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SECURITIES

AND EXCHANGE

REPORT

COMMISSION

TO CONGRESS

THE ACCOUNTING

PROFESSION

COMMISSION'S

July

OVERSIGHT

I, 1978

ON

AND THE ROLE

~I~'/~

SECURITIES AND EXCHANGE COMMISSION

Y

WASHINGTON,

D.C.

20549

OFFICE OF THE CHAIRMAN

June

30,

1978

The H o n o r a b l e W a l t e r F. M o n d a l e President United States Senate Washington, D.C. 20510

Dear

Mr.

President"

I am p l e a s e d to t r a n s m i t h e r e w i t h the "Report of the S e c u r i t i e s and E x c h a n g e C o m m i s s i o n on the A c c o u n t i n g P r o f e s s i o n and the C o m m i s s i o n ' s Oversight Role." The r e p o r t c o n s i s t s of three parts:

(1)

The Commission's expectations.

(2)

The staff's description and of the profession's progress the past year.

(3)

Documentary exhibits the foregoing.

conclusions

and analysis during

relevant

to

This report, the first of its kind prepared by the Commission, fulfills a commitment which I made in testimony before the Subcommittee on Reports, Accounting and Management of the Senate Committee on Governmental Affairs on June 13, 1977. Sincerely,

'~

~aro l~d~,l. Williams Chairman

@

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D,C.

20549

OFFICEOF THE CHAIRMAN

30,

June

The Honorable Thomas P. O'Neill, Speaker U . S. House of Representatives Washington, D.C. 20515 Dear

Mr.

1978

Jr.

Speaker"

I am pleased to transmit herewith the "Report of the Securities and Exchange Commission on the Accounting Profession and the Commission's Oversight Role." The report consists of three parts:

(1)

The Commission's expectations.

conclusions

(2)

The staff's description and of the profession's progress the past year.

(3)

Documentary exhibits the foregoing.

relevant

and analysis during

~o

This report, the first of its kind prepared by the Commission, fulfills a commitment which I made in testimony before the Subcommittee on Reports, Accounting and Management of the Senate Committee on Governmental Affairs on June 13, 1977. Sincerely,

TABLE

OF C O N T E N T S

INTRODUCTION

. . . . . . . . . . . . . . . . . . . . . .

1

INDEPENDENCE

. . . . . . . . . . . . . . . . . . . . . .

8

Introduction

. . . . . . . . . . . . . . . . . . .

8

• Audit

Committees

. . . . . . . . . . . . . . . . .

i0

• Scope

of

. . . . .

12

REGULATION

Services

~D

OVERSIGHT

• Introduction • Peer THE

Review

ACCOUNTING •

,

. . . . . . . . . . .

. . . . . . . . . . . . . . .

.

15

. . . . . . . . . . . . . . . . . . .

15

. . . . . . . . . . . . . . . . . . . .

21

STANDARD-SETTING

Introduction

PROCESS

. . . . . . . .

. . . . . . . . . . . . . . . . . . .

• Recommendations of Structure Committee • FASB

Conceptual

• The and

Concepts of Comparability

the FAF . . . . . . . . . . . . . . . .

Framework

Project

. . . . . . . . .

Uniformity, Preferability . . . . . . . . . . . . . . . .

27 27

29 30

31

• Development of Accounting Standards for Small Businesses . . . . . . . . . . . . . . . . .

32

• Accounting Companies

by Oil . . . . .

and Gas Producing . . . . . . . . . . . . . . . .

33

• Accounting Industries Executive

Matters and the Committee

Related to P a r t i c u l a r Accounting Standards . . . . . . . . . . . . . . . .

36

-

THE

AUDITING •

STANDARD-SETTING

Introduction

. Assessment ° The CONCLUSION

Foreign

of

2

-

PROCESS

. . . . . . . . .

38

. . . . . . . . . . . . . . . . . . .

38

Structure

. . . . . . . . .

40

of

41

Corrupt

of

AudSEC

Practices

Act

1977

. . . . .

. . . . . . . . . . . . . . . . . . . . . . .

44

INTRODUCTION

During sional

the past several years,

attention

has been focused to an unprecedented

degree on the accounting promoting

The Federal

in the aftermath have authorized accountants

in

laws,

since their

of the economic crisis of the early the Commission

to require

audit the financial Thus,

ant unique and

important

processes

and on its role

in the integrity of financial

securities

corporations.

the proper

profession

public confidence

reporting.

public and Congres-

those

functioning

that

1930's,

independent

statements of publicly-held

laws have placed

responsibilities

of this nation's

and, more broadly,

enactment

upon the account-

in facilitating

capital

of our economic

formation

system as a

whole. Further,

the

ures by major questionable

incidence of significant

corporations payments

other events,

and the disclosure

and illegal

acts

have raised concerns

and credibility

unexpected

of financial

of widespread

in the 1970's,

about the

fail-

among

integrity

controls and reporting of

publicly-owned

companies

and, consequently,

responsibility

of the accounting

profession

the role and has come under

-

careful

scrutiny.

structure

A broad

of the accounting

examination

began

on Oversight

John Moss.

which

by the staff

and That

of the Subcommittee

of the House Committee chaired

a little

chaired

held public

over

by Congressman one year

Accounting

and

on Governmental

Affairs

by the late Senator

hearings

("Metcalf

profession.

Those

hearings") hearings

were

report of the Senate Subcommittee

by the Senate

Subcommittee

report

issued

and in

1977.

The Subcommittee the House Committee held public accounting

on Oversight

on Interstate

hearings

in February

profession's

latory program.

efforts

Recently,

tee, Congressman Moss, a self-regulatory after

the report

Committee

the accounting

followed

November

has resulted.

on Reports,

of the Senate

Metcalf,

were

profession

It was continued,

Subcommittee"),

preceded

of the nature

and Foreign Commerce,

("Senate

concerning

examination

in 1976 with

by the Subcommittee

Management

-

and Investigations

on Interstate

ago,

2

the National

and Investigations and Foreign Commerce

and March,

introduced

Association

1978 on the

to develop a self-regu-

the Chairman

organization

of

of that subcommit-

legislation

to create

for accountants of Securities

patterned

Dealers

("NASD").

-

The been

responsibilities

transferred

Thomas

Williams

that,

to continue tion

Williams

Eagleton

as Chairman

and to expand

concern.

subcommittee,

Senator

the work

-

of the Senate S u b c o m m i t t e e

to a n e w

Eagleton.

3

has

of this

begun

chaired

by Senator

informed

Chairman

subcommittee,

he intends

under

Senator

Metcalf's

it to include

various

other

He concluded

a recent

letter

have

direc-

areas of

to Chairman

by stating:

Appropriate committees of Congress have recently spent substantial time and effort developing sound public policies for improving the accountaDility of p u b l i c l y - o w n e d corporations and their auditors. We are serious about seeing them implemented. I look forward to working with the SEC toward meeting tbat objective in a timely manner. The Metcalf expectation

hearings

and urgency

for

Commission

to take action

confidence

(i) in the

(ii)

a viable

self-discipline accounting

also

a sense

the profession

and the

which

will

resolve

system

(iii)

and auditing

The hearings many people

and

clearly

independence

in the p r o f e s s i o n ' s

and main£ain

conveyed

in public

of accountants,

and ability

to develop

of self-regulation

in the processes

standards

conveyed

result

and

by which

are promulgated.

a second

in and out of Congress

of

message

-- that

are critical

of the

-

Commission charge

of

for what

its oversight

to the auditing held

is not,

doing

responsibilities

in the dis-

with

financial

reporting

The Commission

undertook

at the Metcalf

respect

of p u b l i c l y -

companies.

