Finding Meaning in Regulatory Disclosure Requirements:

Finding Meaning in Regulatory Disclosure Requirements:The Case of Ford Motor Company in the Early 1900’s

"You can’t build a reputation on what you are going to do." (HenryFord).

Introduction

There are many reasons to expect continued growth in accounting standards and regulations (referred to as regulations in this paper). Internationalization of business to countries with uncertain financialstandards, litigation, major corporate frauds, and innovation in financial transaction structuring and financial instruments are among the major contributors to this regulatory expansion.

Companies, investors and regulators all have an accelerating technological ability to capture and monitor data in real time. These expanded capabilities have not made establishing new accounting standards and financial disclosure regulations easy; this is still an arduous process. At each stage of development, from draft to comment period to implementation, stakeholders have input into new proposals and their varying interests must be balanced. Standard-setters are forced to consider a wide set of implications for every new regulation.

Despite efforts to ensure all viewpoints are considered, new requirements invariably lead to mixed reactions from stakeholders.One way to characterize these reactions is on a continuum from substantive (essential, important) regulation to symbolic (irrelevant) regulation. The terms symbolic and substantive are not absolute terms, but relative categories based on how likely the requirements are to accomplish their stated goals. Different stakeholders may interpret the same regulation as substantive, symbolic, or somewhere between those extremes.

The issue of substantive versus symbolic regulation is important in accounting. As our regulations continue to expand, stakeholdersand accountants alike must believe the regulations have substance.Some believe the level of disclosure is already too high to be

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useful (e.g. Radin, 2007, Vos, 2013). They must also believe compliance with all regulations is important. The quality of financial reporting will surely decline if accountants decide someregulations are merely symbolic (and compliance with them is unimportant). The usefulness of accounting to all stakeholders will decline if stakeholders believe accountants fail to follow all regulations.

Our paper addresses the issue of symbolic regulation in accounting, using the specific example of a 1903 State of Michigan law. We examineFord Motor Company financial disclosures from 1904-1924 made in compliance with this law, which required corporate annual reports to be filed with the State. We obtained the annual reports from the StateArchives of Michigan in Lansing, MI. We investigate whether this law is an early example of symbolic regulation.

We link contemporaneous news reports to the Ford disclosures as a way to demonstrate the use of annual report information. News reporting was the main means of spreading information at this time, and providesinteresting insights about when and how these annual reports were usedand by whom. We found little evidence to support use of the information by the State of Michigan (implying it might be a symbolic law), but found considerable evidence that many other stakeholders used the information in a variety of business decisions (implying it might be a substantive law).

The next section of the paper provides additional background on symbolic regulation. Then, there are additional sections describing the Ford Motor Company annual reports and the news regarding those Ford disclosures.

Substantive and Symbolic Regulation

Substantive regulations provide information that is considered useful and impactful. Potential impacts are varied, and may include enticing those being regulated (usually companies) to modify their actions to avoid negative disclosures, or providing regulators with the evidence necessary to compel such modifications in company activities. Stakeholders are likely to find a regulation substantive if it provides relevant information that will impact decisions, if it

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requires specific and measurable information, and if the regulation islikely to be enforced.

Symbolic regulations are at the other end of the continuum. These regulations are accompanied by rhetoric with broad appeal, but most likely have little practical impact because the details are too vague to be implemented (Merino, 2003). Some additional reasons stakeholders might believe a requirement is symbolic include: the information being provided is not expected to be usedby those collecting it, the information is too technical for most stakeholders to understand, or the information is prohibitively expensive to generate (stakeholders presume those passing the rules realize compliance is too expensive).

Alternatively, a regulation may have been championed by a stakeholder group (e.g. politicians) to encourage initial adoption, but that group may have little continuing interest in its effectiveness (e.g., Kim, Stark and Borgida, 2011). Wallman (1995) proposed that stock option valuation regulations were heavily impacted by lobbying efforts of stakeholder groups. For these reasons, compliance with symbolic regulations is less likelythan is compliance with those that are substantive.

The idea of symbolic regulation exists in many industries. For example, in the regulation of environmental practices, research has found some regulations are substantive and help improve companies’ environmental performance while others are symbolic, and make no meaningful contribution toward changing environmental performance (e.g., Campbell, 1993; Rodrigue, Magnan and Cho, 2011;Hrasky, 2012).

