Colonel Arthur H. Carter was one of the recognized leaders of the accounting profession during the period of “CPA Movement” in the early 20th century. He was closely intertwined with the NYSSCPA and The CPA Journal. While no single figure was personally responsible for the establishment of the independent public company audit, Carter’s leadership is perhaps most familiar and his story is fascinating in its own right. The authors take a look at this legendary figure, his accomplishments and service, and the way he helped shape the profession as it is known today.
The first issue of the publication now known as The CPA Journal was released as what was expected to be a quarterly publication in October 1930. The lead article in that issue, albeit a short one page, was penned by the president of the New York State Society of CPAs, Arthur H. Carter; in 1930, Carter was serving the first of his three terms as Society president. Although his one-page article, which basically described the purpose of the new publication, was to be little noted nor long remembered, by the end of his third term in 1933 he was to become one of the best-known accountants in the nation. In addition to his leadership of the NYSSCPA, he also served as president of the National Association of Cost Accountants (now the Institute of Management Accountants), as vice president of the American Institute of Accountants (now AICPA), and as president of the prestigious Accountants Club of America. At the same time, he was the firmwide managing partner of Haskins & Sells (now Deloitte), the largest CPA firm in the country and the oldest of the purely American CPA firms. In his third term as Society president, Colonel Carter, as he was known because of his Army rank during World War I, was asked to testify before a Senate committee regarding the need for audits of publicly traded U.S. corporations. It was this testimony that largely led to the legendary status that Carter carried within the profession. The fact that Carter authored the lead article in the first issue of The CPA Journal is appropriate, because his service to the NYSSCPA helped launch his professional leadership career.
From CPA to Managing Partner
Carter’s path to the public accounting profession was unique. Born in 1884 in Hillsboro, Kansas, Arthur Hazelton Carter was introduced to the accounting profession before he ever became a public accountant. His wife Marjorie was the daughter of Elijah Watt Sells, who along with Charles Waldo Haskins had established the first major public accounting firm in America in 1895. Carter married Marjorie Sells in 1910, having met her in the Philippines in 1908, when she had accompanied her father on a project in that country.
Carter had graduated from West Point Military Academy in 1905. During the early days of World War I, Carter organized ordnance accounting, linking property accountability with the purchase of new materials. He left active duty in 1915 to become a farmer in Leesburg, Virginia, but when the United States entered World War I, his commission was reactivated, initially as a major, and later as a full colonel. Carter again left active duty and his commission to join his father-in-law’s firm in 1919 following the armistice. He passed the CPA examination in New York in 1922 and became a partner in the firm that same year.
The September 15, 1918, issue of the Haskins & Sells Bulletin contained an article entitled “Helping to Win the War.” However, the article was not about the firm or any of its existing employees; instead, it was about the contributions of Colonel Arthur H. Carter, the son-in-law of Elijah Watt Sells. The introduction stated: “Colonel Arthur H. Carter has the acquaintance of so many persons in our organization that we believe the following accounting of what the newspapers call his great achievement will be of interest.” The article quoted from a Louisville newspaper wherein Carter was lauded because the artillery school that he commanded was the only one to graduate a class of officers every week for the duration of the war: “But in naming Lieut. Col. Carter as commandant of the school, the War Department puts its mark on him as the best artillery instructor in the United States, and that involves more than a sacred trust—it involves a responsibility great enough to make weak men recoil” (p. 58). A year later, after leaving the Army, Carter received the Distinguished Service Medal for his “exceptionally meritorious and conspicuous service,” and he joined his father-in-law’s firm as a staff accountant.
When Carter became managing partner of Haskins & Sells in 1930, a new era of leadership was about to dawn. Colonel Carter was apparently not motivated solely by self-interested gain, but more likely opportunity and duty. The June 1932 Fortune suggested that Carter was already a millionaire before becoming the firm’s managing partner. Fortune stated that although partners in large CPA firms earned up to $100,000 per year (new staff accountants earned $30 a week), there were few who were millionaires, with Carter, Colonel Robert Montgomery, J. E. Sterrett, Samuel Leidesdorf, and George O. May being among the few (“Certified Public Accountants,” 1932, p. 98). Some portion of wealth may have come to Carter via his wife’s inheritance. Fortune also observed that Carter was the head of the “greatest of the strictly American accounting firms” (emphasis supplied).
During his tenure as managing partner, the number of partners increased from 28 to 88. It was said that Carter, who was made a general during World War II, carried his military training and bearing with him when he came to public accounting. He imposed military-like discipline and expected only the best from all members of the organization.
His office at the Haskins & Sells headquarters at 2 Broadway, for instance, was as austere as an army barracks. The two principal decorations were an American flag and General Carter’s two-starred general’s flag (“Maj. Gen. Arthur Carter Dies; Senior Partner in Haskins & Sells,” New York Times, January 5, 1965, p. 33).
