The accounting establishment

MISSING IMAGE

Material Information

Title:
The accounting establishment
Physical Description:
Book
Creator:
United States -- Congress. -- Senate. -- Committee on Government Operations. -- Subcommittee on Reports, Accounting, and Management
Publisher:
U.S. Govt. Print. Off. ( Washington )
Publication Date:

Record Information

Rights Management:
All applicable rights reserved by the source institution and holding location.
Resource Identifier:
aleph - 20416728
oclc - 2764654
System ID:
AA00022191:00001

Table of Contents
    Front Cover
        Front Cover 1
        Front Cover 2
    Title Page
        Page i
        Page ii
    Letter of transmittal
        Page iii
        Page iv
        Page v
        Page vi
    Glossary
        Page vii
        Page viii
    Table of Contents
        Page ix
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    Summary
        Page 1
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    Chapter I. The "big eight" accounting firms
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    Chapter II. Organization of the American Institute of Certified Public Accountants (AICPA)
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    Chapter III. Influence of the "big eight" accounting firms in the AICPA
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    Chapter IV. Activities of the AICPA
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    Chapter V. The Financial Accounting Standards Board (FASB) and related organization
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    Chapter VI. Influence of the AICPA and the "big eight" accounting firms on the FASB
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    Chapter VII. Influence of the other private sponsoring groups on the FASB
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    Chapter VIII. Activities of the FASB
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    Chapter IX. Accounting responsibilities of the Securities and Exchange Commission
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    Chapter X. The Cost Accounting Standards Board (CASB)
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    Chapter XI. Examples of the need for accounting and auditing reforms
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    Appendix A. Questionnaire to "big eight" accounting firms and responses
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    Appendix B. NYSE and AMSE clients of the "big eight" accounting firms: Summary financial and employment data
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    Appendix C. "Big eight" firms' testimony and presentations before congress, state legislatures and regulatory commissions
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    Appendix D. Compensation of principal executives and number of women and black partners in "big eight" firms
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    Appendix E. The American Institute of Certified Public Accountants
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    Appendix F. The National Association of State Boards of Accountancy
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    Appendix G. Other financial accounting standards board sponsors
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    Appendix H. Financial Accounting Standards Board
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    Appendix I. Securities and Exchange Commission
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    Appendix J. Cost Accounting Standards Board, General Accounting Office and Internal Revenue Service
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    Appendix K. Miscellaneous
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    Back Cover
        Back Cover 1
        Back Cover 2
Full Text












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94th Congress \ COMMITTEE PRINT
2d Session J


THE ACCOUNTING ESTABLISHMENT


A STAFF STUDY




PREIPAREDIi) BY TlE

SUBCOMMITTEE ON REPORTS, ACCOUNTIN(-
AND MANAGEMENT

OF TIHE

COMMITTEE ON GOVERNMENT OPERATIONS

UNITED STATES SENATE


DECEMBER 1970





Printed for the use of the committeete ion Governmenit (opernitimons


U.S. GOVERNMENT PRINTING OFFICE


67-159 0


WASHINGTON : 11171


For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402 Price $12


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COMMITTEE ON GOVERNMENT OPERATIONS


ABRAHAM RIBICOFF, Connecticut, Chairman
JOHN L. McCLELLAN, Arkansas CHARLES H. PERCY, Illinois
HENRY Mf. JACKSON, Washington JACOB K. JAVITS, New York
EDMUND S. MUSKIE, Maine WILLIAM V. ROTH, JR., Delaware
LEE METCA LF, Montana BILL BROCK, Tennessee
JAMEES B. ALLEN, Alabama LOWELL P. WEICKER, JR., Connecticut
LAWTON CHILES, Florida
SAM NUNN, Georgia
JOHN GLENN, Ohio


RICHARD A. WEGMAN, Chief Counsel and Staff Director
PAUL HOFF, Counsel
ELI E. NOBLEMAN, Counsel
DAVID R. SCHAEFER, Counsel
MATTHEW SC(IN E IIIEK. Counsel
FRED ASSELIN, Investigator
ELLEN S. MILLER, Professional Staff Member
JOHN B. CHILDERS, Chief Counsel to the Minority
BRIAN CONBOY, Special Counsel to the Minority
MARILYN A. HARRIS, Chief Clerk
ELIZABETH A. BREAST, Assistant Chief Clerk
HAROLD C. ANDERSON, Staff Editor



S B(('MMITTEE ON REPORTS, ACCOUNTING AND MANAGEMENT
LEE METCALF, Montana, Chairman


JOHN L. McCLELLAN, Arkansas
EDMUND S. MUSKIE, Maine
SAM NUNN, Georght
JOHN GLENN, Ohio


BILL BROCK, Tennessee
CHARLES H. PERCY, Illinois
LOWELL P. WEICKER, JR., Conneetthnit


VIc REINEMER, Staff Director
E. WINSLOW TURNER, Chief Counsel
JOHN B. CHESSON, Counsel
GERALD STURGES, Profecsionll Staff Member
LYLE RYTER, Minority Couise
JAM ES GEORGE, Professional Staff Member
JEANNE A. MCNAUGHTON, Chief Clerk
ANNE BONI, Assistant Chief Clerk
JANE WOODS, Editor
PETER INTERIM AGGIO, Research Assistant


(Ih)




















ABRAHAM RINCOFF, COMM., CHAIRMAN SUBCOMMtITTEE
JOHN L MC CLELLAN. ARK. CHARLES H. PERCY. IU- LEE METCAtLF. MONTH CHAIRMAN
HENRY M. JACKSON. WASH. JACOB K. JAVITS, N.Y. JOHN L_ MCCLELLA, ARK. BILL BROCK. TEN.
EDMUND S. MUSKIE, MAINE WILLUAM V. OTH". JR., DIL. EDMUND MUSK1IE. MAINE CHARLES H. PERCY. ILL.
LEE METCALF, MONT. DILL BROCK. TEMN. SAM 14N. GA. LOWELL P. WeIC(R. JR.. COP.
JAMES B. ALLEN., ALA. LOWELL P. WEICKR, JR., CONK. JOHN OLGNl. OHIO
LAWTON CHILES, FLA.
SAM NJN, GA. VIC RNEMER. STAFF DIRECTOR
JOHN GLENN. OHIO E. WNSW TURNER. CHIEF COUNSEL
RICHARD A. WEGMAN 161 RUSSELL BUILDING
CHIEF OINS AND STAFF DIRECT Xn b ae nate (202) 224-1474
COMMITTEE ON
GOVERNMENT OPERATIONS
SUBCOMMITTEE ON REPORTS,
ACCOUNTING. AND MANAGEMENT
(PURSUANT TO SEC 7. RES. 3O. WTH CONGRESS)
WASHINGTON. D.C. 20510

7 December 1976






The Honorable Abraham Ribicoff
Chairman
Senate Government Operations Committee
Washington, D.C. 20510

Dear Chairman Ribicoff:

Late last year, this subcommittee began a study of the
Federal government's role in establishing accounting practices
which are used by publicly-owned corporations in reporting
financial and other information to the public. The study
was precipitated by continual revelations of previously un-
reported wrongdoing by major corporations, as well as a series
of corporate failures and financial difficulties which have
come to light in recent years. In many cases, the problems
which occurred were caused or aggravated by the use of accounting
practices that failed to reflect accurately the substance of
corporate business activities.

Congress and the public have a very real interest in
assuring that information reported by corporations is both
meaningful and accurate. Accounting practices are instrumental
in achieving that result because they control the manner in
which corporate financial information is presented and checked
for accuracy. Corporations presently have substantial dis-
cretion in choosing among alternative accounting standards
to report similar business transactions. As a result, the
amounts of earnings or losses reported to the public can vary
drastically depending on which accounting alternatives are
chosen.

Congress recognized the importance of accounting practices
to achieving meaningful corporate disclosure in the Federal
securities laws which were enacted more than 40 years ago.


(III)






(IV)


The Honorable Abraham Ribicoff
Page Two


The Securities and Exchange Commission was given broad authority
to establish accounting practices as part of its mandate to
protect the public from false and misleading information re-
garding the activities of publicly-owned corporations. The
SEC's failure to exercise its authority on accounting matters
has led to many of the problems which have caused a serious
erosion of public confidence in the accuracy and usefulness
of information reported by corporations.

I am transmitting to you the completed study by the
subcommittee staff, which is entitled "The Accounting
Establishment" after an apt characterization by the chairman
of the Financial Accounting Standards Board. The major pur-
pose of this study is to provide Congress and the public with
an understanding of the various private organizations and
Federal agencies involved in establishing and administering
accounting practices which have substantial impact on Federal
policies and programs, as well as private economic decisions.

In the course of preparing this study, the subcommittee
found it necessary to request certain information directly
from the organizations and agencies involved in establishing
accounting practices because relevant factual data was not
readily available to Congress and the public. Thus, the
study and its appendices provide a useful and convenient re-
ference concerning the identities and activities of those
organizations and agencies comprising the accounting establish-
ment. Such a comprehensive reference on this important area
of public policy and controversy is long overdue.

I believe the findings of this study should be of con-
cern to every Member of Congress who believes that the suc-
cess of our competitive economy depends upon the free flow
of accurate and meaningful information regarding the activities
of its major participants -- the publicly-owned corporations
which provide much of the Nation's goods and services. Congress
has established as a national policy that a proper role for
the Federal government should be to ensure the free flow of
such information, but that goal has not been adequately ful-
filled. This study explains some of the primary reasons
why adequate corporate disclosure has not been achieved.






(V)

The Honorable Abraham Ribicoff
Page Three

In particular, I am disturbed by two of the study's
major findings. The first is the extraordinary manner in
which the SEC has insisted upon delegating its public authority
and responsibilities on accounting matters to private groups
with obvious self-interests in the resolution of such
matters. The second is the alarming lack of independence
and lack of dedication to public protection shown by the
large accounting firms which perform the key function of in-
dependently certifying the financial information reported by
major corporations to the public.

Based upon its analysis of all the information reviewed
during the course of this study, the subcommittee staff has
prepared several recommendations which are designed to restore
public confidence in the integrity and usefulness of corporate
financial reports, and help fulfill the intent of the Federal
securities laws. I believe those recommendations serve as
sound guidelines for action by Congress to achieve necessary
reforms of accounting practices. I also note that this study
and its recommendations complement the work being done by other
committees within the House and Senate on regulatory reform
and corporate disclosure.

Interest in this subcommittee's work by the accounting
profession, the business community, the academic community,
and Federal agencies concerned with accounting matters indicates
there will be widespread interest in this study outside of
Congress. Therefore, I ask that the study be issued as a
committee print.

The voluntary cooperation of the major accounting firms,
private accounting and business organizations, and Federal
agencies which provided information to the subcommittee is
appreciated.


yours,



















Digitized by the Internet Archive
in 2013













http://archive.org/details/accstabl00unit










GLOSSARY


Accountant.-An accountant is a qualified person who performs
auditing and accounting services. Accountant is generally used as a
synonym for CPA in this study.
Accounting and Accounting Standards.-Accounting involves the
principles and practice of systematically recording, interpreting, and
presenting financial information. Accounting standards are the prin-
ciples or methods that govern the manner in which financial informa-
tion may be presented.
Accounting Series Release.-Accounting series releases are policy
statements and administrative actions on accounting matters which
are issued by the SEC.
American Accounting Association.-The American Accountfng As-
sociation is a professional organization which primarily represents
the interests of academic accountants. It is one of the private groups
sponsoring the FASB.
Aud;ting anud Auditing Standards.-Auditing involves the periodic
examination of financial statements and checking of business records
to verify their accuracy. Auditing standards govern the manner in
which audits should be conducted.
AICPA.-AICPA is the abbreviation for American I:lstitute of
Certified Public Accountants, the largest professional association of
CPAs. The AICPA is one of the private groups sponsoring the
FASB.
CASB.-CASB is the abbreviation for Cost Accounting Standards
Board, a Federal board established to promulgate cost accounting
standards for use by contractors with the Federal Government.
Cost Accom ntng Stan dards.-Cost accounting standards are used
to measure and allocate costs under contracts.
CPA.-CPA is the abbreviation for certified public accountant.
Such accountants are certified by State examining boarb, as having
met the requirements of State laws regarding certain qualifi,'.tions
to practice accounting. CPAs may serve as independent auditors for
publicly-owned corporations.
"Creaticc Account;vqq".-The term "creative accounting" is widely
used to describe accepted accounting techniques which permit busi-
nesses to report financial results that may not accurately port ry the
substance of their business activities.
FAF.-FAF is the abbreviation for the Financial Accomutitl"
Foundation, which is the non-profit corporation forimeil to o-.perate
the FASB organization.
FASAC.-FASAC is the abbreviation for the Finanvial Accouit-
ing Standards Advisoriy Council, a part of- the FASB organ ization
intendpd to provide outside advice to the FASB.
FASB.-FASB is the abbreviation for the Financial .Accounting
Standards Board, which is the private body ci'eated to V.stablish
accounting standards.
(VII)





VIII


Financial Accoun t;ig Standards.-Financial accounting standards
govern the pie-entation of financial information by publicly-owned
corporations -and other businesses to investors, creditors, and the
public.
Financial Analysts Federation.-The Financial Analysts Federa-
tion is a professional association of securities analysts. It is one of the
private groups sponsoring the FASB.
Financial Execpf .'ces Institute.-The Financial Executives Insti-
tute is an org nization that promotes corporate business interests. It is
one of the private groups sponsoring the FASB.
GAAP.-GAAP is the abbreviation for generally accepted account-
ing principles, which comprise the collection of accounting standards
pie-r -ntly available for use in reporting financial information of pub-
licly-owned corporations and other busine.Ses.
GAAS.-GAAS is the abbreviation for generally accepted auditing
standard -;, which are the standards presently used to guide independent
auditors in checking the business records of publicly-owned corpora-
tions and other businesses for accuracy and consistency.
independent Auditor.-Independent auditor, as used in this study,
is the dlesignation for a CPA or other qualified accountant who inde-
pendently certifies the accuracy of corporate financial information
under the provisions of the Federal securities laws. When acting as
the independent auditor of a publicly-owned corporation, an account-
ant has public responsibilities and must satisfy requirements of the
Federal Government regarding performance of those responsibilities.
NASBA.-NASBA is the abbreviation for National Association of
State oBards of Accountancy, an organization purporting to represent
State boards which l license CPAs.
National Association of Accountants.-The National Association of
Accountants is an organization representing businessmp-n and account-
ants. It is one of the private groups sponsoring the FASB.
Pa rtvncr)s.-Becaiu- most accounting firms are organized as business
partnerships, partners in such firms are responsible for the firms' ac-
tivities and receive a share of the firms' profits.
Principals .-"Principals" are persons associated with accounting
firms who are not CPAs, but provide senior level expertise in the per-
formance of non-accounting services such as management advisory
services. Responsibilities and financial remuneration of "principals"
are generally comparable to those of partners with similar authority.
Practice of Accounting.-Practitioners or practicing accountants
are tho,e who provide professional services to clients on a fee basis, as
distinguished from accountants who are employed by businesses, gov-
ernments, or as academics.
Pub ;Iiy-Owned Corporations.-As used in this study, publicly-
owned corporations are those required to report information under the
Federal securities laws. Such corporations generally have publicly
traded securities and diversified ownership, and comprise the vast
majority of the Nation's sizable corporations.
8EYC.-SEC is the abbreviation for Securities and Exchange Com-
mnission, the Federal agency charged with admin iistration and enforce-
ment of the Federal securities laws.











