ARTHUR YOUNG & COMPANY 277 PARK AVENUE NEW YORK, N. Y. 10017 May 18, 1977 The Honorable Lee Metcalf, Chairman Subcommittee on Reports, Accounting, and Management United States Senate 161 Russell Senate Office Building Washington, D.C. 20510 Dear Senator Metcalf: Arthur Young & Company is one of the leading international firms of independent certified public accountants and auditors, and is one of the "Big Eight" accounting firms identified in the Staff Study entitled "The Accounting Establishment." We and the other large firms of independent certified public accountants are a significant factor in the effective operation of the U.S. capital markets, which are without equal in the world. We affirm those facts with substantial pride in what we are and in what we have accomplished. Our firm has not achieved the position and reputation we enjoy by being subservient to our clients or to the SEC, by entering into collusion or conspiracy with anyone, or by ignoring the interests of investors. Yet the Staff Study sometimes suggests, and sometimes specifically charges, that we have done all these things. We have succeeded in our profession through the efforts of a remarkably talented group of men and women who have developed themselves into a highly effective, and highly competitive, professional organization. Our standards of professional responsibility and performance have been established and maintained under a discipline that is at least as severe and as highly controlled as the discipline prevailing in any other business, That discipline, which is the essence of our practice, requires every partner in our firm to accept responsibilities to our public, to our other partners, and to our employees. Our public includes the owners, the potential owners, the creditors, the managers, and the regulators of our clients. We are confident that we can defend our integrity successfully against any attack, that service to our public has been demonstrated to be our organizational objective, that our compensation is established in open competition in a free marketplace, and that our profession's record of self-regulation is, on balance, quite good. The Subcommittee's Staff has unfortunately chosen to present arguments on only one side of difficult and complex controversies and thus has, in our view, provided limited illumination. The Staff appears not to have considered the substantial accomplishments of the accounting profession, or has failed to grasp the subjects with which it has dealt. Further, the Staff has made significant recommendations for legislation without input or support from responsible representatives of the profession, the academic community, business, or the users of financial statements. We urge that these deficiencies be corrected through the input the Subcommittee will obtain in its public hearings. As an illustration of the Staff's approach, we point to the Staff Study's references to Professor Abraham Briloff. He is quoted not only as though he were an authority on many of the matters dealt with in the Study, but as if he were the sole available authority on these matters and a person whose comments are to be accepted without question. To be sure, Professor Briloff is entitled to state his views, but we respectfully suggest that such views represent a minority opinion. The Staff Study charges that accountants with large firms are not independent. We believe that our response, which follows, considered concepts of independence, public service, and public interest and is guided by a substantial and comprehensive ethics code which causes members of the profession to avoid the appearance of conflicts of interest and to maintain their objectivity. The Staff Study criticizes various activities of the profession as self-serving and alleges that large firms conspire to minimize competition. Our response demonstrates that the largest firms compete vigorously with each other, that these firms invest substantial resources in quality control, training, and professional activities, and that the largest firms are large because of the demands of an economy and capital market which require such a size in order to audit the largest companies. The Staff Study recommends that a government agency assume the accounting and auditing standard-setting function. There is no meaningful evidence in the Staff Study to support the conclusion that the private sector has been unable to develop a meaningful system of accounting, auditing, and reporting. Our response demonstrates that the private sector process anticipates problems, is dealing effectively with them, and will continue to do so more effectively than would a government agency. Further, the Staff Study goes so far as to suggest that professionals should not speak out publicly on matters within their expertise. We believe this suggestion is contrary to the public interest, since it would deny to the public access to our expertise and would infringe on our rights. The Staff Study also suggests that Arthur Young & Company, as auditors of Lockheed, may have performed improper audits and permitted issuance of misleading financial reports. This charge is based on misconceptions resulting from uncritical use by the Staff of the writings of Professor Briloff. In our response, we have rebutted his misstatements and set the record straight. research in presenting the purported views of partners of our The Staff Study suggests a need for significant legislation which, in our opinion, is ill-advised. The Staff Study is on the public record, and has been widely disseminated and widely read. We, therefore, are compelled to put into the record our opposition to those proposals. We note with pleasure the statements by several members of the Subcommittee to the effect that they do not expect to propose new legislation regulating the accounting profession. We believe that in the accompanying response we have demonstrated that concern for the public interest has been a constant consideration in our profession's and our firm's determination of objectives and practices. We are convinced that it would be inappropriate and foolhardy to disassemble the apparatuses within the private sector responsible for the establishment of accounting and auditing standards and to attempt to reassemble them in the government. The pronouncements of the current and immediately preceding national administrations should be heeded--there should be less, not more, government regulation. We are not suggesting that the accounting profession is perfect. It is not. It has a long way to go, and it should be unrelenting in its continuing efforts to improve the quality of its services. The profession has made significant changes; other changes are in prospect. For example, the profession recently has established a program in which professional peers will review and measure the performance of accounting firms. In addition, the Commission on Auditors' Responsibilities, chaired by Manuel S. Cohen, a former chairman of the SEC, has recently issued a report on its tentative conclusions. The report proposes some significant changes that should make the work of inde |