1977

to report

the p r o f e s s i o n ' s and others

such The

which

on

Congress

it and on the C o m m i s s i o n ' s

in this area.

issues which

This document

the accounting

and complex.

the Commission

report

to the Congress

to the challenges

before

hearings

is the

report.

are numerous picture,

periodically

response

had placed

initiatives

first

this

-

and

in June

own

it is, or

4

into three

In order

has

found

profession

is facing

to give a c o m p r e h e n s i v e it necessary

to divide

parts:

. The C o m m i s s i o n ' s conclusions concerning the profession's progress during the past year and its expectations concerning the objectives t o w a r d which the profession must work in the coming months• • The Commission staff's d e s c r i p t i o n and analysis of the profession's progress. The staff's presentation is divided into four specific topics -independence, regulation and oversight, and the accounting and auditing s t a n d a r d - s e t t i n g processes -- and two appendices. The staff report also contains an issues summary which for the convenience of the Senate Subcommittee is keyed to the recommendations in its report• A volume material

of exhibits containing d o c u m e n t a r y relevant to the staff's analysis•

-

The Commission its conclusions and

has

5

set forth

concerning

its expectations

-

in this overview

the profession's

concerning

the profession

should

be working.

range

and complexity

of the

issues

the staff's comprises

description

factual

predicates

are embodied that

The

reader

in the accounting

issues

summary

reader

with

keyed

profession.

which

the

and

is essential which

to the

provide

the

view of the developments assessment

to

are taking

Reference

recommendations

lengthy

conclusions

report will

and the staff's to the

that

and analysis

of the changes

in the staff

a condensed

the past year ments,

recognize

of that material

evaluation

accountants,

-- is necessarily

in the staff description

a meaningful

of the

-- the section

for the Commission's

an understanding

place

should

toward

Because

facing

and analysis

the body of this report

and detailed.

initiatives

the objectives

which

report

during

of these

develoo-

of the Senate

Subcommittee. The

central

ing profession's should

continue

disciplined should

issue future

in the debate is whether

to be primarily

and self-regulated

become

more directly

over

the account-

the profession

and essentially or whether

involved

self-

government

in its regulation

-

and

in the setting

standards report that

under

6

of the accounting

which

of the Senate

the profession Subcommittee

" . . . the existing

and the SEC should

to fulfill

their

"self-initiated

cooperation ferred both

pledges

with

. . . "

the SEC Chairman

the Metcalf

of the Commission Commission

would

accounting

profession.

During Certified tain

it created and,

a new Division

within

("Section") ("Board"),

which

a Public

composed

believe

that

the p o t e n t i a l l y

mechanisms

best

to enable

the of the

has taken

of cer-

1977,

("Division") Section

Oversight

Board

individuals

The Commission

at

support

Institute

Practice

of d i s t i n g u i s h e d

the profession.

that

in September,

an SEC

outside

governance

("AICPA")

that Division,

the

oversight"

of CPA Firms

includes

in

of reform pre-

indicating

Specifically,

sector

expressed

the American

Public A c c o u n t a n t s

concluded

in his testimony

an "active

the past year,

its belief

It further

hearings,

this goal,

The

an o p p o r t u n i t y

by the private

Williams,

exercise

initiatives.

be given

is the method

and Moss for

operates.

of the accounting

promptly."

action

and auditing

indicated

framework

profession

that

-

continues

approach

from to

to developing

the profession

to meet

-

the challenges

facing

is for the profession direction,

but with

The Commission fession's early

to remain

active

efforts

over

of events

during

be a superior

and

the pro-

it is too

will prove

initiatives

be-

show suffi-

to continue

to evolve.

at the present

governmental

of ensuring

responsibilities

with

the Commission

has not concluded, direct

private

but based on its review

to be permitted

means

essentially

those efforts

the past year,

that comprehensive

in the future

from the Commission.

at self-regulation

the long-run,

The Commission

under

satisfied

that the profession's

cient promise

today and

oversight

is not wholly

effective

their

-

accountants

to assess whether

lieves

7

regulation

that accountants

with proper

time,

regard

would discharge

for the public

interest. As articulated the Commission

in the staff

in overseeing

sector

has been extensive

year.

In that

a synopsis tives

regard,

pendence

the efforts

the Commission

it must work

of accountants,

self-regulation

the role of of the private

and active during

of the profession's

toward which

report,

has set forth below

progress

in establishing

the accounting

and auditing

in the ensuing

months.

and of the objec-

in assuring

and self-discipline

the past

the

inde-

meaningful

and in improving

standard-setting

processes

-

8

-

INDEPENDENCE

Introduction The

critical

pendence"

importance

to the public

auditor

has been

Federal

securities

cept

in referring

accountants"

and

accountant

recognized laws

of the concept

in his role

specifically

this

to "independent

the Commission

"independence".

Independence

attribute

of the auditor.

Absent

and services

has

lost

stances

sight which

of the

reasonable

or,

at least,

utilization

in turn

factor

which

which

the auditor

and

likely

threatening

management, is expected

erodes

-- is that

of the auditor's

the company's

circumto

the

function.

its appearance

upon

of avoiding

is seen as en-

the role of the auditor

obvious

the p r o f e s s i o n

This

dangering

The most

value.

believe

independence.

of his attest

his

people might

influence

utility

authority

is the essential

its critics,

importance

con-

public

independence,

are of little

In the view of many of

The

important

to define

skills

as an

for many decades.

recognize

in giving

of "inde-

services the

independence

--

the continued

is largely

same group

dependent

toward

to be independent.

The

-

ultimate

test of

that management the ability

dual

can bring

fessional

responsibility

be mandated however, can

for,

their

some

profession

profession. must work

In considering three major

(i) prohibitions

against

fact,

the auditors'

jeopardize

pendence conduct bility more

in performing which would

and respect

broadly

(iii)

the part of both will

enhance

corporate

depreciate

There

and

respect

which

may,

and

in the eyes of the public;

of these

goals

in

indeof credi-

and,

of conduct,

and managements,

reporting.

on

which

and credibility

While,

the

objectives:

the profession's

integrity

are,

as a

(ii) avoidance

the encouragement

can

such actions,

objectivity

the audit;

the overall

implementation

relationships

accountants

financial

of,

Pro-

which

accountants,

the caliber

toward

indepen-

activities.

by statute.

steps which

take to enhance

and

only by indivi-

is not an attribute

by rule or compelled

clearly

body,

day-to-day

and

that pressure.

professionalism

can be addressed

in their

of pressure

on an auditor

to withstand

sense,

are goals which

is the amount

to bear

of the auditor

accountants

-

independence

In a fundamental dence

9

in general,

is a task highly

of the

appro-

- i 0

priate

to the profession,

establishment

of

there

independent

scope of services to perform

-

which

for their

audit

issues

committees

accountants

audit

analysisappropriately

are two

should

for

and the

be p e r m i t t e d

clients -- which

highlights

--

the staff's

immediate

attention.

