prospective principles will have no greater force than the present ones do. The SEC will consider them authoritative, which they clearly are and will be, but ASR 150 does not even suggest that the SEC will abdicate its ultimate responsibility to judge the propriety of the accounting principles employed by a registrant."

The SEC's record over the years conclusively disposes of any claim that it has "delegated" its responsibilities over accounting matters to the FASB, the AICPA, the accounting profession or anyone else.

In 1940, within two years of first announcing the policy reaffirmed in ASR 150, the Commission adopted its comprehensive Regulation S-X, setting forth its requirements as to the form and content of financial statements filed with it under the Federal Securities Laws. On numerous occasions since then the Commission has amended Regulation S-X to meet new disclosure needs.

The Commission has also issued over 200 Accounting Series Releases (over 70 within the past five years) covering a variety of accounting, auditing and related financial and accounting matters, some of which have conflicted with, or effectively amended or superseded, standards set by the accounting profession's authoritative standard-setting bodies.

For example,

—in its ASR 96, the Commission rejected APB Opinion No. 2 and permitted financial statements filed with it to reflect either of the two most prevalent alternatives for reflecting the effect of the investment tax credit;

-in ASR 147, the Commission characterized lessee disclosures required by APB Opinion No. 31 as inadequate, and imposed additional disclosure requirements of its

own;

-in ASR 148, the Commission adopted accounting rules for certain liabilities on the balance sheet, which prompted FASB Statement No. 6, "Classification of ShortTerm Obligations Expected to be Refinanced";

-in 1975, the Commission became concerned that gain from early extinguishments of debt, then required by APB Opinions to be reflected as ordinary income, were inflating earnings of some companies and urged the FASB to take prompt action, indicating that it would do so if the FASB did not; the result was FASB Statement No. 4; and

-in recent weeks, the Commission has proposed to amend Regulation S-X to adopt FASB Statement No. 13, "Accounting for Leases", and to accelerate its retroactive applications except for companies unable to resolve problems in connection with restrictive clauses in loan indentures or other agreements.

The Commission has taken still other steps to implement its views in other areas, notwithstanding the existence of accounting standards established by the profession's standard-setting bodies. Among other examples are accounting for business combinations as poolings of interests (ASR's 130, 146 and 146A); catastrophe reserves (ASR's 134 and 145); disclosure of inventory profits (ASR 151); capitalization of interest (ASR_163); disclosure of unusual risks and uncertainties (ASR 166); disclosures relating to the adoption of LIFO (ASR 169); disclosure as to holdings of securities of New York City and accounting for securities subject to exchange offers and moratoria (ASR 188); and disclosure of replacement cost data (ASR's 190 and 203).

The Commission also provides for additional financial information in its general corporate disclosure requirements. For instance, concerned with recent bank failures and financial difficulties, the Commission issued a disclosure guide which requires additional financial statistical information in registration statements of bank holding companies under the Securities Act of 1933. The required information includes average balance sheets for each reported period, analysis of investment portfolio loans and deposits, and return on equity and assets. Similarly, prior to FASB Statement No. 14, "Financial Reporting for Segments of a Business Enterprise," the Commission required revenue and income information with respect to reporting companies' lines of business and revenues for classes of similar products as part of its general disclosure requirements.

Through its continual review of the application of accounting standards in financial statements included in reports and filings of publicly-owned corporations, the SEC also has daily opportunities to evaluate the selection and application of accounting standards to the facts and circumstances of particular cases. This is a very important part of the financial reporting system because it permits the SEC, which otherwise might have to consider accounting standards only in general or theoretical terms, to evaluate the selection and application of standards to the facts and circumstances of particular cases. The SEC has not hesitated to insist upon changes in the accounting standards applied when it has found this to be in the interests of investors.

Since 1975, the SEC has published Staff Accounting Bulletins for the purpose of broadly disseminating the views and practices of its staff on the form and content of financial statements filed with it. In its release announcing these bulletins, the SEC noted that the dynamic and evolutionary character of financial reporting required new and revised interpretations and practices, and that the Commission viewed these bulletins as a means of publicizing broadly, particularly for the benefit of smaller accounting firms with less frequent SEC contacts, SEC staff practices and policies as they evolve.

Staff Accounting Bulletins published to date have covered a wide range of accounting and reporting subjects, including business combinations, financial statements for foreign companies, balance sheet presentations, real estate companies, finance companies, taxes, consolidated financial statements, qualitative disclosures, interim financial statements, replacement cost disclosures, and requirements with respect to accounting changes.

