ing principles in recording similar transactions. In choosing among such alternatives, there is no requirement that the accountant choose that principle that represents the data most fairly. Too often users of financial statements must approach those statements as though they emitted a loud ticking sound, waiting for the explosion that will belie their contents. Problems with accounting principles have been matched in recent years with problems in auditing. Accountants use generally accepted accounting principles to measure and report the effects of economic activities on individual entities. Auditors provide an independent examination to determine the propriety of acounting processes, measurements and communication. Put simply, accountants prepare financial information, auditors check it. But what happened in the auditing of the over 200 corporations, including some of our Nation's largest, which made illegal and improper payments in the course of their business? What happened to the auditing of Equity Funding Corp., which for years had groups of its employees meeting to create fictitious accounts and falsify books and reeords? Can there be any question that something is drastically amiss! Recognizing that problems exist, what can be done to solve them? One possible solution is for the Securities and Exchange Commission to establish all accounting principles and auditing standards. The Federal securities laws authorize the Commission to insure that financial data of publicly owned companies is provided "in such detail and such form as the Commission shall prescribe," and authorizes the agency to prescribe "the methods to be followed in the preparation of This authority is plainly sufficient to allow the SEC to set accounting principles and auditing standards for companies going public or which are publicly owned. accounts. Although this authority has existed since 1933, the SEC has chosen not to exercise it in any primary way. Rather, the agency has deferred in the main to the accounting profession to perform these tasks. I believe the SEC has been remiss in this regard. On the other hand, I am extremely reluctant to totally remove the private sector from the process of setting accounting principles and auditing standards. Coming late to the realization that there is trouble in their industry, the accounting profession has begun to stir itself. The Financial Standards Board was established to replace the Accounting Principles Board, which established accounting principles during the 1960's. The FASB has not moved with the speed and forcefulness that is so nec essary. Only recently has the Board issued its tentative conclusions on the conceptual framework for accounting, and public hearings on this key matter will not begin for several months. The FASB determines accounting principles-auditing standards are set by the auditing standards executive committee of the American Institute of Certified Public Accountants. In 1974 the AICPA established a commission on auditors' responsibilities headed by former SEC Chairman Manuel Cohen. The report of tentative conclusions of that group has recently been issued. That report, which is still being analyzed by my staff, appears to contain progressive recommendations in the public interest. What will be significant, however, is the willingness of the accounting profession to accept those recommendations. This is a matter which will bear close watching. Even with these initiatives, history teaches us that the public interest is not well served by leaving the setting of accounting principles and auditing standards solely in the hands of the accounting profession. I believe that a procedure can be devised which will allow the Securities and Exchange Commission and the accounting profession to move together to provide increased protection in the public interest. That procedure would have the Securities and Exchange Commission prescribe by rule a framework for the setting of accounting principles and auditing standards. The financial accounting standards board and the auditing standards executive committee could continue to issue pronouncements within this framework. Principles and standards so adopted would be subject to SEC review, and the Commission would retain its existing authority to act on its own initiative in appropriate circumstances. The approach I have suggested would blend the expertise of the private sector with the public interest responsibility of the SEC. This partnership would be subject to oversight by the Congress, which should be exercised vigorously as recommended in your staff's report. Mr. Chairman, the Federal securities laws require certification of financial statements by independent accountants. Users of such statements must be assured that the data being presented to them has been attested to by someone disinterested from the entity being reported upon. Both the SEC and the accounting profession have a body of literature on what constitutes independence. I think that more can be done. For example, in enacting those portions of the Federal securities laws dealing with the conduct of members of the securities industry, Congress determines that the setting of ethical standards, and the enforcement of those standards, should be left to the industry, subject to review and approval by the SEC. It has been suggested that a similar approach would be appropriate for regulating the conduct of accountants who practice before the Commission. An organization similar to the National Association of Securities Dealers could be established, and charged with the responsibility of promulgating and enforcing strict standards of conduct for independent accountants practicing before the SEC. This organization would enforce these standards through inspections and disciplinary actions. The SEC would exercise oversight of these operations. Your staff study points out that an accountant's independence may be severely compromised by the performance of certain kinds of nonaccounting functions such as management advisory services. The SEC has sufficient authority to require disclosure in annual corporate proxy statements of the auditing and all other activities performed during the year for the soliciting company by the company's independent accountant, and the fees received by the accountant for each of these services. The Cohen Commission has made a recommendation along this line, and I trust that the SEC will act upon it. Once this information is disclosed, it can be analyzed and further action taken if appropriate. This assumes that information contained in documents filed with the SEC can be retrieved and analyzed. I am not sure at all that this is the situ mation from the SEC find it difficult, if not impossible, and that the SEC Commissioners and staff have difficulty themselves obtaining needed information from their own files. I intend to pursue this matter with the SEC at the appropriate time. Corporate management can also help to assure the independence of its auditors by establishing audit committees composed of outside directors. The recently adopted New York Stock Exchange listing requirement is a step in this direction. Such audit committees must have available to them independent expert advisers to assist them in the performance of their duties. In my subcommittee's investigation of the SEC's voluntary compliance program on corporate disclosure, we discovered instances where independent directors had nowhere to turn for outside advice about difficult legal and accounting questions. Your staff study touches upon a number of other points upon which I would like to comment briefly. Your report recommends that the Federal Government act to relieve excessive concentration in the supply of auditing and accounting services to major