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reports of the sixties with regard to pooling of interest. But people did not understand the significance of it. It was only when these companies collapsed under the falsity of these disclosures as they were penetrated and as the underlying rottenness of what took place was disclosed ultimately did we see what happened.

I don't think disclosure is the answer. I think prohibition is the answer, because disclosure simply says something happened. The evils which may have occurred behind the disclosure are not disclosed. I don't think they can be as a practical matter in human and business relations.

Senator METCALF. I take it that you would concur that what we need is some legislation

Mr. KELLOGG. Absolutely.

Senator METCALF. Who would we have to carry out the mandate of such legislation?

Mr. KELLOGG. I think that with legislation and with appropriate staff at the SEC, I think you could enforce it. Let's face it, Senator. There are hundreds of millions of dollars involved.

Senator METCALF. Yes, sir.

Mr. KELLOGG. We are dealing with human beings. We are dealing with the profit motive. We are dealing with the zeal for being bigger. We know that in the industrial world that has required legislation. Senator METCALF. Mr. Mette suggested that a lot of small firms which perform accounting services for small businesses just as a favor to their clients satisfy a need in providing some of the people to carry out the financial practices of the client. But some of the testimony here this morning was that there is aggressive advertising and aggressive promotion of some management services performed by these accounting firms, even fictitious corporations.

So I thought maybe the Cohen report would take care of it. It seems to me today that there is evidence that perhaps we have to go stronger than just disclosure. I am going to ask Mr. Stavisky what he says about it.

Mr. STAVISKY. Senator, being a member of the alumni club of Arthur Young and enjoying the annual dinner, although I don't think I am empowered to represent them here today, I would like to state that I don't believe the Cohen Commission's recommendations will do anything other than delay our accomplishment of independence.

Services that are natural parts of the accounting process should be performed by us. But when I was a younger professional, feeder-type activities were considered unethical for us to engage in.

The major firms and some of the minor firms have taken some of these feeder-type activities and we have brought them into our tables of organizations and we call them management services.

I don't think there is any place for these type of feeder activities in ethical, independent auditing firms.

Senator METCALF. You would agree with the word Mr. Kellogg used that the Cohen Commission report was largely cosmetic.

Mr. STAVISKY. No; that is much too sweeping. I would have to go into some of the recommendations of the Cohen Commission that I think were quite concrete. But in this regard I do believe that the feeder-type activities, doing plant layouts and the like, are just pre

Senator METCALF. I am glad you qualified that. The members of this committee also feel that some of the Cohen report has performed a good service.

Mr. KELLOGG. Senator, just to get the record straight, I didn't mean the Cohen Commission report was cosmetic. I said that disclosureSenator METCALF. You talked about other things as cosmetic. Mr. KELLOGG. That is right.

Senator METCALF. I used your word.

Mr. KELLOGG. There was one point, Senator, if I may. I would like to point out there is a difference between the local accounting firm serving local business and an accounting firm serving a business which is charged with the public interest through having public stockhold

ers.

I think what Mr. Mette was referring to and what we are referring to is the local accounting firm serving local business which doesn't have the management superstructure and infrastructure that large corporations have, where they rely upon the local accounting firm for counseling, other than just the auditing. We are the business counsel

ors.

Senator METCALF. I feel there is a legitimate distinction there. The firms we are dealing with are firms which are under the administration of the SEC, and public corporations that have public stock issues and so forth.

I will ask you each one further question, and ask for your comments. You heard the testimony of Mr. Biegler this morning. He is the first man to recommend legislation. Every other witness before us has said, "No, no, we will be able to do it with AICPA or the ad hoc committees, or something."

He outlined a program of legislation. I feel that if legislation such as that is introduced, we would have hearings on it and ask you all to come and comment specifically on the provisions in such a bill.

Do you agree with Mr. Biegler that there should be legislation, Mr. Dresselhaus?

Mr. DRESSELHAUS. I haven't had long to consider it, sir. I think I would have to say probably at this point, no; that as a small local practitioner, in a local practicing firm, we feel that anything that goes into law is going to improve the larger firms' position.

It is going to put us at some type of a competitive detriment. I think that would have to be my first blush statement. As I said, I have not considered it fully.

Senator METCALF. Sure. As I say, this is the first time any of the profession have recommended legislation. But I don't know whether the members of the committee have seriously thought about legislation until these hearings started to develop. Mr. Mette?

Mr. METTE. Let me address myself first to his second, third, and fourth recommendations which are rather easy for me to do in that the second recommendation on the larger firms filing their own financial statements, we agree with.