The concept of symbolic regulation is also important in accounting. Accountants are taught to comply with all standards and regulations without regard to their opinions on them. When a regulation has little or no consequence for decisions, management may feel that compliance wastes resources, and accountants’ motivation for implementing the regulation will wane. In addition,symbolic regulations may create an atmosphere of general disregardfor regulations (Teed, 2013). Such an attitude would surely have negative impacts on the quality of accounting information.

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Merino (2003) argued that the Securities Acts of 1933 and 1934 may have been largely symbolic in nature and were not expected to be fullyimplemented. Her analysis shows the Acts were not implemented in such a way as to effect immediate changes in actions or decisions by investors. Teed (2013) also concluded that early implementation of theActs was largely symbolic; he found the SEC had uneven reaction to irregularities in public companies, and the SEC did not consistently seek to enforce all of its own regulations.

How a regulation is implemented is impacted by where the stakeholder sees the regulation on the substantive – symbolic continuum. Christmann and Taylor (2006) analyzed implementation of voluntary standards such as those associated with ISO certifications. They foundthat a standard was implemented in a substantive manner by some organizations (and become a permanent part of operations), but other stakeholders implemented the same standard in a symbolic manner (and only be implemented when regulators or auditors were expected). The choice depends on the company and not the standard itself. Short and Toffel (2013) made similar arguments in their research when they foundthat the legal environment of the regulation, for example the penalties for failing to comply, is an important determinant of how regulations are implemented.

Accounting regulations may also be implemented based on perceptions ofthe advantages and disadvantages of compliance. If failure to comply is detected by external auditors, the government, investors, analysts or other stakeholders, there are serious implications for the company.On the other hand, many standards and regulations have become so complex that detection can seem very improbable.

Ford Motor Company and the Michigan 1903 Annual Report Law

We analyzed the annual reports of Ford Motor Company for 1904-1924to address the issue of substantive versus symbolic accounting regulation. We chose Ford because the entire set of annual reportsthe company filed are available with the Michigan Historical Center. Annual reports of this era are not usually available from most state governments; the reports were filed only in paper form

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and states have little incentive to keep the records or make them available to the public.

The time period is limited due to report availability. We were able to obtain reports starting with the state’s regulation (1904)until shortly after members of the Ford family bought back all outstanding shares (1924), which resulted in the company becoming privately held (The Henry Ford Museum, 2015). Many studies of annual reports begin in the 1930s due to the watershed event of the Securities Acts being enacted in 1933. However, government information on Ford was available for a long period before these acts and, as a result, our analysis will contribute to a period oftime often overlooked.

The time period is also fortuitous because Ford Motor Company was organized on June 17, 1903 (although Henry Ford had prior businesses that went bankrupt in the 1890s). A few years later, in1908, the first Model T was made available to the public. The launch of the Model T and the accompanying ramping up of production volume established Ford’s market supremacy. It also established Ford as a very profitable company, enticing other vehicle manufacturers to try to mirror Ford production principles.Interestingly, the Michigan annual reports never required detailedincome statements from filers, so the State of Michigan could watch the company’s assets grow exponentially, but could not directly monitor revenue and profitability.

In 1903, the State of Michigan passed legislation requiring all companies doing business in Michigan to submit an annual report tothe Secretary of State of Michigan beginning with fiscal 1905. A copy of the law was sent to each corporation doing business in Michigan, along with the forms the corporation was required to file. The law included penalties for failing to file this annual report (see Appendix 1 for an example).

The law specified the information that was to be included in the annual report. There are three main required elements: 1) brief company background information such as a description of the types of activities of the company and the locations of its operations, 2) a brief set of financial and operating information, and 3) a

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signature and affidavit section completed by the preparer. These three elements were required throughout the 20 years of reports weexamined, although the details of those requirements changed.

While we were unable to obtain the Michigan legislative records that led to passage of this law, it is likely that the law was passed for reasons that were similar to other laws of the time. Inthe early 1900s there was widespread experimentation with new information gathering methods called systematic management. Information was considered a more fact-based (and therefore better) way to make decisions.

