Senator PERCY. How much support do you suppose your proposals have? Have you discussed them at all with any members of other firms? Have you been able to orbit them, just test them out?

We frequently do. Every administration orbits ideas and sees how they fly and then embodies them in legislation if it looks like there is at chance to have them succeed. What support do you find?

Mr. BIEGLER. Senator, we have not orbited this, so to speak. We are orbiting it today, you might say. I realize that is a risky proposition, to orbit something. But we believe in it, so we don't have any hesitation.

We are going to be working very hard trying to explain to the profession what we are talking about, what we are proposing. We will be putting flesh on this thing. We don't say this is the only answer. Perhaps in the process of discussion of this there will come another answer that will serve the public interest just as well.

If that happens, fine. We have started something that is valuable. But we are going to be pursuing throughout the profession an effort to explain this program and have them understand it. I think it is unfair to expect the profession to react without some time to think about the ramifications of this proposal. We are going to work with them.

Senator PERCY. In other words, you stuck your neck out. You have taken a position as a leader in the industry. You would like to see as much support as possible for this concept that you thought through and think it is fundamentally sound.

Mr. BIEGLER. Yes, sir.

Senator PERCY. So you are going to work now and see if you can gain a body of support to cause some of these things to be implemented or to push for legislation. It can be self-initiative undertaken by the profession. It doesn't require Government, Congress, executive branch, SEC, or anyone else to cary forward on it.

I suggested, Senator Danforth, before I had to leave the room, it might be well for us, and this will be a decision that you and Senator Metcalf will have to make, to have another set of hearings or at least a day of hearings a year from now to have the staff put down all the benchmark representations made to the subcommittee and all of the individual statements made, such as by Price Waterhouse, and then take a check on it a year from now and see how much progress has been made.

Do you think that would be helpful to you to know and to have the profession know that a year from now we are going to get together as a group of people interested in a common objective: Serving the public interest as best we possibly can?

Would it be helpful to you if it were known we would have those hearings in maybe a year and ask you how the proposals and ideas that you have orbited here today are flying now in the profession and what has happened to them?

Mr. BIEGLER. It certainly would. We are strong believers in oversight. I think it would be very, very salutary. We would be delighted to participate.

Senator METCALF. If the Senator would yield, it may well be, following the suggestion that has been made here today, that we would have legislative hearings on proposed legislation instead of just followup

If a suggestion such as yours is followed and legislat duced, we would certainly have a series of hearings people who appeared before us in this course of hearings. Mr. BIEGLER. I WOu, jope we wouldn't wait a year for t decide the program is a good idea.

Senator PERCY. No. No need for that whatsoever.

Mr. BIEGLER. I have instructed our counsel to work on a bill. I am sure that will smoke out a lot of problems we ceived yet.

Senator METCALF. We would be delighted to have coûr se us with suggested langage to implement your suggestions. Senator PERCY. Mr. Biegler, apart from these spectie pre have referenced in your testimony the fact that some of " ing reasons for these hearings and concern by the professor that practices were carried on by sales corporations that sti unknown to the auditors.

The invoices cover them up in such a way that the auditors didn't know what those expenses were. They ran to i millions of dollars in many large companies, such as Lockhee !. Having served as the ranking Republican on that mutt subcommittee for several years in the Foreign Relations Cat I must say I was rather shocked at some of the practices totally contrary to any concept I had had of the way tile faren being conducted and the extensive scale of this kind of aetit. ning through many, many large firms.

1

It wasn't an isolated case as I thought originally. I thonet tr an isolated case. I took that position. I was just dead wrong. How it that accounting firms in their regular andits were manie to i these things when there was a pervasive pattern that devalores, through a profession, all through a particular industry?

The Lockheed plan, for instance, was so frequently reform ge known widely in the industry. Why wasn't it known to the acerto profession? What happened? Maybe you can explain the aaz." the problem you face as a profession.

We would like to know what can be done then to have Usenv.

at the governmental level. I will admit we have some awesome non CTS powers of subpena, which I am reluctant to use, but we use it ver have to.