Audit C o m m i t t e e s The

formation

tees composed keys where tee,

of

by public

companies

of audit

independent

directors

is one of the

to s t r e n g t h e n i n g the auditors a potentially

accountants strengthen

from

auditor

report

nis

commit-

to insulate

pressures

suggestion,

and to

with m a n a g e m e n t

the New York

adopted a requirement

have an audit

specified

criteria

currently

considering

mulgate

is provided

in his r e l a t i o n s h i p

companies

committee

by June

that

and

certain

30, 1978 and the NASD

a rule proposal

in what

is

in this area.

form the A I C P A

a standard which would

Stock

listed

which meets

the A I C P A has formed a special

to study whether

audit

independence.

recently

In addition,

buffer

inordinate m a n a g e m e n t

At the C o m m i s s i o n ' s Exchange

In c o m p a n i e s

to an independent

important

the auditor

-- and hence

independence.

commit-

committee should

pro-

r e q u i r e that an audit

r

committee

be e s t a b l i s h e d

accountant's

accepting

as a condition

to an independent

an audit engagement.

While

the

-Ii

Commission questions fession end,

recognizes

it believes

initiative

that

snould

to it to ensure

is beyond

sufficiently

to mandate and

time which

meet

addressing significant issues.

for

Should

resolution

importance

take whatever

that an audit

the

actions Therefore,

committee

the burden

initiative

the Commission

believes

is on

not be effective

has the authority

in appropriate

circumstances,

to do so. to be given

resolution

appropriate many

to the

establish

This

the Commission

its capability,

committees

priority

frame

area.

its independence.

conclude

timely,

audit

is prepared The

contribute

should

this

can and should

important

to the profession,

it to so d e m o n s t r ate. or

in this

itself

the pro-

for accomplishing

the profession

the profession

requirement

whether

In view of the critical

the profession

are available

legitimate

concerning

of the AICPA will

questions.

are

instrument

requirements

independence

that

there

to be considered

appropriate

of

that

is the proper

of these

-

is short.

criteria

independence

value

this

issue

is high and the

Audit

appear

committees

to b e

related matters

in determining

the approach

central

to

and of to other

-

12

-

Sco~e__oof_Services Another tion

important

is the question

vices -- other self offer

-- which

which

and,

audit

except

limitations

should meet

have

the p e r f o r m a n c e

of the audit

firms should

clients.

This

in general

not yet been this

three basic

it-

be p e r m i t t e d

issue

terms,

atten-

range of ser-

to

is e x c e e d i n g l y

the o b j e c t i v e s

on the scope of auditors'

In c o n s i d e r i n g to resolve

immediate

of the appropriate

accounting

to their

complex

than

issue requiring

services

fully articulated•

issue,

it will

be n e c e s s a r y

questions:

• Are there s i t u a t i o n s in which the m a g n i t u d e of the p o t e n t i a l fees from m a n a g e m e n t a d v i s o r y s e r v i c e s are so large as to affect a d v e r s e l y an a u d i t o r ' s o b j e c t i v i t y in c o n d u c t i n g an audit? • Are there some services which are so u n r e l a t e d to t h e normal expertise and e x p e r i e n c e of a u d i t o r s that it is inconsistent with the concept of being an auditing p r o f e s s i o n a l for auditors to perform those services? • Are there, conversely, some services so c l o s e l y linked to the accounting function that, for the auditor to perform those services for his client means that, the auditor will, in c o n d u c t i n g the audit, be in a position of r e v i e w i n g his own work? A further is whether certain

consideration a prohibition

services

for

underlying against

their

audit

these overall

auditors

issues

performing

clients will

have

- 13-

a disproportionately panies

and smaller

comments

1977,

of

the Commission

independence

should

Commentators services such

stated

services

in depth

who opposed

that there

performed

Commentators

such

who

services

requested

public

and,

offered

audit

clients.

proscribing

the client's

and that there

supported

impairs

from having who have business

their

of certain

certain

actuarial

services)

auditing

their

own work,

that some may result

interest

that performing pairment

of

While

such

(e.g.

services

independence that

the SEC Practice

request Section

result

executive

for comments

non-

of these

in a c c o u n t a n t s in

recruiting),

may result

in fact and

and

independence.

(e.g.

of

an

is no evidence

proscription

that performing

non-audit

services

conflicts

in

accordingly,

are benefits

services

stated

services

by the auditors

with

operations

that providing

audit

for their

familiarity

accounting

issued

the fact or appearance

of accountants

be prohibited

com-

5869,

the non-audit

f i r m s affect

on smaller

firms.

Act Release No.

on whether

by accounting

effect

accounting

In Securities September

adverse

and

in an im-

in appearance. was outstanding,

of the AICPA Division

of

-

CPA Firms proposed requirement

to establish

that would

performing

services

or are not

accounting

the services a manner

the adequacy extensive ment

public

has

indicated on the

that

tunity

its views

rules which other

things,

independent 1978,

have

of the fees pressed

issue

clients,

to question

should

5869

holding

an opporprocess.

also proposed

disclosure

of,

among

by a company's fees.

a rule

rendered

the ad-

The Commis-

be given

In June

requiring

disclosure

by auditors

the percentage

as a percentage

requested

this summer.

and the related

the non-audit

for clients

on the matter.

provided

adopted

After

it is considering

required

of services

for

Board

in

as to what manage-

to the deliberative

services

the Commission

audit

that

the Board

auditor

of the nature their

the

staff

be performed

Act Release No.

would

However,

are defined

the AICPA has

Oversight

from

independence

related.

the staff

should

auditors,

Securities

their

be offered

with

sion believes to add

impair

firms

of the prohibition.

services

hearings

member

the Commission

discussions

of the Public

a membership

or auditing

and scope

advisory

The Board

which

caused

by independent vice

prohibit

that cannot

which

14-

relationship

services

of the audit

to

rendered

ex-

fee and a state-

-15-

ment of whether

an audit committee,

an audit committee,

or in the absence of

the board of directors

all services provided by auditors, giving consideration

to their

effect on auditor

REGULATION

AND

had approved appropriate

independence.