Systematic management information resulted in new controls over the railroads, the postal system, the telegraph, machine packaging, commodity dealers and department stores; it resulted instandardized time zones, led to development of the rotary printingpress and the subsequent creation of the mass media, the mail-order catalog, broadcasting, market research, and statistical sampling methods (Beniger, 1986). The 1903 Michigan annual reportslaw was passed during this same period of time, and may have come as a result of similar efforts to apply data to regulations. Others have noted that the early decades of the 20th century were a crucial period of time for the advancement of accounting practices (e.g., Antonelli, Boyns and Cerbioni, 2008).

According to news accounts, there was also general concern over corporate activities at this time that were consistent with this new law. For example, a Wall Street Journal editorial from 1904 called for a change in public opinion against fraud. The editorial statedthat commercial crimes were hurting society and many were going unpunished. The author indicated that the public needed to change,“stringent statutes directed at commercial graft cannot be effective until public opinion against this graft becomes stronger” (Wall Street Journal, 1904). While it came out after passage of the annual report law, this editorial demonstrates that oversight of corporate activities was being discussed in the business press.

Substantive v. Symbolic: Structural Features of the Law

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Before examining the disclosures of Ford under this law, we examined the features of the law that may convey signs the law wasdesigned to be substantive, and those that imply it was designed to be symbolic.

The major feature of the law that implies this is a substantive law is the penalty for failing to comply. The law states that any director of any corporation who refused to submit this report would be subject to large fines. Initially, the amount of the finewas the amount of all debt the corporation had contracted since the last time it filed its annual report, plus $5 per day. This should have provided corporations with sufficient incentive to file the report, and would have provided evidence of the state’s intent to enforce the law.

In 1907, the penalty for failure to file this annual report added a suspension of the corporation’s right to do business in Michigan, in addition to the financial penalties listed above. Penalties for failure to comply generally mean that regulators areserious about compliance, and the regulated companies’ directors would likely have felt that personal liability for failure to comply was something to be avoided.

Despite these penalties that were meant to encourage compliance, there are indications that the law was largely symbolic. First, itfails to mandate submission of all pieces of requested information(i.e. the report could be incomplete, as indicated by notations onthe forms such as ‘if known’). This reduces the severity of the threat of sanctions for failing to file the report. Filing reportswith missing items was fine as long as the reports were filed properly.

Second, the information requested does not seem to be comparable across companies, or even across time for one company. Numeric andnon-numeric data are intermingled. Estimates are welcome (e.g. theforms include wording such as ‘to the best of your knowledge’), and the required information mixes together historical cost, current value and future value. Explanations and footnotes outlining valuation methods are not required and companies can

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change their valuation methods at will. It is not reasonable to believe the regulators can overcome these information flaws.

Substantive v. Symbolic: Ford Motor Company filings

In this section, we discuss Ford’s filings under the 1903 law. These provide some insight into whether the information being filed was being monitored by the state.

Company Background Information

The Company Background disclosure requirements section of this lawchanged over time. These changes may have been caused by the statemonitoring the replies of filers, which implies that this law was substantive.

From 1904 - 1920, the Company Background section of the annual report contained standard disclosures: ‘The character of the business in which the corporation has engaged during the year’ and‘The place or places in which the corporation has been engaged during the year’. Starting in 1921, the top of the report form added the label ‘To be filed by every corporation for profit, whether domestic or foreign’. 1921 was also the first year the financial information of the corporation was split into columns for ‘In Michigan’ and ‘Without Michigan’. No distinction was made between other locations in the U.S. and foreign locations. The Company Background standard question led to an increasing level of detail provided by Ford rather than a standard response. This is a summary of how Ford’s filing for this simple section changed over time:

In 1904, Ford reported operating only in Detroit, Michigan(see Appendix 2). By 1907, Ford reported operating inDetroit and at branches throughout the country. In 1909 and1910, Ford reported operating in Detroit, Highland Park andRomeo, Michigan. These were the locations of itsmanufacturing facilities. In 1911, Ford reported operatingonly in Highland Park, Michigan but in 1912 its reportedoperating in ‘Highland Park and in many other places

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throughout the world’. This was the response until 1918,when Ford began to report ‘throughout the United States andthe world’ as the location of its operations. In 1922, Fordadded the detail ‘and South America’ to its list oflocations and in 1923 Cuba was added.

We theorize that the state was monitoring the replies and saw the geographic changes in Ford (and presumably other companies’ reports). As the required disclosures changed, Michigan companies may have inferred that the state was monitoring their filings, andthat this law had substance.