CONTENTS

Page
Letter of Transmittal----------- --------------------------------- III
Glossary--------------------------------------------------------- V II
Summary--------------------------------------------------------- 1
The "Big Eight" Accounting Firms ------------------------------- 4
The American Institute of Certified Public Accountants ------------ 9
The Financial Accounting Foundation- -------------------------- 13
The Financial Accounting Standards Board- ---------------------- 15
The Securities and Exchange Commission ----------------------- 17
The "Big Eight" Accounting Firms and Their Corporate Clients ------ 19
Recommendations--------------------------------------------- 20
Chapter I. The "Big Eight" accounting firms-------------------------25
Introduction-------------------- ----------------------------25
Subcommittee requests for information ------------------------- 27
Other information on the "Big Eight" accounting firms ------29
Size of the "Big Eight" accounting firms------- ----------29
Services offered by the "Big Eight" accounting firms ----- 32
Auditing and accounting services ------------------33
Tax services-------- ------------------------------33
Management advisory services --------------------------- 34
Concentration of major corporate clients among the "Big Eight"
accounting firms ------- --- ------------------- 35
CRS methodology------------------------------- 36
Powers and responsibilities of independent auditors ----- 37
CRS findings ------------ --------------38
Effects of concentration -------------------43
Profitability of the "Big Eight" accounting firms ------- 46
Independence of the "Big Eight" accounting firms-------_ 48
Management advisory services ----------------50
Tax services----------------------------------------------- 52
Representation of clients' interests--- -----------------52
Illustrative questionable activities of individual "Big Eight" accoant-
ing firms- --- -- ------------------- 54
Arthur Andersen & Co------------------------------------- 55
Arthur Young& Co--------------------------------- 57
Coopers & Lybrand---------------------------------------59
Ernst & Ernst---------------- --------- 60
Haskins & Sells---__ -- ------------------- 61
Peat, Marwick, Mitchell & Co ---------------62
Price Waterhouse & Co ----------- ------------- 63
Touche Ross & Co------------------------------------- 64
Influence of the "Big Eight" accounting firms on Federal, State, and
local governments --------------------- 64
Quality of practice by "Big Eight" accounting firms---------------- 67
Chapter II. Organization of the American Institute of Certified Public
Accountants (AICPA) --------------------------- 70
Introduction----------------------------------------------- 70
Council-- -----------------------------71
Officers.----------------------------- 73
Elected members-- ------------------- 74
Members at large ------------------------------------ 75
Board of directors. -- ---------------- 75
Past presidents and board chairmen ----------------------76
Designated State representatives---------------------------- 76
(IX)






Chapter II-Continued ?age
Nominations Committee--------------------------------------- 77
Board of directors- --------- -------77
Committees and boards- -----------------78
Senior committees----------------------79
Accounting Standards Executive Committee--- ,..-...- 79
Auditing Standards Executive Committee --------------... 79
Board of Examiners--------------------------- -------- 79
Federal Taxation Executive Committee- ----------------- 80
Management Advisory Se-rvices Executive Committee ------ 80
Practice Review Committee---------------------------- 80
Continuing Professional Education Executive Committee-- 81
Professional Ethics Executive Committee-- -----------81
S-nior technical committees--------------------------------- 81
Joint Trial Board and other permanent committees---_----__-_ 81
Joint Trial Board------------------------------------- 82
Advisory committees--------------------------------------- 83
Chapter III. Influence of the "Big Eight" accounting firms in the AICPA_ 85
Int nr duction-------------------------------------------------- 85
Nominations Committee --------------------------------------- 87
Board of directors --------------------------------------------- 87
Committ: -------------------------------------------- ------87
Senior technical committees --------------------------------- 88
Accounting Standards Executive Committee-------------- 89
Auditing Standards Executive Committee---------------- 90
Federal Taxation Executive Committee------------------ 92
Management Advi-ory Services Executive Committee------ 92
Professional Ethic- Executive Committee----------------- 93
AICPA committees involved with the Federal Government--------- 94
Cost Accounting Standards Board Committee----------------- 94
Federal Government Executive Committee ------------------- 95
Federal Taxation Executive Committee ---------------------- 96
SEC Regulations Committee-------------------------------- 97
Other major AICPA committees --------------------------------- 97
Advi- rv committees- ------------------------------------------ 99
Summary- ---------------------------------------------------- 99
Chapter IV. Activities of the AICPA -- -------- ---101
Introduction--------------------------------------------- 101
Political program----------------------------------------------103
Influencing Federal tax policy----------------------------------- 106
Other congressional lobbyi ng 107
Other congressional lobbving-------------------------------------107
Liaison with the Cost Accounting Standard-, Board---------------- 109
Liaison with the Securities and Exchange Commission-------------- 111
Self regulation---------------------------------114
The "materiality" stanridard--------------------------------- 117
Study comnmisions-- -__ --- --------------------118
The Cohen commission------------------------------------- 119
Accounting Re-earch Association-------------------------------- 120
FASB advocate ----------------------------------------121
Mlanagemrnent advisory .rvice-------------------------------- 122
Periodicals and publications- ----------------------------------- 122
Uniform CPA examination --- -- ---------------- 122
National Association of State Boards of Accountancy-------------- 122
Professional ethics enforcement------------------------------- 125
Public spokesman ------------------------------------ 126
Summary-- ------_-_------ ------- --------------129
Chapter V. The Financial Accounting Standards Board (FASB) and
r(lat,'d crgalizatin--- ------------------------------130
Introduction- ..------..--.--- ------------------- 130
Evolution of standard-etting-- -------------------131
The SEC's "substantial authoritative support" test---------------- 134
Oruanrizational structure ---------------------------------------- 135
Financial Accounting Foundation (FAF)--- ------------------ 138
Financial Accounting Standards Board (FASB)------------------- 142
Financial Accounting Standards Advisory Council (FASAC)-------- 146
Policies to prevent conflicts of interest on the FASB--------------- 147
"Material" investments- -----------------------------------151








Chapter VI. Influence of the AICPA and the "Big Eight" accounting Page
firms on the FASB-------------------------153
Money--------------------------------------------------- 153
Personnel------------------------------------------------- 155
Organizational support---------------------------------------156
Summary------------------------------------------------- 157
Chapter VII. Influence of the other private sponsoring groups on the
FASB------------------ ---------158
Financial Executives Institute- ----------------- 159
National Association of Accountants---------------------------- 161
American Accounting Association------------------------- 162
Financial Analysts Federation-------------- ----------- 164
Chapter VIII. Activities of the FASB --------------- 165
Private meetings--------------------------------------------165
Public statements--------------------------------------- 167
Lobbying------------------------------------------------- 168
Accounting standards--------------------------------- 170
Chapter IX. Accounting responsibilities of the Securities and Exchange
Commission------------------------------------------------- 173
Authority and responsibility-------------- ---173
Accounting Series Release 150------------------------ 176
Adverse effects---------------------------------------------178
Relationship with the AICPA and the FASB_ ---------179
Enforcement of professional standards---------------- ----- 180
"Hochfelder" decision-------------------- 182
Chapter X. The Cost Accounting Standards Board (CASB) ------------ 184
Organization and resources---------------- -- --184
Relationship with the FASB and its sponsors ----------------- 185
Standards------------------------------- 186
Chapter XI. Examples of the need for accounting and auditing reforms_- 188
"Creative accounting" ---------------------------------------- 188

APPENDIX A-QUESTIONNAIRE TO "BIG EIGHT"
ACCOUNTING FIRMS AND RESPONSES
Letter and questionnaire from Senator Metcalf to managing partners of
"Big Eight" accounting firms, December 19, 1975------------------- 191
ARTHUR ANDERSEN & CO.
Letter and enclosure from Harvey Kapnick, managing partner, Arthur
Andersen & Co., January 7, 1976------- -----------------196
Excerpt from Arthur Andersen & Co.'s August 31, 1975 "Annual Report to
our Worldwide Organization"----------------------200
Letter and enclosure from G. E. Stanton, vice chairman-administration,
Arthur Andersen & Co., January 29, 1976 -------------------208
ARTHUR YOUNG & CO.
Letter and enclosure from William S. Kanaga, managing partner, Arthur
Young & Co., February 20, 1976--------------------232
COOPERS & LYBRAND
Letter from Philip L. Defliese, managing partner, Coopers & Lybrand,
January 13, 1976--- -----------------------254
Letter from Senator Metcalf to Mr. Defliese, January 20, 1976---------- 256
Letter and enclosure from Mr. Defliese, February 19, 1976-------------- 258
Letter from Senator Metcalf to Mr. Defliese, March 1, 1976------------ 288
Letter from Mr. Defliese to Senator Metcalf, March 26, 1976--------- 289
ERNST & ERNST
Letter and enclosure from R. T. Baker, managing partner, Ernst & Ernst,
February 12, 1976----------------------------290






XII


HASKINS & SELLS
Letter and enclosure from Michael N. Chetkovich, managing partner, 'Page
Haskins & Sells, February 17, 1976-------------------------- 305
PEAT, MARWICK, MITCHELL & CO.
Letter and enclosure from Walter E. Hanson, senior partner, Peat, Mar-
wick, Mitchell & Co., January 23, 1976 -------------324
Letter from Senator Metcalf requesting clarification of January 23 letter
and enclosure, January 30, 1976- -------------------------------- 335
Response from Mr. Hanson, March 8, 1976--------------------------- 337
PRICE WATERHOUSE & CO.
Letter from John C. Biegler, managing partner, Price Waterhouse & Co.,
December 30, 1975 ----------------------------------------------339
Letter and enclosure from Mr. Biegler, February 18, 1976------------ 342

TOUCHE ROSS & CO.
Letter and enclosure from Russell E. Palmer, managing partner, Touche
Ross & Co., February 20, 1976------------------ 380
Letter from Senator M*etcalf to Mr. Palmer, March 1, 1976--- -----404
Letter from Mr. Palmer to Senator Metcalf, March 15, 1976 -_ --------406
APPENDIX B-NYSE AND AMSE CLIENTS OF THE "BIG
EIGHT" ACCOUNTING FIRMS: SUMMARY FINANCIAL
AND EMPLOYMENT DATA
(A Library of Congress, Congres-ional R.se-:irch Service study by John Spriggs
economic analyst, Economics Division.)
Title page ------------------------------------------------------- 407
Table of contents------------------------------------------------- 409
Background and scope--__ ----------------------- 411
Summary of financial and employment data---------------------------- 413
Table 1-Summary of clients' financial and employment data----------- 417
Table 1A-Number of valid entries for data category--_----------------- 418
Clients listed on the NYSE and AMSE----------------------------- 419
Figure 1--Number of clients-NYSE and AMSE--- --------- 421
Figure 2-Percentage of all companies listed on the exchanges---------- 422
Clients' financial and employment data------------------------------ 423
Figure 3-Sales of clients-NYSE and AMSE------------ ------ 425
Figure 4-Percentage of sales of all companies listed on the exchanges----- 426
Figure 5-Net income of clients-NYSE and AMSE-- ---------------- 427
Figure 6-Percentage of net income of all companies listed on the ex-
changes-------------------------------------------------------- 428
Figure 7-Income taxes of clients-NYSE and AMSE ------------429
Figure 8-Percentage of income taxes of all companies listed on the ex-
chnges ----- -------------------------430
Figure 9-Number of employees of clients-NYSE and AMSE----------- 431
Figure 10-Percentage of employees of all companies listed on the ex-
changes-_ ------------------ -- -------------------- 432
Figure 11-A-sets of clients-NYSE and AMSE ------------- 433
Figure 12-Percentage of total assets of companies listed on the exchanges- 434
Fifty largest clients------------------------------------------------435
Table 2-Ranked by sales ----------------------- 437
Table 3-Ranked by net income------------------------------- 438
Table 4-Ranked by income taxes__ ------------439
Table 5-Ranked by employees----- ------------------- 440
Table 6-Ranked by assets ------------- ------------ 441
CPA firms in selected industries--_-- --- -------- 442
Table 7-Natural resources and banks------- -------------- 444
Table 8-Chemnicals and drugs and pharmaceuticals_------------- 415
Table 9-Machinery and equipment and electric power companies--- 446






XHI


'Pave
Summary--- ---------------------------------447
Attachment 1-"Big Eight" accounting firms:
Financial and employment data of clients--------------------- 448
Price Waterhouse & Co--------------------------------- 448
Arthur Andersen & Co---------------------------------- 462
Coopers & Lybrand-------------------------------------- 478
Haskins & Sells---------------------------------------- 48.
Peat, Marwick, Mitchell & Co----------------------------- 498
Arthur Young & Co------------------------------------- 512
Ernst & Ernst------------------------------------------ 520
Touche Ross & Co--------------------------------------- 532
Clients of other firms--------------------------------------- 540
Attachment 2-List of organizations occurring on more than one client
list -------------------------------------------------------- 559
Attachment 3-List of organizations with no financial data---------- 560