OVERSIGHT

Introduction As mentioned

above,

created a new Division Division, intended

1977,

an SEC Practice Section.

self-regulation.

the structure important

The Section

limitations.

creation

and as a potentially viable program of self-regulation. ment of the Section which for the Commission's

voluntary

the Commission

believes

of the accounting

both contain

accomplishment

for a meaningful

it is the establish-

forms the primary basis that there

self-regulation. that

it would

to recommend

to impose comprehensive

as a major

Indeed,

is

the Commission

foundation

conclusion

for successful

for the Commission

of the Section

Nonetheless,

that

for pro-

As set forth below,

and the operations

the Section's

the AICPA

of CPA Firms and, within

to serve as the primary vehicle

fessional

regards

in September

Therefore,

be inappropriate

legislation

direct governmental

profession

is promise

at this time.

designed regulation

-

The Commission structure First,

accountancy

that the self-regulatory

three objectives

the regulation

and auditing

involved

the public

with

be left exclusively because

interest,

is continually

structure

must have available

resources

necessary

accounting quality

must be firm,

timely,

its administration As noted, significant fession ever,

to meet

The first achievement

even-handed

to assure

procedures.

and one for which There

which may threaten

structure

in both

of the Section

credit.

and

and resolve

and fair

its disciplinary

substantial

factors

address

the self-regulatory

the establishment

deserves

the profession

the self-regulatory

issues needed

Third,

accomplishment

several

ability

and

which

to it the capability

to anticipate,

performance.

not

in the profession.

within

changing,

and professional

are so thoroughly

they should

to those engaged

the environment

of public

for formulation

standards

practices

to be effective.

of the practice

and the responsibility

of accounting

Second,

-

believes

must meet

because

16

was a

the proare,

how-

the Section's

these objectives. uncertainty

which may impair

is the effectiveness

the Section's

of the Public Oversight

-

Board. public

Although

any

the Board

perspective

not afforded direct

Instead,

control

authority

over

to conclude

of the profession,

formal

is not p r e p a r e d

authority will

to the Board's effectiveness.

is not responsive

--

comprised

has

The Commission

that this lack of "line"

sought

of the Section.

E x e c u t i v e Committee,

the Section.

rily be fatal the Section

members

the activities

a broad

the A I C P A has

-- nor has the Board

the S e c t i o n ' s

over

is capable of bringing

to the S e c t i o n ' s work,

the Board

of p r a c t i c i n g

1 7 -

necessa-

However,

to the Board's

if,

recommenda-

\

tions,

the C o m m i s s i o n

the s e l f - r e g u l a t o r y

will

effort

be forced should

to conclude

be m o d i f i e d

that

or termi-

nated. The competence,

commitment,

dence of the Board will an overseer sufficient at their

disposal

sibilities. plinary

and

The Board members

have adequate

to perform

their

of the program.

involved

its results.

in an open and e f f e c t i v e

indepenas

must d e v o t e

funds and staff

functions involved

Similarly,

in overseeing

Finally,

and

its e f f e c t i v e n e s s

They must be actively

process

be actively

determine

of the program. time and must

dedication

the peer

and responin the d i s c i the Board must review process

the Board must c o m m u n i c a t e

manner

with

the profession,

the

-

public

and,

Commission

of course, can,

18

-

the Commissio n so that

in turn,

fulfill its

the

own oversight

responsibilities. The AICPA has a p p a r e n t l y in filling

the Board m e m b e r s h i p

of the magnitude and,

experienced

of the r e s p o n s i b i l i t y

accordingly,

its work.

the Board

Despite

active during Another the Section

-- perhaps

this

the past

has been

fact,

in concept

is that,

while

is voluntary,

is to be successful

all accounting

firms

members joined and

will

do so.

investment

auditors selves

auditing larger

and the AICPA

sibilities.

bankers

Closely

of this program disciplinary

has been very

will

it should

adequately associated

exert

is the uncertainty

become

audit

committees

pressure

on

them,

their

respon-

the v o l u n t a r y

over

The Section's

companies.

to assure

fulfilled with

embrace

firms who have not

matter

probably

that

firms have

that

of the Section

mechanism.

m e m b e r s h i p in

it is clear

accounting

As a practical

they have

in b e g i n n i n g

publicly-owned

anticipates

to be members

that

slow

--

few months.

uncertainty

all of the

because

involved

the Board

if the program

Virtually

difficulty

aspect

the Section's

sanctioning

power

-

is still

untested,

handedness, Questions

1 9 -

a n d thus

its timeliness, •fairness,

and effectiveness

have been

disciplinary

raised

remain

to b e

concerning

-- r e g a r d l e s s o f the quality can be effective. in the Section

or revoked

to withdraw

would make

its o w n independent i n q u i r y

appeared

reality nization

could

toe make

if any.

sufficient

Committees

of the Section

is whether

the Section

and

through

sanctions

even

a

the Commission

and take whatever This practical

authority

following

the P e e r

to the orga-

should

proceed

a particular is involved

as contemplated

these

cases

f r o m the examination.

nizes

the complexities

be found

are studying

peer

audit

reviews failure,

or threatened.

presently

of this

and Executive

with d i s c i p l i n a r y

of special

The program

must

Review

and the Board

the conduct

t h o u g h litigation

some approach

--

it effective.

A c o r o l l a r y ~issue which

action,

or should

from the Section,

appropriate,

"lend"

organization

firm's m e m b e r s h i p

firm elect

action

the

of those mechanisms

However, s h o u l d a

be suspended

demonstrated.

whether

mechanlisms of a voluntary

even-

permits

excluding

The Commission

issue,

but believes

to deal with

recogthat

such situations.

-

The Commission's

20

-

support

regulatory

efforts

is premised

AICPA that

it can,

in fact,

tion.

The procedures

of the profession's on representations

institute

followed

have been challenged

suit

by certain

questions

have also been

of the anti-trust These

challenges

will evaluate need

could

of present

in the scope, statements gative tration

include

activities,

and

The Commission '

including

the

consideration

or legislation. or legislation

(i) an expansion including

an increase

and depth of its review of financial it and an expansion

with

of accountants

including

action,

forms of regulation

filed with

activities

law

of the Section.

in determining

forms of regulation

nature

in establish-

of the AICPA,

are as yet unresolved.

Commission

self'regula-

in a pending

laws to the activities

be considered

by the

as to the applicability

future developments

Alternative which

members

raised

to take appropriate

of alternative

viable

by the AICPA

ing the Section instituted

self-

a requirement

respect

of its investi-

to accountants;

practicing for peer

before review;

(ii)

regis-

the Commission, and

(iii)

the

-

creation

of a comprehensive

If the profession's fail,

then

reasons

ing an appropriate to determine

sight,

issue

rights

should

accountants

body.

self-regulation

efforts

need

to understand

the failure

alternative what

have

before

approach.

recommend-

It is difficult

that approach,

related

also been under

be expanded,

if needed,

affected

important represent

by them.

raised

and over-

as to whether

the Federal

actions

the

securities

liability

should

only one category issues,

are therefore

which

of

be limited.

issues of legislative

These

consideration,

to regulation

and whether

in such private

are broad,

separate

somewhat

of action

and accountants sons

self-regulatory

will

for

currently

questions

private

These

-

be.

As an

laws

present

the Commission

the underlying

should

21

policy,

of perare under

not addressed

in this report. Peer Review In the Commission's element proposed peer

in the AICPA's peer

review

view,

the single most

self-regulatory

review program.

is to provide

initiative

The underlying

a regular

important is the

concept

examination

of

and eval-

-

uation

of the work

publicly-held firm's work those

who

of each

clients

conforms

assume under

successful,

the peer

objectives.