We wouldn't even accept the Justice Department's word for r subpenaed ourselves. We dug out stuff the Justice Depaese overlooked. In fact, they were scurrying to run over to toe é Department to find material we had found and found in our 4. It was really an unholy mess we discovered. What can that we shouldn't be spending our time doing that. I didn't sny e here to be an investigator. I found it a very unsavory sort of didn't like it at all. I was a waste of time. It was someti, nga to do. Something was happening and the profession was not it up. How were they so clever they could hide it for many yea** all of you and not have it discovered?

And what can be done in the future to make absolutely nema maybe we ought to have a law they can't lie to you, make it a

up with the same powers we have sometimes. Maybe we have to delegate it in a sense. Tell us what we can do to help in that regard.

Mr. BIEGLER. Of course, this has been a trauma for everybody that has been involved. I think that we as auditors were just as shocked; and I personally was, as I am sure you were, sir.

When the problems started to emerge in 1975, I think the real question is what did the accounting profession do to react to it? Well, we certainly in our firm instituted some very tough procedures: (a) to attempt to detect these decisions, and (b) in particular to institute tough procedures as to what should happen when questionable payments came to light; tough standards of disclosure, in other words.

We at the same time sensitized our staff throughout the world on this problem, increased our own training, but we also changed our requirements with respect to representations, written representation from management.

We changed our representation letter to require that management say that there were no off-book accounts, no slush funds, and that sort of thing, and that there were no things that should be disclosed to us that hadn't been disclosed.

Very interestingly, as I understand it, S. 305, the Proxmire bill. includes a provision that, if that bill is passed in both Houses, will make it a criminal offense for a management to sign that representation letter if it is not true.

So in that sense, Senator, S. 305 deals with representations to auditors. I think that will strengthen our hands. But I believe that we at our firm, and the other firms in the profession to the best of my knowledge, as this problem emerged, have acted very responsibly, sir. Senator PERCY. Mr. Chairman, I ask unanimous consent to submit for the record a question to Mr. Biegler on the executive search of management and advisory services of the profession, and also on a concept of an annual report to Congress by SEC.

I would like to ask just one last question.

You are president of FAF and responsible for management oversight and funding requirements of FASB. I would like to know what you intend to do to see that the FAF structure committee recommendations are implemented.

These recommendations include broadening the FAF and FASB's constituency. Also, could you comment on what procedure FAF is taking to find a replacement for Mr. Armstrong? What type of candidate should we expect to see placed in this vitally important position? He is not subject to confirmation hearings, but he certainly will be questioned down the line by this subcommittee.

Mr. BIEGLER. As far as the structure committee report, as president of the foundation, when I became president last fall, I actually was the prime mover behind the instructions to that committee to make this special study.

I have watched their efforts very closely. I am 100 percent behind their recommendations. I am going to do everything in my power to see that those recommendations are adopted and implemented this year. I can't guarantee it will be this month. It is going to be done this year, if I have anything to do with it.

We are having an all-day trustees meeting on the 26th of this month just to deal with the report. I believe we will come back 1 year from

As far as finding a successor to Marshall Armstrong, we have a selection committee of the trustees. It is working very hard. They met the other day. I am in constant contact with them. They are looking. It is a difficult position to fill. They are looking for an outstanding leader, a person of considerable stature and credibility with all the various publics that the FASB deals with, a person who has a political sensitivity not in the sense of political here in Congress, but political sensitivity to the problems.

I am hopeful that very soon we will be able to announce who is going to succeed Marshall Armstrong. It is terribly important to us, sir. Senator PERCY. Thank you very much, indeed, Mr. Biegler. We appreciate both of you being here. We look forward to seeing you back hopefully sometime soon.

Senator METCALF. Again I thank you for most helpful and constructive testimony.

Mr. BIEGLER. Thank you, sir.

Senator METCALF. Our next witnesses will be a panel: Mr. Robert Half, of Robert Half Personnel Agencies, and Theodore Barry, of Theodore Barry & Associates.

