Thank you for your letter of 18 May concerning
the subcommittee's review of accounting practices promul-
gated or approved by the Federal government. I think
your suggestion that auditors be required to sign their
own audit certification has merit and certainly deserves
consideration.

Two final days of hearings are scheduled this month,
after which we hope that many of the reforms which have
been suggested by the various witnesses, including the
"Big Eight" firms, local accountants and others will be
implemented by the Securities and Exchange Commission
and the profession itself.

Thank you for sharing your views concerning the subcommittee's work and your offer of assistance.

Very truly yours,

ORIGINAL SIGNED BY

If it is at all possible I would like to add the enclosed report as my written testimony to the other research findings in support of rotation of auditors.

I hope that some meaningful legislation will ensue from these hearings.

The problems of the profession are deep seated and ingrained. Nothing short of some stiff, jolting laws can the monopolistic sinews of the Accounting Establishment be broken. The individual members of the profession are simply helpless; and so is the Securities and Exchange Commission unless it is provided with the necessary laws by Congress.

It is entirely within the purview of your subcommittee to recommend legislation which will insure "truth in reporting"

-

- by requiring true signatures and not a configuration of the firm's name in script form. This requirement shall be for all reports submitted to governmental agencies, including the Securities and Exchange Commission.

It is also within the purview of your Sub-Committee to strike down the undue influence of the Accounting Establishment on State Regulatory Agencies by:

1). Declaring all syndicated accounting services which cross state lines to be subject to the full impact of anti-trust laws. This will make the prosecutorial of the Justice Dept. much

easier.

A.

2). By prohibiting members of syndicated accounting firms

Chairman Lee Metcalf:

of accounting

June 13, 1977

tice is strictly a state function. The outside influence of the giant syndicated firms should not be brought to bear; currying special considerations and advantages.

These remedial legislations are most persuasive in view of the voluminous work which your sub-committee and staff have done.

I would have so testified for the passage of these legislation, if given the opportunity to do so. I am able to document my position with specifics.

Thank you again.

Enc.

Yours very truly

Alfred Y K. Au

REPORT

A PERSONAL REVIEW AND OPINION ON THE ARGUMENTS FOR AND
AGAINST ROTATION OF A FIRM OF AUDITORS

by Alfred Au

CONCLUSION

In my considered judgement and opinion, there appears to be very viable arguments, as outlined in the submitted data, for the rotation of auditors. Summarized, the pro arguments stress the independence of the review or audit; the avoidance of perfunctory and mechanical checking; the avoidance of fraternization and the conflict of interest. Furthermore, the lack of a perpetuity of tenure will cast a better image of independence with the public.

This is a foregone conclusion when one considers the very nature and mission of an audit, which is to provide an independent review and discovery process. This "mission" cannot be accomplished effectively when one is "brain-washed" or "in bed" with the subject he is commissioned to examine.

BASES FOR CONCLUSION

The bases for the above conclusion are as follows:

1.

2.

No viable con arguments against rotation. Though there are sixteen (16) points listed against the six (6) pro arguments, but none of the 16 can be considered a viable argument. In fact there were open admissions of the need to change audit personnel, though not admitting to the need to change the firm, without any explanation of this concession. If audit personnel who do the actual auditing needs to be changed, how is this an argument against rotation which favors the complete change of auditors, firm and all?

A detailed evaluation of the arguments against rotation is as
follows:

Arguments Against

(a) The first four arguments for are negated by the specter of
legal liability, unfavorable publicity, and impairment of the
accounting firm's reputation. Accounting firms are constantly
worrying about "letting their guard down." They constantly
alert partners and staff to their responsibilities to the
public, review their work, question them closely, shift personnel
from client to client, and take all possible precautions.

Evaluation:

The concern for good professional work is true of any conscientious firm. And of itself, the concern is not a viable argument for perpetuity. For the question immediately comes to mind is whether this concern for good work tends to get sloppy when tenure is practically guaranteed? It is interesting to note that "personnel shifting" is practiced. This fact is an affirmation of the argument for rotation, rather than against it.

(b) In the absence of rotation, auditors must be particularly critical. Presidents of listed corporations have indicated that they changed auditors because the auditors were too friendly with division heads (beefing up of division profits to increase bonuses) and seemed too anxious to agree with the president himself. Accounting firms can lose clients by being acquiescent, perhaps more often than by being tough.

Evaluation:

Rather than being a statement against rotation, this is in
affirmation of rotation. An auditor is expected to be "fair"
in his evaluation, and not "particularly critical." One can
be "particularly critical" of non-essentials to give the
illusion of independence, while overlooking the big issues and
questions which has led to the many malpractice suits.

Why

not rotate so that the auditor can be "fair" and not picayunish.

(c) "First audits" are expensive. The auditors must spend considerable time familiarizing themselves with internal structure, systems and controls. Frequent changes of auditors would increase aggregate audit costs. In addition, there is a cost related to the time spent by executives to familiarize the new auditors with the company's business controls and procedures.

Evaluation:

All audits are expensive. Audit fees seem to escalate with tenure, much in the same manner as salaries increase with time on the job. Every auditor is expected to spend considerable time familiarizing himself as to the internal structure, systems and controls, for that is part of the job. If it can be surmised from the above statement that in repetitive audits such familiarization is not necessary, then the statement must be construed as an argument for rotation, rather than being

2.