First,

-

accounting

in order

responsibilities

the Federal

it must

incorporate

of quality

of the

reviewers

and of the reviewed

be structured

pendence

in fact

the c r e d i b i l i t y peer

review

tion

by both

in such

and

to promote

must

the Board

organizational,

conceptual,

key questions the program above.

which

is to meet

as to assure confidence

it

indein

Third,

open

the

to examina-

so that each

entails

and legal to date

review

must

Second,

that the e s t a b l i s h m e n t

review program

deliberations

the work

responsibilities.

recognizes

of the peer

firm.

and the Commission

peer

structure

to both

public

three

and apply mean-

be sufficiently

of a meaningful

of

To be

satisfy

review process.

its oversight

The Commission

profession's

a manner

of the p e e r

process

may discharge

control

expected

laws.

must

standards

that

of independent

securities

review program

audits

whether

standards

ingful

must

firm which

to assess

to the high

the

accountants

22

system

a host of

problems.

concerning leave open

be satisfactorily

the objectives

The

the several

resolved

articulated

if

-

First, e f f e c t i v e review process

23

-

Board oversight

reguires

of the peer

that the Board

have an

adequate iopportunity to observe

peer

field

the overall

as well

and specific sion must permit

as to review both findings.

have

adequacy.

The proposed

be accorded

While

the C o m m i s s i o n

of the peer

of the process Second, peer

fession

of

to

its

of the peer

Other

can depend on the Board's to a great degree,

for the C o m m i s s i o n

judgment

review be persons

a n d the Board's

the o b j e c t i v i t y Reliance

clearly

of the

the q u a l i t y

supervision.

is c o n s i d e r i n g

in which one accounting

of reviewing

is seeking.

to sample

supervision

to arrive

as to the adequacy

the o p p o r t u n i t y

review program

can achieve

evaluation

information.

the p r o f e s s i o n

in the position

the Commis-

access only as required by law.

not be possible

p r o g r a m without

program

that only the Board would

review process

at an independent

in the

to the process

structure

a c c e s s to certain

would

it would

access

an objective

program c o n t e m p l a t e s accorded

Correspondingly,

sufficient

it to make

reviews

whether firm

the work of another and c r e d i b i l i t y

a

is firm

the oro-

on that concept

would

-

clearly

require

be instituted.

review

the performance acceptability

issue

of utilizing

would

benefit

the resources of

the peer

review.

is to be credible

review panel

safeguards

But,

should determine

of the reviewing

firm,

reliance

final

the

take steps

the review.

review panel

on its own developed

and

by the firm engaged

Stated differently,

report

independent

ideally should

evaluation

the perfor-

be based

of the materials

in the peer review process

conducting

to

report without merely expressing

on a report prepared

to perform

if

and acceptable,

itself as to the quality of the review,

its own

mance

corresponding

Such a review process

firm in performing

firm-on-firm

satisfy

-

that certain

from the efficiencies a single

24

and the firm

the review should be limited

to a "staffing"

function. Third,

credibility

depends on affording of the process. peer

the public

The Commission

review process

cannot

degree of credibility tions"

setting

and suggestions

of the peer

access

to the results

believes

attain

that the

the desired

if the "letter of recommenda-

forth the reviewers' for

review program

improvement

recommendations

in the reviewed

firm's

-

system and the reviewed not available Finally, bitrarily

25

-

firm's

response

thereto

are

to the public. the peer

restricted

review process must

in scope.

not be ar-

Among possible

limita-

tions on the scope of reviews which have been d i s c u s s e d are the exclusion exclusion

of e n g a g e m e n t s

the reviewed may exist

of cases

in litigation

at the request

firm or its client.

for certain

limitations,

these e n g a g e m e n t s

reviewers,

under Board oversight,

on whether

they are satisfied

engagements

peer

reviews

is the extent

can

investors

and should

the same

of the audit.

outside

Where A m e r i report

they are e n t i t l e d

based

to expect,

level of p r o f e s s i o n a l i s m

in both the foreign While

ways.

on the scope of

to rely on an audit

overseas,

and judgment

in other

be encompassed.

upon work performed receive,

bearing

in those

to which work performed

should

are asked

the

reviewed

utilized

examined

important q u e s t i o n

decision

and should depend

and the p r o c e d u r e s

of the United States

rest with

that the

Another

reasons

the ultimate

should

can be a d e q u a t e l y

of either

While valid

to exclude

firm's personnel

and the

recognizing

and the d o m e s t i c

phases

that there may be legal

-

and other

outside

easily

resolved,

of engagements

early

wrote

this

study

Committee McCloy

for

some definitive regarding

in July

stated

that each problem

1978.

formed

and an

review

panel,

and those

letter,

confident

John

that

on q u e s t i o n s functions

review p a p e r s available

The Commission

the Board

that

to the E x e c u t i v e

firms, peer

Board,

indicating

In that

to be made

area entails

realize

Oversight

review p r o g r a m

can be reached

of reviewing

Nonetheless, must

peer

that he is rather

solutions

public

16, 1978

be submitted

review by the Commission."

Committee

complex

of the Public

on June

and will

of the performance

issues.

States.

this has been

of the proposed

"selection

to be made

to

as to the quality

is extremely

Chairman

action

further

the Board

the United

to consider

Williams

revisions

under

outside

issue

not be

has urged

itself

per-

is not expected.

McCloy,

Chairman

specific are

force

resolution John

to satisfy

reviews

that will

the Commission

performed

a task

by the AICPA,

to peer

of this country

this need

Although

-

difficulties unique

formed

address

26

difficult

for

recognizes

and sensitive

and the Executive

that a s e l f - r e g u l a t o r y

effort

-

which

27

-

fails

to incorporate

a system of peer

which meets

the objectives

described

the Commission

to withdraw

review

above would

its support

compel

for the profession's

program. THE ACCOUNTING

STANDARD-SETTING

PROCESS

Introduction The roles of the Financial Board

("FASB")

promulgating

and the Commission

accounting

received an increasing government question

is where

sector

with this basic questions

should

community.

initiative

accounting

whether

be governed

belongs

sector.

of the FASB

have

from both

for establish-

-- in the In connection

have raised

the timeliness,

of

The primary

standards

issue, observers

concerning

standards

amount of attention

or the public

and effectiveness standards,

the

Standards

in the process

and disclosure

and the business

ing and improving private

Accounting

other

openness,

in setting

structure

accounting

public and non-public ~companies by the same set of accounting

disclosure

standards,

how standards

to achieve

uniformity

and comparability

and

can be developed in financial

-

statements

for

similar

how accountants under more

which

facts

-

and circumstances

can determine

one particular

appropriate

28

and

the c i r c u m s t a n c e s

accounting

principle

to use than an alternative

is

accounting

principle. The Commission, No. tive

4 was

issued

since Accounting

in 1938,

for e s t a b l i s h i n g

belongs

in the private

oversight, greater

principally

resources,

emerging

accounting

and

has believed improving

of the ~rivate

its expertise, problems

in the private

Commission generally

believes has been

responsive

that

In that

satisfactory

and procedures.

role

remain

sector's to detect

stage

and

to all companies continues

for s t a n d a r d - s e t t i n g

the performance

to r e c o m m e n d a t i o n s

standards

The Commission

sector.

performance should

its ability

can be applicable

initiative

initia-

to Commission

at an earlier

or not publicly-owned.

belongs

accounting

because

whether

the

the

subject

its standards

that

that

Release

sector,

because

to believe

Series

and that

for

regard,

of the FASB it has b e e n

improvement

The C o m m i s s i o n ' s

one of oversight,

the

to ensure

in its primary that

-

the private a manner

sector

which

and harmonizes under

This

addresses

facing

it in

of self-governance

with

the Commission's

responsibilities

securities

laws,

including

the

setting

standards.

reasonably

ship

is the ability

FASB

to consider

of the FASB and the Commission well.