We are delighted to have you both here. Mr. Half, I think you are first on the list, so we will call you first.

TESTIMONY OF ROBERT HALF, ROBERT HALF PERSONNEL AGENCIES, INC., NEW YORK, N.Y., AND THEODORE BARRY, THEODORE BARRY & ASSOCIATES, LOS ANGELES, CALIF., A PANEL

Mr. HALF. Thank you, Senator, for inviting me here today. Just a little of my background. I am a C.P.A., but I don't practice accounting. I started Robert Half Personnel Agencies back in 1948. We place accounting, financial, and related data processing personnel exclusively. We franchise in 55 cities and in 3 countries.

I know the subcommittee has read the transcript of my prepared statement. I appreciate the opportunity to briefly highlight two aspects of the large accounting firms' personnel activities:

First, the C.P.A. firm's relationship with its own employees, many of whom are transferred to a client's payroll; and

Second, the C.P.A. firm acting as an employment agency doing executive recruiting. The transition from the C.P.A. firm to the client starts with the employment philosophy of the large accounting firms. It is called up or ont. In other words, when they recruit at a campus and speak to the fledglings, they say, "If you don't make it with us, and you don't rise to become partner, we will try to place you with one of our clients," and they usually do.

The large C.P.A. firms like this method. It gives them an opportunity to get loyal employees to work for a client and, hopefully, perpetuate the relationship with a client. It gives them an opportunity to continue to recruit at campuses and avoid hiring experienced personnel.

The large accounting firms control the entire future of many of the staff. This is not only to the detriment of the employees, but in the long run to the clients and to the public.

The C.P.A. firm creates an alumni association by transferring selected staff personnel to work for clients. Only in this case the alumni

association rarely favors the alumni. Many of those who work for the C.P.A. firm's clients are locked into loyalties to that C.P.A. firm.

Key personnel are united by the strong ties of obligation. These people usually have great difficulty in making job changes outside of the influence of their C.P.A. firm, because other C.P.A. firms recommend their own alumni to their own clients.

And since large C.P.A. firms influence clients to hire their excess staff, there is nowhere to go but the small firm. And to compound the problem, smaller firms prefer small firm oriented people, causing candidates to lower their standards in order to get a new position.

When an accountant is transferred to a client, he or she joins colleagues who also served their time at the same large C.P.A. firm. These employees, like those recruited by the executive recruitment department, owe their jobs and careers to the accounting firms.

The certified accountants are no longer certified public accountants. The outside accountants become inside accountants.

I am a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants. Both organizations demanded that I sign affidavits to the effect that I would not practice as a public accountant as long as I remained in the personnel field. They were right.

Personnel selection is a management function. I have no right to practice as a C.P.A. They have no right to do personnel placements. A large C.P.A. firm's recruitment department selects two or three people to present to a client.

The client hires one. To narrow the choice down to two or three people, the C.P.A.'s may have eliminated 100 more candidates. Can't we assume that those applicants with obvious connections to other C.P.A. firms are not included in their presentation?

Can't we assure that the C.P.A. firms would be less objective in judging the quality of performance of their own placements, less critical of mediocrity? Mr. Walter Hanson, the senior partner of Peat, Marwick, Mitchell & Co., in a National Association of Accountants speech in February of this year indicated that executive recruitment grew out of the request of clients.

But the fact that a client turns to C.P.A.'s for personnel does not mitigate the question of conflict of interest, independence, or objectivity. The client is completely unaware of the problems of the accounting profession.

The client has invited the outside accountants to participate in management, thereby prostituting accounting independence by actively assisting in management's most important decision-selecting key personnel.

Eight accounting firms have a lock on more than 90 percent of the big corporations. Where is their growth coming from? Not from auditing but from recruiting and other activities not directly related to accounting.

There is a growing legislative interest in this problem. For that matter, in New York State a bill was introduced to prohibit personnel placements by C.P.A. firms and certain other activities unrelated to auditing.

The American Institute of C.P.A.'s protests the continuation of