an exemplary fashion to serving the American public in the securities fields.

However, I have also one very strong impression. That is the SEC did not closely examine accounting rules. That is, the SEC was not sufficiently diligent in its efforts to formulate rules that it applied to the accounting profession.

I had a strong feeling that, instead, the SEC was by far too defferential to the industry. Whereas SEC Commissioners would grill members of the New York Stock Exchange-they would grill registants, they would ask very probing questions of all the other segments of the industry the Commission regulated--they would not scrutinize or ask tough, probing questions of the accounting profession.

Andy Barr was chief accountant when I was in SEC. That would be 1969 through 1971. He is a very fine gentleman. But in my judgment-this is a personal opinion; I didn't have the time to go back and go through any records to go back and document all of this-but in my personal opinon and impression, he spoke too much for the industry and two little for the public. It is that simple.

I understand there have been recent changes at the SEC, that perhaps the Commission is a little more diligent in probing the profession. I can only speak to my personal experience at the time I was there. At that time SEC in my judgment was not at all diligent.

I can't overemphasize how important that diligence is because as the Chairman knows and as you know, Senator Percy, changes in accounting rules and changes in application of accounting techniques to financial statements can have a tremendous effect.

When I was examining registration statements, it bothered me that we didn't have the authority to disclose as much as I though we should. It also bothered me looking at proposed rules that we didn't ask the questions that we should have asked.

I have the feeling it is partly because the SEC lacks sufficient expertise. The insurance industry is different from the banking industry. They are as different as the oil and gas industries are from each other. And all of them have different accounting practices.

I know it is difficult for the SEC to uniformly require certain standards that the company may not feel appropriate for some other endeavor that it is active in. So it is a very difficult question.

Still, it is my belief that no profession can police itself completely. The accounting profession is certainly one that cannot sufficiently police itself. It is for that reason that the Commission has to be more diligent.

The Financial Accounting Standards Board in my judgment is not a sufficient protection. I think it is a proper step to try to coordinate some of the accounting rules and regulations.

In my judgment, there has to be a public body that has final authority to oversee the promulgation of these rules and regulations-and that body should be the SEC.

The SEC should be driven to develop more expertise in each of these various areas that I feel it probably does not now have. The SEC must close the gap, because that is one area, the accounting profession, where the Commission was too lax.

To summarize, I can't speak for the Commission now. I can only give my impressions at the time I was there. I thought it was a great

agency. I worked at the CAB also for 1 year. I thought the CAB, frankly, was dismal compared to the SEC. So maybe I am splitting hairs when I am critical of its handling of the accounting profession. But I am just trying to make a near perfect agency a little closer to perfect. That is the reason for my statement here and my presence here today.

Senator METCALF. Thank you very much, Congressman Baucus. Was it your opinion, when you were legal counsel and working for the SEC, that the SEC did have authority to do the things that you are sug gesting they should do?

Mr. BAUCUS. Yes; I think it did, absolutely. We checked the statutes. I thought there was at least authority for the agency to do much more.

I would have to go back and reexamine the statutes today to see whether I think they have sufficient authority. Certainly there was authority to do much more in my judgment at the time.

Senator METCALF. As you know, we have had some excellent testimony from some of the leading accountants, members of the accounting profession. Price Waterhouse testified that there has to be reform. Mr. Biegler suggested legislation. Some of the others suggested there should be reform within the FASB. You express some misgivings about that.

Is it your opinion that if the SEC really does the job it is authorized to do, we will not need legislation?

Mr. BAUCUS. I think that is correct, Mr. Chairman. On the other hand, I have some pessimistic view of human nature. That is, everybody has to be prodded a little bit.

To say that the Commission finally has sufficient authority may not be enough. I think it would be wiser to suggest that the Commission in the exercise of its present authority do much more, with the full knowledge and with the warning that if it doesn't, Congress comes back with quite stringent legislation.

The main point would be to obviously help encourage the SEC to perform its job.

Senator METCALF. I think that is Senator Percy's idea. I think that is mine.

Senator Percy?

Senator PERCY. We are very grateful for your coming over this morning and the respect we have for you as a Member of Congress. You are very valuable to us.

My own impression through the 25 to 30 years I have worked with the SEC is it is one of the better regulatory agencies. It is more respected I think than most others. It has a fine tradition to live up to. I think Chairman Rod Hills has done a remarkable job in this rather grim situation we have had on payoffs and kickbacks and so forth. They have moved in and done an effective job there.

I think they can do a fine job in the auditing field. It says in the forthcoming testimony that we have that they will issue an annual report beginning July 1, 1978, covering all the recommendations and scope of the hearings that we have held.

It may be a very, very reassuring thing, not only to the Congress

strong support they provide for the implementation of the structure . committee recommendations I think is very reassuring.

Have you seen a copy of the testimony?

Mr. BAUCUS. No: I have not.

Senator PERCY. I think before you leave I would certainly recommend you taking along a copy of that. We would be happy to have any comments you would like to make. I would request that the record be held open. You are a former member of the staff and now you are seeing it from the perspective of a Congressman. We are very grateful for your appearance. Any ideas or suggestions to this committee you may have, we would be most responsive to them.

Mr. BAUCUS. Thank you very much.

Senator METCALF. I want to say, Senator Percy, that if I refuse to agree to the admonition that Admiral Rickover gave me at the conclusion of his testimony

Senator PERCY. You don't disagree with what he said at the beginning when he commended you so highly, did you?

Senator METCALF. I agree with that. [Laughter.]

If I refuse to agree with his suggestion that I run for reelection, Congressman Baucus may well be sitting in this chair continuing this investigation in another Congress.

I am delighted to have him here.

Senator PERCY. I hope we can do away with the seniority system now and make that possible for a freshman Senator. I will say this: He has a long way to go.