The Commission meets its statutory responsibilities in still other ways which belie the Study's assertion of "delegation".

Pre-filing assistance and interpretative advice are available for resolution of particular accounting problems. These may occur in situations where a company and its independent accountants disagree but typically occur when unusual circumstances are presented, with a solution usually resulting following discussions with the SEC's Division of Corporation Finance and/or the Office of the Chief Accountant. The Commission has also announced procedures by which its views may be obtained when its staff, upon request or on its own motion, presents questions involving matters of substance or where the issues are novel or highly complex. Additionally, the SEC's Rules of Practice provide that any person desiring issuance, amendment or repeal of a substantive or interpretative rule or general statement of policy may petition for such action.

The SEC maintains close review liaison with the FASB. The Commission's Chief Accountant attends meetings of the Advisory Council; members of the Commission's accounting staff attend meetings of the FASB's task forces, the Screening Committee on Emerging Problems, and the FASB's public hearings; and FASB staff members regularly attend meetings of the Commission's Advisory Committee on Corporate Disclosure and its

Replacement Cost Advisory Committee. Projects have been put on the FASB's agenda at the Commission's request, and the FASB included data in its December 1976 Discussion Memorandum on "Financial Accounting and Reporting in the Extractive Industries" which the SEC had prepared to elicit views pursuant to its responsibilities under PL 94-163.

V. CAN GOVERNMENT DO BETTER?

The comprehensive financial information and corporate disclosures required in the United States have greatly contributed to its status as the world's major capital market. Despite troublesome issues involving “questionable” or “improper” corporate payments, the fact remains that the United States' financial accounting standards and corporate disclosure requirements are the most highly developed and most rigidly enforced in the world, providing financial information relied on for its integrity, accepted for investment decisions and presented in a manner understandable to the investing public. The role of the FASB as the authoritative standard-setting body, with support within the private and public sectors and SEC review and participation, should not be displaced or its authority diminished, in favor of experimentation with an untried system of direct Federal accounting standard-setting.

The Study recommends Federal Government accounting standard-setting based on the unfounded conclusion that a Government agency will achieve uniformity in setting accounting standards which the FASB and its predecessors have been unable and unwilling to do. As discussed above and in Exhibits D and E, the FASB and its predecessors have made significant progress in eliminating alternatives not justified by differing circumstances and transactions, and in some cases have eliminated all alternatives in favor of a uniform standard.

To support its recommendations, the Study cites the Cost Accounting Standards Board and suggests creation of a Federal board for financial accounting standards modeled after the CASB. However, the Study devotes less than four pages to the CASB and attempts little or no discussion or analysis of the CASB's published accounting standards other than to conclude that “most of them have been responsive to the Federal Government's needs for uniform and meaningful cost accounting standards." The Study similarly contains no discussion or appraisal of other Federal Government experiences in setting accounting standards, nor does it mention that Government standard-setting bodies have been adopting FASB Statements in rule-making proceedings for companies under their jurisdiction. Some discussion and appraisal of this seems appropriate. The FAF and FASB believe that when viewed objectively, the Federal Government's experience to date does not support the Study's assertions and certainly is not a basis on which to consider the changes the Study recommends.

The following appraisal is not a criticism of Government efforts in setting accounting standards. Rather, it points out two critical facts overlooked by the Study. First, the scope of the Federal Government's efforts in setting accounting standards is limited when compared to the scope of the FASB's work. The FASB is charged with improving standards of financial accounting and reporting for all operations of all companies, in all industries and in all environments. The Federal Government's efforts, on the other hand, have been restricted to particular kinds of transactions or industries or for a specific function of Government. Second, the Federal agencies involved, after studying the facts, have concluded that the existence of accounting alternatives is not necessarily inappropriate per

se.

A. Cost Accounting Standards Board

The CASB was created as an agent of the Congress in August 1970 by an amendment to the Defense Production Act of 1950 and was formally organized in 1971. The Comptroller General of the United States is Chairman and appoints the other four members of the Board, of whom two are from the accounting profession (currently a partner and the retired senior partner of two “Big Eight" firms), one from private industry and one from the Federal Government. The Act prescribes the CASB's function as follows:

"The Board shall from time to time promulgate cost-accounting standards designed to achieve uniformity and consistency in the cost accounting procedures followed by defense contractors and subcontractors under Federal contracts."

Standards promulgated by the CASB are submitted to Congress and, unless disapproved within 60 days by concurrent resolution, have the full force and effect of law.

