Opinion ID: 263341
Heading Depth: 1
Heading Rank: 5

Heading: financial reporting to stockholders

Text: 45 Most vigorously pressed in this case is the Company's objection to the order that all future accounting statements to stockholders shall conform to the Commission's accounts. 11 As already noted, when the Commission formulated Order 204, it considered various methods of describing tax deferrals. In its view the accounts there prescribed would assure clear disclosure    and lessen the possibilities of misunderstanding and misinterpretation of the nature and purposes of accumulated tax deferrals. 19 F.P.C. 837, 840 (1958). We shall examine the historic and textual supports for these opposing positions. 46 A. AUTHORITY OF FPC TO REGULATE BASIC CORPORATE ACCOUNTS. We agree with the Commission's determination that it, rather than state agencies, has the power to regulate the basic accounts which a company subject to its jurisdiction must use for financial reporting purposes. 47 1. History of Federal Power Act. Here a short reference to an important chapter in our nation's financial history is desirable. In the years between 1928 and 1935 the Federal Trade Commission made a comprehensive investigation of the public utility industry. Among the abuses the seven-year investigation disclosed were misstatement of earned surplus, or failure to distinguish earned from capital surplus, and making payment of dividends from the latter; deceptive or illusory methods of dividing, or pretending to divide, earnings or profits; deceptive or unsound methods of accounting for assets and liabilities, cost, operating results and earnings. 12 48 Noting the frustrations experienced by utility stockholders and others in securing accurate, reliable accounting information concerning holding companies and their operating subsidiaries from stockholder reports and other published financial statements, the Trade Commission reported to Congress that: 49 [D]ue to various practices that have unfortunately come into common usage, an investor or other interested party has great difficulty in getting an accurate idea as to the financial condition of a corporation and the success of its operations from the published balance sheets and income statements usually released for the benefit of stockholders   . 50 Some of the holding and operating companies fail to follow accounting practices that would clearly and properly indicate the nature of surplus shown by the corporate financial statements. For instance, some companies combine all types of surplus, regardless of its origin, in the general surplus account. The latter is usually supposed to represent only earned surplus, but in many cases it does not.    [Our italics] 51 Some companies set up on their balance sheet alleged surplus items.    Other deceptions arise from an effort to continuously show earnings for dividend purposes and for use in published statements to influence the investing public.    52 It has been found that it is quite a common practice among holding companies to overstate earnings and surplus by recording unrealized earnings   . 13 53 Noting further how ineffective states had been in their efforts to regulate accounting practices of interstate electric systems, the Federal Trade Commission found that the evils existing in the industry flourished in spite of such regulation as has existed. 14 The Trade Commission recommended to Congress the enactment of legislation to correct these abuses by the creation of an appropriate federal agency with power to make and enforce uniform accounting   . [Our italics] 15 The present Federal Power Act and the Federal Power Commission are the fruit of that investigation. 54 2. Broad Powers Granted to FPC by Act. In unambiguous language section 301(a) of the Act, 16 U.S.C.A. § 825(a), empowers the Commission to require utilities to keep accounts, records of cost-accounting procedures, correspondence, memoranda, papers, books, and other records as the Commission may by rules and regulations prescribe as necessary or appropriate for purposes of the administration of this Act,   . 16 The burden of justifying any accounting entry is placed squarely on the person making, authorizing, or requiring such entry   . 55 Section 301(b) provides that the Commission shall at all times have access to and the right to inspect and examine all accounts, records, and memoranda of licensees and public utilities    ; and section 301(c) provides that the Commission shall also have access to the books, accounts, memoranda, and records of any person who controls, directly or indirectly, a licensee or public utility subject to the jurisdiction of the Commission   . 17 56 The Company urges that a proviso clause in section 301(a) negatives the Commission's jurisdiction over the Company's reporting of financial data to the general public. We find no support for this contention. The clause referred to recites: 57 That nothing in this Act shall relieve any public utility from keeping any accounts, memoranda, or records which such public utility may be required to keep by or under authority of the laws of any State. 58 In numerous cases it has been held that the Commission's accounting is not subordinated if it comes into conflict with state regulatory requirements. Northwestern Electric Co. v. Federal Power Comm., 321 U.S. 119, 64 S.Ct. 451, 88 L.Ed. 596 (1944), affirming 134 F.2d 740 (9th Cir. 1943); Louisville Gas & Electric Co. v. Federal Power Comm., 129 F.2d 126 (6th Cir. 1942); Northern States Power Co. v. Federal Power Comm., 118 F.2d 141 (7th Cir. 1941). 18 It should be noted that the proviso is a prohibition running to public utilities; not to the Commission: [N]othing in this Act shall relieve any public utility from keeping any accounts    required    by    the laws of any State. [Our italics] It was embodied in section 301 to insure that state commissions shall not be precluded from prescribing accounting procedures necessary for their regulation. 19 But as pointed out by Justice Roberts, speaking for a unanimous Supreme Court in the Northwestern Electric case, We are not here concerned with what the regulatory authorities of [the state] may or may not demand or permit. Whatever that action may be, it is subordinate to Congress' appropriate exercise of the commerce power. 321 U.S. 119, 125, 64 S.Ct. 451, 454, 88 L.Ed. 596 (1944). [Our italics] 59 Who then is to determine what shall be a regulated utility's basic records and how these records are to be reflected in public financial reports? 60 It would appear to be a truism that a corporation can have only one set of basic corporate books which reflect its actual financial condition. For as pointed out in Arkansas Power & Light Co. v. Federal Power Comm., 81 U.S.App. D.C. 178, 156 F.2d 821, 823 (1946): 61 [A] public utility cannot keep more than one set of actual, official corporate accounts. Neither can any other corporation, for that matter. There must always be an official recording of figures to represent the actualities of the business, to constitute the genuine record of stewardship, the basis upon which representations are made as to the real results of the utility's operations and its true financial condition in reports to stockholders and to the public, and in financial statements to be submitted to prospective investors or creditors. Merely to state this proposition is to demonstrate its soundness, since any reasonable mind immediately perceives that actual transactions can be truly reflected by only one set of figures. A differing set shows only a hypothetical situation, demonstrating the distinction between what is, and what might have been. 62