Benington, Harold

O’Mahoney, Joseph C,

English

eGrove (Univ. of Mississippi)

Journal of Accountancy Volume 67 Issue 2 Article 8 2-1939 Correspondence: Plan for Pooling the Investments of Endowment Funds; Borah-O’Mahoney Bill Harold Benington Joseph C, O’Mahoney Follow this and additional works at: https://egrove.olemiss.edu/jofa  Part of the Accounting Commons Recommended Citation Benington, Harold and O’Mahoney, Joseph C, (1939) "Correspondence: Plan for Pooling the Investments of Endowment Funds; Borah-O’Mahoney Bill," Journal of Accountancy: Vol. 67: Iss. 2, Article 8. Available at: https://egrove.olemiss.edu/jofa/vol67/iss2/8 This Article is brought to you for free and open access by the Archival Digital Accounting Collection at eGrove. It has been accepted for inclusion in Journal of Accountancy by an authorized editor of eGrove. For more information, please contact egrove@olemiss.edu. CORRESPONDENCEA Plan for Pooling the Investments of Endowment FundsEditor, The Journal of Accountancy:Dear Sir: An article on the above subject, written by Mr. Ralph S. Johns, was pub­lished in the January issue of The Journal. I would draw attention to one feature of the plan as outlined, which would, in my opin­ion, often result in gross injustice whereas by adoption of the modification which I am about to suggest, the plan would work equitably.Mr. Johns’ plan provides for the relative interests in the pool of the various trusts being determined by adjusting the carrying value of the securities and the capital values of the various trusts to correspond with the market values prevailing at the date of the inception of the pool. His argument in sup­port of this procedure is entirely logical and convincing. For reasons, to me quite inex­plicable, however, he proposes that there­after any new trust entering the pool shall take “pot luck” with those already involved. To do this might on occasion result in the rankest injustice.For the sake of example, let us assume that a pool was formed on June 30, 1928, by the X university and its carrying value was frozen at $4,000,000 in accordance with the market values prevailing at that date. Suppose that at June 30, 1932, some philanthropist, or the executors of his estate, turns over a certified check for $500,000 to the university for the purpose of creating a special endowment fund. Now assuming that none of the securi­ties in the pool had been sold since 1928, it is obvious that by 1932 the market value of the pool’s portfolio would have shrunk considerably, let us say 20 per cent or $800,000, owing to the distressful economic situation existing at the latter date. It would be patently unjust to ignore this fact in de­termining the proportionate interest of the new trust in the pool, which should conse­quently be 5/37ths and not l/13th, as would result by the application of Mr. Johns’ sug­gested procedure, a difference of nearly 1/17th! I have of course purposely given a rather extreme case to illustrate my point, but such extreme situations do actually oc­casionally arise.Now my suggested modification of the plan is as follows:(a) New endowment funds to be separately invested until the close of the current fiscal year.(b) At the close of each fiscal year, all ac­cumulated profits or losses on pool investments to be equitably credited or charged to the endowment funds con­cerned and any undistributed income of the pool credited to the income accounts of the endowment funds concerned.(c) The investments already in the pool and those temporarily earmarked as belong­ing to new endowment funds to next be revalued at the market prices prevailing at the close of the fiscal year, these values to be set up on the books and the new endowment securities to be merged in the pool.The fact that my plan involves annual re­valuation of the endowment funds at market prices presents no bar to its adoption. The endowment funds belonging to a university are of no value to it, except as they produce income, and the carrying value assigned to them is therefore unimportant except as conveying some indication of the probable income that may be expected by them and as furnishing an equitable basis on which their joint income can be apportioned amongst them: for both of these purposes the market values of the securities owned, in my opinion, furnish the best yardstick available.Mr. Johns, in this connection says, “With respect to unearned increments, it may be stated that any attempt to classify unrealized profits with realized profits is not regarded generally with favor among accountants. It would introduce a feature which would make the plan so cumbersome as to be impractica­ble.” I venture to suggest that he exaggerates the cumbersomeness of the procedures in-110Correspondencevolved, and would point out that the objec­tion of accountants to the anticipation of un­realized profits is directed at situations where to do so might result in their distribution as profits or might result in an unduly opti­mistic credit position, neither of which situa­tions arise in connection with endowment­fund accounting.Yours truly,Harold BeningtonChicago, Ill.The Borah-O’Mahoney BillEditor, The Journal of Accountancy:Dear Sir: Your recent letter and the April issue of The Journal of Accountancy have just come to my attention. Your fear that section 5(j) and section 20 of the bill intro­duced by Senator Borah and myself would be a step backward by halting progress in corporate accounting and reporting which has resulted from the wide adoption of the professional audit does not seem to me to be warranted. This provision was not directed against accountants and in my opinion would operate in their interest, because no one would be more likely to be selected by stock­holders under that provision as corporation representatives than accountants.The provision is intended to permit small and minority stockholders to deliver their proxies to any person who may be certified by the Civil Service Commission as a com­petent representative, so that they may have a skillled and independent proxy at stock­holders meetings. The section does not pro­vide for the substitution of the accredited representative for the independent auditor or certified public accountant.I would have no objection to a provision intended to clarify the purpose of the section and to make certain that it is not directed against accountants.Thank you for your letter and memoran­dum suggesting that auditors of corporate accounts be elected by the stockholders. This is an interesting suggestion and certainly would be a step in the right direction. The selection of such an independent auditor by the stockholders would be greatly strength­ened by the adoption of the accredited repre­sentative device, since such accredited repre­sentatives would present wider representation on behalf of the stockholders in the selection of such an auditor. The selection of auditors by stockholders, as provided in the English companies act of 1929, or the Pennsylvania corporation code of 1933, does not appear inconsistent with the accredited representa­tive device. Rather it is complementary.To a greater and greater degree it is be­coming apparent that corporations, the stock of which is widely distributed, are in fact economic states. To prevent abuse of eco­nomic power, such as that illustrated in the recent McKesson & Robbins case, it is im­portant that a greater degree of stockholder representation and control should be de­veloped. Yours truly,Joseph C. O’Mahoney U. S. Senator from Wyoming.Washington, D. C.111

Correspondence: Plan for Pooling the Investments of Endowment Funds; Borah-O’Mahoney Bill

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Correspondence: Plan for Pooling the Investments of Endowment Funds; Borah-O’Mahoney Bill

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