF 19 in 1944, with gross profits of $17 -mil- lion and a net of $5 million, it raised its dividend from $2:to $3 a share. But its stockholders’ report for that year showed no item for taxes on income or surplus profits. This caught the eye of one keen investment analyst, who looked into the detailed report which the company had filed with the SEC. There he found that Amerada actually -had paid $200,000 in- taxes, but this was less than it had paid in previous years when its income was lower. And it had paid no excess-profits tax at all. The answer to this is another study in ac- counting legerdemain. It so happens that each year, any oil company can claim that its oil properties have been de- pleted by 27.5 percent of its gross income. The fact that after four years, this figure of depletion comes to 110 percent has never seemed to bother Congress, solicitous for the future of ._- the oil companies. In addition, by law Amerada is permitted to charge off costs of developing new wells as operating © expenses, though the rest of us would have to list such expenses as capital out- lays. So, by these perfectly legitimate deductions, Amerada was able to show a pitiable state of affairs to the govern- ment. But to its stockholders, everything was rosy. But what if its report to the government is nearer the truth? What if it is really depleting its oil reserves? What if its extensive drilling operations strike nothing of value? Fortune, after analyzing Amerada’s success with a not unfriendly eye, added that ‘“Amerada’s present affluence and serenity are also due to luck.” If luck should run out, those annual reports are going to look awfully silly. But these are special cases, each with its own peculiarities. What can be said in general about the figures presented in the ordinary annual teport? As George O. May puts it, they are “the reflections of opinions subject to a wide margin of error.” And accountants differ furiously among themseves in their opinions. Suppose, for example, one or ce ene a ee eee