A part of that

of the Commission

adopting

as the Commission for the gain

the challenges

the objectives

relationship

has worked

-

meets

the Federal

of accounting

29

standards

did when

to request

the

in particular

the appropriate

or loss on early

relation-

areas,

accounting

extinguishment

of debt was

at issue. Recommendations

of the FAF Structure

In December

1976

Financial

Accounting

Structure

Committee

the Board of Trustees Foundation

to review

FASB and the Financial Council

("FASAC").

Committee opening ing

issued

all

involvement

broad

("FAF")

constituency,

established

Standards

1977,

which

of the FASB to public from all

strengthening

a

the Advisory

the Structure

its recommendations

in the FASB

of the

comprehensively

Accounting

In April

aspects

Committee

included view,

segments

increas-

of

the organization

its

-

30

-

of the FASB and accelerating planning

goals,

issuing documents

standards

in layman's

are held,

systematically

and broadening

its work pace,

language

explaining

before

reviewing

the base of FASB

have created

financial

ness

recommendations.

a greater

in the process

FASB Conceptual

action

The structural

standards.

the efforts for

of the FASB

financial

enterprises.

ious and careful

thought to the theoretical

conceptual

framework

accounting

problems

ter confronting reporting. for

increased

in financial

credence

The FASB project

the profession

statements

the most

must give

ser-

underpinnings a

emerging

important

mat-

in the area of financial

framework

would

also provide

of the

information

contained

and foster

consistency

of treat-

facts or transactions,

to financial

to

reporting

to develop

to address

is possibly

comparability

ment of similar

Accountants

from which

A conceptual

changes

and effective - ~

accounting

framework

reporting.

standards,

to implement

of profit-making

of financial

hearings

Pro~ect

supports

a conceptual

proposed

support.

of openness

of setting

Framework

The Commission establish

degree

public

existing

The FASB has taken expeditious the Committee's

establishing

reporting.

thereby

adding

-

The ment draft

FASB

is actively

of a conceptual in late

issues

that

final

to issue

forms

of supplemental

memorandum

a final

thrust

supports

reporting among

major

in 1979.

issued

a discussion

of financial

framework

of uniformity draft

reporting

to the concept

of standard

project

and comparability.

on objectives

of financial

of financial

The work product

The Commission concepts

quarter

Preferability

for comparability

adherence

goal

of chang-

in the fourth

to be adopted

of the conceptual

enterprises.

strates

alternative

organizations.

exposure

calls

with

The FASB

of the effects

the objectives

the concepts

The current

and elements

in 1978.

the FASB has recently

The Concepts of Uniformit[, and Com~a__[ra__b_~Tit~ The

It is expected

dealing

enterprises statement

concerning

for nonbusiness

be issued

disclosures

Reporting"

1978 on the measure-

objectives

draft

an exposure

of Financial

in early

will

an exposure

In addition,

It issued

concerning

on business

with

on the develop-

in such a framework.

statements

hopes

of 1978,

forward

"Objectives

statements

ing prices

moving

hearing

involved

of financial

-

framework.

1977 on

and held a public ment

31

reporting

of the FASB demon-

of comparability

as a

setting.

has traditionally

of preferability

supported

and comparability

and

the

-

currently

requires

to the Securities

a letter

from their

tants

simply

accounting

approach.

for a given

will

When

accounting

be adopted

The

Advisory

reporting

accounting Council

of FASAC,

of small

businesses process.

to its technical

shifts

cease

in

in accoun-

that

is preferable the

use of alterna-

since only one method

Standards

substantive problems

for Small steps

of small

practitioners.

to be responsive

agenda

also

to consider

businesses Business

as a permanent to the needs

and p r a c t i t i o n e r s

The FASB has

Businesses

in a d d r e s s i n g

A Small

has been established

committee

setting

changes

as the standard.

FASB has taken

and small

require-

the FASB d e t e r m i n e s

standard

of A c c o u n t i n g

financial

princi-

of an alternative

set of circumstances,

in that area will

Development

the

approval

it

discussing

in accounting

arbitrary

with

of 1934 to file

accountants

to discourage

to obtain

a particular

tives

and

Act

reports

The C o m m i s s i o n ' s

to prevent

methods

file

Exchange

of any change

are designed

accounting

which

independent

ples made by the company. ments

-

companies

pursuant

the p r e f e r a b i l i t y

32

in the

standard-

added a project establishing

-

guidelines

33

-

for distinguishing

that all enterprises that only certain

should

between

disclose

enterprises

(e.g.

information and

information

large businesses)

should disclose. The Commission the disclosure concluded rules

has also taken

problems

public

hearings

and regulations

to raise capital disclosure

reviewed should

concerning

of small

of the Federal

received ~ at these hearings to determine

It has just

the effects

and the impact on small

and analyzed

to recognize

companies.

on the ability

requirements

The comments

of small

steps

what

of its

businesses

business

of the

securities

laws.

are now being actions,

if any,

be taken.

Accounting__by Oil and Gas Producing In 1975 Congress Conservation

Act

("EPCA"),

developing

a reliable

Commission

to assure

of accounting

enacted

the Energy Policy

which,

the development

the issue of accounting

and of

required

the

and observance

for oil and gas producers.

to Congressional

the FASB undertook

for purposes

energy data base,

practices

In response

Companies

consideration

of

for oil and gas producers,

a project

to develop

financial

-

accounting December

6, 1977,

Accounting scribing engaged

standards

issued

a single

requiring

tentative

rules

and,

issuance

accounting

issued

itself

the FASB's

in proposing that

1977

by that date.

19 in December

it should

it could

the accounting

by December

practices

this

its

the Commission

reflected

be developed

to extend

whether

by

the delibera-

took action

of FAS No.

was able

to determine

1977,

to assure

the FASB promulgated

companies

costs.

of the EPCA that

it required

Commission

efforts"

essentially

comment

pre-

activities

the FASB

in July

19")

for all

followed

The Commission

the provisions

the

method

after

and on

of Financial

19 ("FAS No.

closely

which

for public

practices

With

Statement

and development

conclusions

conclusions.

unless

industry

a form of "successful

tions of the FASB

meet

this

accounting

The Commission

rules

No.