APPENDIX C-"BIG EIGHT" FIRMS' TESTIMONY AND PRES-
ENTATIONS BEFORE CONGRESS, STATE LEGISLATURES
AND REGULATORY COMMISSIONS
Letter from Senator Metcalf to managing partners of "Big Eight" account-
ing firms regarding their testimony and presentations, since January
1975, before Congress, State legislatures and regulatory commissions,
April 8, 1976--------------------------- 569
ARTHUR ANDERSEN & CO.
Response to April 8 letter frem G. E. Stanton, vice chairman, administra-
tion, Arthur Andersen & Co., April 30, 1976------- --------- 571
Further response to April 8 letter from G. E. Stanton, vice chairman,
administration, Arthur Andersen & Co., May 28, 1976 --------594
Statement of Thomas A. Sampson, vice president, Greater Boston Chamber
of Commerce, and managing partner of Arthur Andersen & Co. in Boston,
regarding the initiative petition to create a Massachusetts Public Power
Authority, February 19, 1975------------------------------------- 622
Summary statement of Arthur Andersen & Co. before the Committee on
Ways and Means, U.S. House of Representatives, "Taxation of Inter-
national Business by the United States-The Competitive Aspects of
Proposed Major Changes in the System," July 15, 1975---------------- 624
Excerpt from testimony by Randall B. McDonald (Arthur Andersen & Co.)
and Robert E. Field (Price Waterhouse & Co.) before the Special Sub-
committee on Integrated Oil Operations, Committee on Interior and
Insular Affairs, U.S. Senate, 93d Congress, 2d session, "Market Per-
formance and Competition in the Petroleum Industry," February 21,
1974- ----------- -------------- 632
Findings and opinion accepting waiver consent and imposing remedial
sanctions by Securities and Exchange Commission in the matter of
Arthur Andersen & Co., July 8,1974-- ----------------- 638
Article in Wall Street Journal regarding Arthur Andersen's "Public Re-
view" Board, October 12, 1975- --------------------641
Article in New York Times regarding Arthur Andersen and Merck & Co.,
March 10, 1976 --------------- ---------- 649
Executive News Briefs, published by Arthur Andersen & Co., regarding
firm's petition to SEC, June 1976- -------- ------------- 650
Executive News Briefs, published by Arthur Andersen & Co., regarding
reaction in the accounting profession to SEC petition, June 1976-------- 654
Article in Wall Street Journal regarding Arthur Andersen's protest of the
SEC's policy on accounting rules, June 22, 1976----------------------- 656
Article in Wall Street Journal regarding Arthur Andersen's challenge of
FASB, June 24, 1976--------------------------------------------- 657






XIV


ARTHUR YOUNG & CO.
Response to April 8, 1976 letter from Alan S. Berk, Arthur Young & Co., 'age
May 10, 1976--------------------------- 658
Article by David Burnham, New York Times, regarding Arthur Young &
Co.- American Medical Association plan for recruitment of physicians
for Federal advisory committees, June 29, 1975----- -------- 662
Forbes magazine interview with Arthur Young & Co.'s managing partner,
New York office, May 15, 1976------------------ 663
Article in New York Times about lack of guidelines regarding bribery of
foreign government officials, December 5, 1975----------------------- 664
Article in Wall Street Journal about Arthur Young & Co. passing money
for foreign government officials on behalf of Pullman Inc., October 25,
1976---- ------------ --- ---------- 665

COOPERS & LYBRAND
Response to April 8, 1976 letter from Philip L. Defliese, managing partner,
Coopers & Lybrand, May 4, 1976-- ----------------- 666
Coopers & Lybrand comment to FPC in Docket No. RM75-27, regarding
allowance for funds during construction, September 4, 1975----- ----- 669
Coopers & Lybrand comment on FPC Order No. 530 regarding normaliza-
tion of utility taxes, November 26, 1975---------------------------- 674

ERNST & ERNST
Response to April 8, 1976 letter from R. T. Baker, managing partner,
Ernst& Ernst, May 19, 1976-------- ---------------686
Letter from Ernst & Ernst regarding fuel adjustment charges to H. Clyde
Reeves, chairman, Special Advisory Commission, electrical utility rates
and regulation, Frankfort, Ky., November 14, 1975------------------ 692
Letter from Ernst & Ernst regarding cost of money as an element of the
cost of facilities capital to Mr. Arthur Schoenhaut, executive secretary,
CASB, April 26,1976-- ---------------- 695
Article by Paul Valentine in Washington Post regarding congressional
review of Ernst & Ernst audit procedures, September 16, 1972----------- 698
Article by Paul Valentine in Washington Post regarding Ernst & Ernst's
record as police consultants, October 26, 1972 ----- ------ 699
Article in Wall Street Journal regarding Ernst & Ernst's proposal to adopt
simple form of "inflation accounting," August 20, 1976---------------- 700

HASKINS & SELLS
Response to April 8, 1976 letter from Thomas B. Hogan, partner, Haskins
& Sells, April 30, 1976------ -----------------------701
Excerpt from the report of the trustee of Equity Funding Corporation of
America, October 31, 1974-------------- ------ 704
Article in Wall Street Journal regarding fraud at Equity Funding Corpora-
tion of America, June 5, 1975------------------------------------- 726
Regulatory reform discussion outline presented by John F. Utley of
H.askins & Sells, chairman, Committee on Regulated Industries, AICPA
White House Conference, July 2, 1975------- ---------- 727

PEAT, MARWICK, MITCHELL & CO.
Response to April 8, 1976 letter from Walter E. Hanson, senior partner,
Peat, Marwick, Mitchell & Co., May 4, 1976--------------730
Statement of Hugh C. Braly of Peat, Marwick, Mitchell & Co., on b!.half
of Rocky, Mountain Oil & Gas Association, before Ways & Means
Committee, July 22, 1975--------------------- 732
SEC accounting ,'ries release No. 173 in the matter of Peat, Mirwvick
Mit.ch-ll & Co., July 2,1975--- ----------------- 736
Letter from Arthur Young & Co. to the partners of Peat, Marwick,
Mitchell & Co., November 21, 1975-------------------------------- 788






XV


PRICE WATERHOUSE & CO.
Response to April 8, 1976 letter from John C. Biegler, Price Waterhouse & Page
Co., April 30, 1976------------------------ 789
Statement by Roscoe L. Egger, Jr. of Price Waterhouse & Co. on behalf of
Chamber of Commerce of the United States, before the Senat- Govern-
ment Operations Committee, regarding regulatory reform bills, May 24,
1976------------------------------- 796
Article in Wall Street Journal, regarding Price Waterhouse & Co. knowl-
edge of bribe paid by United Brands, April 11, 1975------------------- S09
Article in Wall Street Journal, about SEC charges regarding bribes paid by
General Tire, May 11, 1976-------------------810

TOUCHE ROSS & CO.
Response to April 8, 1976 letter from Russell E. Palmer, managing partner,
Touche Ross & Co., April 30, 1976------ ------------- 812
Findings, opinion and order accepting waiver and consent and impouing
remedial sanctions before the Securities and Exchange Commnission in
the matter of Touche Ross & Co., February 25, 1974-------....- 820
SEC order for public proceedings in the matter of Touche Ross & Co.
et al., Giant Stores Corp. and Ampex, October 1, 1976----------------- 834

APPENDIX D-COMPENSATION OF PRINCIPAL EXECU-
TIVES AND NUM.IBER OF WOMEN AND BLACK PARTNERS
IN "BIG EIGHT" FIRMS
Letter from Senator Metcalf to managing partners of "Big Eight" account-
ing firms regarding compensation received by their three most highly
paid executives and the number of women and blacks who are partner-
in the firms, June 7, 1976---------------------- ------------------ 845

ARTHUR ANDERSEN & CO.
Response to June 7, 1976 letter from G. E. Stanton, vice chairman-
administration, Arthur Andersen & Co., July 16, 1976---------------- S47

ARTHUR YOUNG & CO.
Response to June 7, 1976 letter from William S. Kanag imnaaging
partner, Arthur Young & Co., June 30, 1976------------------------ i2

COOPERS & LYBEAND
Response to June 7, 1976 letter from Philip L. Defliese, manning p:trt .-r,
Coopers& Lybrand, July 20, 1976------------- -------- ----- '

ERNST & ERNST
Response to June 7, 1976 letter from R. T. Bak_.r, ran.,i.z ,rtner,
Ernst & Ernst, June 24, 1976---- -----------------9
Letter from Senator Metcalf to Mr. Baker, managit,_ i._Artner, E'n-t &
Ernst. June 28, 1976------------------------------------------
Response to June 2S. 1976 letter from 1%. T. Baker, mun.wi!.:i :rt:, ",
Ernst & Ernst, September 1,1976-------------------------- .

HASKINS & SELLS
Response to June 7, 1976 letter froin Michael N. CIetl;v partner, Haskins& Sells, July 15, 1976 ---------------------------- '

PEAT. MARWICK, MITCHELL & 'O.
Response to June 7, 1076 letter from Victor M. Earle III. eit'rf:il I u,'1 l.
Peat, Marwick, Mitohell & Co., June 2,. 197; -----------------------






XVI


PRICE WATEBHOUSE & CO.
Resp)onse to June 7, 1976 letter from John C. Biegler, Price Waterhouse Page
& Co., June 10, 1976--------------------------------------------- 870
TOUCHE ROSS & CO.
Response to June 7. 1976 letter from Russell E. Palmer, managing partner,
Touche Ross& Co., June 11, 1976 ----------------- -871

APPENDIX E--THE AMERICAN INSTITUTE OF CERTIFIED
PUBLIC ACCOUNTANTS
Letter from Senator Metcalf to Wallace E. Olson, president, AICPA,
reqiic -tin- certain information regarding AICPA activities, May 7, 1976- 873
REeSTonse from Mr. Olson, June 7, 1976 ---------------------876
AICPA financial statement, e.cerpted from 1975 AICPA annual re-ort--- 926
Index of pre-,nt:t ions by AICPA from January 1975 through March 1976- 935
Objectives of Federal Taxation Executive Committee and subcommittees
as described in AICPA Committee Handbook----_---- -- -- 943
Objectives of other important AICPA committees as described in AICPA
Committee Handbook-______________________ 946
Letter from John Lawler, administrative vice president, AICPA, to
members of AICPA council, April 12, 1972-------------948
"The Political Action Committee: A Guide for Professional Accountancy,"
a brochure distributed by the AICPA _-- ----------------------- 951
Article in CPA Journal, regarding congressional regulation of accounting
principles, by Jerry J. Throckmorton, Wright State University, and
Russell H. Hereth, University of Cincinnati, April 1976------------- 961
Article in CPA Journal, regarding national political program for the
accountingg profession, by Gilbert Simonetti, Jr., vice president, AICPA,
February 1976-------------- ---------------- 964
Article in CPA Journal, regarding future accounting actions and prospects,
by Louis M. Kessler, past pre-ident of AICPA, March 1976_---------- 968
Letter from Gilbert Simonetti, Jr., vice president, AICPA, regarding Moss
amendment to establish an Office of Petroleum Accounting and Auditing,
to Representative H. John Heinz III, July 9, 1975------------------ 971
Letter from William T. Barnes, chairman, AICPA Federal Government
Division, regarding premerger notification legislation, to Senator Philip
A. Hart, July 15, 1975------------------------ 973
Letter from Philip L. Defliese, AICPA board chairman, regarding legisla-
tion to audit energy information, to Representative John E. Moss,
September 4, 1975-- -- ---------------------976
Statement by Federal Tax Division of AICPA, on estate and gift tax
reform, submitted to House Ways and Means Committee, March 15,
1976- ----------------------------- 981
Statement by Federal Tax Division of AICPA, on tax revision, submitted
to Senate Finance Committee, March 18, 1976---------------------- 985
Letter from Ivan Bull, AICPA board chairman, regarding possible Govern-
ment intervention in accounting matters, to AICPA council members in
Southeastern States, July 23, 1976----------------------993
Objectives of AICPA, excerpted from AICPA publication, Professional
Standards-Ethics and Bylaws, September 1, 1974-__ -- ---- 996
AICPA's plan for voluntary quality control review program for CPA firms
with SEC practices or with general audit practices, July 23, 1976 -------- 1000
AICPA's proposed statement on auditing standards-"The Independent
Auditor's Responsibility for the Detection of Errors or Irregularities,"
April 30, 1976---- --------------------- 1009
AICPA's proposed statement on auditing standards-"Illegal Acts by
clientss, April 30, 1976------------------------------------------ 1015
Statement by Manuel F. Cohen, chairman, Commission on Auditor's
Responsibilities, defining the role and responsibilities of independent
auditors, to the AICPA council, May 1976-------------------------- 1020
Financial appeal by Michael N. Chetkovich, chairman, board of trustees,
Accounting Research Association, to accounting firms and individual
practitioners represented in AICPA_------------------------------- 1035
Brochure published by Accounting Research Association of AICPA
inviting financial support ----------------------------------------- 1037






XVII


Description of nature of management advisory services by accounting
firms, issued by Management Advisory Services Executive Committee, Page
AICPA-------------------------------------------------------- 1041
Article by Morton Mintz, Washington Post, regarding solicitation of
"Big Eight" accounting firms for contributions to President Nixon's
reelection campaign, November 2, 1973----------------------------- 1050
Article by Frederick Andrews, Wall Street Journal, regarding clearance
by AICPA Trial Board of Maurice H. Stans, January 19, 1976 ---------- 1053
Article by Richard Phalon, New York Times, regarding clearance by
AICPA Trial Board of Maurice H. Stans, January 20, 1976 ------------ 1054
Speech by Wallace E. Olson, AICPA president, regarding the search for
fairness in financial reporting, before the Los Angeles chapter of the
California Society of CPAs, March 23, 1976 -----------------1055
Representation of "Big Eight" accounting firms on AICPA committee-.
compiled by subcommittee staff ----------------------------------- 107s
APPENDIX F-THE NATIONAL ASSOCIATION OF STATE
BOARDS OF ACCOUNTANCY
Letter from Senator Metcalf to NASBA., requesting certain information
regarding NASBA activities. March 30, 1976---------------_--------- 1109
Response from W. Douglas Sprague, president, NASBA, April 6, 1976-- 1111
Annual report, NASBA, 1974-75------------------------------------- 1117
Letter from Senator Metcalf to Mr. Sprague, NASBA president, re-
questing elaboration of certain provisions of NASBA's response, April 13,
1976----------------------------------------------------------- 1141
Response from Mr. Sprague, April 2S. 1976 ------------------1143
Staff compilation of contributions by major accounting firms to NASBA-- 114S
APPENDIX G-OTHER FINANCIAL ACCOUNTING STANDARDS
BOARD SPONSORS
FINANCIAL EXECUTIVES INSTITUTE
Letter from Senator Metcalf to C. C. Hornbostel, president, Financial
Executives Institute, requesting certain information regarding FEI
activities, April 1, 1976--- -------------------- 1149
Response from Mr. Hornbostel, M'ay 19, 1976------------------------- 1151
Financial Executives Institute National Headquarters financial statements
for year ending June 30, 1975------------------------------------- 1154
"Financial Executives Institute, the Voice of Corporate Financial Officers,"
a brochure published by Financial Executives Institute--------------- 1156
Letter from William M. Hornet, Jr., chairman, Financial Executive,-
Institute Committee on Taxation, to Senator Metcalf, with enclosed
summary and conclusions of study by Prof. Robert B. Stobaugh,
Harvard Business School, regarding domestic effect of proposal to tax
unremitted foreign earnings of U.S.-controlled multinationals, June 8,
1976- ------- ---------------------1167
Letter from Mr. Hornbostel to Senator Ribicoff in opposition to Hamkell
amendment to establish Office of Energy Information and Analysis,
July 14, 1976-------------------------------------------------- 1171