Speeches and Service Activities
During the 1930s, Carter was active in professional accounting organizations. His first leadership roles were in the Accountants Club of America, an organization in New York that provided a forum and social setting for accounting professionals, for which he served as vice-president and president in the late 1920s and 1930. He would become a vice president of the American Institute of Accountants (AIA) and a member of its Committee on Accounting Procedure, Council, and Executive Committee; he served three terms as president of the New York State Society of CPAs (1930–1933). In 1933, he began a term as president of the National Association of Cost Accountants (NACA).
As a leader in professional organizations, Carter was called upon to make many speeches. Some topics of his addresses in the 1930s included public relations aspects of accounting; moral responsibility of public and private accountants; and the public accountant and his relations with the securities commissioner. In a 1932 speech to the NACA, “The Accountant’s Relation to Corporate Management,” he stated that “accountants are becoming the most important executive in business.”
His disdain for government interference dissolved when it came to promoting the interests of the public accounting profession.
Three themes emerged from his speeches on the profession. First, accountants have the abilities to provide valuable service to business and government, but are underutilized and unappreciated. Specifically, corporate directors have failed to take advantage of the services of independent accountants even as the responsibilities of directors increased with growing numbers of shareholders. Carter advised directors to consult independent auditors on accounting policies in the same manner as lawyers are consulted on legal questions. He further desired that accountants build a stronger, unified, and more respected profession with a spirit of integrity and loyalty to one another. He thought that accountants should be more recognized in civic affairs. In 1932, Carter wrote a letter as president of the NYSSCPA to the presidents of the AIA and the American Society of CPAs (ASCPA), reporting that the NYSSCPA board of directors and committee chairmen had resolved that a committee be formed with five members each from the AIA and ASCPA in order to bring about a merger of the two organizations. Carter’s desire for the accountancy profession to be represented by one national organization was realized in 1936, when the two groups united to form what is now the AICPA.
Carter’s second theme may have derived from his service on a special committee of the AIA headed by George O. May in the early 1930s. The committee had two tasks: to make accounts published by corporations more informative and to educate the public on the significance, value, and limitations of financial statements. The work of this committee was credited with helping to lead to the requirement that financial statements be audited by independent accountants to be listed on a stock exchange and also to the adoption of a standardized form of auditors’ report. As a result of the Great Depression in the 1930s, investors (then numbering approximately 10 million) were seeing the importance of understanding financial statements. Carter saw that bankers and business executives were relying more on information supplied by public accountants. He focused on difficult reporting issues, such as foreign exchange, valuation of inventories, write-down of assets, consolidated financial statements, and intercompany transactions. Even though he believed that these issues had been well addressed, the public criticized accountants for being too technical and for producing information that was not understandable. Carter wanted the public to see the profession in its true light.
Finally, Carter’s support for mandatory audits of public corporations is the stance for which he is most noted. He reported that 83% of listed companies were audited by independent accountants and he judged that these corporations were better than those not audited. Carter believed that the public was uninformed of the need for independently audited financial statements. Required audits would lead “to a time when every big-league financial game shall be played according to rules interpreted by a trained and impartial umpire” (Arthur H. Carter, “Excerpts from Annual Address,” The Certified Public Accountant, June 1932a, p. 374). Carter also supported mandatory audits for municipalities, and in March 1933 the NYSSCPA issued a report advocating Carter’s recommendation.
Carter railed against government regulation for hampering business industries, even criticizing antitrust legislation and the Interstate Commerce Law. However, his disdain for government interference dissolved when it came to promoting the interests of the public accounting profession. In pointing out the problem of the lack of recordkeeping in many enterprises, Carter recommended that the Department of Commerce urge all businesses to use the services of CPAs in order to reduce the number of business failures.
In the January 12, 1901, issue of Commerce, Accounts & Finance, Charles Waldo Haskins wrote:
Free, fair and full reports of industrial organizations, should be founded upon thorough, independent audit of accounts by disinterested certified public accountants, whose signed certificates, to be published with the report, are a more nearly perfect guarantee of reliability than any other yet to be discovered.
This was only one of many calls for independent audits in the early decades of the 20th century, but these calls were largely ignored by Washington regulators and Wall Street exchanges. Investors did not seem to care whether financial statements were audited by public accountants; they flocked to the stock market despite the lack of protection. The number of stockholders in America increased 20-fold from 1900 to 1930 (from 500,000 to 10 million). Many attributed this growth of an investment class of individuals to the experience of buying Liberty Bonds during World War I. The stock market crash of 1929 and the ensuing 1932 discovery that the supposed largest company in the world, Kreuger & Toll, was a fraud led to calls for investor protection.