-

and gas producing

for exploration

proposed

for

Standards

in oil

34

statutory

1977

the

deadline

rely on the FASB's

determinations. In addition, 1977 ments

the Commission

to supplement prescribed

proposed

the disclosures

by the FASB with

rules

in financial

in state-

the presentation

-

of information revenue gas

reserves.

This proposal

economic

in understanding

value

production

tion of the C o m m i s s i o n ' s

conditions

-

on the present

from estimated

of current

35

information

and followed

of proved

represented

efforts

the effects

of future

oil

and

a continua-

to achieve to assist

of changing

a year-long

net

reporting

investors economic

joint

effort

i

between

the Commission

Following announced on the take

that

issues

an

of FAS NO.

it would

solicit

and,

tions.

After

ducting

extensive

19,

assessment

its staff

public

comments

hearings are now

in the process

issues

ceeding.

The

of these deliberations

proceeding unique

in the near

on this

to the oil

legislative

relationship

issuereflects and gas

requirements

distinguishable

involved

future.

of

will

The C o m m i s s i o n ' s circumstances

industry,

primarily

of the EPCA,

the FASB.

the

in this pro-

and

from the usual Commission

with

determina-

on this matter

the complex

be published

under-

and con-

analyzing

results

comment

by the EPCA,

Of the FASB's

written

public

the C o m m i s s i o n

further

as contemplated

receiving

and

industry.

issuance

independent

Commission

and the

the

is thus oversight

-

36

-

A c c o u _ n n t i n ~ Matters Related to Particular Industries a n d _ t h e A_cccountin ~ Standards Executive Committee

The Commission current

technical

priority

and have

to address

other

recognizes

agenda

that

an impact issues.

on the resources

The Commission

in most

respects

work

product

of the FASB during

that

resources

to particular associated

mechanism

this

accounting

principal

function,

("SOPs")

concerning

in specialized recommendations judgment

areas

and the

available

agenda year,

satis-

and but

notes

for the d e v e l o p m e n t matters

basis.

unique

Closely

of the AICPA

standards.

reporting issuance

to the FAS8,

has,

and

SOP's

and represent

profession

the

respect

of Statements

accounting

("AcSEC")

AcSEC,

matters,

industries.

of the accounting

a high

has been

of the AICPA with

financial or

on the

is the role of the A c c o u n t -

Committee

committee

financial

available

on a timely

of accounting

technical

the past

for addressing

issue

Executive

in the setting senior

the technical

have not been

with

ing Standards

with

industries

issues

of the FASB all have

fied

of an effective

the

as

to its

of Position

reporting

are

issued

as

the c o n s i d e r e d

as to the pre-

-

ferable method particular

a significant

required

increase

and

in

increase

being devoted

framework.

FASB undertakes

a program

set forth

steps

that there

forces

of the private of financial

Until

unless

action.

in its task

its staff

such

in this area,

has taken other to ensure

since

the

are c u r r e n t l y

time as the accounting

considered

to be

the FASB or the C o m m i s s i o n

Therefore,

AcSEC ~ should

is adequate

and s u b c o m m i t t e e s

sector

research

might not be readily available

in SOPs will b e

accounting,

staff

require

issues such as the e s t a b l i s h m e n t

of a conceptual

preferable

in its own

of the FASB and

to broader

for dealing

probably would

in the use of outside

industry expertise

and the efforts

take

representation

from all e l e m e n t s

including preparers

and users

statements.

It is n e c e s s a r y accepted

issues

by the FASB of a m e c h a n i s m

industry matters

and some

practices

on narrow

industries.

particular

resources

-

of accounting

Establishment with

37

accounting

circumstances and particular

to be realistic alternatives

concerning industries

for

particular

as to how q u i c k l y similar

facts a n d

accounting

can be eliminated.

matters Establish-

-

ment of a framework to all a

industries

long-run

setting

38

-

of accounting

is a project

objective,

bodies must

of major

it is a goal

strive

framework

is established,

[eporting

practices

interim

applicable

proportions.

that

Until

refinements continue

STANDARD-SETTING

As

the standard-

to achieve.

are and will

THE AUDITING

standards

such a to current

to be necessary.

PROCESS

Introduction One of the most auditor the

important

professionalism

issuance

Auditors'

culminated

of the final

final

report

included

and recommendations

accountability

and the audit

the

bility

identified

for particular

matters

generally

in the Cohen Commission

Commission

1978,

function.

a broad

in

recommendations

The range

The AICPA has virtually

committees raised

on

at improving

by the Cohen Commission

or newly established

The Commission tions

aimed

to that report by assigning

issues

existing

in March

("Cohen Commission").

of conclusions

responded

regarding

report of the Commission

Responsibilities

Cohen Commission's

initiatives

with

all of

to various responsi-

in the report.

endorses

the recommenda-

report.

A few of the Cohen

have already

been

addressed

-

by the profession, implemented

others

and still

consideration.

to the Auditing

for most

other

particular

been

satisfied

on whether matters,

with

by Clients",

of Errors

sector

ing standards example,

with

standards

(which were evenadequately

authorized

Responsibility

or Irregularities",

Series

has

to AudSEC on such

Auditor's

and procedures

has

of that

the Commission

Report

"Illegal

When There

the Commission

role where

at times

the Commission

Acts

Are

that

appropriate

in a timely manner. Release No.

for

has

it believed

was not developing

in Accounting

traditional

Although

AudSEC dealt

In addition,

its oversight

the private

matters. ~

and the "Auditor's

Contingencies". exercised

("AudSEC"),

in general,

m a t t e r s as "The Independent the Detection

Committee

auditing

of comment

satisfactory. principally

the final work product

of letters

of

fallen

committee

years,

to being

stages

has been

has

Executive

auditing

way

in the early

to date

technical

In recent

issuance

are

on their

has had d i s a g r e e m e n t s

with

the

Standards

resolved)

committee.

others

for establishing

the Commission tually

are w e l l

of these issues

senior

responsiDility and

-

Theprogress

Consideration

the AICPA's

39

177,

the

auditFor

-

Commission

indicated

rules relating followed

40

-

its intention

to standards

by independent

interim

financial

adopted

acceptable

fied date. concerning financial

to finalize

and procedures

accountants

to be

in the review of

data unless the accounting

AudSEC

rules of its own prior subsequently

the involvement data closely

proposed

profession

to a speci-

adopted procedures

of auditors with

paralleling

interim

those proposed

by the Commission. Assessment

of Structure of AudSEC

One of the principal Cohen Commission itself.

related

In response

issues

identified

to the structure of AudSEC

to the recommendations

C o m m i s s i o n and the concerns of various AICPA formed

a special

recommendations

recommendations modifications,

to evaluate

the AICPA Council

but rejected

committee,

the proposal

that a full-time

of the Cohen

persons,

the structure

of the special

Cohen Commission established.

committee

concerning

At its May 1978 meeting

by the

the

and p r o p o s e

of AudSEC. adopted

the

with certain of the

paid body be

-

The

special c o m m i t t e e

be reduced

to fifteen

to any AICPA member, in auditing

inclusion

public

that

which would

hearings,

from outside does

not necessarily

sion

to reject a full-time

enough with

the newly

the enhanced

standards

staffed

supported

board

of persons

the Commission

the committee's their

structure

to

and lend en-

reasons

appears

necessary to Provide

need

for

an annual

involvement

board,

adopted

provide

issue

Although

objectivity

board will

forces

process

agree with

of the attributes

be desighated

the Commission

the

the profession.

