Senator METCALF. I want to make the record very clear. The AICPA's Cohen commission admitted there was an appearance of conflict of interest when a C.P.A. carried out management practices. However, the recommendation of that commission was mere disclosure, and suggested that disclosure of the C.P.A.s management practices and others the services they performed for their clients-was essential to remove what they call potential conflicts of interest.

I gather from both of you that you feel we have to go further and have a divestiture or a complete divorce of management practices and procedures from C.P.A.s. Is that correct?

Mr. BARRY. Our position is that independence can be achieved, that independence must be achieved. We feel it can be achieved either by divestment or regulation leading to not coserving a company with consulting and auditing work concurrently.

Senator METCALF. The C.P.A.s and auditors have to get out of the management service business to have a complete removal of this conflict of interest. Isn't that correct? Isn't that your position?

Mr. BARRY. No; that is not really-well, for the same client at the same time. We think a public accounting firm should do public accounting work for a client and no management consulting work for that client, but that it can do management consulting work for nonaccounting clients.

Senator METCALF. That would remove the sort of incestuous relationship where you have people from the accounting firm going over into management practices of the client. But it would seem to me that it wouldn't completely remove the suggestion that I thought you made very well when you pointed out that not only are management services badly performed when the C.P.A.s perform them for their clients, but the accounting and auditing services are also badly performed when that C.P.A. performs management services.

Now does that only relate to when it is the same client or does it relate to when there is duality of performing the management services and accounting services?

Mr. BARRY. Yes; it does only relate

Senator METCALF. When it is only the same client? Do you agree with that, Mr. Half?

Mr. HALF. No; not completely. I think the appearance of conglomeration is what is happening now. The large C.P.A. firms become conglomerates. The fact that Mr. Barry had indicated that two of the large C.P.A. firms were interested in acquiring his company is conglomeration, and is hardly in keeping with professional dignity.

I can't conceive, for example, that a law firm would merge with a management services firm. And I have difficulty conceiving how a C.P.A. firm could merge with a management consulting firm like Mr. Barry's.

Senator METCALF. How are we going to get this divestiture, even going only as far as has been suggested by Mr. Barry? How are we going to attain it? Will it require legislation? Do you think the C.P.A. profession can do it voluntarily within its own professional boards and activities?

Mr. HALF. No. I think that it has to be done, if not by legislation. by mandating the SEC to control this activity. And as far as the large nonpublic companies, I think this would be taken over by the various

What affects the large companies in a smaller sense affects the smaller corporations. The multi-billion-dollar frauds that large industry has been involved in, is only one facet of this problem.

There have been many multimillion-dollar frauds by smaller businesses that aren't reported as widely as the Equity Fundings and the Penn Centrals.

Senator METCALF. How do we have a mandate without legislation? What do we do? Write a letter to the Chairman of the SEC and say, "Do it"? I have written several of such letters and nothing happened. Mr. HALF. I wrote letters, too. I will concede legislation is necessary. Senator METCALF. What do you think, Mr. Barry? Do you think we could do it without legislation?

Mr. BARRY. I would encourage legislation. Don't misread my earlier position. I feel very keenly that independence is critically important to the execution of management consulting. I am not an accountant and not qualified to judge what it calls for or what conditions add up to independence.

I feel very keenly that the public accounting firms should not practice management consulting for those same clients. We in the independent world, having seen 60 percent of our market erode in the last 20 years and no letup in sight, would be delighted to, with a little assistance and help, restore honest competition.

We are all businessmen. We all like a fair shot at the jobs.

Senator METCALF. I want to thank you both for appearing here, for presenting very strong testimony in this special area that our staff pointed out was a matter of restoring public confidence. Your testimony has been most helpful to members of the committee.

Mr. BARRY. Thank you very much.

Mr. HALF. Thank you.

Senator METCALF. Next, we have a panel: Mr. William R. Mette, Jr., Mr. J. B. Dresselhaus, Mr. Irving Kellogg, and Mr. Norman H. Stavisky.

Mr. Mette, would you lead off?

TESTIMONY OF WILLIAM R. METTE, JR., EXECUTIVE PARTNER, ALEXANDER GRANT & CO., CHICAGO, ILL.; J. B. DRESSELHAUS, PRESIDENT, ASSOCIATED ACCOUNTING FIRMS INTERNATIONAL; IRVING KELLOGG, C.P.A., KELLOGG & ANDERSON, LOS ANGELES, CALIF.; AND NORMAN H. STAVISKY, C.P.A., STAVISKY, SHAPIRO & WHYTE, BOSTON, MASS., A PANEL

Mr. METTE. I am William R. Mette, Jr., executive partner of Alexander Grant & Co. I would like to thank you, Mr. Chairman and members of the subcommittee and Mr. Chesson and his colleagues on the staff, for your invitation to appear on behalf of our firm.

Because the time you can take for these hearings is necessarily so limited and in order to help you keep to your schedule, I have requested that you simply reproduce the written statement that we have provided in the record of these proceedings.

