TV -2

Because if what is desired is something other than what the present consensus network is doing, the only way to get it, in my opinion, is to make some major structural changes to the system. Tinkering won't do; neither will promised changes in attitude, however sincere, because the structural limitations of the existing network guarantee its repeat performance of established patterns. Two interrelated questions there

fore remain:

(1) What other system output would be preferable?

(2) What structual changes to the system are most likely to pro

duce those changes?

What Other System Output Would Be Preferable? What Structural Changes Would Be Likely To Produce Those Changes?

The Subcommittee Staff Study indicates several areas where different outputs of the financial standards rulemaking and implementation system would be preferable to the existing productions. These include: Real independence of accounting firms from the business interests of their clients.

More competition for the "Big Eight" accounting firms from

smaller rivals.

Uniform accounting standards eliminating alternative methods

of accounting.

More reliable auditing performance.

Structural changes to the existing system are recommended by the

Staff Study to accomplish the changes indicated above, and I will close this statement by discussing the proposed structual alterations associa

IV -3

1.

Real Independence of accounting firms from the business interests
of their clients.

One would expect that the AICPA and FASB would insist that they
are independent of clients, but logic and the evidence presented in the
Staff Study contradict that real independence can or does exist in the
present system. Combining accounting and management advisory services
by an accounting firm and selling both to a given client places the
accounting firm in a position where there is a possible temptation to
bend the accounting and auditing services to validate or fulfill the
promises or advice of the management advisors, in effect emeshing the
firm with the client's business interests. Under such circumstances,
even honorable men are apt to rationalize. The defense that the ac-
counting and management groups organizationally are separate can be chal-
lenged because, as is common knowledge, every institution has its in-
formal organization, and communication occurs on golf courses, at
dinners, parties, etc. Perhaps a comparison with the distinction be-
tween price conspiracy and parallel pricing in antitrust law is ap-
propriate; awareness and unsaid understandings can be as effective as
specific agreements. It is best that people not be tempted.

The involvement of the AICPA with the users of corporate financial rules is another case in point, which I believe has been established in this statement, the Staff Study, and in other research. J.S. Seidman almost twenty years ago made a prophetic remark in this

connection. He said

Accountant

Today, (1959) CPAs alone are pretty much the high priests of
accounting principles. In twenty years, will the users of

accountants and tulents as tem elDRE

Structural Recommendations to Achieve that

countants from clients

Major recommendation of the Staff Study in this Item.

venting accounting firms from offering management act ch I endorse. Another structural device would be to res

=

1 standards rulemaking authority and place it with the utm
ment, thus eliminating accountant-user joint development
al standards, which I previously urged, and continue to so .:

More competition for the "Big Eight" accounting firms
smaller rivals.

The Staff Study recommendation aims at a reduction in the 1 ice of the "Big Eight" firms, and could also foster accountant e*ndence. The possible structual devices to effect this are mandator anges of accountants after some years or choices offered to stareǝlders for their selection. While preventing long term associations etween accounting firm and client could tend to prevent too close a elationship between them, freedom of contract, and the advantages of Compatible business arrangements are also important. The alternatives available to produce more competition in the public accounting area deserve careful consideration and further study by the Subcommittee.

3. Uniform accounting standards eliminating alternative methods of accounting.

The proposal for development of uniform accounting and the em ination of accounting alternatives is of crucial importance and anter est. At stake are several difficult and debatable technical protiem namely, whether uniform accounting systems are useful and desirable.