In January 1933, the New York Stock Exchange (NYSE) changed its rules to require companies that sought a NYSE listing to be audited by an independent CPA. On April 1, 1933, Colonel Arthur Carter, as NYSSCPA president and managing partner of Haskins & Sells, testified before the U.S. Senate Committee on Banking and Currency. As the only officer of a major CPA organization to testify, Carter provided testimony that supported Congress’s decision that independent audits should be mandatory for publicly traded corporations. The 1933 Securities Act subsequently required public corporations to file registration statements certified by independent accountants.
The report of Carter’s testimony before Congress was 13 single-spaced pages. The questioning of Carter by the Senators was grueling, as they repeatedly insinuated that he was advocating positions for the purpose of benefitting his accounting firm and the public accounting profession. Carter argued in his testimony that the issuance of opinions as to the disclosures of financial statements by independent CPAs was preferable to the creation of an army of government auditors to achieve the same objective. He testified that independent auditors were different from corporate controllers; because of their independence, they could provide the necessary oversight to corporate financial statements. In his words:
We audit the corporate controllers. [The corporate controller] is in the employ of the company. He is not independent. … It is generally regarded that an independent audit of any business is a good thing.
Throughout the late 1930s and the decade of the 1940s, Colonel Carter was increasingly recognized for his role in keeping America’s auditing profession within the private sector.
When Kentucky Senator Alben W. Barkley (later vice president, 1949–1953) asked Carter, “Who audits you?” Carter replied, “Our conscience.” Carter had explained the ethics of the profession with a two-word answer that has become fabled in the history of U.S. auditing. A year later, the Securities and Exchange Commission was created to administer the new legislation and to require audits of all registered corporations.
Throughout the late 1930s and the decade of the 1940s, Colonel Carter was increasingly recognized for his role in keeping America’s auditing profession within the private sector. A 1950 speech by an SEC commissioner recognized his contribution, as did a later SEC official pronouncement. SEC Accounting Series Release (ASR) 81, Independence of Certifying Accountants—Compilation of Representative Administrative Rulings in Cases involving the Independence of Accountants, issued in 1958, acknowledged and legitimized the role of Carter in the passage of the bill and the awarding of the audit franchise to public accountants:
The passage of the Securities Act, however, is an important landmark in the development of the concept of the responsibility of the independent accountant to the investor and the public. The original draft of the Securities Act did not require certification by independent accountants. A representative of the accounting profession [Colonel Carter, as identified in footnote 2] appeared at the hearings on the bill before the Committee on Banking and Currency of the U.S. Senate to suggest revisions of the bill. He pointed out the bill as drafted imposed “highly technical responsibilities upon the Commission as to accounting principles, their proper application and their clear expression in financial statements,” and suggested the bill be revised to require that “the accounts pertaining to such balance sheet, statement of income and surplus shall have been examined by an independent accountant and his report shall present his certificate wherein he shall express his opinion as to the correctness of the assets, liabilities, reserves, capital, and surplus as of the balance sheet date and also the income statement for the period indicated.
The committee considered at length the value to investors and to the public of an audit by accountants not connected to the company or management and whether the additional expense to industry of an audit by independent accountants was justified by the expected benefits to the public. The committee also considered the advisability and feasibility of requiring the audit to be made by accountants on the staff of the agency administering the Act. … The proposal to require certification by independent public accountants was incorporated in the bill as passed.
(ASR 81, para. 3-4; emphasis added)
Carter’s role and views may not have been fully appreciated by the contemporaneous media, but they were fundamental views that had developed over a period of time.
Some might question why the president of the American Institute of Accountants (AIA) did not testify, or why Colonel Carter did not work with the AIA. A logical explanation lies in the political issues within the profession at the time; Carter was no longer an AIA officer in 1933, but was president of what might have been a more powerful and more creditable NYSSCPA. At that time, the national accounting profession was divided between the AIA (headquartered in New York) and a rival group out of Detroit known as the ASCPA. As a result, it is logical at the time that Congress would ask the president of the NYSSCPA to testify. (At the urging of Carter and the NYSSCPA, the AIA and ASCPA merged in 1936.)