Senator METCALF. It has already been ordered that all of your prepared statement will be included in the record.

Mr. METTE. Thank you.

May 10, 1977

Statement of William R. Mette, Jr., Executive Partner of
Alexander Grant & Company

To the Subcommittee on Reports, Accounting and
Management of the Committee on Government
Operations, United States Senate

Introduction

This statement is presented on behalf of Alexander Grant & Company a major national and international accounting firm. The statement sets forth our firm's views with respect to the Staff Study, "The Accounting Establishment," published at the direction of the Subcommittee in December 1976.

We agree with the premise of the Staff's Study and recommendations that the public accounting profession is of public importance, and that it is appropriate for Congress to review how well the accounting profession is doing its job. We welcome the opportunity to express our views on the important issues raised by the Staff Study.

We agree with the further premise of the Study that the private sector, the AICPA, the FASB and its predecessors, and the accounting firms, large and small, have not accomplished all that the public is entitled to expect from them. The accounting profession has not sufficiently narrowed the availability of alternative accounting principles. Consequently, users of financial statements today cannot be confident that they can compare the reported results or statements of position of one corporation to another. They cannot be sure that like events and transactions have been accounted for and reported alike. The accounting profession has not made the necessary practical distinctions between large and nall businesses in determining what accounting and disclosure obligations, and thus recordkeeping requirements, are imposed. In the face of major auditing or disclosure failures, the profession has offered apologies and attempted to limit the scope of accountants' legal liabilities, when it should have been taking firmer steps to articulate tougher, clearer auditing standards, to improve auditing techniques, and to rationalize and simplify the disclosure process. And the profession has retained so-called "ethical restrictions" and tolerated other prac

tices which amount to artificial restraints on competition-to the detriment of the smaller accounting firms, and ultimately, we believe, to the detriment of businesses, investors, and consumers who would benefit from a more competitive and efficient marketplace for accounting services.

The public nature of the accounting profession and the public interests it affects make it appropriate for the profession to undergo public scrutiny by Congress. More should be disclosed about the organization of the profession and about its practicing firms. Although the questionnaires addressed by the Staff to the "Big Eight" were not submitted to Alexander Grant, we have voluntarily provided the Staff with a brief general description of our firm, as well as more detailed answers to the questionnaires and our firm's financial statements for our most recent fiscal year.*

Our Views as to the Recommendations Set Forth in the Staff Study

We have organized and presented our views as responses to the sixteen recommendations of the Staff Study, because the recommendations serve well as catalyst and focal point for discussion and debate, which should lead to constructive reform of our profession. We of course understand that the recommendations were presented in this spirit rather than as demands for legislative action.

At the outset, it is important that the fundamental difference between accounting and auditing be acknowledged. Accounting provides the concepts and "language" that we use in analyzing and communicating the economic and financial substance of business life; it is a set of conventions governing the compilation and presentation of financial information in the form of financial statements. Auditing is the means by which independent certified public accountants investigate and report upon whether the communications contained in financial statements are in accord with the accounting conventions and whether they reflect economic and financial reality. The problems experienced in recent decades as a result of inadequate accounting principles are very different from, and must not be confused with, the problems which have produced auditing failures. Thus, the solutions to be worked out by the private sector and public regulatory authorities in these two different areas must likewise be different.

*The description of our firm appears as Appendix A hereto.

2

Our views may be briefly summarized as follows:

1. We believe that the process by which accounting principles are established must be substantially improved. The process should be designed to reduce or eliminate alternative accounting principles. It should have as its principal objective the simplification of accounting and disclosure, so as to make financial statements more understandable, and to reduce unnecessary disclosure and recordkeeping requirements which confuse the user and impose too great a burden on smaller businesses.

2. We submit that the Financial Accounting Standards Board and its predecessors have paid insufficient attention to the needs of two important constituencies-the users of financial information who have been deluged with unnecessarily complex disclosures, and the smaller and medium-size businesses which have been compelled to comply with accounting and disclosure requirements which are difficult and costly even for the largest companies.

3. We hope that the FASB's performance can be improved, and that it can continue to discharge the important role of establishing accounting principles. If the FASB's record does not improve, we recognize that others may conclude that some Federal Governmental agency should be created to replace it.

4. We believe that the accounting profession can also improve the process by which auditing standards are established, both procedurally and substantively. We do not believe that the federalization of the establishment of auditing standards would substantially improve those standards or reduce the incidence of auditing failures. The abuses recounted in the Study involve faults other than bad auditing. They do not establish that existing auditing standards are inadequate. Moreover, auditing is an art; at bottom it requires diligent exercise of judgment—which would be jeopardized by mandated compliance with governmentally prescribed standards, steps, or checklists.

5. We believe that accounting and auditing standards should be considered and established in open meetings which any interested observer may attend.

6. We urge that artificial restraints on competition among accounting firms be eliminated. Accounting firms should within reasonable limits be permitted to advertise, and appropriately to