After McKesson's

There are some 17,000 Certified Public Accountants in the U. S. To win the coveted initials C.P.A. they had to pass rigorous examinations in accounting. Beyond that, their functions are virtually unregulated by law. Their methods of auditing and analyzing a corporation's balance sheet are their own, the developments of over 400 years of practice. The U. S. public first realized that these methods were not always perfect when the McKesson & Robbins scandal broke last December. How was it possible, the average investor asked, for $18,000,000 in fictitious inventories to deceive seasoned accountants?

SEC set out to answer the point with an investigation which is not yet completed. The American Institute of Accountants, chief C.P.A. professional association, also launched an investigation. Last week it issued its report, tantamount to an order to all Institute Accountants from now on. Its chief decision: that good auditing procedure calls for actual corroboration of inventories by physical tests, heretofore usually done only on specific request by the company.

Also published this week was the most challenging analysis of accounting in many a day--Truth in Accounting* by C.P.A. Kenneth MacNeal, treasurer of Alden Park Corp., Philadelphia real-estate concern. His thesis: "The great majority of contemporary certified financial statements must necessarily be untrue and misleading due to the unsound principles upon which modern accounting methods are based." Some of his examples: A man invests $30,000 in 1,000 shares of General Motors at 30. The stock rises, he sells it at 60, and reinvests in 1,000 shares of International Harvester at 60. His twin puts $30,000 into International Harvester at 30, it rises to 60, and he keeps it. Each started with the same amount in cash, each ended with 1,000 shares of International Harvester, but according to accounting practice, one had $30,000 profit and the other none.

A group of financiers forms two identical investment trusts, each with identical portfolios. After a market rise, Trust X realizes its profits by selling its securities, but Trust Y does not. Accountants therefore certify that X had a large profit, Y only that realized on dividends. X's stock rises on the news and Y's falls. The financiers then sell their X stock at a profit, reinvest it in the depressed Y stock. Then they order Y to realize its profits by selling its portfolio. When the accountants certify this profit, Y's stock rises, giving the unscrupulous financiers a profit at other stockholders' expense.

* University of Pennsylvania Press ($3.50).

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