Carter’s role and views may not have been fully appreciated by the contemporaneous media, but they were fundamental views that had developed over a period of time. On September 28, 1932, he had delivered a speech in Indianapolis to the attendees of the annual meeting of the ASCPA; one month later, that speech was published in the October issue of the ASCPA journal (Arthur H. Carter, “Some Problems of the Last Three Years,” The Certified Public Accountant, October 1932b, pp. 587–592). Months before his important Senate testimony, he pointed out that directors as representatives of other shareholders must approve important corporate transactions and policies. However, Carter felt that directors were limiting their effectiveness by not taking full advantage of the services of independent public accountants. He further stated that directors, to fully discharge their duties, “are really obligated to utilize the services of independent public accountants” (Carter, 1932b). The increasing number of stockholders meant that more would be demanded of directors than had previously been the case. Carter also shared with his audience the fact that, since 1929, credit grantors had been much more apt to request audited financial statements from potential borrowers. “In prosperous times,” he said, “the risks involved in the extension of credit to all classes of business and individuals are relatively slight.” With the onset of the Great Depression, however, lenders began placing more reliance on public accountants to provide information about borrowers’ financial positions. He concluded his speech with the following words:
There is a woeful lack of intelligent understanding of the need for independently audited financial statements; there is too little recognition of the profession in civic affairs; and among ourselves, we are not making sufficient progress in building a unified profession with a spirit of loyalty to one another, such as prevails in the professions of law and medicine. We are not thinking sufficiently of defending or protecting our members against unfounded or unreasonable criticism. To build a stronger and more respected profession that should occupy a higher position in the business world requires the united, generous efforts of every man in the profession—a willingness to serve, a broad viewpoint, and a realization that we must advance by our combined strength and standing as a professional body, and by the value and integrity of the services of the individual members.
(Carter, 1932b, p. 592)
Awards and Accolades
With the onset of World War II, Carter’s “star” would rise even higher. Long known by his contemporaries as “Colonel Carter,” he would rise to the rank of a two-star Major General during World War II and be awarded the Oak Leaf Cluster in lieu of a second Distinguished Service Medal. In 1946, Carter received the American Institute’s Gold Medal for Distinguished Service to the Profession. The scroll presented to him noted his “outstanding service to his country and the accounting profession in the wartime office of Fiscal Director of the Headquarters Army Service Forces.”
Carter officially stepped down from the position of managing partner and retired from Haskins & Sells in June 1947. Essentially, he had two careers—17 years with the U. S. Army and 23 years with Haskins & Sells. Following his retirement, the Carters moved from Greenwich, Connecticut, to Virginia and Florida. He established a hospital in Leesburg, Virginia, and later became president of the Good Samaritan Hospital near his winter home in Delray Beach, Florida. Carter was a golfer, fisherman, hunter, horseman, and polo and squash player. He and Marjorie spent many summers fishing in New Brunswick, Canada [Thomas G. Higgins, “General Arthur H. Carter (1884-1965), The CPA Journal, May 1967, pp. 257–259]. He died on January 3, 1965 at the age of 81.
Upon the death of Carter’s wife, Marjorie, in 1973, her will provided for a quasi-endowment trust fund of $650,000 to be administered by the American Accounting Association (AAA) to fund a substantial number of scholarships each year to students majoring in accounting. Awards in the amount of $2,500 to $3,000 were made to approximately 50 honorees each year from the late 1970s through the early years of the 21st century when the funds were depleted. As a result, the name and recognition of “Arthur H. Carter” lived on for nearly four decades after his death. Carter established the Arthur Carter Trophy award for NACA local chapters and the Trophy is still presented by the IMA. Another memorial to Carter can be found at Hoyt Scout Camp in Connecticut, where the training cabin, built in 1968/69, is dedicated to “General Carter” in recognition of a posthumous donation. (For more, see “Maj. Gen. Arthur Carter Dies; Senior Partner in Haskins & Sells,” New York Times, January 5, 1965, p. 33; and John W. Queenan, “Arthur H. Carter: A Memorial,” Haskins & Sells Reports, Vol. 02, Spring, 1965, pp. 14–15.)
A Legendary Leader
By the early 1930s, investors had lost much of their wealth, and with that their confidence in the stock market and its institutions. Congress and Federal officials perceived that audits by independent accountants held the potential to restore confidence and provide better information for lending and investment decisions. The development of Arthur Carter’s leadership role in the profession originated and was fostered by Carter’s service to the NYSSCPA, the AIA, and the NACA. These organizational positions, together with his 1933 Congressional testimony, established his leading influence in the accounting profession. His testimony before the Senate Committee considering legislation in l933 was a contribution to the eventual mandate of independent audits of publicly traded companies and helped keep the accounting and auditing profession independent of control by federal agencies. Arthur Carter became a legend in the view of many accountants, and his ascension can be traced to his leadership roles in the NYSSCPA 90 years ago.
Arthur Carter became a legend in the view of many accountants, and his ascension can be traced to his leadership roles in the NYSSCPA 90 years ago.
All three of the coauthors have been recipients of the AICPA’s Distinguished Achievement in Accounting Education Award as the outstanding accounting educator in America. Dale Flesher was the 2011 honoree, while Previts won in 1996, and Tonya Flesher is the most recent recipient in 2020. All three are past presidents of the Academy of Accounting Historians.