I suspect it would be something that the present individuals would strongly resist. It might be a question of major structural change. Given the existing system, it is difficult to find a way out. Senator JACKSON. I appreciate that. That is what troubles me. I am groping for a methodology, a procedure, by which we can for the public protection provide the assurance that integrity, I guess that is the word, is there; that when you sign on the line it does represent an effective audit. Because the audit is moved away in the mind of the public more than just numbers and figures. It gets into, of course, a social area of responsibility to make sure whether certain kinds of business activities are proper. It isn't again, I should say, just looking at the numbers alone. But is there a course of conduct being undertaken by company X that is, while maybe legal in a technical sense nevertheless an improper one that ought to be brought to the attention of the public so they should have that information? Dr. CHATOV. The gray area of corporate behavior, of course, has been focused in a line of thinking that various people have been worried about: The question of corporate social responsibility. I think it encompasses this kind of question. When one thinks of the social responsibility aspect, it ought not be limited to the corporations but to the entire network of those people who are a part of it, like the auditors. I would like to suggest one thing, that the fact that the present system as structured has had some negative effects for the auditors themselves, since they are not federally licensed or do not report to the Federal Government, it means that they become legally liable for errors or mistakes that they make in their auditing. One of the continuing problems that the accounting and auditing profession has had has been how to avoid liability to third parties. I think that is the danger they have under the present system. That is also implied in the Hochfelder decision. Of course, that is another major element of analysis. Senator METCALF. Thank you very much, Senator Jackson. Senator Percy? Senator PERCY. I have no questions, Mr. Chairman. We are running late and I think we ought to get on. Senator METCALF. Thank you very much for a splendid statement and for a fine contribution. Dr. CHATOV. Thank you very much. Statement of Dr. Robert Chatov, Associate Professor of Environmental Analysis and Policy, School of Management, State University of New York at Buffalo before the Subcommittee on Reports, Accounting and Management of the Committee on Governmental Affairs, United States Senate Statement of Dr. Robert Chatov, Associate Professor of Environmental Analysis and Policy, School of Management, State Reports, Accounting and Management of the Committee on Governmental My previous research in the matters before the Senate Subcommittee today are related to my interest in the formation and implementation of public policy. I am particularly interested in questions involving government regulation of the private sector, and public requlation by self-regulating, private sector groups. Both of these phenomena are evident in the Securities and Exchange Commission (SEC)-accountant relationship; those patterns, plus an interest in industrial concentration, mergers and anti-trust law and activity led me to investigate the background and operations of these groups, the results of which were published in my book Corporate Financial Reporting: Pablle or Private Control? in 1975, to which the staff report referred in several places as its authority for certain observations about SSC-accountant interaction? I am interested in the uses of accounting, in the public poly impact of accounting information, and in the operations of the accounting profession as an example of professional group thanks. W professional training and experience includes a 2.2. Law Wayne State Chiversity a P.2. 27 Business Whinistratie hiversity of Califoma, Bertelev an Associate Professor of Environments. » the School of Management, State Univers.. I was previously employed with Ford Motor in various management and analytical capac.L marketing and financial activities. My normal toward maintenance and improvement of the free eu.ti and with making more efficient the flow of informat... investors and the government of a highly complex, inst. society must depend. Ι -1 I. The Importance of the Subcommittee's Staff Study The Accounting Establishment The Subcommittee's Staff Study, The Accounting Establishment is a significant step in analyzing the development of corporate financial standards and the accounting and auditing process in the United States. The importance of these hearings in considering these matters is difficult to overestimate. For the first time in nearly forty-five years, the purposes behind corporate financial reporting are being carefully examined, as is the system which controls and implements the development of financial standards. The research presented by the Subcommitte Staff carries forward, tests and validates some of my previous work; some of the study's recommendations are compatible with steps I have urged, particularly the removal of financial standards setting authority from the existing, selected groups that now control them, and, a cessation of the practice of offering management consulting and advisory services by "independent" public accounting firms. I am pleased to have the opportunity of commenting upon the Staff Study. The subcommittee Staff Study has generated great opposition from the organizations controlling corporate financial reporting standards setting and implementation. And no wonder, considering The Staff Study is the Study's conclusions and recommendations. too extensive to permit commenting upon all its aspects, but a glance at some of the conclusions and recommendations fairly well |