-2 Honorable Lee Metcalf, Chairman July 5, 1977 I will begin by respectfully asking that your Committee and all others who may read the Anthony statement in the record of your Committee's deliberations, read the related sections of the Appendix rather than rely on Professor Anthony's clips therefrom. This is because he manifests a most vivid combination of presumption, inference and conjecture in his ostensible analysis of my writings. In thus responding I shall make but two general and brief points by way of specific response, to wit: 1. I was not complaining that bitterly about the FASB's Statement No. 2 (re Research and Development Expenses). True, by an appendix to the statement prepared for my May 21, 1976, appearance before the Moss Committee, I alluded to the R & D issue insofar as it related to the Lockheed Aircraft Corporation, but that was principally to round out my testimony before that Committee regarding the "Lockheed Syndrome," i.e., my inveighing against that company's accountings for the L-1011, TriStar program. My statement before that Committee included but one brief paragraph regarding R & D per se. The essential thrust of my obloquy was the continued and continuing deferral of more than a half billion dollars in sunk costs incurred on TriStars already sold and delivered -- costs which I maintained were not and are not reasonably capable of being recouped. I believe that Professor Anthony will recognize the fundamental issue if he were to reread the Appendix K and the exchange of views on this issue submitted to your Committee by Arthur Young & Co. and myself. 2. I resent Professor Anthony's smearing my considered proposal for a Corporate Accountability Commission with epithets Lice pre war Facist Italy," "the Soviet Union," "Orwell's 1984." He unfairly and improperly snatches fragments from my elaborate presentation of a program which I hoped might serve to assure corporate accountability beyond mere debits and credits. I very much respect advocacy, but resent pettifoggery. I sincerely believe zy commitment to the democratic process, to the Constitutional process of checks and balances, to the avoidance of concentration of power (and its concomitant potential for compution) pervade my writings, including my proposal for a Corporate Accountability Commission. The very phrases "Visibility and Accountability," "Pull and Fair Disclosure," which pervade my writing regarding the corporate scene should testify to that commitment. -3 Honorable Lee Metcalf, Chairman July 5, 1977 =Professor Anthony regarding each of the points set forth in his either before your Committee, at Harvard, or here statement at Baruch. I do appreciate your affording me the opportunity of responding to Professor Robert N. Anthony's submission. AJB/jat cc: Professor Robert N. Anthony Cordially, Abraham J. Briloff Emanuel Saxe Distinguished Baruch The City 17 Lexington New York N.Y. 10010 June 21, 1977 Hon. Lee Metcalf, Chairman Subcommittee on Reports, Management and Accounts United States Senate Washington, D. C. 20510 Dear Senator Metcalf: In various submissions to your Committee incident to the recent hearings on its Staff Study entitled The Accounting Establishment there have been references to my writings, especially as reproduced in the Study's Appendix K (pages 16051710). For the most part these comments, while generally critical in nature, were made in passing and do not necessarily call for a present response from me. I am confident that the record as a whole will serve as such a response. However, the May 18 submission by Arthur Young & Company ("AY"), one of the "Big-Eight" accounting firms comprising the "Accounting Establishment," does demand such a response. Thus, that submission, comprising 139 pages, devoted no fewer than thirty such pages (most of the statement's Chapter 6) to a critical, frequently acerbic, response to my allegations of unfair accountings by The Lockheed Aircraft Corporation, an AY client. In view of the nature and extent of that critical response it becomes incumbent upon me to reply in detail. In so doing, I shall respond to what I believe to be the crucial issues, to wit: 1. Whether the $558 million "blob" of L-1011, TriStarrelated costs included in Lockheed's 1974 balance sheet as a current asset (and thereafter among other assets in reduced amounts) should logically and reasonably be characterized as an asset in any amount. 2. Whether the company's L-1011, TriStar program was producing a positive or negative contribution to Lockheed's incremental income during the period under consideration. 3. And even if these sunk costs are properly deferrable as an asset, at what amount may they be carried on Lockheed's balance sheet? 