NATIONAL ASSOCIATION OF ACCOUNTANTS
Letter from Senator Metcalf to William M. Young, Jr., executive director,
National Association of Accountants requesting certain information re-
garding NAA activities, April 2. 1976- -----------------1173
Response from Mr. Young, April 22, 1976---------------------------- 1175
Financial statement and executive director's report for fiscal 1975, National
Association of Accountants --------------------------------------117S
Letter from Senator Metcalf to Mr. Young, requesting elaboration of
certain portions of response, April 29, 1976------------- 114
Response from Mr. Young, May 12, 1976---------------------------- 11;6


67-159 0 77 -2






XVIII


Letter from Dudley E. Browne, National Association of Accountants Sub- Page
committee on Responses to Cost Accounting Standards Board, regarding
issues relating to cost of capital, to CASB Project Director Paul R. Mc-
Clenon, June 30, 1975---------------------- 1190
Letter from Allan C. Crane, chairman, National Association of Accountants
Management Accounting Practices Committee, regarding depreciation of
tangible capital assets, to Staff Director Joseph J. Jasinski, House Bank-
ing Subcommittee on Economic Stabilization, July 16, 1975---------- 1195
Letter from Mr. Browne to Arthur Schoenhaut, CASB executive secretary,
regarding proposed cost standard dealing with cost of money as an
element of the cost of capital, April 23, 1976----------------------- 1197

AMERICAN ACCOUNTING ASSOCIATION
Letter from Senator Metcalf to Paul Gerhardt, administrative secretary,
American Accounting Association, requesting certain information re-
garding AAA activities, April 2, 1976------------------------------1199
Response from Mr. Gerhardt, April 29, 1976-- -----------------1202
Financial statement, American Accounting Association, 1974 and 1975--- 1204

FINANCIAL ANALYSTS FEDERATION
Letter from Senator Metcalf to T. R. Lilley, president, Financial Analysts
Federation, requusti-ig certain information regarding its activities,
April 2, 1976---------------------------- ----- 1206
IResponse from Mildred M. Hermann, corporate secretary, Financial
Analysts Federation, April 28, 1976------------------------- 1208
Statement by Financial Analysts Federation regarding its activities------ 1210
Schedule of income and expenses of Financial Analysts Federation, fiscal
1975, and fical 1976 budget---- ------------- --------- 1212
Article in Finaniicial Analysts Federation Newsletter, regarding work in
progress, November 1973-----------------------------------------1213
Article in Financial Analysts Journal, regarding Financial Accounting
Standards Board he'tririg on accounting for re.uearch and development,
May-June 1974 ----- ------ -------------- 1213
Article in Finamcial Analysts Journal, regarding Financial Analysts Federa-
tion part ii ipation in FASB proceedingg, July-August 1974_------__ 1214
Article in Financial Analysts Journal, regarding segment reporting,
September-October 1974------------------------------------- 1215
rtid.:l in Financial Analysts Journal, regarding Financial Analysts
Federation submii-,.ions to SEC and FASB, November-December 1974-- 1216
Article in Financial Analyv-t Journal, regarding views on l.-asing, interim
reporting, conitingefcies and debt reclassific;ttion, January-February
1975- ------------------------------1216
Article in Financial Analysts Journal, regarding comments to FASB on
:,ccooiitirig for ca*i.i, conting, i.kic and certain mrnarktable securities
and ru tructuring of debt in a troubled loan situation, January-February
1976------------------------- --------1217
Article in Fi nrincial Analysts Journal, regarding Financial Analysts Federa-
'ion comments on repl:i--tiiient cost disclosure, segment reporting,
-r'ltciiility and pensi(,on plan reporting, March-April 1976__------ __ 1218

APPENDIX TI-FINANCIAL ACCOUNTING STANDARDS
BOARD
Letr from Senator Metce.lf to Marshall S. Ariutriring, chairman of
I"ASB, ,qi> ,-ting certain information regarding FASB activities, May
5, 1976 __ ---------------------1219
li-.pove from Mr. Arm-trnig, May 27, 1976--_------------ 1222
Abbreviations i -,i by FASB-------------------------------------- 1223
Dr-cription of the FASB --- ------ -------------- 1224

FASB EXHIBITS
Annual colnpi-iation of mrneiiiber. of The Financial Accounting Standards
Board-- -----------------------------1228
Fringe benefits provided for members of the Financial Accounting Standards
Board-------------------------------------------------------- 1229






XIX


Summary of contributions received by Financial Accounting Foundation Page
for the years ended December 31, 1975 and 1974--- -------- 1232
Contributions received from the public accounting profession for the years
ended December 31, 1975 and 1974_-- ----------- -1233
Contributions received from industry and commerce for the years ended
December 31, 1975 and 1974-------------------1237
Contributions received from other sources for the years ended December
31, 1975 and 1974-------------------------- 262
Memberships held by trustees of the Financial Accounting Foundation and
members of the Financial Accounting Standards Board and Financial
Accounting Standards Advisory Council in the foundation's sponsoring
organizations--------------------------------------------------- 1263
Explanation of the restrictions on outside financial interests mandated in
section 4, article II-A of the bylaws of the Financial Accounting Foun-
dation----------------------------- 1266
Policies in respect of investments, personal activities, speeches and publi-
cations of members and directors of the Financial Accounting Standards
Board; [and, Questionnaire Relating to Investments and Personal Ac-
tivities] (Staff Note: Questionnaire retained in committee files)-------- -1275
Policies in respect of personal activities, speeches and publications of mem-
bers of the staff of the Financial Accounting Standards Board [and
affirmation form (Staff Note: Affirmation form retained in committee
files)---------------------------------------------------------- 1287
Explanation of any restrictions on financial interests or positions held by
trustees of the Financial Accounting Foundation, corporate electors of
the foundation, or members of the Financial Accounting Standards
Advisory Council----------------------------------------------- 1292
Professional staff------------------------------------------------- 1298
Consultants engaged from January 1, 1973 (date of inception) to May 15,
1976---------------------------------- 1301
Persons who have served on FASB task forces from January 1, 1973 (date
of inception) to May 15, 1976------- -------------- 1303
Members of the FASB screening committee on emerging problems------- 1312
General statement regarding the Financial Accounting Standards Board's
communications with Congress, the SEC, CASB, and other Federal
agencies or departments----------------------1313
Testimony before the Committee on Interior and Insular Affairs, U.S.
Senate, March 9, 1976, re S. 1864, Energy Information Act------------ 1317
Letter dated July 11, 1975, to Hon. Harley 0. Staggers, chairman, Inter-
state and Foreign Commerce Committee of the U.S. House of Repre-
sentatives, re H.R. 7014, Energy Conservation and Oil Policy Act cf
1975-------------------------------- 1330
Letter dated October 3, 1975, to Hon. Harley 0. Stagger-, chairman, con-
ference committee on S. 622, Energy Conservation and Oil Policy Act
of 1975 ----------------------------- 1334
Letter dated October 9, 1975, from the Financial Accounting Foundation
to members of the conference committee on S. 622 --------- 1311
(Staff note: Examples of FASB correspondence with various agenci( s
are retained in the committee files.)
General statement regarding the Financial Accounting Standards Board's
meetings with prominent public accountants, businessmen, and members
of the academic community-------------------------------------- 1347
Meetings held with prominent public accountants, businessmen, and
members of the academic community------------------------------- 1350
Meetings scheduled to be held as of Maiy 15, 1976, with prominent public
accountants, businessmen, and members of the academic community--- 1358
Organizational charts of the Financial Accounting Foundation and the
Financial Accounting Standards Board----------------------------- 13f0
Financial statements excerpted from the 1975 annual report of the Finan-
cial Accounting Foundation and Financinl Accounting Standards B(:ird- 1363
(Staff note: 1973, 1974, and 1975 reports are retained in committee'
files.)
Certificate of incorporation and bylaws of the Financial Accounting
Foundation ---------------------------------------------------1367
(Staff note: Rules of FASB procedure retained in committee files.)
Members of the Financial Accounting Standards Advisory Council (This is
the end of the exhibits submitted by FASB)------------------------ 1395






XX


Article in Wall Street Journal regarding FASB decision to consider oil and Page
gas accounting, October 6, 1975---------------------------- 1397
Address by Marshall S. Armstrong, FASB chairman, regarding the politics
of establishing accounting standards, before third annual Securities Reg-
ulation Institute, San Diego, January 16, 1976--------------- 1398
Article in Wall Street Journal regarding return of FASB member Walter
Schuetze to P<:,t, Marwick, Mitchell & Co., April 16, 1976------------ 1419
Article in FASB Status Report regarding return of Mr. Schuetze to Peat,
Miarwick, Mitchell & Co., and reappointment of FASB member Donald J.
Kirk, April 28, 1976----------------------------------- 1420
Letter from Robert Van Riper, FASB administrator of public information,
regarding FASB meeting with the Business Roundtable, to Vic Reinemer,
staff director, Senate Subcommittee on Reports, Accounting, and Man-
agement, October 11, 1976---------------------------------------- 1421
Staff study of private interests represented on FASB task forces--------- 1423

APPENDIX I-SECURITIES AND EXCHANGE COMMISSION
SEC request for partial response and solicitation of comments on certain
questions regarding Arthur Andersen & Co., file No. S7-647, July 27,
1976---------------------------------- 1429
SEC Rule 210.2-01 regarding qualifications of accountants------------- 1431
SEC accounting series release No. 4 regarding administrative policy on
financial statements, April 25, 1938-------------------------------- 1432
SEC accounting series release No. 150, a statement of policy on the estab-
lishment and improvement of accounting principles and standards,
December 20, 1973_----- ------- -------- 1433
Letter from SEC Chairman Ray Garrett, Jr., regarding Moss amendment
(to H.R. 7014) to authorize Comptroller General to audit energy informa-
tion and certain financial statements, to Frank G. Zarb, Administrator,
Federal Energy Administration, August 22, 1975---- 1435
Letter from SEC Senior Conmmiissioner Philip A. Loomis, Jr., regard-
ing accounting and auditing aspects of H.R. 7014, to Representative
Clarence J. Brown, October 3, 1975-___- _---------------------1437
Letter from Senator Metcalf, regarding proposed SEC rule on replacement
cns)t data, to George A. Fitzsimmons, Secretary, SEC, January 29, 1976-- 1440
Article in the Wail Street Journal, regarding SEC withdrawal of proposal
r( girding quarterly auditing, February 11, 1976----_ -----_ 1444
Article in The CPA Letter, regarding SEC appointment of advisory com-
mittee on replacement cost data implementation, May 24, 1976 ------- 1445
Letter from John C. Burton, Chief Accountant, SEC, regarding accounting
series releases, to John B. Chesson, Counsel, S&natz Subcommittee on
Reports, Accounting, and Management, January 28, 1976------------ 1446
Letter from Senator Metcalf, regarding SEC accounting responsibilities
and authority, to SEC Chairman Roderick Hills, March 1, 1976------- 1450
Response from Mr. Hills, April 30, 1976------------------------------ 1451
Rule 2(e) of the SEC's Rules of Practice, regarding appearance and
practice before the Commission------------------------------------ 1465
Letter from Senator Metcalf, regarding rule 2(e) proceedings on unpro-
fessional behavior, to SEC Chairman Hills, April 26, 1976------------ 1467
Response from Mr. Hills and accompanying memorandum from Harvey
L. Pitt, SEC General Counsel, June 10, 1976------------------------ 1469
Letter from Senator Metczi1f, requesting :i-njlysis of the Ilochfelder decision
of the Supreme Court concerning negligence and liability of accountants,
to SEC Chairman lHill-, MAI:y 19, 1976----------------------------- 1479
Response from Mr. Hills and accompanying memoranda from Harvc.v L.
Pitt, SEC General Counsel, August 27, 1976- -------------------- 1482
Opinion )f the U.S. Supreme Court, Eri.st & Erif v. Iwlchfcl(-der, et al-_- 1509
Letter from John C. Burton, Chief Accountant, SEC, regarding accounting
intrr.'st organizations with whom SEC representatives meet, to John
B. Chesson, Counsel, Senate Subcommitter- on Reports, Accounting, and
Management, August 9, 1976------------------------------------- 1545
Tr:nis(rip)t of proc,.odicig-, Arthur Andersen & Co. v. SEC, in the U.S.
District Court, Northern District of Illinois, Eastern Division, No.
76 C 2832, Sept(.mber 3, 1976------------------------------------- 1547