engaged

of AudSEC.

appropriately

through

be open

and that an advisory

the standard-setting

credibility

and

task

on the activities

full-time,

streamline

merit

or not currently

of non-AICPA members;

At the Metcalf

that AudSEC

that membership

that one member

director;

report

hanced

recommended

whether

be established

a small,

-

members;

practice;

as a research

council

41

it needs.

concluhave

to have the process

The new auditing

to demonstrate

that

it can perform

effectively. The Foreign

Corrupt

On December Act was

signed

19,

into

Practices 1977, law,

Act of 1977

the Foreign

and

Corrupt

its requirements

Practices became

-

effective panies with

upon

signing.

from engaging

respect

Section

to require

of t h e

reporting

books and records

officials,

Securities companies

accounting

Commission

is likely

accounting

the provisions

the Act amends

Exchange Act of 1934 to make

and keep accurate

and maintain

a

controls which meet

to require,

controls

of the Act.

set out

opinion

independent

accounting

in the Act,

from the issuer's

representation

to the Commission's

to such reports.

controls meets

together

or through

independent

has formed a task force

with

that the

public accountant

representation

to management's

is in compliance

from management

the objectives

management's

filed with

This could be accomplished

issuer's system of internal

of the

in reports

the

that an issuer's system of

t~rough a representation

addition

practices

rules have not yet been proposed,

it, a representation

similar

com-

objectives.

Although

internal

in certain corrupt

and to establish

system of internal certain

-

Along with prohibiting

to foreign

13(b)

42

public

as to

an opinion, described

accountant.

considerations,

to study the

with an

above, In

the AICPA

issues related

-

It can be expected will

look

to their

concerning

their

systems of

such

objective

systems.

Although

of such criteria the

issuer

of the Act.

supplement

Act.

These

rules,

for any person

with

statements. proposals manner

best

to m e a s u r e

the requirement

compliance

that

are expected

with

the o b j e c t i v e s

is m o n i t o r i n g

these efforts.

has pending

rule p r o p o s a l s

certain of the provisions

director,

would make

predate

books

and

of corporate to act on

the Act's

in

financial

the Act's enactment

to furthering

records

of a

an accountant

intends

of the

it unlaw-

or shareholder

to mislead

The C o m m i s s i o n

suited

auditors,

or n o n - e x i s t e n c e

the criteria

his examination

-- which

internal

to falsify corporate

company

control.

consisting

against which

the Act,

if adopted,

and for any officer, publicly-owned

and

issuers

for g u i d a n c e

accounting

the existence

the Commission

would

connection

criteria

The C o m m i s s i o n

which

ful

internal

executives

in assuring

Finally,

accountants

does not affect

comply with

to be helpful

of many

an advisory committee,

of financial

to recommend

that managements

independent

The AICPA has formed primarily

43 -

its rule -- in the

objectives.

-

44

-

CONCLUSION

The C o m m i s s i o n the past year tunity

has been

regulation to reach future

legislation

legislation.

tiative

be required.

it will,

legislation

in a g e n e r a l l y

in the r e g u l a t o r y

dence

the structure,

system.

in t h e

hand,

self-

topossible

alternative

direct would

ini-

may

the p r o f e s s i o n ' s

be given

as we

to any need

a more

for

adequate

or to confirm

its p l a c e ~

time,

however,

g o v e r n m e n t a l ~r e g u l a t i o n afford t h e

or a more meaningful

work of public

responsi-

the p r o f e s s i o n ' s

We are not at this

or a c c o u n t a n t s

protection

respect

of providing

that c o m p r e h e n s i v e

of accounting increased

for

cannot

satisfactory manner/

should

the purpose

foundation

convinced

If, on the other

oppor-

It is too early

a legislative

consideration

for

with

during

at self-

or control

time.

for example,

is not successful,

program develops

legal

at this

continued

its efforts

the C o m m i s s i o n

conclusions If,

to merit

to supersede

of a c c o u n t a n t s

any d e f i n i t e

that the p r o g r e s s

to pursue

Consequently,

bly recommend

hope

sufficient

for the p r o f e s s i o n

regulation.

well

has concluded

accountants.

public

basis

ei£her

for confi-

-

The Commissioh

legislation

statutory

Although,

forth herein,

the Commission

on the bill. matter, ensure

that Congress its technical

possible

legislation

with

methods. Commission

the enactment

it will provide

comments

of the subject

responsibility

the Commission

profession

proposed

program,

to define

to

range any

As described

has worked the objectives

to assure

implementation

that the

is consistent

and t o s u g g e s t

the objectives without

ways

in which

imposing

specific

in the staff report,

has monitored

the profession's

in this area closely.

In addition,

has been active during

the past year

the profession's

set

in this area.

with those objectives, to achieve

for

and policy views concerning

of the self-regulatory profession's

support

has a special

the past year,

the accounting

scheme

has the benefit of the full

of both

During

cannot

of the importance

the Commission

create

based on the conclusions

at this time,

Because

Moss very

which would

self-regulatory

accountants.

of such legislation

-

is aware that Congressman

recently has introduced a comprehensive,

45

initiatives

the

efforts

the Commission in overseeing

concerning

the

indepen-

-

dence

of auditors

and

46

-

the accounting

standard-setting

processes.

does

that ~ it is necessary

not believe

all of

its i n i t i a t i v e s ,

maintaining

committees,

tors,

and the work

Commission

its views effort

scope

and

that

and

concerning

the profession

this

in such areas

performed

the profession

deserved,

insights

on which

in

where

in general,

is not

The

necessary, has offered

the s e l f - r e g u l a t i o n

has embarked.

h o w e v e r , that accountants

report

as

by audi-

of the FASB and of the AICPA.

it when

It is crucial, stand

of services

to catalogue

instrumental

for Progress

has criticized

complimented

the Commission

it has been

the m o m e n t u m

audit

While

and auditing

in any sense

under-

the termi-

\

nation

of the process

committee, have

Congressman

directed

the process

begun

by Senator

Moss'

attention

Subcommittee,

to the profession.

of d e m o n s t r a t i n g should

rity

to regulate

profession,

still

confidence

(iii)

maintain

in their

control

the p r o f e s s i o n ' s

over

members

(ii) ensure

the quality

and discipline

who

On the contrary, themselves

(i) r e t a i n primary

professionalism

Sub-

and others

that accountants

r a t h e r than government their

Metcalf's

autho-

and

in,

and objectivity,

of the work t h o s e who

of

fail

-

to adhere accounting demand

erally

-

to its standards, and auditing

the profession's

for many years mission

47

to come.

and

(iv) formulate

standards,

is one which will

and the Commission's If the profession

lose sight of these objectives, and accountants

run, be the losers.

specifically

appropriate

commitment

or the Com-

the public

will,

gen-

in the long