4. The SEC's role in and responsibility for the Lockheed -2 5. My statement during the course of an extensive interview by the editors of Barron's in April, 1976, that: "I can quote reports of the Comptroller General of the United 'States--to demonstrate that Lockheed--was perpetrating a canard." 6. My "false" (AY's characterization) response to a question put to me by Congressman James Scheuer during the course of my testimony on May 21, 1976, before a committee of the House of Representatives (the "Moss Committee"). 7. The accounting for preferred stock of the kind Lockheed proposed to issue in 1976. I turn to these several issues: 1. The Accounting for the TriStar Costs: There appears to be no dispute between AY and myself that the $558 million sum as of the close of 1974, was comprised of two segments, to wit: (1) $375 million of costs directly incurred in the building and delivery of 97 TriStars sold and delivered through 1974, but which costs Lockheed chose not to charge to these planes; and (2) $183 million for initial planning and tooling costs hence, a total of $558 million. As stated, this sunk cost was being carried in the 1974 balance sheet as a current asset, as though it were to be currently recoverable in cash or other economic resources. I expressed my view before As is evident from the record Lockheed was hoping to spread these deferred costs over the next 203 planes presumed to be in the L-1011, TriStar program (hence a 300-plane program), and AY was going along with its client's proclivities. the Moss Committee that all things considered from the vantage point of the end of 1974 and thereafter such a future projection was "pie in the sky," thereby contradicting the accounting practices followed for this program. As I read the AY polemic the firm does not state its independent affirmative confident belief that the 300-plane program is likely of accomplishment. Instead, the chapter is replete with phraseology to the effect that no one could guarantee that the indicated program is impossible of attainment at any time in the infinite future. AY should know that a current asset or any asset on a balance sheet cannot be supported by a mere "hopefully"; that there could conceivably be a "pot" at the end of some wishful thinking; that given some kind of miracle, straw will somehow be -3 assets then none of its clients should ever be required to take an inventory write-down, and every purchaser of a lottery ticket would be permitted to put into his balance sheet the prize which is in the offing. I have too high a regard for AY to believe they really believed the $558 million to have been an asset of any kind, and of any amount as of the close of 1974, or as of the present. I know they are familiar with the standards for assets spelled out in our professional literature: they know full well that the Financial Accounting Standards Board ("FASB") determined that because of the risks and uncertainties implicit in Research and Development ("R & D") expenditures such costs were to be stricken from the balance sheet. There is no question but that the risks and uncertainties implicit in this $558 million blob were no less than those envisaged by the FASB for R & D. Somehow Lockheed was able to rationalize a distinction, and AY accommodated the corporation, albeit begrudgingly. (It is an ironic twist that when Marshall Armstrong, FASB's chairman, read my criticism of the accounting for the $558 million he wrote to Congressman John Moss castigating me for my failure to point out in my testimony before his Committee that these costs were to be exorcised from the balance sheet pursuant to FASB's R & D promulgation, its Statement Number 2. I thereupon informed Mr. Armstrong that he was laboring under a misapprehension-that Lockheed and AY had somehow developed an invidious distinction between the $558 million of "hopefullies" and R & D costs. That was last November-- I have yet to hear whether, in the meantime, Mr. Armstrong had communicated his views to AY.) I maintain that the only rationalization for perpetuating this more than half-billion dollar charade was that to do otherwise would expose Lockheed's enormous deficit in shareholders' equity. All I am asking is that AY concede the underlying motive for this accounting pretense; it would then be confirming that which everyone already recognizes. In short, only AY still appears to believe that their "emperor" is clothed in these hundreds of millions of dollars of gossamer "assets"; I too appreciate fairy tales--excepting when they carry the imprimatur from distinguished colleagues in my profession. Frankly, I cannot comprehend AY's becoming that "up-tight" about my criticism of Lockheed's accountings for the TriStar program. Thus, when in 1974, Textron, another of AY's clients, was on the verge of injecting some modest sums into Lockheed's capital the |