Present Value / Fair Value Financial Information

This section of the law is intriguing in that it has both substantive and symbolic elements. In addition to historical cost amounts, the required financial disclosures included the present value of the real estate and the present value of personal estate.The lines in the form asking for the present value information included the phrase ‘as near as can be estimated’, implying that the state knew that companies filing the reports would provide estimates (see Appendix 3).

No information was supplied to corporations (or supplied by them) about the method used to determine the present values. It is unlikely that the amount was independently-determined because thatwould have been costly, and was not mandated. Because of the wide variation in methods used to determine these values, it is hard tosee this information as useful. This requirement may have been a symbolic element of the law.

However, at this time there was common use of fair values in investing information. In the period leading up to the 1929 marketcrash, values of assets were constantly being ‘fair valued’ higherand higher (Turner, 2006). At this time there was also debate in the accounting profession about which types of values Balance Sheets should present (historical, present value, or both). Present values above historical cost would have been commonplace. This suggests that the legislators wondered about fair values of Michigan corporations, and asked corporations to supply fair

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values even if they had to be estimated. That implies this elementis substantive.

Balance Sheet Information

Similar to the fair / present value information, Balance Sheet information required by the law has elements that imply the law could be interpreted as either symbolic or substantive, depending on the stakeholder. Filers may have seen the requirement as symbolic given the lack of detail required, but we found evidence that external stakeholders used the information that was submitted.

The law required filers to submit a variety of amounts that would later become associated with Balance sheets. There are two reasonsto believe this balance sheet requirement may have implied that the law was symbolic from the standpoint of the state.

First, from 1905-1920, no formal Balance Sheet was required, and the amounts submitted did not collectively amount to a Balance Sheet. In 1921, filers were required to provide both amounts from specific categories of assets and liabilities and a proper BalanceSheet in good form (see Appendices 4 and 5). We found that the amounts on the sof Michigan forms and Ford’s Balance Sheet are notcomparable (within any one year) due to formatting differences (category and account name differences). This was undoubtedly truefor most corporations. The law did not require the company to reconcile its formal Balance Sheet with the lines on the annual report that were submitted to the state.

Second, the law did not specify the valuation method filers shoulduse to compute the amounts on the Balance Sheet; it only specifiedthat the Balance Sheet must balance. At the time, Balance Sheets commonly used multiple valuation methods (historical cost, appraised value, current value). There was discussion within the accounting profession, with many people advocating a move to a single valuation (historical cost) method (e.g., Montgomery,

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1927). In addition, there were no required disclosures relating tovaluation methods. 1

While the two issues above imply the state may have not intended to fully use filers’ reports, we found evidence in news reports ofthe time that other stakeholders were using the reports. For example, from 1903-1911, Ford Motor Company was the defendant in alawsuit for patent infringement. The suit claimed Ford owed royalties to the Electric Vehicle Co. for violating the Selden patent of 1879; the patent related to the design of car drivetrains.

There are numerous articles throughout this time period that referto amounts Ford Motor Company (and the other defendant companies) would owe if it lost this lawsuit, and assets the companies had amassed as a result of selling vehicles covered by the Selden patent. Information about Ford assets would have come from annual report filings. On August 16, 1910, the Wall Street Journal reported that Ford was given the option of suspending vehicle manufacturing, use and sale of infringing machines, or posting a bond of $350,000 with the court toward paying what it owes, and filing monthly statements of their business with the court.2 The court argued that Ford Motor Company had the ability to post this bond; this information would have come from Ford’s annual report filings.

Another example of Ford annual report information being used in this manner comes from a suit by Dodge Bros. against Ford Motor Company. In 1916, The Chicago Tribune reported that Dodge Bros. sued Ford to get the company to disburse $52,000,000 of the prior

1 As shown in Table 1, the main asset categories reported by Ford increased dramatically over the period 1904-1924. Without additional details, there is little use for the information (although it is interesting to note how much the amounts changed over time).

2 Note that on January 10, 1911 the Wall Street Journal reported the appeals court reversed this decision.

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year’s profits to employees.3 This article reports on the court hearing for this case, where numerous amounts from Ford’s annual report were used. In Ford’s 1916 annual report filed with the State of Michigan, Ford reported cash on hand of $52,550,771.92; this fact was introduced in the court hearing. This information was used as evidence that Ford had sufficient cash on hand to pay its profit shares.

