board, you will find that there is an appendix in every standard that attempts to explain why the board made the decision it made.

It takes time to get business executives to understand why their answers may not have been acceptable to the board. I think it is important that the board attempt to communicate that. We have failed in that area. I am not saying at all, Senator, if you understand it, that there would be any attempt to set the accounting standards on a consensus or head-count basis.

What I am saying is I agree that there must be an eggressive program of selling the product of this board as to why a certain decision in the view of the board is the way to go. The first step, as you all know, is to determine what the objectives of financial statements really should be.

Senator PERCY. Just a clarification on your last answer; does that answer imply really that standards are issued without knowing what are the economic impact consequences?

Mr. ARMSTRONG. It does not imply that.

Senator PERCY. If it does, it sounds like a typical regulatory agency. We have a provision I am strongly supporting that will require every regulatory agency to issue an economic impact statement before a regulation can go into effect. The statement would tell what it is going to cost and the best estimate they can as to what the benefits

are.

As I listened to you, it didn't sound as though the standards had an economic impact or backup for them.

Mr. ARMSTRONG. There is a differing view out there, Senator, as to whether in fact accounting standards have an impact on market values of stock, whether in fact an accounting standard has an impact on a management decision. We have not ignored economic impact.

In our standard No. 2, which resolved the question of how you account for research and development costs, we undertook an extensive survey as to what the impact might be. We did the same thing on standard No. 5, which relates to accounting for contingencies. There was some contention that that standard could or would influence the balance of payments and we attempted to get as much information as we could.

What I have said is we are trying to expand upon our ability to determine whether an accounting standard will have or has had an economic impact.

Senator PERCY. Senator Metcalf, I would like to just conclude. I have no further questions.

Certainly, I feel that the FASB should implement the trustees 17 recommendations. I think they are good in general, and I think. Mr. Way, you are to be commended.

Mr. WAY. Thank you.

Senator PERCY. Maybe the structure committee should commence to talk about the 17 recommendations with us. I would also like to comment on the very full attendance at these hearings. It is encouraging to see the degree of interest in the hearings, and we appreciate very much the time that many of you are taking to be here.

I think the hearings can be constructive and helpful. I just fee' what we are down to in many respects is that the whole private enter

challenged over the last few years. We have had our own Watergates in the private sector.

We know, I think everyone in this room knows, that it is the finest economic system the world has ever devised. It works miraculously well, and we don't want to see any basic changes in it; but things have crept in that have eroded our strength. What we want to do is root those out as much as we can and constantly improve.

I think we take an attitude of, not satisfaction, but constructive discontent to describe the condition that we are in. I think we should constantly strive to improve it and refine it as things get more and more complex. As the role of government regret fully seems to be getting bigger, we want to try to reconcile the problem here with private industry.

I think it can be approached in many, many different ways. I am fearful, for one, of too much money going into the public sector. I had a rule of thumb that if we ever got above a third of our total gross national product going into the public sector, we would have a change of lifestyle in this country. We are up to 37 percent now. Great Britain is at a 60-percent level, and I think that is one of the great reasons it is in such deep, deep trouble.

This is a great chance for us to strengthen a profession that has an absolutely crucial role. I am willing to do anything to strengthen the profession. I would like, even if it takes legislation, to reinforce the powers of the independent auditing profession. But I would suggest voluntary changes. Then I think we ought to back you up possibly in those ways.

I think these hearings and the staff work that has been done to point out some problems have been extraordinarily helpful. I hope that everyone who is here can make a contribution in some way or another and would accept the fact that everyone on this committee is a deep believer in and has great respect for this economic system of ours. We love it so much we want to see it improved in every possible way. The accounting profession holds a great responsibility in this regard and it crosscuts so many things in many respects that Government could never do. The longer I am in Government, the more impressed I am with what we shouldn't be doing, and can't do really, and how much more ought to be delegated back to the private sector.

Our whole job is to really make sure that we don't gravitate into having Government start to assume and do those things that the profession has done in the past. That is my purpose. I can't speak for the other committee members, but that is my whole intent and purpose. We just want to strengthen your hand and in partnership with the SEC and in partnership with the corporations and all the stockholders of this country and all the employees of the country who want to make certain the integrity of the system is preserved. That is really what

we are after.

I want to thank you very much, indeed.

Mr. ARMSTRONG. Thank you, Senator.

Senator METCALF. Thank you very much, Senator Percy.

I certainly want to underscore and concur with your statment. Senator Percy's contribution and participation in this hearing has already

I want to remind you that at Tuesday's hearing every single member of this subcommittee was here and participated. It is the first time in my experience that everyone on our subcommittee was attending a hearing in the same day. Senator Jackson left the Energy Committee and came over and participated. Senator Percy and Senator Nunn have many other activities. Senator Danforth left the Finance Committee to demonstrate his interest and concern. So we are all concerned.

None of us want to add a single bit of paperwork to the Federal Government, nor do we want to add another department or another agency.

I want to especially thank you, Mr. Way, for coming in and outlining your suggestions for structural changes which your committee of trustees is making in this area.

However, the accounting profession isn't the best of all possible worlds. We have already discovered some things that are wrong. The reason we want you here is to tell us what you are going to do about it. Mr. Armstrong, thank you for coming.

I want to tell you that apropos of what Senator Percy was talking about in making financial reports more readable and more understandable, a few years ago when we had Sputnik, we all got excited about getting a man on the Moon. Lyndon Johnson was majority leader of the Senate, and John McCormack was majority leader of the House. Both of them set up special committees, and we created the space agency.