publicly owned corporations and that Congress consider methods of increasing competition among accounting firms for selection as independent auditors for major corporations. You point out that the "big eight" accounting firms have as clients approximately 85 percent of the over 2,500 corporations listed on the New York and American Stock Exchanges, which corporations accounted for about one-half of the $2.5 trillion in sales for our country's manufacturing, trade, and retail sectors and about 84 percent of the $75.4 billion of corporation profits after taxes for the years 1974 and 1975. Some argue, however, that these figures indicate that these companies require large accounting firms to conduct a proper audit. I agree with your recommendation that appropriate agencies of the Federal Government should inquire into this matter, as should the Congress. Your staff study also recommends that the Federal Government retain accounting firms which act as independent auditors only to perform auditing and accounting services and that Federal employees should not serve on committees of the American Institute of Certified Public Accountants or similar organizations that are assigned to directly or indirectly influence accounting policies and procedures of the Federal Government. The policy underlying these recommendations, I presume, is the avoidance of conflicts of interest, a policy I strongly support. The Congress has recently adopted an extensive code of ethics to prevent conflicts, or the appearance of conflicts, for Members in the performance of their public duties. Such codes, if adopted by agencies of the executive branch, could serve the same purpose, yet still allow Federal employees to participate in such organizations under appropriate circumstances. Such participation may well be in the public interest since it brings these accounting organizations a viewpoint which otherwise might go unheard. Your staff report recommends the Securities and Exchange Commission treat all independent auditors equally in disciplinary and en argue that india's "mmung smilar barns or the aw should CUTS MUST gats over Finally, your så solg n_ross should amend the Federal securities laws tipastor the "out of thai Individuals to sue independent auditors for nericne inder the fraud provisions of those laws reversing the tension of Le T.S. Supreme Court in the case of Ernst & Emat. Exit & Tebcommittee on Oversight and Invstigations has ma le a similar recommendation. Te Hochfelder decision, however, is only one of many the Supreme Court has rendered in the last 3 years which fairly well may be characterized as anticonsumer. These cases in the securities area deny individ a access to the Federal court system, and make it extremely difficult for aggrieved persons to prevail, even if they can successfully earn entry into that system. I am deeply concerned about those decisions. Next year the Acan Law Institute and the American Bar Association will bring to t Congress a proposed new Federal securities code, which will in one statute the many laws now administered by the SEC. T.....* posed code should provide a vehicle for reversing much of wat Burger court has done in this area. Mr. Chairman, we are all familiar with the story of the ap accountant who, when asked the sum of 2 plus 2 replied. ~W? what did you have in mind?" Mark Twain suggested: "I.. :-- ** bad when you're publicly criticized; things are disastrous when you're laughed at." I think the accounting profession is peopled by some of the most conscientions, diligent, hardworking individuals I have ever me. I am troubled when they are laughed at. I hope that we can pose together to solve the problems facing the accounting con... through reasoned debate and good-faith efforts on all de Mr. Calmaz, flat concludes my prepared remark. I am prepared end to your questions. Ir. going T Senator Men Anz. Thank you very much. Congressman Moss. I want to assure you that this subcommittee is committed during the remainder of this sesvice ** ***** mong mamm for either self-discipline or action brite SE Fadenemerities laws, I of s or me allegedly reorganized the committee system retat Senators would be available to sit on various communes and t have three or four committees working at the Menembeless, I should be over at the Governmental should be me the Energy and Natural Resources Committee. here Senator Percy has already gone. I same Where there is a creation hearing. Temvetat my colleagues aren't here is because we are working .: we are working on many other things. You under or a tax ing ed that Senator Perry did o come and make an open 111 expressed his interest in the course of this hearing. Congressman Moss, during the past few years two former SEC Commissioners have headed AICPA study groups. One former Commissioner has been retained as counsel for that group. A retired chief accountant of the SEC was employed by the AICPA at an annual rate of $60,000 per year. The assistant to the Chairman of the SEC has gone to work as the vice president of Government relations for the AICPA. Isn't this symbolic of the revolving door between regulatory agencies and the firms they regulate, which evidences the sympathy and commonality of interest that exists between the SEC and accountants, and probably evidences the reason little has been done by the SEC on accounting matters since 1933 ? Mr. Moss. I think nothing could more adequately illustrate the evils of the revolving door system that clearly operates in areas of clear conflict. There is no question as to the magnitude of the conflict of interest represented by the instances just cited by you, Mr. Chairman. Senator METCALF. So we find that we have passed, and we have consistently referred to legislation over the years which the SEC has failed to enforce, and has failed to support. I am not sure whether additional legislation is needed. It may be that additional prodding down at the SEC is needed. Mr. Moss. Mr. Chairman, I think two things: One, I think better oversight by Congress Senator METCALF. Let's you and I take care of that. Mr. Moss [continuing]. And two, a more conscientious selection of the persons who serve as members of the Commission by the Executive. I think, if we can achieve those two objectives, that we will have made a major step toward enhancing the quality of regulation, perhaps enhance it to the point where we might significantly reduce the quantity of regulation. Senator METCALF. I think that is a splendid statement, Congressman Moss. I am glad you brought up the case of Ernst and Ernst v. Hochfelder. It has been my experience that the courts sit down and work on the law as they interpret it, as passed by Congress, and if the Congress doesn't agree, then it is our responsibility to change or modify the laws so that we answer the criticism of the court. We are going to have an opportunity to do that when the American Law Institute recommendations come up. You have a whole room full of people from the accounting profes sion behind you, and I hope you will make suggestions as to some modifications and changes which are needed, because I think the ALI recommendations may be the vehicle for calling the accounting profession into account to the people of America, and perhaps changing some of the provisions of the Hochfelder decision. Mr. Moss. I believe that the only way we are going to improve the overall performance of the accounting profession is through actions upon sound advice. I am not an accountant. As you have already entered your disclaimer on the record, I assume you are not, either. But I do rely on the product produced by accountants. I am not alone, I am ed to find. In meeting with one of the very distinguished brokers the city of Boston with a long experience in dealing with cor |