These two lawsuits are examples of stakeholders beyond the State of Michigan using Ford’s annual report filings and use of the filings supports classifying this law as substantive.

Assurance, Signatures and Affidavit Verifications

The law included no external third party verification of the information in the annual reports, another feature that may have implied to filers that the law was symbolic. The annual reports required signatures of an officer and a majority of the members ofthe Board of Directors. The signors provided a notarized statementthat the information contained in the annual report was accurate (see Appendix 6).

A notarized signature is not the same as independent verification through an external audit. Notaries, while independent of the company, do not evaluate the information being disclosed and do not collect evidence as to its veracity. They simply provide verification of the person’s signature. Unverified information lacks credibility and reliability, implying that the information was unlikely to provide a basis for important decisions at the state level.

Completeness of Filings

The law allowed filers to leave information blank on the annual report forms. In addition, filers could write in responses such as‘unknown’. Ford provided these types of responses in some of the reports we examined. For example, beginning in 1923, Ford left the

3 At this time, Ford Motor Company had an employee profit sharing plan under which half of its annual profits were paid.

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‘Cash on Hand’ line blank in its form filings, although its accompanying Balance Sheet did report a cash balance each year. This implies the state was not reconciling the annual report formswith the Balance Sheets; this is further evidence for this law being symbolic from the viewpoint of the State of Michigan.

However, we know the company had cash because of news reports of the era. For example, the Wall Street Journal reported, “The Ford Motor Company has more actual cash in its treasury than any other corporation in the United States, if not in the entire world (May 5, 1923, pg. 3)”. The Chicago Tribune ran a similar news item, reporting on Sept 6, 1923 that “Cash on hand was reported as $210,293,922 as of June 30, 1923. This is the largest sum ever reported by any industrial concern in the world” (pg. 7). These news reports provide evidence that some stakeholders were monitoring the annual report filings, implying that this law was substantive.

Limitations

A major limitation of our study arises from the lack of information from the legislative process that led to this 1903 law. We sought information through the Secretary of State of Michigan and the Michigan state records offices, but were told thelegislative debates and documentation leading to this law was not available. Given this lack of information, drawing conclusions about the uses of these annual reports by the state is a challenge.

We also realize that drawing conclusions about external stakeholder use of these filings may be distorted by our focus on Ford Motor Company. Ford was an extremely successful company in a red-hot industry; the level of interest in its financial filings may not be representative of the level of interest in all filings under this law.

Lastly, we cannot definitely argue that the State of Michigan was not using the annual reports in some way. We presume there was some use for some companies because the law did gradually change during the time period we studied. Reasons behind the changes may

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have been related to other factors in play at the time, for example other related legislation. Perhaps future research on the topic will provide new insights that we were not able to address in this paper.

Conclusions

We examined the disclosures made by Ford Motor Company from 1904-1924 under the 1903 annual report law of the State of Michigan. Todetermine whether this law is an early example of symbolic or substantive regulation, we looked for business news articles of the time to these disclosures in an effort to discover how these annual reports were used.

We found support for considering this law symbolic. One major reason is the variability of valuation methods allowed under the law. All amounts could be estimated, including cost, fair value and present value information. In addition, no specific valuation method for determining Balance Sheet amounts was required, allowing filers to mix and match valuation methods both within a period and between periods. These issues made use of the annual report information a challenge.

Additionally, filers were allowed to submit incomplete information; Ford’s filings include many instances where information is left blank, or the company wrote in ‘unknown’. Further, information submitted was not verified by any level of assurance (such as an audit). Together, these features all imply this law was at least somewhat symbolic in nature.

However, we found fairly widespread use of this information, implying that the disclosures were substantive from the standpointof investors and the general public. Information from these annualreports was quoted in the business press and used in lawsuits. There appears to have been substantial interest in the filings of Ford Motor Company. This may have been due to Ford’s prominent role in the auto industry, and its huge financial success.

The early twentieth century saw widespread use and acceptance of standardized information to help investors, lenders, owners and

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the government evaluate economic progress and make informed judgments. The growth of accounting during this period is a continuing story of matching needs for information with requirements to provide that information (Vatter, 1958).