Mr. BAUCUS. We have the same problem on the other side.

Senator METCALF. Thank you very much for coming over.

Mr. BAUCUS. Thank you, Mr. Chairman.

Senator METCALF. Now we wind up these hearings by coming to the agency that really has the power and authority. We have tried to hear from all representative groups.

Mr. Harold M. Williams, the Chairman of the Securities and Exchange Commission, has brought the members of his Commission here today to tell us any plans that he and his Commission have for changing some of the abuses that have been pointed out, and have been admitted by the profession.

You have a tremendously important job, Mr. Chairman. I am hesitant in burdening you with another great job of accelerating your attention to the accounting profession. But I think it is so important to the American people that it is necessary for us to insist upon your carrying out what we believe is the congressional intent.

I am delighted to have you here this morning. I am going to call on Senator Percy in a minute. He is also pleased to have you here. We both have high regard for you. We are pleased that you are going to be Chairman of the Commission. You start anew. I am looking forward to some of the responses you are going to make today to the questions we are going to ask, and what you are going to do in the months ahead before we come back and ask you how you are getting along with your work. Senat or Percy?

Senator PERCY. Mr. Chairman, I would just like to join you in welcoming Chairman Williams and Commissioner Pollack and Com

former member of the staff of the U.S. Senate and was the right arm of Senator Wallace Bennett and a lot of freshman Senators that came along.

I served on that Banking Committee with John Evans. I know him to be an outstanding man. He had a very important responsibility. We are delighted to welcome you back this morning to the U.S. Senate. I hope you feel very familiar on that side of the table as well as here. Mr. EVANS. Thank you.

Senator METCALF. I would say you ought to drop in at my office because that is Senator Bennett's old office, 1121.

Chairman Williams, go right ahead.

TESTIMONY OF HAROLD M. WILLIAMS, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION, ACCOMPANIED BY COMMISSIONER PHILIP A. LOOMIS, JR., COMMISSIONER JOHN EVANS, AND COMMISSIONER IRVING POLLACK

Mr. WILLIAMS. Thank you, Mr. Chairman.

Mr. Chairman, Senator Percy, it is a pleasure to be with you here this morning, and particularly to follow a member of Congress who also characterized us as a near perfect agency. I hope that we will continue to enhance and deserve that image and reputation.

Mr. Chairman, the members of the Commission are pleased to appear before you this morning to participate in this subcommittee's review of the accounting profession. A copy of my prepared statement, along with the listing of Commission enforcement proceedings involving accountants, a memorandum from the Commission's general counsel analyzing Admiral Rickover's proposals, and a judgment illustrating the essential attributes of audit committees, are being submitted for the record.

Senator METCALF. Unless there is objection, that material will be included in the record immediately after your prepared testimony. Mr. WILLIAMS. Thank you.

Let me begin then just in a brief summary with what might amount to a bit of an editorial overview of the situation. Rather than being burdened, Senator, by the activity of this committee, I think it provides us with appropriate focus on what we all agree is a very vital and immediate problem.

These hearings have tended to bring into focus more clearly the growing dissatisfaction with the performance of the accounting profession, some of the reasons for it, and a recognition that time is rapidly running out on the profession and its opportunity to reform itself.

The hearings have pointed up the significant gap existing between what the public expects of the profession and what the profession itself does or believes it should do. This gap must be closed. Closing it must be a profession priority as well as a Commission priority.

In many ways, public expectations are probably excessive-for example, in failing to realize the limits inherent in an audit process as contrasted to that involved in, say, a thorough review and also in not recognizing the increased costs involved in conducting an audit de

Yet, the accounting profession plays a vital role in the management and capital formation processes on which American business rests. How well it performs its function is vital to the maintenance of public confidence in those processes. Because of the requirement that registration statements include audited financial information, independent accountants exercise significant influence over corporate access to capital from the investing public.

The slowness on the part of the profession to respond to the need for change has, in part, been caused or aggravated by the divisiveness within the leadership of the profession and, in part, as a result of efforts to stonewall problems or proposed solutions, perhaps with the wish that the problems would disappear.

It should be noted that there is an inevitable time lag in the process by which accounting and auditing adapt to a dynamically changing business environment; one which cannot be avoided even with the most diligent of efforts.

This is compounded by the human reluctance, or at least tardiness, in adapting to changing circumstances which present more problems than opportunities. In fairness to the profession, it should also be noted that it has periodically taken important initiatives, although often belatedly, such as the appointment of the Wheat Committee and the resulting FASB, which was a profession initiative, as were the Structure Committee and the Cohen Commission, of which you have heard much in these hearings and to which we have addressed ourselves in our testimony today.

The crux of the Commission testimony this morning has several dimensions:

1. Time is running and the need for substantive progress is great. 2. It is desirable that the establishment of accounting and auditing standards continue to be primarily a private sector responsibility with active SEC oversight. No one knows the problems better than the profession, or is as able to deal with them if it is motivated to do so.

3. The Commission has not always been diligent in pressing to secure timely address and resolution of accounting issues. It intends to pursue a vigorous program in the future as it has for the past period of years.

The primary problems the profession faces are in three areas: one, independence; two, accounting and auditing principles and standards; three, discipline.

The common thread is that the problems which arise, more often than not, reflect the failure of individual judgment and professionalism rather than inadequate accounting principles or auditing standards. Individual judgment and professionalism cannot be legislated, nor can failures be prevented by law or regulation.

What we need to do is, first, strengthen the environment in which the profession functions to reduce the pressures on independence which in turn give rise to poor judgment and professionalism. Second, there is a need to strengthen the quality control over the application of accounting principles and auditing standards, again to reduce the occurrences of poor judgment and poor professionalism. Third, there is a need to improve the effectiveness of the disciplinary process against