XXI


APPENDIX J-COST ACCOUNTING STANDARDS BOARD,
GENERAL ACCOUNTING OFFICE AND INTERNAL REVE-
NUE SERVICE
Letter from Senator Metcalf to Elmer B. Staats, Chairman, Cost Ac- Pape
counting Standards Board, March 1, 1976-------------------------- 1563
Response from Mr. Staats, March 15, 1976-------------------------- 1564
Letter to Jack Chesson, subcommittee counsel, from Arthur Schoenhaut,
executive secretary, CASB, with enclosed list of members of commitf.. s
of professional ,(,counting :issociaticns ai-d l..inv s g-Y, rv elio .,e-
assisted the CA-B, J,.ne 22, 1976---. - __ _ _..-. 15-6
Letter from _' SB 'h- ;rma-i Elmer St, as re ar ing th;e C .SB Pabt
service award, to A' PA chairman n Ivan ull, _pril 13, 19"6 .. 1589
Letter from Seiiator 1 ^"ctcalf, regardirg pr pcscd ( ASL rule on historical
depreciation costs for inflation, December 5, 1975-------------------- 1581
Letter from Senator Metcalf to Elmer Staats, Comptroller General,
General Accounting Office, March 1, 1976------------------------- 15 6
Res-ponse from Mr. Staats, March 31, 1976-------------------------- 1587
Letter from Senator Metcalf to Donald Alexander, Commissioner, Internal
Revenue Service, March 1, 1976----------------------------------- 1.SS
Response from Mr. Alexander, April 22, 1976, and enclosed IRS publica-
tion 538, "Tax Information on Accounting Periods and Methods"--- 1589

APPENDIX K-MISCELLANEOUS
Letter from Abraham J. BrilofT, professor of accountancy, Baruch College,
City University of New York, re .irding Lockh1eedl Aircraft Qorp. a'd
Arthur Young & Co., to Senator Metcalf, July 6, 1976---------------- 1605
Statement by Professor Briloff to House Comm-rce Subcommittee on
Oversight and Investigation, May 21, 1976------ --------------16-
Excerpt from Professor Briloff's book, "More Debits Than Credit.," re-
garding Lockheed Aircraft Corp. and accounting matters_ __-------1662
Interview with Professor Briloff by editors of Barron's, April 12, 19, and 26,
1976 issues of Barron's----------------------------------- 1681
Letter from Professor Briloff, regarding new system of depreciation re-
cently adopted by Department of Commerce, with a t tInched excerpt from
"More Debits Than Credits," to Representative Ch:irles A. Vanik,
March 24, 1976------------------------------------------- 1697
Testimony by Adm. Hyman G. Rickover, Deputy Commander for Nuclear
Propulsion, Naval Sea Systems Command, and Director, Division of
Naval Reactors, Energy Research and Development Administration,
regarding cost accounting standardd, before House Defense Appro-
priations Subcommittee, May 15, 1974.. -. -------------- 1711
Testimony by Admiral Rickover, regarding accounting matters, before
House Armed Services Seapower Subcommittee, September 23, 1974.._____ 1721
Testimony by Admiral Rickover, regarding Renegotiation Board, before
House Banking Subcommittee on General Oversight and Renegotiation,
June 12, 1975-- ------------------------1726
Letter from Norman J. Elliott, CPA, regarding experience with "Big
Eight" firms, September 1, 1976--- -----------------------1729
Letter from Kenneth Leventhal, Kenneth Leventhal & Co., alleging anti-
competitive behavior by "Big Eight" firms, March 31, 1976_---------- 1731
Letter from Senator Metcalf to Mr. Leventhal, June 4, 1976--------- 1732
Letter from Robert Coffman, chairn-an, AICPA Committee on Dispikue-
ment of CPA Firms, to Norman H. Stavisky, CPA, Stavisky & Shapiro,
September 17,1974--_ ------ ----- --------1733
Memorandum from Mr. Stavisky, July 14, 1976----------- ------ 1735
Letter from Robert Half, Robert Half Personnel Agencies, Inc., regarding
personnel placement activities of large public accounting firms,
September 20, 1976---------------------------- 173
Article by Charles G. Carpenter and Robert H. Strawser in the Journal of
Accountancy regarding displacement of auditors when clients go public,
June 1971------ --------------------------1743
Article by Eli Mason, CPA, M\ason & Co., in the CPA. JournA. lIrLopin<
restructuring of accounting profession, July 1975------------------- 1747
Article in Time, regarding corporate corruption, February 23, 1976 ------ 1754
News release by Representative William J. Hughes and related study re-
garding creative accounting practices and profits of oil companies,
April 9 1976---------------------------------------.------------ 1755













SUMMARY


The accounting establishment in the United States is primarily
comprised of the Nation's eight largest accounting firms, certain influ-
ential CPA professional organizations and business lobbying group-.
and a few Federal agencies-most notably the Securitiet and Ex-
change Commission. This study examines the inter-relationship- and
activities of those private groups and Federal agencies in order to
determine their impact on accounting practices promulgated or
approved by the Federal Government.
The purpose of this study is to inform Congress and the public
regarding the participants involved in developing and applying ac-
counting practices which significantly affect government policy, the
economy and society in general. Concise factual information regard-
ing the accounting establishment has not previously been readily
available to Congress and the public. This study and its appendices.
provide information necessary to formulate sound Federal policy on
accounting matters.
Accounting standards govern the presentation of information in
corporate financial statements. Enactment of the Securities Act of
1933 and the Securities Exchange Act of 1934 created a need for
accountants to act as independent auditors for publicly-owned corpo-
rations by requiring that certain information reported to the public
by corporations be independently certified. The "Big Eight" and
other large accounting firms have prospered from this Federal re-
quirement because they are retained as the auditors for the Nation's
major corporations. Such auditors are responsible for providing inde-
pendent certification that corporate financial statements pre-ent fairly
and accurately the results of business activities.
Independent auditors must have the complete confidence of the
public for whose benefit the Federal securities laws were enacted.
That confidence can only be maintained by strict adherence to stand-
ards of conduct which assure the public tHiat auditors are truly inde-
pendent and competent to perform their responsibilities. Even the
appearance of bias or conflict of interest by an independent auditor
can erode the public confidence necessary to make the disclosure policy
embodied in the Federal securities laws successful.
The primary purpose of the Federal se.uritie- laws is to instill
public confidence in the reliability and accuracy of information re-
ported by publicly-owned corporations. Doubts as to the reliability
and accuracy of such information impair its usefulness to the public
for making efficient economic and social decisions, and defeat the pur-
pose of the sei,'rities laws. Independent auditors perform a key func-
tion in achieving the goal of the Federal e'uritis law-s be':imie they
provide the means for independently checking and confirming tli,
information reported by corporation,.
(1)







Historically, Congress and the public have regarded accounting as
an arcane subject better left to accountants themselves. Continual
revelations of wrongdoing by publicly-owned corporations have caused
a new awareness of the importance of accounting practices in permit-
ting such abuses to occur. Unexpected failures of major corporations
have led to requests for substantial assistance to such companies from
taxpayers. Accounting practices ultimately involve social issues that
affect the Nation's economic welfare.
Because of their broad social and economic significance, accounting
issues must be addressed by Congress and the public in a manner
which ensures that the public interest is protected. If past abuses are
to be prevented in the future, it is important that the accounting
establishment, which has permitted many abuses to occur, be under-
stood. Accounting issues are too important to be left to accountants
alone.






CHART 1


CONTROL OF THE "BIG EIGHT" ACCOUNTING FIRMS AND THE AICPA
OVER ACCOUNTING STANDARDS APPROVED BY THE SEC


THE "BIG EIGHT" ACCOUNTING FIRMS THE "BIG EIGHT" ACCOUNTING FIRMS AND THEIR
CORPORATE CLIENTS
The "Big Eight" firms control the AICPA. ^_^ ^^^
The "Big Eight" firms control the AICPA. The "Big Eight" firms and their corporate clients, as well as all other
independent auditors and publicly-owned corporations, are required
to use FASB accounting standards recognized by the SEC when
reporting financial information to the public.




AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS SECURITIES AND EXCHANGE COMMISSION (SEC)
(AICPA) The SEC officially recognizes accounting standards established by
The AICPA Board of Directors has exclusive authority to elect and the FASB as the only standards which satisfy the requirements of
remove the members of the FAF Board of Trustees. the Federal securities laws.

t4


FINANCIAL ACCOUNTING FOUNDATION (FAF)
The FAF Board of Trustees has exclusive authority to appoint and
remove the members of the FASB.


FINANCIAL ACCOUNTING STANDARDS BOARD (FASB)
The FASB establishes accounting standards, as well as determining
the procedures used to establish accounting standards.


IIIRI







Chart 1 on page 3 provides a basic outline of the relationship
among major organizations described in this study. The various boxes
in Chart 1 identify the primary segments of the accounting establish-
ment and their roles in the extraordinary process by which public
authority to set accounting standards has been delegated to self-
interested private parties. Chart 1 is a useful guide for summarizing
the information contained in this study.

THE "BIG EIGHT" ACCOUNTING FIRMS
Chart 1 shows that the first major segment comprising the account-
ing establishment is the "Big Eight" accounting firms which are
described in Chapter I. These eight firms are so big and influential in
relation to other accounting firms that they dominate the practice of
accounting in the United States and probably throughout the world.
Listed alphabetically, the "Big Eight" firms are:
Arthur Andersen & Co.,
Arthur Young & Co.,
Coopers & Lybrand,
Ernst & Ernst,
-HaTskiiis & Sells,
Peat, Marwick, Mitchell & Co.,
Price Waterliouse & Co., and
Touche Ross & Co.
The "Big Eight" firms provide auditing and accounting services
for the vast majority of major corporations. The next seven largest
accounting firms in the Nation are important, but do not match the
"Big Eight" in terms of size and influence.
The "Big Eiyrht" are often called "public accounting" firms" or
"independent public accounting firms." This study finds little evi-
dence that they serve the public or that they are independent in fact
f! om the interests of tbeir corporate clients. For that reason, this
study ".fers to the "Big Eight" simply as accounting firms.
Information on the "Big Eight" firms and other private segnments
of the .iccouinting establishment is not ir.idily available to Congne.s
A,;;d the public from published sources. iTherefore, it was necessary for
this bcomlittee t,- .v.,quest information directly from the "Big Eight"
and other private groups. Additional information was obtained from
F-.I. ,:i1 .,,oe,-cies and other sources within and without the accounting
profession.
The "Big Eigrht" firms are large orgrmizations. Each has several
hiundr.1l partners, and their supporting staffs range in size from ap-
pro-xi ,ately 4.000 to over .8,000 per--ons. They inaintain offices in every
major city in the United States, and have affiliations in major cities
oveT;. : -.
i, uence exercised by the "Big Eitht firms far exceeds that
witch iniayht be expected from the number of CPAs working for them.
Only about 11 or 12 percent of the Nation's (-1i-1ated 160.000 CPAs
are :I--ociated with "Pig Eight" firms, but their influence is magnified
because their clients are the largest and wealthiest corporations in the
United State'. Because of their large size, the "Big Eight" firms
exercise suh-j antial influence directly on accounting practices promul-







gated or approved by the Federal Government. They also exercise sub-
stantial indirect influence through the American Institute of Certified
Public Accountants (AICPA), which they control, and through the
accounting practices followed by their corporate clients.
On the average, the "Big Eight" firms receive approximately TO70
percent of their total revenues from performing auditing and a'eount-
ijig services, 18 percent from performance of tax services, and the
remainder from performing management advisory services. Auditing
-anl accounting services involve designing a reliable system of re'ord-
keeping for businesses, checking the record-keeping sy:ttem periodically
to assure that it is effective, providing assistance in presenting finan-
cial information so that it accurately conveys the results of business
activities, and certifying financial statements for accuracy. Tax serv-
ices involve helping clients achieve maximum financial benefits from
provisions of Federal, State, local, and foreign tax laws.
Performance of management advisory services involves helping a
client to manage its business, and goes beyond the expertise normally
associated with the practice of accounting. The "Big Eight" account-
ing firms provide management consulting services such as executive
recruitment, marketing analysis, plant layout, product analysis,
actuarial services, and financial management services. All eight firms
employ professionals, termed "principals," (who are not CPAs) to
provide expertise in performing non-accounting management advis-ory
services.
The supply of auditing and accounting services to corporations listed
on either the New York Stock Exchange or the American Stock
Exchange is heavily concentrated among the "Big Eight" firms. A
study performed by the Congressional Research Service for this sub-
committee found that 85 percent of the 2,641 corporations listed on the
New York Stock Exchange and the American Stock Exchange are
clients of "Big Eight" firms. Those clients accounted for one-half of
the $2,552 billion in sales for the Nation's manufacturing, trade, and
retail sectors and about 84 percent of the $75.4 billion of corporate
profits after taxes, using average annual data for the years 1974 and
1975.
Concentration of major corporate clients among the "Big Eight"
firms is greatest on the New York Stock Exchange where the larg.2st
corporations are listed. "Big Eight" accounting firms have 92 percent
of the companies listed on that exchange as clients. For all the corpo-
rations listed on the New York Stock Exchange, the clients of "Big
Eight" firms accounted for 94 percent of all sales (revenues) received,
94 percent of all profits earned, 90 percent of all income taxes paid,
94 percent of all people employed, and 94 percent of all assets owned.
A single "Big Eight" firm-Price Waterhouse & Co.- provides
auditing and accounting services for clients that account for 24 per-
cent of the sales and 28 percent of the ea rings on the New York
Stock Exchange. Four other firms-Arthur Aii'ler-en & Co., Coopers
& Lybrand, Haskins & Sells, and Peat. Marwick, Mitchell & Co.-col-
lectively are the auditors for 50 percent of the sales and 51 percent of
the earning for all of the corporations on that exchan2el ,. Tim-i. five
of the "Big Eight" accounting firms collectively audit 74 percei'ilt of
the total sales and 79 percent of the total net earnings of corporations
listed on the New York Stock Exchange.







