mony, plus adequate time for questioning well prior to the adjournment hour of 12:30.

I have had a long and genuine interest in seeing that constructive proposals are set forth in the accounting profession and that business corporations meet ever growing public awareness and interest in the credibility and effectiveness of private sector activity.

Understandably, my interest has evolved from my former experience as a chief executive officer for many years. Working with independent auditors, I have been frequently confronted by many issues and decisions involving the germaneness and correctness of applying accounting and auditing standards.

I have had to go through many of the decisionmaking processes the industry itself is struggling with. In this area I have long advocated that business must step up the pace of getting its own house in order. There needs to be greater disclosure of corporation activities; not in the technical footnote language but in layman's terms.

I always tried to emphasize to the engineering division for example, that we are not designing products for the private sector to be operated by other engineers. These products have to be operated by people. I have urged the accounting profession not to make their language so indiscernible and the footnotes so extensive so that the average person I am talking about this being a people's capitalism so the average person can understand them, rather than depending upon another accountant's expertise to be able to understand the language actually used.

There needs to be fuller discussion on the part of the industry on their concerns and the corrective steps the corporation is taking to assure continued corporate health and unquestioned integrity of its officers.

The Wall Street Journal had a front page article on a report put out by an organization that admitted its mistakes. I can recall many, many years ago being concerned with this when I was a chief executive officer. I had Pete Peterson, the president, putting out a report that enumerated and laid out five or six mjor mistakes our management had made on decisions. We received nothing but commendation. for this. Our stock didn't drop. If we lay out our mistakes rather than make extravagant claims things were going to be better, we are on the right track to solve real problems.

I have believed for decades in candid, open and honest reporting both by politicians and by the private sector. If you read some of the blurbs put out in the form of annual reports by companies, you wouldn't think they had a problem in the world.

It is up to the individual to go dig it out. But I really think it is the responsibility of the accounting profession to challenge management and not put out white papers; but to tell the truth about what is happening in their industry, candidly lay it on the line without having to have an investigative reporter go about trying to find out really what is happening in the industry or in that particular corporation.

I think that is really what we are after now. We are trying to find a basis of credibility and believability in the private sector that I think has been lost, just as it has been lost in the public sector.

We have had to go through some very, very agonizing appraisals

dence of the people in the Congress. For its own protection in the area of independent and professional credibility, the accounting profession must play a vital role in urging the issuers of financial statements to initiate greater disclosure, to improve management controls and internal audit practices, to better define corporate objectives, and to share with the investment public the strengths and weaknesses, the pluses and minuses of the corporations' activities as reflected in financial statements and related public disclosure.

This is not a time for corporations and auditing firms to only react negatively to staff studies or to hope the effects of the 1960 go-go era will be forgotten under the addage of "Let sleeping dogs lie." The private sector should seriously be engaged in a process of self-examination to identify problems that really do exist. Then the private sector should be proposing solutions for those problems voluntarily before being forced into such examinations and solutions.

I have talked to the chairman because we do share a different background. I think that is the great value of the Congress. We have businessmen. We have lawyers. We have farmers. We have people of various backgrounds. But I have tried to determine whether we have a commonality of interest. I find that we do. I don't think either one of us wants to see greater Government regulation. We don't want to see the Government substituted for the private sector.

The whole concept of chartering Federal corporations, having the Government move in and be the overall auditor of corporations, is repulsive to me, and I think to our chairman. We do not want to see bigger Government. We want to see better Government. We want to see Government get out of things, many of the things they are in right

now.

This President has enunciated that. We are working very closely with him on reorganization authority to see he has the authority to reduce the size of the Government. For heaven's sake, we don't want to get into some areas now which the private sector has been carrying on for years. But I think we would be naive to feel you can go through the series of abuses we have seen, particularly in the area we revealed in the committee on which I was ranking Republican for several years, the Multinational Subcommittee of the Foreign Relations Committee. I was shocked and corporations' directors and officers were shocked, and auditors were the most shocked of all to find out that kickbacks, payoffs and bribes had been consistently and steadily paid by many of our larger corporations in their regular business practice without there having been any knowledge of it whatsoever. It has been a very embarrassing thing for the profession, for the corporations, and for the outside directors to reveal how little they really knew about what was going on with the responsibility that they have.

That is just one instance. Maybe there are other instances. But let it be a warning to us that the system has to be improved; otherwise, that last resort, the big brother, the big hand of government, inevitably is going to be brought in.

Those of us who want to resist it mightily simply won't have a defense unless the industry itself takes action. So it is for that reason that these hearings really are an opportunity, a real opportunity, to look at some of the things that have gone on, to admit that there is rea

I want to commend the industry itself long before this staff study got underway, for having its own audit made of its own procedures and practices by an outstanding former Government official. The recommendations that have been brought forth in the Cohen report I think point up the fact that the industry itself has been active, wants to improve, and recognizes the need for improvement.

The best real chance for success in reforming audit and accounting procedures and standards as well as corporate management responsibility in the area of growing public and governmental awareness must rest with the private sector itself. If it fails to heed the message, if it fails to take the initiative, then that initiative will be taken from it. But I think Senator Metcalf and I are united in the fact that we want to see that every other effort is exhausted before we resort to what we would consider a total failure on the part of these hearings if more Government intervention was brought in as a result. What we would like to see is more initiative and creativity taken by the industry itself, and particularly the accounting profession for which we have a very high regard overall.

Congress and the executive branch are taking major steps to improve financial disclosure and codes of ethics within the Government sector. This goes for the judiciary, the executive branch, and the congressional branch. The House and the Senate have just gone through an agonizing period, distasteful to all of us. But we recognized we had to do it. We had to restore the faith of the people back in Government that we could police ourselves and find a way to eliminate practices that had crept in that simply cannot be tolerated in the morality of today.

