Accounting Principles in Corporation Law

Abstract

The interrelationship between law and accounting is intricate and confusing. It is not enough to say simply that accountants must turn to lawyers for answers to legal questions and lawyers to accountants for answers to accounting questions, for the problem often is whether and to what extent a question is one of law or accounting or a mixture of both. When state corporation statutes speak in terms of capital, surplus, profits, retained earnings, depreciation, and the like-the phrases frequently standing stark, without definition-to what extent will accounting usages and practices control the legal question? When such terms are defined by statute or decision, to what extent must the legal definitions be reflected in the financial statements prepared by accountants? When federal securities laws require the dissemination of financial information, and prohibit misleading statements, to what extent will accounting practices or state corporation laws determine the question of and adequate disclosure? Investigation will show that accounting terms in law are not single, static concepts, equally applicable for all purposes. A state corporation law's definition of surplus or profits will not be controlling in the computation of full disclosure under securities laws is not simply a matter of disclosing profits available for dividends or taxable income; none of these concepts will dictate the method of computing return on capital in the administrative determination of fair and reasonable rates to be charged by public utilities; and the interpretation of accounting terminology in private contracts is primarily a question of intent of the parties, which may or may not have any particular relation to accounting concepts appropriate for other purposes. The foregoing are a few of the instances where the law requires interpretation and computation in an accounting framework. The accounting profession, however, is concerned primarily with a nonlegal goal: the preparation of financial statements that fairly present the financial condition and results of operations of an enterprise, not for any single purpose required by law, but for the general purpose of informing investors, creditors, consumers, employees, and other interested parties.1