important source of specialized professional advice. However, we acknowledge that persons not familiar with our standards of independence and our internal discipline may share the fears expressed in the Staff Study. Accordingly, we recommend that audit committees review, at least annually, all significant professional services provided by the auditors.

Providing Management Advisory Services to the

Federal Government

The Staff Study recommends that the Federal government not retain firms which act as independent auditors to provide management advisory services or "other consulting services." Again, it is not clear whether the term "other consulting services" includes consulting as to the manner of accounting for particular transactions and advice on accounting systems. The report also implies that CPA firms which provide auditing, accounting, and management advisory services to various levels of government, as well as to corporations, are loyal to their corporate clients at the expense of government. The firms are accused of seeking to influence government, even when it is our client, to the benefit of our corporate clients. Again, no example of conflict of interest is given and we believe the problem is illusory.

We believe that the types of management advisory services we have historically provided to the Federal government have not resulted in the types of conflicts the Staff Study implies. To limit or eliminate CPAs as providers of consulting services would, in our opinion, work to the considerable disadvantage of the Federal government and the taxpayer. In support of this position, we present the following observations:

1.

In virtually all cases, we have provided manage-
ment advisory services to Federal agencies only

2.

3.

after there has been a comprehensive, competitive selection process involving:

The selected firm (be it a CPA firm or a general
line consulting organization) is the one deemed
best qualified (weighing technical capability
and price) to provide services to the agency.

No evidence is presented in the Staff Study
that government clients of CPAs did not receive
competent, professional management advisory
services.

The Staff Study assertion that almost all manage-
ment advisory services performed for Federal
agencies by CPA firms relate to policy matters
is incorrect and is not supported by any evidence
in the report. There are references in the
Study to selected consulting engagements--a
study of the regulatory reporting system for
cable television operators and a fact-finding
study with respect to the costs and profits of
defense contractors. An objective view of the
two engagements would disclose that no formula-
tion or study of agency policy direction was
made. The vast majority of management advisory
service engagements for Federal agencies relate
to providing technical assistance in such areas
as financial analysis, accounting systems, and
EDP practices--service of benefit to the
internal operations of the Federal government
rather than services directed toward establish-
ing or influencing policy.

4.

To exclude government agencies from obtaining
the services of CPA firms would accomplish little
aside from depriving the government of highly

skilled professional advice which CPAs have
provided to government for several decades.

DO THE 'LARGE FIRMS' DOMINATE
THE ACCOUNTING PROFESSION?

The Staff Study asserts that large accounting firms dominate the accounting profession--that these firms conspire in their own interests and that the combination of dominance and conspiracy results in work of low quality, erosion of independence, and lessening of competition.

We do not agree with these assertions. On the contrary, we believe that large accounting firms enhance the quality of our profession's work, raise the level of its independence, and compete vigorously with each other. In this chapter, we document these beliefs, beginning with a discussion of the reasons for large accounting firms.

Why Large Firms?

When Arthur Young came to the United States from Glasgow in 1890, his mission was to supervise investments of a Scottish banking firm which had provided the money to build the Great Northern Railroad and which raised funds for other American enterprises. He was one of a number of English and Scottish chartered accountants who came to the United States to examine the financial condition and earning power of American companies in which the English and Scottish had invested. From the very beginning of what are now the large firms, accountants and auditors were advising on business and accounting matters and providing, on a multinational scale, an attest function for the benefit of absentee owners.

Today some 15 large accounting firms are providing accounting and auditing services to most of the major U.S. businesses. These firms have grown to their present size principally as a result of the growing needs of their clients. As companies grew, requiring more services at more locations and as business became more complex, some accounting firms grew (internally and by merger with smaller firms) to provide the services their clients required.

The large firms of today have the internal structure needed to meet the audit requirements of their large clients; they have sufficient resources to make a significant and consistent commitment to controlling the quality of work performed.

Because of their size, these large firms are able to:

• Attract capable people by providing them with
challenging, stimulating work and satisfactory
compensation.

• Educate their people in firmwide programs
specifically tailored to their needs so that
they can better understand and apply generally
accepted accounting principles and auditing
standards to complex transactions.

• Allow some of their people to devote consider-
able time, effort, and expense to professional
affairs.

• Utilize people in specialized activities devel-
oping specialized knowledge of industries and
regulatory rules.

• Maintain professionals throughout the world to
provide accounting and auditing services locally.

Of significant importance to users of financial statements is the fact that these large firms are capable of applying, on a worldwide basis, the discipline of their organization and consistent auditing procedures to the various components of multina