In the early twentieth century, systematic information gathering and use was developing across the economy, and there had been a shift in focus from personal attributes of managers and customers to data based on transactional outcomes (Yates, 1989). Governmentsand other stakeholders began to tap this increasing body of information, exploding the volume of information companies provided.

The thirst for more information was confused with the need for better information; this confusion persists today. Of course we must recognize that systematic information gathering by the government plays an important role in corporate oversight. For standard-setters, balancing the costs and benefits of standardization is difficult because little is known about what would constitute an efficient level of standardization in accounting (Madsen, 2011).

Being able to identify requirements that act as signaling devices but accomplish little else is essential to slowing the growth in unnecessary financial disclosures. Symbolic regulations act as signals to help people move on from the impacts of economic disasters and frauds, but they do little to change actions that caused those problems. There are far simpler and cheaper ways to send these signals. In addition, laws that are symbolic when enacted, may have unintentional consequences when used in a substantive way by the public. The lack of detail and third partyverification mean that the public may be incorrectly using the information or using inaccurate information as the source of theirdecisions. The costs of symbolic information collection can be immense, from both the perspective of the company needing to comply and from the public perspective that may make poor decisions.

We wonder how much of the additional information available in 2015is used in the decisions of investors, owners, managers and the

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government. How much of the incremental disclosures are designed to dissuade fraud and improper accounting? How much effort do companies spend to obscure valuable information to maintain competitive advantage, and do those efforts change when a regulation is seen as more symbolic than substantive?

Maybe the next hundred years of accounting history will begin to identify which disclosures are necessary and helpful rather than merely symbolic before those regulations are adopted. We believe that most regulations are likely to have aspects that imply the regulation is symbolic, and aspects that imply the regulation is substantive.

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Table 1Ford Motor Company

Annual Report Financial Disclosures

Year Cash on Hand

Goods, Merchandise,Personal Property

Real Estateused in Business Total

Assets19044 --- --- $ 75,989.84 $

---1905 $

42,318.77$ 119,385.12

$ 97,589.48

$ 330,412.39

1906 $ 49,185.12

$ 230,945.82

$ 116,577.20

$ 490,772.90

1907 $ 17,583.18

$ 656,954.09

$ 21,733.11

$ 1,401,019.90

1908 $ 977,710.79

$ 715,003.34

$ 22,483.11

$ 2,300,572.19

1909 $ 438,131.52

$ 1,576,753.52

$ 72,083.11

$ 2,867,131.91

1910 $ 734,762.14

$ 2,495,221.18

$ 243,788.47

$ 5,295,246.15

1911 $ 5,367,520.42

$ 5,390,144.26

$ 1,610,527.51

$ 13,363,048.95

1912 $ 5,995,073.65

$ 6,387,542,31

$ 5,815,787.09

$ 20,430,171.61

1913 $13,225,710.82

$ 10,884,915.7

$ 6,155,640.2

$ 30,266,266.

4 This year, the annual report did not list “cash on hand” nor “, merchandise, personal property.”

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0 4 701914 $27,092,712

.75$ 6,571,894.79

$19,098,395.91

$ 59,801,836.13

1915 $41,574,864.19

$22,843,799.76

$15,187,498.49

$ 81,853,819.11

1916 $52,550,771.92

$43,322,702.58

$21,959,407.14

$127,827,944.25

1917 $45,130,390.96

$66,921,158.13

$27,292,542.80

$158,834,778.99

1918 $66,547,408,68

$53,743,620.80

$13,574,117.78

$166,243,226.17

1919 $59,829,278.67

$88,506,436.42

$31,132,734.47

$298,407,255.28

1920 $13,557,244.61

$124,350,295.39

$50,861,000.92

$284,554,041.68

1921 $ 54,844,538.00

$97,561,784,41

$46,926,010.00

$263,368,199.78

19225 $145,985,669.31

$95,576,200.64

$81,626,015.03

$409,820,132.97

1923 $251,173,590.74

$94,328,306.48

$92,494,087.85

$568,101,639.16

1924 $265,723,525.61

$190,338,475.57

$112,037,978.48

$644,624,468.04

5 This is the first year the disclosures are broken into ‘In Michigan’ and ‘Without Michigan’. We have summed those two amounts for this and all subsequentyears to assist readers in making comparisons of the amounts over time. These totals are not shown in the annual reports filed by Ford.

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