On the American Stock Exchange, 76 percent of the corporations
listed are audit clients of "Big Eight" firms. For all the corporations
listed on the American Stock Exchange, those clients account for 67
percent of all sales (revenues) received, 67 percent of all profits
earned, 66 percent of all income taxes paid, 61 percent of all people
employed, and 73 percent of all assets owned.
Again, the clients of Price Waterhouse & Co. account for the most
revenue and income, about 16 percent of the total sales and 19 per-
cent of the total net income of corporations listed on the American
Stock Exchange. When the clients of Price Waterhouse & Co. are
grouped with those of Arthur Andersen & Co., Coopers & Lybrand,
Haskins & Sells, and Peat, Marwick, Mitchell & Co., those five firms
are the auditors for clients that produce 45 percent of the sales and
49 percent of the earnings for all the corporations listed on the Amer-
ican Stock Exchange.
The Congressional Research Service found that the concentration
of corporate clients among those five "Big Eight" firms was even
greater when only the Nation's 50 largest corporations are considered.
Analysis of the auditors for the 10 largest companies in six selected
industries also showed concentration among certain "Big Eight" ac-
counting firms. For example, Price Waterhouse & Co. clients include
six of the 10 largest oil companies-Exxon, Gulf, Standard Oil of
California, Standard Oil of Indiana, Royal Dutch Petroleum and
Shell.
As independent auditors for major corporations, the "Big Eight"
firms exercise great influence over the financial results shown by those
corporations. The accounting establishment has permitted the evolu-
tion of a. system of flexible, alternative accounting methods to report
similar business transactions. Drastically different financial results
can be reported to the public merely by using alternative accounting
methods selected from the collection of acceptable methods.
Independent auditors must agree with the accounting methods used
by a corporation in order to certify to the public that the corpora-
tion's financial statements present fairly the results of its operations.
The present system of flexible, alternative accounting standards allows
an independent auditor to use a great deal of discretion in approving
various accounting methods. The method approved by the independent
auditor can mean the difference between a corporation reporting
healthy profits or severe losses to investors and the public.
The independent auditor is also responsible for certifying the ac-
curacy of corporate records to the public. Present auditing standards
permit an independent auditor to use a great amount of discretion in
determining how much testing of corporate records should be done. In
order to maintain the confidence of investors, government authorities
and the public, corporations must receive unqualified endorsement
from their independent auditors regarding the integrity of business
records.
Because independent auditors presently exercise significant dis-
cretionary influence and are intimately involved in the presentation
of corporate financial statements, the adverse effects traditionally
associated with exco-sive market concentration are agniravated by the
dominant position held by the "Big Eight" firms in supplying audit-






ing and accounting services to major corporations. Excessive market
concentration traditionally causes problems concerning the price and
availability of goods and services. The concentration of major corpo-
rations as clients of the "Big Eight" indicates a need for an inv-ti-
gation of possible anti-competitive effects.
Through the various services they provide, individual "Big Eight"
firms have become involved in the affairs of more than one client
competing within the same industry. Excessive concentration in the
supply of auditing and accounting services exists among all iiidus-
tries, and often within the same industry. The AICPA committee
structure provides the "Big Eight" accounting firms witli ani op-
portunity to promote anti-competitive practice-, by meeting tog(etferl
privately and establishing important auditing and accounting policies.
Concentration in the supply of auditing and accounting services
appears to be increasing as a result of corporate mergers and the sale
of corporate securities to the public. Small and medium-sized account-
ing firms usually lose clients to the "Big Eight" when smaller com-
panies "go public" or are acquired by major corporations.
The practice of accounting is very profitable for partners in "Big
Eight" firms, especially for the top partners who determine the
policies followed by the firms. Collectively, the "Big Eight" firms
have estimated total annual revenues of over $2 billion and net earn-
ings for their partners of more than $500 million. The substantial fi-
nancial interests at stake indicate that the firms have a strong vested
interest in avoiding changes in the present system which might reduce
the value of their services to clients.
Serious questions have been raised concerning the independence
and competence of the "Big Eight" accounting firms and other inde-
pendent auditors. Those questions have arisen because of accounting
and auditing problems involved in the Penn Central collapse., the
Equity Funding fraud, improper and illegal activities by Gulf Oil
Corp. and Northrop Cor)., and the many other abuses by corporations
which have come to public attention in recent years. A common com-
plaint in such cases has been, "Where was the independent auditor?"
Doubts as to the accuracy and reliability of information reported by
corporations have resulted from continual revelations of corporate
misconduct which was not found or not reported by independent audi-
tors. Congress and the public have little assurance that corporate fi-
nancial stat-ments accurately portray the results of Ibuziness activities
because of flexible, alternative accounting standards. Public confidence
in independent auditors, which is essential to the success of the Federal
securities laws. has been seriously eroded.
This study finds that public doubts concerning the performancee of
independent auditors of major corporations are well founded. More-
over, the problems causing an erosion of confidence in the "Big
Eight" accounting firms and other independent auditors are inherent
in their present system of practice, the procedure by which they are
chosen, and their relationship to standard-setting bodies. RestorItion of
public confidence in the independence and competence of such auditors
depends upon reforming the manner in which they perform their
responsibilities.
The most important requirement of independent auditors is that they
be regarded by the public as truly independent from the interests of







their clients. The "Big Eight" firms have seriously impaired their inde-
pendence by becoming involved in the business affairs of their corpo-
rate clients, and by advocating their clients' interests on controversial
issues. It appears that the "Big Eight" firms are more concerned with
serving the interests of corporate managements who select them and
authorize their fees than with protecting the interests of the public,
for whose benefit Congress established the position of independent
auditor.
The management advisory services provided by "Big Eight" firms
are intended to aid corporate managements in operating their busi-
nesses, and necessa rily involve "Big Eight" firms in the business affairs
of their clients. Such involvement creates a professional and financial
interest by the independent auditor in a client's affairs which is incon-
sistent with the auditor's responsibility to remain independent in fact
and in appearance.
When a "Big Eight" firm recruits executives for a corporate client,
shareholders and the public may wonder if the firm is retained as the
client's independent auditor primarily because of the relationship exist-
ing between the firm and the influential executives it recruited. Simi-
larly, the public may reasonably doubt the ability of a "Big Eight"
firm to act as independent auditor for a corporate client which has also
retained the firm to provide marketing analysis, financial management
services, actuarial services, or other management advisory services. In
such cases, an independent auditor not only becomes involved in the
business affairs of its clients, but may be placed in the position of
auditing its own work.
Representation of clients' interests is another area where the "Big
Eight" accounting firms have failed to meet their responsibility to
remain independent. They advocate the partisan interests of their
corporate clients on controversial issues, both for a fee and as a "public
service." Partners of "Big Eight" firms join recognized business lob-
bies and actively represent them before Federal, State, and local
governments.
"Big Eight" firms have advocated the interests of corporate clients
on substantive political issues regarding taxation of corporations. They
have supported increased investment tax credits, more liberalized de-
preciation methods, continuation of tax credits rather than deductions
for taxes paid to foreign governments, and other procedures designed
to increase the amount of cash held by big corporations. Advocacy of
controversial positions involving the fair distribution of taxes results
in a lo-s of independence because the auditor's interests become asso-
ciated with the interests of clients or some other special interest group.
The "Big Eight" accounting firms readily identify with the self-
interests of corporate managements on many other controversial issues.
They te-tify before State regulatory commissions on the amount of
profits which should be earned by regulated utilities, and in support
of automatic cost adjustment clauses which circumvent the regulatory
process. "Big Eight" firms support inclusion of construction work in
progress in regulated utility rate bases, as well as charging utility
customers for Federal income taxes that are never paid to the Federal
Government.
They testify before Congress in support of higher oil and natural
gas prices, and for faster write-offs of production costs. "Big Eight"






firms write to Federal agencies to urge adoption of rules that would
have the Federal Government pay private contractors for "costs" that
are not normally accepted costs at all. They oppose more strin.,rent
Federal regulations on reporting by corporations, and recommend
that the Federal Government not adopt uniform accounting methods.
Independent auditors are endowed with a public reputation for
impartiality and objectivity because of the special role "-isirned to
them by Congress in the Federal securities laws. Their statements
and recommendations are accorded great respect and credibility be-
cause of the general belief that such statements and recommendations
are made independently. Thus, it is highly improper for them to u-c
their special status as a basis for advocating the self-interests of their
corporate clients, especially for profit.
The competence of the "Big Eight" accounting firms as independ-
ent auditors has also been questioned in recent years. Three of them
have been officially disciplined by the SEC for auditing failures. Sev-
eral of the "Big Eight" firms have been involved in legal actions re-
sulting in adverse settlements because of alleged auditing failure.
The "Big Eight" firms provide auditing, accounting, and manage-
ment advisory services to Federal, State and local governments as well
as corporations. Through their employment, they are able to influence
governmental policies and procedures which may affect the business
activities of their corporate clients. The influence of the "Big Eight"
firms on governmental policies and procedures can be ...iibstntial in
certain areas, and may represent a conflict of interest with respect to
services performed for clients in the private sector.
The total revenues received by the "Big Eight" firms for service- to
the Federal Government amounted to $16,486,000 in 1975. That was
more than double the $8,037,000 received in 1971. Performance of serv-
ices for the Federal Government appears to be of increasing impor-
tance to the "Big Eight" accounting firms.

TIHE AMERICAN INSTITUTE: OF CERTIFIED PUBLIC ACCOUNTANTS
Chart 1 on page 3 shows that the American Institute of Certified
Public Accountants (AICPA) is the first major step in the proc.s by
which the "Big Eight" firms are able to control the (est ablishment of
accounting standards used by their corporate clients. The AICPA is
the largest professional association of CPAs and the mo-t important
private group affecting the practice of accounting. It dominates all
.signlificant aspects of accoumtint because the accounting, 1 profv:ssion is
largely self-regulated, and Federal and State authorities have recog-
nized policies and procedures established by the AIC1PA as repre-
sentin decisions by the accounting profession. Chapters II. III and
IV of this study describe the AICPA anid its activities'.
The AICPA is organized in a manner which permits the parties
controlling its power structure to maintain their control over the o'ga--
iization. The "Big Eiglht" firms effectively control the power sti'c-
ture, and use the AICPA to advance their collective interets. The
AICPA's power structure is commrised of its council, its boax'd of di-
rectors, its president and aduninistanitive staff, anl its important
committees which establish AICPA policies and prorcduros. (See
Chart 2 on page 72.)





10


Although CPAs associated with the "Big Eight" account for only
15 percent of the AICPA's 117,695 members, they comprised 31 per-
cent of the 252 members on its council in fiscal 1976. The 15 largest
accounting firms comprised 42 percent of the council membership.
Through control of the AICPA's power structure, the "Big Eight"
firms are able to assure that most council members agree with their
views.
The AICPA's board of directors has broad authority to set policies
and manage its resources. In fiscal 1976, six of the 18 board members,
including the immediate past chairman of the board and the desig-
nated next board chairman, represented "Big Eight" firms. Nine of
the 18 board members were from the 15 largest accounting firms.
The real work of the AICPA in terms of performing certain tasks
and accomplishing specific goals is handled almost exclusively by its
committee structure. The 108 committees listed and described in the
1975-76 AICPA Committee Handbook cover every topic of interest
to the accounting profession. While the influence of the "Big Eight"
firms pervades the AICPA committee structure, their representation
is concentrated on committees performing work in substantive areas
that have an extensive impact on the actual practice of accounting,
and frequently affect governmental policies. "Big Eight" repre-
sentation exceeded 50 percent on several of the most important com-
mittees in fiscal 1976.
The AICPA bylaws provide that the five most important commit-
tees-called senior technical committees-s hall speak for the AICPA
in their respective areas without consulting either the council or the
board of directors. Because Federal agencies and State boards of ac-
countancy charged with regulating accountants have chosen to rely
upon the AICPA to such a great extent, the pronouncements of senior
technical committees have become the prescribed standard followed
by CPAs in several substantive areas. The public and the accounting
profession are profoundly influenced by the activities of senior tech-
nical committees, but these autonomous committees have no proce-
dural guarantees to protect the interests of those not actually
represented on the committees.
The "Big Eight" firms dominate all five senior technical commit-
tees. Through these committees, they are able to determine the
AICPA's policies and direct its activities on such important matters
as accounting standards, auditing standards, management advisory
services. Federal taxation, and professional ethics. The senior tech-
nical committees theoretically speak for the entire membership of the
AICPA in those five areas of vital interest to CPAs and the public.
The Auditing Standards Executive Committee, one of the senior
technical committees, performs an especially important function. It
develops the AICPA's positions on proper auditing procedures which
are issued as Statements on Auditing Standards. The Federal Gov-
ernment, State governments, and courts of law generally recognize
those standards as the ones which must be followed by all CPAs.
Chart 1 on page 3 illustrates the process by which the "Big Eight"
firms and the AICPA control the establishment of accounting stand-
ards. Accounting standards are important because they govern the
manner in which businesses must present financial information to the
public.







The process by which the Auditing Standards Executive Commit-
tee sets auditing standards on behalf of the AICPA is more direct and
tightly controlled. Auditing standards equal accounting stand ards in
importance because they govern the procedures used by accountants
to check the accuracy and reliability of business records supporting
financial statements. The legal liability of accountants in cases involv-
ing fraud or other illegal activities by corporate managements is often
determiined by their compliance with recognized auditing standards.
In fiscal 1976, eight of the 21 members on the Auditing Standard-
Executive Coiuinittee, including the chairman, represented the "Big
Eight" firms. The combined representation of the Nation's 15 largest
accounting firms was 14, or two-thirds of the total committee niiember-
ship.
The "Big Eight" accounting firms also dominate the several AICPA
committees established to advise the Federal Government, iich as the
Cost Accounting Standards Board Committee, the Federal Govern-
ment Executive Committee, the Federal Taxation Executive Com-
mittee, and the SEC Regulations Committee. When the AICPA
speaks to the Federal Government. it is the voice of the "Big Eight"
and. to some extent, the next seven largest accounting firms.
Several other important committees are dominated by the "Big
Eight" accounting firms. An example is the Planning and Finance
Committee which determines the compen-sation of AICPA staff of-
ficers. The 15 largest accounting firms aLzo have their own exclusive
-'.dvisory committee to promote their interest. within the AICPA.
The AICPA is a big organization which spent over $18 million on
its various activities in fiscal 1975, including $589,000 just to influence
the Federal Government. Another $187,000 was spent on Federal taxa-
tion matters. The "Big Eight" firms have lsed their influence to guide
the AICIPA into a broad range of activities intended to benefit their
interests.
In addition to the professional education and ethics enforcement
activities undertaken by most other profe-ional associations, the
AICPA engages in activities de:-igned to increase its power over the
practice of accounting. It controls the establishment of accounting and
auditing standards. It develops and grades the Uniform CPA Exalli-
ination used to test CPA applicants in every State. The AICPA also
provides substantial support to the National Association of State
Boards of Accountancy, an organization which purports to represent
the State boards that regulate CPAs.
The AICPA is an active political organization. It has estdablislhed
a "key man" program to influence Members of Congress. The pur'pozse
of tlhe prorann is to combat "government intervention in the profes-
sion's affairs" occasioned by an "anti-Iusi ness" attitude in Congi-'es,
according to the AICPA's chairmann of the board.
Representatives of the AICPA testify before Con-rress and mnake
presentations to Federal agencies and departments. The AICPA lob-
bies Congress on both accounting and non-:icountinai niatters. One
of its 'major projects is to influence Federal taxation policies.
The AICPA biennially prepares a booklet entitled "Recom lended
Tax Law Clianges" which it distributes to all Members of Congress.
Four "Statements of Tax Poli,-y" on controversial tax issues have al.o
been prepared and distributed. The AICPA's recommendations con-