The CASB, like the FASB, is a panel of experienced experts, and the two Boards and their staffs maintain continuing liaison and comment on each other's proposed pronouncements. Additionally, two members of the CASB, including the Comptroller General of the United States, are members of the FASB's Advisory Council. The CASB also relies on cooperation in technical matters from a special AICPA committee formed for that purpose.

The Study cites the CASB as a particular instance of a Government agency performing a standard-setting function similar to that performed by the FASB. Analysis of the purpose and mandate of the CASB reveals several factors which significantly distinguish its task from that of the FASB and does not support the Study's recommendation that the Federal Government take over financial accounting standard-setting.

First, the scope of concern to the CASB—developing cost accounting standards for companies contracting with Federal Government agencies, principally in defense procurement is much narrower and more specialized than the FASB's responsibility for developing accounting standards to be applied in the preparation and presentation of financial statements for all publicly and privately-owned companies.

Second, the objective of the CASB-to achieve increased comparability and uniformity of cost accounting procedures for Government contracts in order to facilitate Government procurement—is a particularly appropriate objective to be carried out by a Governmental entity. By contrast, the FASB's objective of establishing and improving financial accounting standards is designed to meet the varied needs of investors, creditors and other members of the public engaged in investment decisions and private capital formation and allocation. As discussed above, this task is infinitely more complex, the constituency is significantly larger and more diverse, and the subject matter is not limited to a special function of Government.

Third, the volume of work produced by the FASB and the CASB does not support the Study's assertions. Both bodies have been in existence a relatively short time—just under four years for the FASB and a bit more than six years for the CASB. Without considering the differences in scope and complexity of subject matter and periods of existence, the FASB's output of 14 Statements, 18 Interpretations, 20 Exposure Drafts, 13 Discussion Memoranda, and 15 public hearings compares favorably with that of the CASB.

The Study repeatedly criticizes the accounting profession and the FASB for failing to achieve “uniformity" by not eliminating alternative accounting methods. However, the

CASB has also concluded that uniformity in cost accounting is not always desirable, if indeed possible. In its Statement of Operating Policies, Procedures and Objectives (March 1973) the CASB recognized "the impossibility of defining or attaining absolute uniformity, largely because of the problems related to defining like circumstances." This statement continues: "The Board does not seek to establish a single uniform accounting system or chart of accounts for all the complex and diverse businesses engaged in defense contract work. On the other hand, if the Board were to be satisfied that circumstances among all concerned contractors are substantially the same, the Board would not be precluded from establishing a single accounting treatment for use in such circumstances." Statement of Operating Policies, Procedures and Objectives (March 1973), p. 2.

A brief review of several of the CASB's cost accounting standards is illustrative.

In January 1975, the CASB issued Cost Accounting Standard 409 relating to depreciation, an area in which the Study is critical of the FASB and the accounting profession for not eliminating alternative methods. The CASB studied the depreciation question over a long period, through extensive research involving distribution of a preliminary draft standard, analysis of comments from over 100 respondents, a field survey of over 100 profit centers selected as representative of industry, analysis of data developed by the Treasury Department and the AICPA, publication of a proposed standard, analysis of an additional 200 letters of comment, and discussions with representatives of many groups. After this analysis and review, the CASB concluded in the preamble to its Standard:

"[N]o particular method [of depreciation] is necessarily appropriate for all contract cost accounting situations. The Board is establishing criteria by which the method or methods appropriate in the specific situation can be determined." (40 FR 4259)

A second area of CASB study has been accounting for costs of material. In 1976, after a lengthy study comparable to its study of depreciation, the CASB issued its Cost Accounting Standard 411. Standard 411 prescribes that, while a contractor must adopt a written policy with respect to the accumulation and allocation of the cost of material and must consistently adhere to that policy, any of the following five methods of costing can be used for Government contract purposes: (1) first-in, first-out (FIFO), (2) moving average cost, (3) weighted average cost, (4) standard cost, or (5) last-in, first-out (LIFO).

CASB Cost Accounting Standard 404 for capitalizing tangible assets is another instance where the CASB concluded that diversity of normal business practice made it undesirable to adopt a uniform cost standard. Standard 404 requires each contractor to establish and adhere to a "reasonable" capitalization policy, but does not require a single standard for all contractors nor provide a specific definition of "reasonableness". In its preamble, the CASB stated “in most cases, the contractor is best able to determine what policy will be most suitable for his situation. . . ." (38 FR 5318)

These Cost Accounting Standards are instructive in that they reflect, even in the comparatively narrow area of costing for Government contracts, that alternative accounting practices frequently are necessary or desirable. The experience of the CASB is independent verification that use of a single accounting method does not necessarily assure the most meaningful and useful information.