Page 54 - Encyclopedia of Business and Finance

eobf_A 7/5/06 2:54 PM Page 31

Antitrust Legislation

Auditing Standards No. 56 (AICPA, 1988) or to Mont- monopoly. To combat this sort of business behavior, Con-
gomery’s Auditing (O’Reilly et al., 1998) for a more in- gress passed antitrust legislation.
depth discussion. Further, while the focus of this article In 1890 Congress passed the Sherman Antitrust Act,
has been on the use of analytical procedures during finan- which forbade all combinations or conspiracies in
cial statement audits, portions of analytical procedures restraint of trade. The act contained two substantive pro-
can also be helpful to both management and investors. visions. Section 1 declared illegal contracts and conspira-
For example, managers of a business may develop certain cies in restraint of trade, and Section 2 prohibited
key ratios and statistics, which can be used to monitor the monopolization and attempts to monopolize. When an
progress of the business. For example, a manager may use injured party or the government filed suits, the courts
data such as the number of new customers, number of could order the guilty firms to stop their illegal behavior
customer complaints, and other customer satisfaction or the firms could be dissolved. The Sherman Antitrust
measures to monitor the sales revenue and profitability of Act pertained only to trade within the states, and monop-
the company. An investor might also use analytical proce- olies still flourished as companies found ways around the
law.
dures to evaluate his or her investment portfolio. For
example, an investor may try to forecast the future sales of In 1914 Congress passed the Clayton Act as an
a company based on knowledge of the industry in which amendment to the Sherman Act. The Clayton Act made
the company operates and the prior sales history of the certain practices illegal when their effect was to lessen
company. The sales forecast could then be used to develop competition or to create a monopoly. The main provisions
an earnings forecast for that company, which is a critical of this act included (1) forbidding discrimination in price,
component in developing an investment decision. Thus, services, or facilities between customers; (2) determining
while analytical procedures are an integral part of the that antitrust laws were not applicable to labor organiza-
tions; (3) prohibiting requirements that customers buy
audit process, they can also be a useful tool for managers
additional items in order to obtain products desired; and
and investors.
(4) making it illegal for one corporation to acquire the
SEE ALSO Accounting; Auditing; Financial Statement stock of another with intention of creating a monopoly.
Analysis Because loopholes were also present in the Clayton Act,
the Federal Trade Commission (FTC) was established to
enforce the antitrust legislation.
BIBLIOGRAPHY
American Institute of Certified Public Accountants (1988). Passed in 1914, the Federal Trade Commission Act
Statement on Auditing Standards No. 56: Analytical Procedures. provided that “unfair methods of competition in or affect-
New York: Author. ing commerce are hereby declared unlawful.” The FTC
Hirst, Eric D., and Koonce, Lisa (Fall 1996). “Audit Analytical consists of five members appointed by the president and
Procedures: A Field Investigation.” Contemporary Accounting has the power to investigate persons, partnerships, or cor-
Research 13(2), 457-486. porations in relation to antitrust acts. Examples of unlaw-
O’Reilly, Vincent M., McDonnell, Patrick J., Winograd, Barry ful trade practices include misbranding goods quality,
N., Gerson, James S., and Jaenicke, Henry R. (1998). Mont- origin, or durability; using false advertising; mislabeling to
gomery’s Auditing (12th ed.). New York: J. Wiley & Sons. mislead consumer about product size; and advertising or
selling rebuilt goods as new. The act also gave the FTC the
power to institute court proceedings against alleged viola-
Jean C. Bedard
tors and provided the penalties if found guilty.
James J. Maroney
The Robinson-Patman Act of 1936 strengthened the
price discrimination provisions of the Clayton Act. One
amendment involved the discrimination in rebates, dis-
ANTITRUST counts, or advertising service charges; underselling and
penalties. Another provided for the exemption of non-
LEGISLATION profit institutions from price-discrimination provisions.
In the United States, at the end of the nineteenth century, The main purpose of this act was to justify the differ-
widespread business combinations known as trust agree- ences in product costs between customers and clarify the
ments existed. These agreements usually involved two or Robinson-Patman Act.
more companies that combined with the purpose of rais- The Celler-Kefauver Antimerger Act, passed in 1950,
ing prices and lowering output, giving the trustees the extended the Clayton Act’s injunction against mergers.
power to control competition and maximize profits at the Because the purpose of this act was to forbid mergers that
public’s expense. These trust agreements would result in a prevented competition, corporations that were major

ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION 31