A History of Segment Reporting

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Often, the rules and regulations created by governing bodies are reactions to societal events and pressures. This pattern certainly holds true in regards to financial reporting. The first financial reporting regulations were set in place during the Great Depression in reaction to the stock market collapse of 1929. These regulations were The Securities Act of 1933 and The Securities Exchange Act of 1934, which established the Securities and Exchange Commission (SEC) and became the foundation for future financial reporting regulations. While addressing Congress, President Roosevelt said that the 1933 Act “…puts the burden of telling the whole truth on the seller. It should give impetus to honest dealing in securities and thereby bring back public confidence.”[1] Some companies had already been publishing financial statements prior to these requirements, apparently believing that the benefits of disclosure outweighed the costs. However, there were no standards that governed these disclosures and some of the statements were basically useless. For example, a corporation released an annual report in 1902 that stated “[t]he settled plan of the directors has been to withhold all information from stockholders and others that is not called for by the stockholders in a body. So far no request for information has been made in the manner prescribed by the directors…”[2] I think that most investors would agree that the financial reports released by corporations today are far more useful than this sort of disclosure which happened prior to the enactment of the Acts of 1933 and 1934.

Again, in the 1960’s societal pressures resulted in financial reporting changes. Amid the civil rights movement, the feminine movement, and the environmental movement, congressional hearings of the Subcommittee on Antitrust and Monopoly of the Senate Committee on the Judiciary began to investigate U.S. industries. During these hearings, in 1965, economics Professor Joel Dirlam recommended in his testimony that the Securities and Exchange Act of 1934 be amended to require corporations to report “the relative profitability of different divisions and product lines”.[3] The Subcommittee was so intrigued by this idea that it asked Manuel Cohen, Chairman of the SEC to comment on Professor Dirlam’s recommendation. Cohen responded “with a letter and memorandum to Senator Hart [Chairman of the Subcommittee on Antitrust and Monopoly] …pointing out some of the difficulties of Dirlam’s proposal and reasons for not requiring such information at that time.”[4]

In May 1966, Manuel Cohen addressed the Financial Analysts Federation at their annual meeting stating that disclosure of sales and profit on a divisional basis should be the next goal of financial reporting by conglomerate companies. According to Skousen “[t]his date is often accepted as the beginning of the campaign for segmented disclosure by diversified companies.”[5] Later in 1966 “Cohen testified before the Subcommittee on Anti-trust and Monopoly, indicating that the SEC already has authority under the 1933 and 1934 Acts to require disclosure of segment operating results if that is in the interest and for the protection of the investing public.”[6]

This caught the attention of many different professional financial organizations who according to Sprouse had “an apprehensive attitude toward the activities of the SEC…[i]t was considered important, therefore, that some group seize the initiative in determining how far the reporting requirements for diversified companies should go and in marshalling the support for acceptable recommendations.”[7] In 1967 the Accounting Principles Board (APB) released its Statement No. 2, “Disclosure of Supplemental Financial Information by Diversified Companies”, which

urge[d] diversified companies to disclose voluntarily supplemental financial information as to industry segments of the business. The Board believes that the experience derived from voluntary disclosure...
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