ACCOUNTING AND AUDITING PRACTICES AND

PROCEDURES

THURSDAY, APRIL 21, 1977

U.S. SENATE.

SUBCOMMITTEE ON REPORTS,

ACCOUNTING, AND MANAGEMENT OF THE

COMMITTEE ON GOVERNMENTAL AFFAIRS,

Washington, D.C.

The subcommittee met at 10.05 a.m., pursuant to notice in room 3302, Dirksen Senate Office Building, Hon. Lee Metcalf chairman of the subcommittee) presiding.

Present: Senators Metcalf and Percy.

Also present: Vic Reinemer, staff director: E. Winslow Turner. chief counsel; John B. Chesson, counsel: Gerald Sturges, professional staff member; Lyle Ryter, minority counsel: Jeanne A. M.Nangon chief clerk; and Anne Boni, legislative assistant.

Senator METCALF. The subcommittee will be in order.

This is a continuation of the hearings on the subcommittee's B study of the accounting profession.

Today we have before us members of the Financial Assoming Foundation, and the Financial Accounting Standards Board Weat very pleased to have them here today. We have Mr. Marstall SA strong, chairman of the FASB. and Mr. Alva O. Way. THE SAME Financial Accounting Foundation and the chairman of the so

on Government relations of the FAF board of trustees Mr. W&T # also vice president-finance of General Electric Ca

Mr. Armstrong, as I understand it. you are going to mi of TE will hear both witnesses and then, by that time. I hope than SenĒTOS Percy will be through with his testimony before the bathing and Currency Committee, and you will be subject to questiLZ

TESTIMONY OF MARSHALL S. ARMSTRONG. CHATEMAN FUSENTED ACCOUNTING STANDARDS BOARD

Senator METCALF. Mr. Armstrong.

Mr. ARMSTRONG. I am Marshall S. Ametrong, fa man of # Financial Accounting Standards Board Thirr-ETE THERE AT Itered public accounting in a regional form beimanere a Zapolis, ultimately becoming its managing pannen.

My working life has been dedicated to putut bonnet og fre practitioner and then as one charged with resporening for woning standards for public financial reporting

I have been active in professional associations, and was selected in 1970 to serve as president of the American Institute of C.P.A.'s. Much of my energy has been committed to the improvement of accounting practices.

Aside from my 4 years as chairman of the FASB, I spent 6 years as a member of its predecessor, the accounting principles board. Ì also served for 5 years on the AICPA's auditing committee.

Having made the decision recently to step down as chairman of the FASB at the end of 1977, I appear before you today, Mr. Chairman, as a knowledgeable observe of the matters under consideration by your subcommittee-as one who is especially sensitive to the public interest-one without a self-interest.

Accompanying me today, as you have already recognized, is Mr. Alva O. Way, vice president of the Financial Accounting Foundation and chairman of its Committee on Government Relations. The foundation is the organization that has responsibility for funding the board, selecting its members, and overseeing its operations.

The financial accounting standards board, as I am confident you know, has one charge: to improve financial accounting standards.

I welcome this opportunity to appear before the subcommittee to present the views of the financial accounting standards board on a study prepared by your staff entitled "The Accounting Establishment."

With your permission, Mr. Chairman, I am submitting for the record, on behalf of both the board and the foundation, a printed statement of position.1 The statement provides our comments on the study and certain of its recommendations in much greater detail than I intend to deal with in my testimony today.

Senator METCALF. Without objection, that statement will be printed in the record, following your testimony.

Mr. ARMSTRONG. Thank you, Mr. Chairman.

Let me say at the outset that we strongly disagree with the study's recommendation that the Federal Government assume the direct responsibility for financial accounting standards for publicly owned corporations.

Our statement of position corrects and supplements the staff study in certain major respects and strives to balance the record.

Mr. Chairman, I was particularly pleased to learn at the hearing on Tuesday that both you and Senator Percy are in favor of retain ing and improving the existing structure for establishing accounting standards, rather than establishing a new Federal agency.

I want to assure you that the FASB takes these hearings seriously and believes they serve a public purpose. I also want to assure you that the FASB will cooperate in endeavoring to meet your concerns as to accounting standard-setting as it presently operates.

We also were pleased that Congressman Moss is in favor of blending the expertise of the FASB and the private sector with the public responsibility of the SEC.

The principal points I wish to make in my testimony today are

that:

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First, the public interest will be served best if the accounting stano ard-setting process remains in the private sector with, effective rejet and participation by the SEC;

Second, the financial accounting standards board is

and objective in its work and, with its due process procedures 10 pHlic participation, has achieved acknowledged success in improving the quality of financial information available to the American cap markets; and

Third, the financial accounting standards board is the mos effect r and most promising vehicle to advance accounting stan aras neve sary to maintain and enhance the strength of the capita ma′′ESTS Let

me take a moment at the outset to highlight the organization et the board.