I think the private sector must also reexamine its practices, what it is doing, whether or not corporations that do not have enough control by outside directors-and I mean really outside directors, not those beholding to the management for any other reason, whether it be services or fees that they are receiving whether or not the system itself is set up to be self-policing so we don't need Government involvement. We hope so.

The private sector must understand that with the example set in the public sector, the private sector will be under increasing pressure by the American public to initiate constructive change to further this process.

Mr. Chairman, I know the minority looks forward very much indeed to participating in these hearings. They will be totally nonpartisan. I hope the hearings will help to stimulate the type of constructive dialog and self-generated initiative so necessary for the private sector to enhance its role as the cornerstone of our economic well-being and its historical and constructive partnership role with Government. We in Government don't create wealth. We depend entirely upon the private sector to do it. We certainly express deep appreciation to the many people in this room and others who have worked to bring about and make these hearings possible. We hope they will be constructive, and I will certainly do everything I can to see everything we undertake is constructive. Certainly we start off with a first witness who is a highly respected Member of Congress and we welcome him and welcome the cooperation and the support of the House of Representatives

Thank you, Mr. Chairman.

Senator METCALF. I thank the Senator from Illinois. He has expressed my own convictions and my own ideas for the course of these hearings.

The integrity of the accounting profession was above and beyond question for a long time, and all at once we found, as the Senator from Illinois has suggested, that they were missing bribes and failing to reveal information that should have been revealed to the public.

We want them to come in and tell us what they are going to do about self-policing of their own profession. If they can't do that, of course, maybe the Federal Government, because of its very important responsibilities, will have to do some policing. But we hope that does not take place. We hope they convince us that they are going to take care of it and reform some of these practices.

Now I am delighted that our first witness is a colleague from the House, Congressman John Moss of California. John Moss and I came to the Congress together. We came to the Congress together as new Congressmen in a very difficult period, John. That was when President. Eisenhower was sweeping the country. We had a Republican Congress and a Republican Senate. There were a number of new Democrats at that time.

Senator PERCY. That sounds like a fine period. I look back with great nostalgia on that.

[Laughter.]

Senator METCALF. As long as John and I got elected at that time, it doesn't make much difference. But I hope it never recurs. I am in wholehearted accord with the two-party system. I like it the way it works right now.

Senator PERCY. As long as yours is the largest.

[Laughter.]

Senator METCALF. But anyway, John and I have been friends for more than a quarter of a century now and working in various areas of communications with industry, the utilities, and so forth. So I am especially pleased that the chairman of the Subcommittee on Oversight and Investigations-you have some seniority over there in the House Congressman Moss, who knows about the accounting policies of the Securities and Exchange Commission, will tell us about his experience and observations.

John, I am delighted you are here.

TESTIMONY OF HON. JOHN E. MOSS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Moss. Lee, I can think of no two Members of the Senate I would prefer appearing before. I have enjoyed our association, and as I have worked with Senator Percy, I have enjoyed that association. I also have to say that the sentiments expressed by both of you regarding the accounting profession, its problems and the appropriate role of Government, are shared by me.

Mr. Chairman, you stated that you had been assuaged. I have been told that I am greatly feared. I don't know why, because I do not regard the kinds of inquiries that we have made as adversary in any

surfaced not because we caused them to, but because they could no longer be suppressed. It has created a crisis of credibility, as Senator Percy correctly points out, equally as great in the private sector as anything we have encountered in the public sector.

It is important that those instances of credibility loss be overcome. I think this committee is taking the essential first step in bringing about a lessening of public concerns.

Mr. Chairman and members of the subcommittee, I am pleased to be here this morning in response to your invitation to appear and testify on the findings and recommendations of your staff's study titled, "The Accounting Establishment." That study raises very appropriate questions concerning the performance of the accounting profession in the discharge of its responsibilities, and I believe that your committee deserves praise for bringing these very important matters to public attention.

Accurate financial information lies at the heart of the capital formation process. If savers are to be asked to invest in American enterprises, they must be assured that the financial statements upon which they base their decisions accurately reflect the conditions of those enterprises. It has been suggested that the United States faces a significant capital shortage in the years ahead. The capital formation process, and the relationships of the financial institutions involved in that process, will be matters with which the Subcommittee on Oversight and Investigations, in the House, will concern itself in the 95th Congress.

The executive and legislative branches of the Government are seeking ways to ensure that there is sufficient capital available to fuel the productive enterprises upon which a sound and healthy economy is based. But no steps will be helpful if investors cannot believe in and rely upon the information provided them by financial statements audited by members of the accounting profession. It is for this reason that the inquiry into accounting and auditing practices and procedures is so vitally important.

The Subcommittee on Oversight and Investigations of the House Commerce Committee, which I have the privilege of chairing, has been investigating accounting practices for some time. This inquiry was occasioned by a number of events occurring in the 1970's, including certain unsafe and unsound practices in the securities industry; the use of incompatible accounting methodologies within the petroleum industry; the eleventh hour reporting of financial infirmities of the Penn Central: and the prevailing crisis of public confidence in corporate accountability occasioned by the disclosure of illegal or improper payments made by a number of our Nation's largest corporations, in some instances with the knowledge of their independent accountants.

One witness before our subcommittee began his testimony by citing a cartoon from the New Yorker which showed an executive introducing his company's accountant with a wink and the words, "In examining our books, Mr. Matthews promises to use generally accepted accounting principles, if you know what I mean."

Mr. Chairman, no one can reasonably deny that there are serious problems in the accounting establishment. The "creative accounting" techniques of the sixties still have not been adequately resolved. Ac