We had many hearings on the space agency. People came from the whole academic world, and scientists from all over the United States. They would talk and pretty soon they could see that all of us on the committee were glazed, our eyes were glazed, and we weren't understanding what was going on. It was sort of an erudite discussion.

I remember one day that one of the physicists said, "Let me clarify this," and he turned around and got to the blackboard and wrote an equation that was as long as both of my arms. That was his clarification. Of course, we have learned since then that the very difficult problem of physicists talking to each other can be made so that the people of America can understand.

I think that it is a much easier problem for the accounting profession to solve. Instead of talking to each other in that rather archaic language of yours, you can develop some way of talking to the people of America and explaining what you are doing in your profession. Thank you very much for coming.

Mr. ARMSTRONG. Thank you, Mr. Chairman.

Mr. WAY. Thank you.

Senator METCALF. I am very pleased to have as our next group of witnesses a panel. The panel is led by a very distinguished constituent of mine. I am especially pleased to have Mr. Gordon Anderson here. We also have Mr. Norman J. Elliott, Mr. Robert A. Satin, and Mr. Thomas S. Watson.

TESTIMONY OF GORDON ANDERSON, C.P.A., VELTKAMP, DORE & CO., BOZEMAN, MONT.

Mr. ANDERSON. If you wish, sir.

Senator METCALF. I am very pleased to have a Montanan here this morning.

Mr. ANDERSON. Thank you. Maybe first I should give other members here and the audience a background of myself.

I am presently employed as partner in charge of audits for Veltkamp, Dore & Co. Veltkamp, Dore & Co. is fairly new. We are only 5 years old.

It is a small C.P.A. firm consisting of eight professional accountants and a supporting staff of six individuals, with one office located in Bozeman, Mont.

The firm was established in 1972, and I have been with the firm since its inception, except for a brief leave of absence during which I worked for Congressman Baucus of Montana. My personal experience in public accounting consists of heavy emphasis is tax, auditing, and to a somewhat lesser degree, management advisory services.

Ours is a firm consisting of a large number of small clients, and the services we provide are similar to those of the large firms. The services we provide are auditing, which is about 20 percent of our gross fees; tax, which is the majority of our activities, and is around 50 percent; writeup services, which is basically bookkeeping for our clients, is 20 percent; and management advisory services is 10 percent. Our audit clients are typically Government entities, nonprofit organizations, a few industrial clients, and some retail organizations. We have no corporate clients who are publicly held but rather they are typically closely held and in many instances are family owned. The majority of our audits are requested by our clients' banks, the organizations' board of directors in nonprofit organizations, and by governmental bodies.

It has been our firm philosophy, and continues to be, not to accept audit engagements of such a size that if we were to lose the client we would suffer any serious shrinkage in the scope of our firm activities. The management advisory services our firm has provided in the past, consist mostly of assisting our small business clients establish accounting systems to meet their management and reporting needs for tax or management purposes.

Management advisory services were not actively sought by our firm. We did not go out and actively pursue work in that area, but rather requested by our clients in connection with our normal relations with them.

The accounting firms in our area are the only entities providing

these services.

We have not accepted any engagements to provide our audit clients with any significant amount of management advisory services. As you well know, the business environment is substantially different than what exists in New York City or what it is for publicly held

The majority of our clients are in many cases family owned and it is typically a small business environment.

This has caused some change in philosophy in the way we operate. compared to larger firms. You will find that financial statement disclosure might be more extensive in a firm such as ours because of the following:

One: Due to the possibility of a lower degree of financial sophistication on the part of many of our clients and their statement readers, we feel a need to provide all disclosures necessary to simplify and add clarity to the understanding of the financial position and operations of the entity.

We have an availability of direct communication with those statement readers and have learned a great deal about their expectations from financial statements, which is a great benefit.

Two: We personally have no clients that we hold so dear in terms of fees billed that we are willing to damage the credibility we now have for any compromise on our part in relation to what we hold as our professional standards.

Three: We, as a firm, have always held the firm belief that those accounting principles that will best disclose the true financial picture of an entity will be the best for a client in the long run.

Even though other generally accepted alternate principles which may be adopted may show a higher net income, it may not be in the client's best interest to use such a method if his banker doubts the validity of the statement.

Four: Statements from firms with clients such as ours may tend to be more financially conservative due to an additional pragmatic reason that most of our clients use the same principles for financial statement and tax reporting purposes. This is just due in large part to the additional expense and inconvenience of maintaining a duplicate set of records using differing principles.

I personally find my profession rewarding in many aspects. It af fords me a reasonable income in a geographic area that I wish to have and further provides a high degree of personal satisfaction in that the services we provide our clients are, I feel, a needed and valuable commodity to them and society.

Being only 28 years old, I am looking forward to a long number of years of practicing in the profession, and I am extremely concerned over the deterioration of esteem that is occurring nationwide with respect to public confidence in financial statements and the accounting profession. It has had an effect on our firm.

In the last 2 months I have had several comments about the staff study and its view on accounting; also its coverage in the financial press. Every time a Lockheed happened or every time a Penn Central happened, bankers questioned our financial statements as well. Their confidence in all financial statements has deteriorated.

As accounting is a profession that exists in its attest function only if the public has confidence in the integrity, independence, and competence by which its art is applied, any deterioration of the public's confidence should be viewed with extreme concern by all affected.

I would like to compliment the staff and the subcommittee members,