The board was established in 1972 as a separate, indeper vent charged to improve financial accounting and reporting. Te vopr consists of seven full-time members appointed by the trustees of the foundation, to serve 5-year terms.

My colleagues on the board are: Robert T. Sprouse, & former pira fessor of accounting at Stanford University: Oscar S. GIL, L. T tired partner of Haskins & Sells, and a former professor of avoNE: ing: Donald J. Kirk, a former partner of Price Waterhouse Arthur L. Litke, the former Chief Accountant of the Feier Power Commission; Robert E. Mays, the former controlier of Exxor Compet and, Ralph E. Walters, a former partner of Touche Loss & C

The board is supported by a full-time salaried staf of approx. mately 80, about 25 of whom are experienced accountants from practice, industry, and the academic world.

The board also engages specialists as consultants on partena" pro...ects. In addition, a 29-member financial accounting standar a masom council representing a broad constituency advises the boar..

For most projects, the board has task forces representing man* disciplines to assist in understanding highly technical probem air to assure a neutral and evenhanded approach to the issues of & slee The board benefits greatly from the advice and assista o' tai council and the task forces.

The initiative for accounting standard-setting has beer II : pvate sector since it assumed that responsibility voluntary in the ear 1930's. Later in that decade, as you know, the SEC indate its m ingness to permit the private sector to continue tras initiative subject of course to the Commission's review and participation.. This was a wise decision in my judgment. The success "na" na achieved is ample evidence of the ability of the private sector to ge the job, and to do it well.

I submit that the FASB has the talent, the will, and the cour. It treat to set standards that will assure communication by US, ellierprises of the financial information needed for a healthy, growing woLLION, That is a unique type of information. It must not be diner compromised.

Should the Federal Government assume the direct responsio 'ix for setting accounting standards, I foresee grave problems that con is th sult in severe disruptions to the American capital markets:

First, the Government, by attempting to implement national poting through accounting standards, could divert financial reporting away

from the pervasive purpose of furnishing objective information needed for effective, efficient, and equitable allocation of the Nation's

resources;

Second, there could be significant dissipation of sizable voluntary efforts that the board has been able to muster in this complex area: Third, Government intervention could change the process from & voluntary effort to an adversary process;

And finally, a transition to standard setting by Government would cause serious disruption of the progress that is underway in further improving accounting standards and could erode standards of prove soundness.

While Mr. Way will speak of these problems at some greater length. as one involved in the accounting standard-setting process for much of a lifetime, I felt impelled to express my great concern about a takeover by the Federal Government.

The structure of the FASB, Mr. Chairman, has evolved over the last 40 years, and is today, I believe, a model for self-regulation in the private sector. It is still in the process of evolution, and I trust wil! continue to evolve to that end as the trustees and the members of the board respond, as they will, to continued needs for improvement. The board's success, in my judgment, as a self-regulatory body results principally from two factors:

One: The spirit of independence and objectivity in which it operates. Two: The wide public support and participation which it has been

able to evoke.

As chairman of the board, I assure you that the spirit of independ ence drives the board. The six other members have diverse backgrounds and are men of strong conviction.

Mr. Chairman, I say without reservation that the board has func tioned with complete independence: without domination by the trustees, by the sponsoring organizations, by the major accounting firms. by business concerns, or by anyone else.

However, notwithstanding the careful structuring of the FAF and the FASB to assure the integrity, independence, and objectivity of the board, and the FASB's extensive procedures to assure broad pub lic participation, the staff study asserts that the AICPA, the major accounting firms, and others dominate the FAF and through it the FASB, in order to serve the special interests of the major accounting firms' large corporate clients.

The record proves the contrary, and clearly reflects the FASES independence and objectivity as well as the breadth and depth of public participation in the board's processes.

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Dramatic evidence of this independence, objectivity, and public participation is provided in exhibit B of the statement of position have furnished for inclusion in the record.

I commend it to you, Mr. Chairman, and all members of your subcommittee and staff, for careful study.

Senator METCALF. It has already been inserted.

Mr. ARMSTRONG. Yes; we put it in.

As exhibit B clearly shows, from the eight FASB standards analyzed, sponsoring organizations disagree among themselves: major accounting firms disagree with each other, their clients, and the AICPA; and the FASB's most consistent support in terms of positions taken on technical issues seems to come from users of financial