67-159 0 77 3







sistently support more tax benefits for the accounting profession's
business clients.
Many AICPA members, especially those in large accounting firms,
act as independent auditors for publicly-owned corporations, and are
required to be independent of their clients' interests in fact and ap-
pearance. However, the AICPA does not hesitate to identify the inter-
ests of CPAs with those of their business clients. The accounting pro-
fession's reputation for objectivity and impartiality, as embodied in its
preeinenit professional association, is used by the AICPA to pro-
mote the partisan interests of the "Big Eight" firm's corporate clients.
Another major AICPA project is to expand the use of CPA serv-
ices by the Federal Government. This understandable effort is accom-
p)anied by statements of the benefits to be realized by the Federal
Government lxcause CPAs possess great expertise and follow strict
standards. The AICPA also recommends that CPAs be hired under
cost-plus type contracts rather than fixed-cost contracts, and that the
Fedeai': Government "indicate the price it has in mind" so that pro-
spective contractors will know how much to bid.
While the AICPA promotes the capabilities of CPAs to depart-
ments and agencies of the Federal Government with money to spend, it
cautions Federal enforcement authorities that only limited results can
be expected from audits performed by CPAs. It advocates legislation
to limit the hlal liability of CPAs for performing faulty or incdm-
plete audits. The AICPA sometimes takes contradictory positions to
promote different purposes before different pa rties.
Actions by the SEC, the Cost Accounting Standards Board, the
Internal Revenue Service, and other Federal agencies and departments
often affect the "Big Eight" firms or their corporate clients. The
AICPA exerts special effort to maintain liaison with such agencies
and departments in order to influence their activities. The views es-
pouiised by the AICPA usually reflect those of the "Big Eight" account
ing firms and their big corporate clients.
Federal employees serve on certain AICPA committees which are
specifically a-signed to influence Federal policies and personnel. Be-
cause the AICPA is a lobbying organization that reflects often con-
troversial views of the "Big Eirht" accounting firing, the participa-
tion of Federal e,-iployees on committees that attempt to influence the
Fedei.l Government is highly questionable. Federal employees affect
Federal accounting practices through the performance of their official
duties, and there is no need for them to pa rticipate in influencing other
Federal employees th rough a professional lobbying organization.
The AICPA attempts to respond to major problems facing the ac-
counting profession by proposing "reforms" that are acceptable to
those, controlling the organization. When strong criticism arose con-
cerning failun'- in the establishment of accounting standards, the
AICPA appointed a study commis-ion which issued its report in
March, 1972. FThat report recommended creation of the Financial Ac-
count ing Standards Board. Adoption of that recominnendation resulted
in t1i, present ina(le(jaite system of establishing accounting standards
which lis described in this study.
Similarly, the AICPA appointed its Commission on Auditors' Re-
sponsibilities--tli,, Cohen commission-to respond to criticism of in-
dependent auditors of major corporations arising from recent disclo-







sures of unreported corporate wrongdoing. Although the Cohlien
commission was established and is completely funded by the AICPA,
it has been designated as an "independent" commission in an effort
to boost its credibility. The AICPA's Cohen commission has not vet
completed its study, but has given indications that it will support the
concept of limited auditor responsibility advocated by the AICPA
and the "Big Eight" accounting firms.
The AICPA has already adopted a voluntary program intended to
assure the public regarding the quality of accounting firms practicing
before the SEC. The primary participants in the program would 1)be,
the "Big Eight" firms which would review each other to evaluate their
quality control procedures. The program has several major deficiencies
which make it wholly inadequate as a basis for public confidence in
the quality of practice by large accounting firms.
Two proposals have been issued by the AICPA concerning an inde-
pendent auditor's responsibility to detect and report illegal acts by
clients. Both proposals are aimed at limiting the responsibility of inde-
pendent auditors. The tone of the AICPA proposals is typified by a
remarkable statement in the second one that auditors are not respon-
sible for reporting illegal acts to the proper government authorities:
"Deciding whether there is a need to notify outside parties of an illegal
act is the responsibility of management. In the ordinary case, the
auditor is under no legal obligation to notify outside parties."
The AICPA established the Financial Accounting Standards Board
and plays a key role in selecting its members and financing its opera-
tion. AICPA control over the FASB is carefully written into the
charter and bylaws creating the FASB. Chart 3 on page 137 illustrates
the manner in which the AICPA controls the FASB.
Congress and the public should recognize the partisan and political
nature of the AICPA when evaluating its influence on accounting
practices promulgated or aDproved by the Federal Government. UTnder
the control of the "Bio Eight" accounting firms, the AICPA sets
auditing standards and maintains control over the setting of ac-
counting standards which have substantial impact on the public and
the Federal Government. Many other areas of public policy affecting
accounting and business are controlled or heavily influenced by the
AICPA.
THE FINANCIAL ACCOUNTING FOUNDATION
The Financial Accounting Foundation (FAF) is the non-profit
corporation organized by the AICPA and co-sponsored by four other
private intore-t ,rouins to operate the Financial Accounting Standards
Board (FASB), which sets accounting standards.* Those groups are
the Financial Executives Institute, the National Association of Ac-
countants. the American Accounting Association, and the Financial
Analysts Federation. None of those private interest groups is suited
to control the setting of accounting standards which affect the Federal
Government and the public.
*The Securitles Industry Association was added as the sixth sponsor of the FASB on Oc-
tober 1, 1976. Although mided as a sponqnrInz group too late to be Inliiided l n this study.
the Securities Industry Association reportedly represents the interests of more than .-0
investment banking firms. Its addition as an FASB sponsor does not significantly affect the
findings of this study.







As shown in Chart 1 on page 3 the FAF does not set accounting
standards directly, but rather serves as an intermediate organization
theoretically to separate the FASB from its private sponsors. That
separation is the basis for the FASB's claim that it is "independent."
Chart 3 on page 137 illustrates in more detail the relationship between
the FASB organization and its private sponsoring groups. Chapters
V, VI, VII, and VIII of this study describe the FASB organization,
its sponsors, and its activities.
The FAF is comprised of nine trustees who are selected from the
five sponsoring groups in the manner summarized on Chart 3. The
AICPA maintains control over the FAF board of trustees because the
exclusive power to elect and remove them is vested in the AICPA's
board of directors, who-e chairman is automatically designated as one
of the trustees. The other" sponsors only have the authority to nominate
a single trustee each.
Eight of the nine FAF trustees are AICPA members. Only one of
the trustees supposedly representing the other four sponsoring groups
is not also a member of the AICPA. In addition to the control they
exercise through the AICPA over the selection of all trustees, the
"Big Eight" had three representatives serving directly as FAF
trustees in 1976.
TFhe board of trustees has two princip il responsibilities-to appoint
members of the FASB and the Financial Accounting Standards Ad-
visorv Council (FASAC) and to arrange for financing of the entire
FASB organization. That organization is comprised of the FAF, the
FASB, and the FASAC.
Exclusive a authority to appoint and remove FASB members is
vested in the FAF board of trustees, who cannot themselves simul-
taneously serve on the FASB. FASB members can be removed for
"reqsonablv evidencin m conduct detrimental to the purposes or repute
of the FASB." Thus, FASB members are not truly independent of the
trustees once they are appointed to office. The trustees themselves can
be removed by the AICPA's board of directors for conduct "detri-
mental to the purpo-es or repute of the FAF or the FASB," so they
are not truly independent either.
Financing for the FASB organization comes almost exclusively
fromi its five private sponsoring groups and their members. All of
thIe groups have pledged to support the FASB financially, but their
contributions are not equal. Contributions to the FASB are concen-
trated among the large accounting firms and major corporations which
would be most affected by any major reform of accounting standards.
The accounting profession donates about half of the money con-
tributed to operate the FASB. In 1975, a total of $4,129,201 was con-
tributed to operate the IFASB, and the accounting profession donated
$2,059,076. The "Big Eight", the AICPA, and 41 other accounting
firms donated 99.6 percent of that amount.
The "Big Eight" firms each contribute $200,000 annually, so they
taccounte( for $1.6 million or 78 perinet of the $2,059,076 donated by
tihe accounting profession in 1975. The next seven largest accounting
firms contributed a total of $286,500, meaning that the Nation's 15
largest accounting firms gave a combined total of $1,886,500 or 92 per-
cent of the contributions received by the FASB from the accounting







profession. The AICPA, which is controlled by the large accounting
firms, donated most of the remainder.
Corporate contributions toward operating the FASB amounted to
$1,928,349 in 1975, a little less than half of the total $4,129,201 received.
Approximately 80 percent of the corporate contributions was traceable
to members of the Financial Executives Institute, a business lobbying
group, which is one of the FASB's sponsors. Although 1,397 corpora-
tions made contributions in 1975, 580 of the Nation's largest corpora-
tions donated 91 percent of the $1,928,349 designated by the FASB
as coming from the corporate sector.
Contributions from the other FASB sponsors were much smaller.
The National Association of Accountants, another organization repre-
senting business interests, contributed $75,000 in 1975. The American
Accounting Association, which primarily represents academic ac-
countants, donated only $6,876. The Financial Analysts Federation
contributed $7,000.
Contributions for operating the FASB are made to the FAF which,
after deducting its small operating expenses, passes the money to the
FASB. That procedure is intended to create an impression that the
FASB is insulated from the monetary influence of its sponsors.
Donations to the FAF are tax-deductible, so the taxpayer partially
subsidizes operation of the FASB.
THE FINANCIAL ACCOUNTING STANDARDS BOARD
The Financial Accounting Standards Board is the private body
within the accounting establishment which actually sets accounting
standards. Chart 1 on page 3 shows that the FASB is separated
from the AICPA and its other sponsors by the FAF. A more detailed
summary of the FASB's relationship with its sponsors is shown in
Chart 3 on page 137.
The FASB's organizational separation from the private interest
groups sponsoring it is the basis for the claim that it establishes
accounting standards "independently." However, the separation is
one in name only. This study finds that the "Big Eight" accounting
firms, the AICPA and, to a lesser extent, the other sponsoring groups
have control over the operation of the FASB. Such control is exercised
in terms of money, personnel, and organizational support.
The FASB has seven members, and all of them belong to one or
more of the five snT)onsoring groups. Six of the seven FASB members
belong to the AICPA. In 1976, three of the members were from "Bicy
Ei.pht" firms.
Overall. 23 of the 32 FASB professional staff members belong to
the AICPA. Ten of the 32 staff members were previously witli "Big
Ei.rht" accounting firms. The concentration of FASB staff members
identified with the AICPA and the "Big Eirit" firms is greater in
the higher staff positions and the positions which have the most inlp)act
on the accounting standards issued by the FASB.
There is a close identity between the leadership of the AICT'A .and
the leadership iii the FASB ormg,,izatimn. The present FASB chair-
mann is a 1)past pivesideiit of the AICPA. Even the Fin.ncial Account-
imn Standards Advisory Couicil, which is suppose(l to provide the
FASB with a broa(l spectrum of outsid(le advice, is largely comprised





16


of representatives from the same group of big accounting firms, big
investment firms, big law firms, and big corporations which dominate
every facet of FASB activity.
As part of its claim to independent operation in the public interest,
the FASB has developed rules of procedure for promulgating account-
ing standards. Tho-e rules generally permit an opportunity for criti-
cal comment on FASB proposals before they are finally adopted as
standards. However, they do not overcome the fact that the FASB
and its st aff are not. fairly balanced as to the interests represented by
tho.-, persons who perform the work and make the actual decisions
regarding accounting standards which affect the Federal Government
and the public.
An exaIiple of the special interest orientation found throughout
the FASB is the composition of the task forces which perform much
of the work in researching and d(leveloping FASB positions on par-
ticular accounting issues. The memberships of such task forces are
largely comprised of outside representatives from large accounting
firms, corporate clients of "Big Eight" firmis, contributors to the
FASB, Lrge invest iient firms, and big banks. The FASB's extractive
industries task force, which is attempting to develop uniform account-
ing stalidards for oil, gas, and linining conpi)anies, has 19 identifiable
outside intere-ts represented on its membership. Seventeen are easily
identified :is having an actual or potential financial interest in the type
of accounting standards used by extractive, industries.
The FASBI has adopted conflict of interest policies "to establish to
public :;iti- faction the independence and objectivity of those respon-
sible for eft: 'blishing and iniprovin_, standards of financial accounting
and reporting." D,-"pite its recognition that even the appearance of a
conflict of interest is enough to undermine public confidence. the
FASB's policies permit its members and staff to own unlimited
amounts of investments, such as publicly traded securities, which
could o'ainlse conflicts of interest. Members do not even have to report
an investment to the FAF trustee: inlesc it iq "material." which the
annual reporting instructions define as $25,000 or more invested in
a s.inxle company.
The complete inadequacy of the FASB's policies to prevent conflicts
of interest is perhaps Lst illustrated by the recent departure of an
FASB member from one of the "Big Eiaht" accounting firms who
riD i]ned prior to the end of his term in order to return to his firm. His
resignation apn'-ars to violate an FASB rule prohibiting mnemlbers
from enterin- into formal or informal employment agreements while
serving on the FASB. It ,eems doubtful that an FA.SB member
would resign with an announcement of his intent to return to his
previoeis business affiliation without some formal or informal agree-
mnent that he waN; wanted back and that there was an ac-eptable posi-
tion for him. A "revolving door" arrangement between the FASB
and the big accoilunting firms supporting it h;as appieriiently already
be p-rn.
A review of the FASB's activities confirms the finding of this shidy
that tlohrp is no rea1-on to ex ('ct the, FASB to achieve serious reform
I)v establ;shinf a ." tem of unifo ri and meaninrful :ocvonntinr
standlnrds. Such a system is needed to replace the Drsent collect ion of
flexible, alternative standards which have perii itted the growth of
''creftive accomntint ;is an accept]ible option to accurate financial







reporting. A study sponsored by the AICPA has listed 31 separate
kinds of business transactions with an aggregate of 80 different ac-
counting alternatives for reporting the transactions.
During its three-year existence, the FASB has issued 12 "Statements
of Accounting Standards." Those standards have addressedI account-
ing problems of varying significance, but they have not resolved such
problems in a manner which results in meaningful, as well as uniform,
treatment of specific business transactions. Two of the standards have
permitted alternative accounting methods, and none of them has seri-
ously threatened the accounting prerogatives of various special inter-
est groups in the esta lished business community.
The FASB has also engaged in a series of private meetings with
representatives of large accounting firms and big business. Meetings
have not been held with other segments of the public affected by the
FASB's pronouncements because the FASB only seeks direct con-
tact with "responsible representatives of groups having a capability
to provide meaningful information and insight concerning the estlb-
lishment of financial accounting standards." Despite its failure to
seek divergent views and establish a system of uniform and meaning-
ful accounting standards in the public interest, the FASB and its
sponsors launched an intensive lobbying campaign to thwart efforts
by Congress to direct the SEC to establish such accounting standards
for oil and gas companies.