In fact, as I believe you know, we voluntarily submitted answers to the questionnaire that you had submitted to the Big Eight firms to give you comparable information on another sized firm, and we also submitted copies of our own firm's financial statements and quality

The third recommendation had to do with letting some sunshine in on the setting of accounting and auditing standards. This was also one of our firm's recommendations.

The fourth recommendation had to do with the SEC establishing what management advisory services would be suitable, which we would be also willing to have them do. As I have mentioned, management advisory services have not been all that serious a problem for our firm to comply with.

The first question really is the key one, which is: Should there be a mandatory quality review program? We have done a lot of talking with others about this. I, several months ago, stated that one of the shortcomings, in my view, of the American Institute program was that it was voluntary rather than mandatory.

I also have serious concerns about the cost versus the benefit. When you get to a program that would involve literally thousands of firms at a significant cost to do this, we question whether there will really be the benefit and improved practices.

We feel that to some extent the SEC's efforts to date have been helping. There is no doubt but that their requirements that firms subject themselves to reviews have been very meaningful, both to the firms having been reviewed and to others, strengthening all of our systems of quality review.

Just exactly what would happen when one of the very large firms was reviewed and found no longer to qualify is really the key issue of this proposal. I am not going to tell you that I have reached a conclusion on that.

I do know that there are many clients that are served by these very large companies that we must consider also. I think that is a key issue to the proposal.

Senator METCALF. Mr. Kellogg?

Mr. KELLOGG. I am very much impressed by Mr. Mette's comments. I just heard Mr. Biegler's well-prepared talk this morning, and being a lawyer, I hesitate to say yes or no. I would like to think of the foreseeable consequences. I do think that, however, we should analogize to antitrust activities. That is, that where hundreds of millions of dollars are involved, people don't do things voluntarily.

Senator METCALF. Mr. Stavisky?

Mr. STAVISKY. I thought Mr. Biegler's presentation could have been a giant first step. I also would like to go over it step by step. I was impressed with the Price Waterhouse presentation. I would like the opportunity to later comment on its individual procedures.

However, I see in it a danger of a two-class status that could once again accelerate the merger of firms. In this case we would have to have the proper classification. It's as in the Dr. Seuss story, where the "Sneeches on the Beaches" had to have stars on their stomachs instead of bellybuttons.

I think in this case we would have to have a star. We wouldn't be caught dead with just a bellybutton.

[Laughter.]

Senator METCALF. These hearings are going to go on for awhile. The record is open.

I would welcome any additional thoughts that any of you have on either the material that was presented here or the material you read

This is the first, probably the only opportunity to have you before me to answer questions. But if you will volunteer some other comments, I know that every member of the committee will be delighted to hear from you.

I want to say, Mr. Stavisky, that I come from Montana, where we had Crazy Horse, Sitting Bull, and the Sioux and your getting the wagons in a circle doesn't bother me a bit.

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Senator METCALF. I want to thank you all for coming. You have been most helpful. I know that both Senator Percy and Senator Danforth are very interested and concerned in these hearings, and all members of the subcommittee, as they get time, will read your testimony.

I don't know whether they have all read our staff report or not, but they are keeping up with the testimony.

Thank you for coming.

[Whereupon, at 11:15 a.m., the subcommittee recessed, to reconvene at 8:30 a.m., Thursday, May 12, 1977.]

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In reviewing the transcript of my May 10, 1977 testimony before this Subcommittee, I noticed a response to one question that might be considered incomplete and I would like to clarify the record on that point.

In the course of my testimony, Mr. Turner asked the following question and I gave the following reply:

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When I gave this answer to Mr. Turner I was focusing on the part of this question which referred to "advising" and "auditing"; the principal point in my mind was that we have a policy against assigning any partner, alternate partner or lead manager to more than one major petroleum company audit. These are the only Price Waterhouse personnel who make policy decisions with respect to audits or deal with senior management of our large clients. meetings are held with audit companies, boards of directors or chief financial officers of a company being audited, it is our partners, alternate partners and lead managers who attend.

When

This policy is a complete answer to staff charges that Price Waterhouse "exercises concentrated influence in the natural resources industry" (Staff Report, p., 44). The Price Waterhouse partner and lead manager are the only ones among our people who would make policy decisions with respect to audits and who would have contact with the audit committees, boards of directors, top executives and chief financial officers of a company being audited. It was the asserted exercise of "influence" and such higher-echelon people that I was thinking about in my testimony: those people are limited to working with one major oil company.

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