REGULATION OF THE PROFESSION

Several of the Staff's recommendations would impose upon the profession additional layers of governmental regulation which in our view are unnecessary and unwarranted. We believe the Staff

has failed to appreciate the effectiveness of the existing regulatory processes, both within the private sector and the public sector. The Cohen Commission report states:

"Our overall conclusions are that the existing
elements of regulation should be considered not in
isolation but as a total system established and
maintained by firms, the profession, state boards,
the SEC, and the courts and that the system is per-
forming reasonably well."

Some of the elements of the total system that have a continuous regulatory effect on the practice of public accounting are:

1. The individual's personal attitude of profes-
sional integrity, objectivity, independence,
and public service as well as his concern for
the professional reputation on which his career
depends.

2.

The technical and ethical standards promulgated
by many large public accounting firms (which
are often more restrictive than the rules of
either the AICPA or the SEC) and the related
quality control and review programs of such
firms that assure compliance with professional
standards; the obligations of the partners to
one another, and concern for the firm's reputa-
tion and potential legal liabilities.

3.

4.

5.

6.

7.

8.

The technical and ethical standards and related
disciplinary procedures of the AICPA and various
state societies of CPAs, and the developing
program of professional "peer reviews."

Clients' requirements for quality service from
an auditor of good repute, increasing oversight by
corporate audit committees, and the prominence
being given by the SEC to disagreements on
accounting principles between management and
independent auditors.

The professional accreditation standards, licen-
sing procedures, accountancy laws, and discipli-
nary procedures of the various state boards of

accountancy.

The SEC's technical and independence standards,
its reviews of registration statements and
reports, and its enforcement proceedings.

Civil and criminal proceedings in the courts.
initiated by investors, creditors, and others.

The fear of adverse publicity with its attendant
damage to professional reputations.

Quality Control Programs at Arthur Young & Company

To assure that partners and professional staff adhere to professional standards (including standards of ethical conduct), many CPA firms, and probably all of the larger ones, maintain recruiting, education, and surveillance procedures designed to make deviations from such standards unlikely and to detect them if they occur. For example, Arthur Young & Company:

1.

Recruits professional staff at excellent colleges
and universities across the nation and attempts to
hire persons with the best records of character,
integrity, leadership, and scholastic achieve-
ments. In this process, as a part of our affirm-
ative action program, we seek to hire qualified
minorities for positions on the professional
staff.

2.

3.

4.

5.

6.

7.

8.

Conducts continuing professional education and
training programs which include emphasis on
adherence to professional standards, and train-
ing in sophisticated audit techniques. Our
national program offers over 60 courses during
the year, some of which are given several times,
and is supplemented by many local programs.

Maintains information systems designed to assure
that the firm's partners and professional staff
remain independent of audit clients and their affiliates.
• A list of audit clients and their affiliates
whose securities are publicly traded is
available to assist partners and other
professional personnel in adhering to the
firm's independence requirements.

• All partners and professional staff annually
confirm in writing their independence from
audit clients and their affiliates.

• A central record of the names of all publicly
traded companies (none of which may be an
audit client) in which any partner has a
financial interest is being established.

Has strict standards for promotion and advance-
ment of personnel at all levels.

Closely supervises audit work while it is in
progress.

Performs several levels of review of work on
each audit engagement (see "Objectivity" below).

Assigns internal "review teams," consisting of
experienced personnel, to make periodic reviews
in offices other than their own, to monitor
compliance with (a) generally accepted auditing
standards as evidenced by audit workpapers
on selected engagements, and (b) firm administra-
tion policies prescribed in the firm's manuals,
as well as to identify any actions needed to
improve our procedures (see "Objectivity"
below).

Evaluates the business ethics and reputation
of potential clients and periodically reviews
existing clients to consider whether they

should be retained. The firm has rejected
prospective clients, chosen not to retain
certain clients, and parted company with
clients because of disputes over accounting
principles.

Objectivity

Our firm has established an effective system of controls to ensure objectivity. For each major engagement there are at least two partners--an "engagement partner" and a "colleague partner." The former has the primary responsibility; the latter participates in making major decisions and reviews of both the financial statements and our reports before they are issued. Because colleague partners are not involved in engagements on a day-to-day basis, they bring an additional objective viewpoint to discussions and reviews. We also require other reviews, by persons who are not in any way connected with the engagement, of financial statements reported on by the firm for conformity with generally accepted accounting principles, and our reports thereon are reviewed for compliance with reporting standards. These reviews are in addition to the reviews made by members of the engagement team. As a matter of both policy and practice, our partners and managers on an engagement are expected to consult with others in the firm when they have questions as to the appropriateness of a client's financial statements or our proposed report thereon. We also have inspection programs in which our people review the work of others in their own offices and the work of people in other offices. Among other purposes, these programs are designed to enable us to appraise the quality of the decisions made by our people in audit situations.

Audit Committees

In recent years, the establishment of audit committees by companies with publicly traded securities has become a prevalent practice. The New York Stock Exchange has recently adopted an amendment to its Listing Agreement requiring listed companies to have, beginning in 1978, audit committees consisting of directors who are independent of management. For many years we have sup

ported the establishment of such committees to provide a means of communication for auditors with directors who are not a part of management. We believe audit committees can be helpful to auditors if management tries to exert pressure on them to compromise their independent views. Accordingly, we support a proposal to give additional audit-related responsibilities to audit committees, including the power to engage and dismiss auditors or make recommendations on these matters to the shareholders.

Reporting of Client/Auditor Disagreements

Another factor that strengthens auditor independence is the SEC requirement that when there is a change in auditors, the company must report certain disagreements with the auditor, during the preceding two years, that relate to accounting principles, financial statement disclosures, or auditing procedures. The replaced auditor has the opportunity to explain his view of the disagreement if it differs from the view expressed by the company. From November 1971 to April 1976, 165 companies reported disagreements with auditors.

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