THE SECURITIES AND EXCHANGE COMMISSION
The Securities and Exchange Commission is th, Federal Govern-
ment's major participant in the accounting estab linhii.e-it. To an
astounding de-ree, the SEC has permitted, and even inci-ted upon,
establishment of accounting standa(lards which have substantial impact
on the Fedei al Government and the public by self-interested private
accounting organizations. The rezu]t Laiz. Lec-i an e-xt ordinary
delegation of public authority and r-esponsinility to narrow private
interests.
Chanter IX of thi' studiv describes the aceom- ting .,sponsibiliti,<
of the SEC. The SEC's role *n tle pr'-cnt system of setting accounil)r
stands, rds is ill iit 'ated by ."-lirt 1 on p,- e 3.
In the Securiti-; Act of 19' -nd(l the Seciiriti- Excha%.' Act of

4--
193L COnP-,-, :i":,t1ed the rEC to pIrotect tle lM-ie fi,;! i' 1--- .
misleading mnfo ';,iti-.; :,y :',.ui*nm m !;puliciy-own,'' c. (',rp:rations to
,Tiscl,,-, .i1,1icI(:l ;i,;d other information ii a ,i;i" mi'er- wv ic a, W.ie^v
'ie ,,t- the ,i,.iilts ,,f .or o ,ite ,.'A i'tt ,.-. oa e the ^"^,
broad anthif lt vy to (..t nbli .* am 'oinit .rr ald mii..rt'mi st ,',a"'1s ;.;
part of its mandate t,, ali-,iditer and enfoi', the f t
Federal -eeuritiws la.,. S( ,, a-fNer its creation, the >L( i 1' i. a
three to two, vote 't to exerci,--' its authority t,- ,t a< ix '
-tanda Instcal. the !F C decided t"( ,(If v on :ice(oi]t ,,'I -;I; i,1 li. ,-,-
ill tle, priv te 1.,t ,r as l,.in protective of tlhie public mtel ,-(. 't ,\ ,_
as such -tno rdshave i-antal .i..rittie su to" T1 41 iri the
,nsn,,-lf yi'-, thAe .AT(TlA has e'r..ted t16ree 1,',lie> to pi',,de '-lie
support ti' ,ogh authborita tive pronouncements. \ cI .11o.tion ,:f flexible,
alternative acc-untin,, > a






ing principles--has evolved in the private sector to satisfy the SEC's
"sulb)stantial authoritative support" test.
After IHie failure of its previous two standard-setting bodies to
develop a system of uniform and meaningful accounting standards, the
AICPA created the FASB in 1972 in an effort to stem criticism of its
capabilityy to s.et re-ponsive standards. The SEC issued a policy state-
ment-Accounting Series Release (ASR) 150-in 1973 which spe-
cifically endorie:, the FASB as the only private body whose standards
will be recognized by the SEC as satisfying the requirements of the
Fe(ederal securities laws. In effect, the SEC has delegated tlhe establish-
inent of accounting standards which are binding on all publicly-owned
corporations to the special interest groups which control the FASB,
and h;i. ,.-erved a mere oversight role for itself.
Fir fromi l,'ing unhappy with the private sector's failure to establish
uniform an I meaningful accounting standards, the SEC has consist-
ently defended its delegation of authority to standard-setting bodies
controlled by thie AICPA. In ASR 150, it said: "Tie determinations by
these bodies have been reg-arded by the Commission, with minor excep-
tions, as Iing responsive to the needs of investors." That assured state-
mnent was made after the conglomerate takeovers of the 1960s, the
unanticipated collap-e of the Penn Central, and many other problems
illustrating failures of accounting standards.
When Coiig, -. attempted to achieve uniform accounting standards
for oil and gas companies in 1975 by directing the SEC to exercise
its authority to set such standards, the SEC joined with the AICPA,
the FASB, and other private interest groups in opposing the attempt.
It imdertook an intii..-ive lobbying campaign in a su'cessful effort
to pIe"-ivi1 its delegation of standard-s.etting authority. The SEC
denoolsti;!ted more concern for protecting the FASB's privileged
position than for protecting the public from misleading financial
information.
Through the ve.6ir-. the SEC has maintained a close relationship
with thie AICPA and its standard-setting bodies. The SEC's chief
a, ."ountants, who greatly influence its accounting policies, ha"e be-
loned t to the AICPA and worked with its committees. intended to
iniflnvence the SEC. One was even hired by the AICPA as a consult-
ant at an annual rate of ;60,000 after his retirement from the SEC.
The SEC has also shown a tendency to treat. large accounting firms
more leniently than individual CPAs and small firms in disciplinary
actions. Individual CPAs and small firms are routinely suspended from
practice before the SEC and identified publicly as punishment for
their improper or illegal acts. The three "Big Eight" firms disci-
plined by thie SEC for simiilar acts have received relatively mild sanc-
tions. anl thlie individuals involved were iot identified publicly.
Auditingr standards k-.tablished by the AICPA are recognized by
tlie SEC as adequate to assure the accuracy and reliability of corpo-
I~t aeors -ass. "re accuacy rP
;ite records -l)upporting information reported to the public. Continual
revelations of unreported corporate wrongdoing have raised serious
qestiIon- 1Varding the adequacy of present auditing standards. The
SE 'C lias no procedure, for checking the quality of work by inde-
lpendent auditors in performing their responsibilities under the Fed-
eral -1''iirHtiic: laws.
Arthur Ander-',n & Co.. one of the "Biz Eight" firms, has brought
suit in IFederal court to abrogate the SEC's policy of approving past





19


and future standards issued by the FASB. Preliminary findings by
the court indicate that Congress will have to exercise its authority to
correct the adverse effects of the SEC's delegation of standard-setting
authority. Action by Congress will also be necessary to restore the op-
portunity for individuals to sue negligent accountants for damages
under the Federal securities laws.
THE "BIG EIGHT"T ACCOUNTING FIRMS AND THEIR CORPORATE CLIENTS
The last box in Chart 1 on page 3 illustrates the circular lp ,tern
of self-interest evident in the present system of setting accounting
standards. The controlling influence of the "Big Eight" accounting
firms in establishing accounting standards ultimately benefits the.
managements of their corporate clients by assuring that such stand-
ards will be generally acceptable to them. The "Big Eight" firms bene-
fit because the present system enhances the value of their services to
clients by permitting more flexibility in reporting financial results to
the Federal Government and the public.
Unfortunately, accounting standards which permit corporate man-
agements great flexibility in reporting the results of their business ac-
tivities have resulted in many cases of inaccurate or misleading finan-
cial statements. Economic decisions based on such financial stat ements
have caused substantial losses to investors, creditors, suppliers, pur-
chasers and others. To the extent that public policies have been based
on inaccurate or misleading financial statements, the Federal Govern-
ment has acted upon illusion rather than fact.
For example, most Federal revenues are received from taxes com-
puted on income or asset values. Accounting standards are instru-
mental in determining such income and asset, values. Under the present
collection of accounting standards, a busine-s can report healthy earn-
ings or severe losses merely by selecting alternative accounting stand-
ards. Accounting issues involve social issues such as the fair distribu-
tion of Federal taxation.
The FASB represents only the interests of its private sponsoring
groups. No amount of transferring funds and authority through inter-
mediate organizations can alter the fict that, in the end, all of lthe or-
ganizations are controlled by the same self-interested parties. The in-
ability to divorce private influence from private control impairs all
efforts to achieve public confidence in a system which ve(ts public au-
thoritv in private organizations.
Allegations of government inefficiency and wastefulne-C hlave been
uIsed to justify retention of the authority to establish accounting
standards within the private setor. Available evidence, however, indi-
cates that government agencies are capable of settling stamidards
eoinpetently and more efficiently than priv-ite or1LTiz ti-) ions. In any
event, establishing accounting standards involves social i -snes tli t
can be resolved effectively only by authorities responh-ile solely to
the public.
Congress established the Cost Accounting Standards Board in 1970
"to achieve uniformiiity and consistency in the eost-accounting princi-
ples followed by rdopfence contractors and subcontractor' under Fed-
eral contracts." The CASB performs a standard-setting function





20


essentially similar to that performed by the FASB, but the CASB's
staff and budget are approximately half the size of the FASB's.
Although there are some deficiencies in the CASB's structure and
procedure-, it is performing its task competently overall. The CASB
is described in Chapter X of this study.
Chapter XI of this study references some materials describing
problems which have occurred because of improper or ineffective
accounting and auditing practices. They demonstrate the need for
accounting and auditing reforms. They also illustrate that account-
ing issues are information issues, involving the meaning, clarity, and
amount of information given to Congress and the public regarding the
activities of major corporations.
This study shows that there are serious deficiencies in the existing
accounting establishment. The Federal Government, through the
SEC. hlias cooperated in permitting the use of accounting practices
which have resulted in substantial damage to the public in apparent
violation of the intent expres-ed by Congress in the Federal securities
laws. Refonis are needed to restore public confidence in the accuracy
and reliability of financial and other information reported by
publicly-owned corporations.

RX E-CO M 3M ENDATIONS
The Federal Government has an important responsibility to ensure
that publicly-owned corporations are properly accountable to the
public. Existing accounting practices promulgated or approved by
the Federal Government have failed to fulfill that responsibility ade-
quately. The following recommendations are based on the findings of
this study, and identify actions which should be taken by Congress
and appropriate Federal agencies in order to achieve efficient and
effective accounting practices that will promote corporate account-
ability.
1. Congress should exercise stronger oversight of accounting prac-
tices p1ronmlgated or approved by the Federal Governmnnt, and more
leadership in establishing proper goals and policies. Broad delegation
of legislative authority to Federal agencies, which have in turn dele-
gated broad authority to private interest groups, has been a major
factor in the establisliment of accounting practices which have bene-
fitted special interv,-ts at the expense of the Federal Government and
the public. As the branch of the Federal Government most directly
reprs-entative of the public, Congress should exercise its authority to
achieve proper accounting practices.
2. Congire-s should establish comprehensive accounting objectives
for the Federal Government to guide agencies and departments in
p)erforim iingr their responsibilities. The lack of such objectives has
permitted divergent and sometimes contradictory accounting prac-
tice. within the Fedleral Government. It has also contributed to the
failure to establish uniform and meaningful accounting, standards for
publicly-owned corporations during the past 40 years.
The Co(t Accounting Standards Board lhas benefitted from its spe-
cific -hita utory mandate to achieve "uniformity and consistency" in cost
accounting standards used by the Federal Government, whereas the
SEC has never established meI in'inful objectives for financial account-







ing standards. A comprehensive set of Federal accounting obje.,tives
should encompass such goals as uiiiforiniity, col-istency, clarity, accu-
racy. simplicity, meaningful prcseniitation, and fairness in application.
In addition, Congress should est, ablish specific policie- ao in such
"creative accounting" techniques as percent of completion income
recognition, inflation accounting, "normalized" accounting, and other
potentially misleading accounting methods.
3. Congress should amend the Federal securities law- to re-tore the
right of damaged individuals to sue independent auditors for negli-
gence under the fraud provisions of the .-ecurities laws. Such legisla-
tion is necessary to overturn the holding of the U.S. Supreme Court
in Ernst & Ernst v. Olga Hochfelder, et ac., 96 Sup. Ct. 1375
(March 30, 1976) that "scienter"-the intent to deceive, manipulate,
or defraud-is a necessary requirement of private actions for damages
under the fraud provisions of the -ecurities laws. The dissenting
justices recommended that Congress restore the rights denied indi-
viduals in order to achieve the remedial intent of the Federal securi-
ties laws.
The few independent auditors who perform negligently should be
held responsible for their actions, and should not be permitted to im-
pair public confidence in the competence of all independent auditors.
The Federal Government should not establish any "accountant-client
privilege" or provisions which would limit the liability of independ-
ent auditors. Competent independent auditors already are adequately
safeguarded, and unnecessary restrictions would impede the opera-
tions of Federal enforcement authorities and courts of law.
4. Congress should consider methods of increasing competition
among accounting firms for selection as independent auditors for ma-
jor corporations. At present, a single accounting firm, nominated by
management, is placed on the ballot of annual meetings of stock-
holders. Domination of the corporate election proce-s by large institu-
tional investors and management ensures that the accounting firm
nominated by management is elected. Long association between a cor-
poration and an accounting firm may lead to such close identification
of the accounting firm with the intere-t S of its client's management
that truly independent action by the accounting firm becomes difficult.
One alternative is mandatory change of accountants after a given
period of years, or after any fnindig by the SEC that the accounting
firm failed to exercise independent action to protect investors and the
public. Another alternative is amendment of the Federal securitie-
laws to require that more than one accounting firm be on the ballot
at annual meetings of stockholders. The mechaniiim for achievinQ thii
choice for stockholders could be a requirement that stockholder' with
voting rights to a given, small percentage of the stock would be en-
titled to nominate an accounting firm as the independent auditor.
Holders. of a limited number of shares also could be 1)ermitted to vote
for their own renre-entative on a corporation's audit committee.
5. The Federal Government should directly e-tablish financial ac-
countin, staiiindards for publicly-owned corporations. Accounting
standards. involve social and economic issiez which can only be re-
solved effectively through the processes of ro-venment re nonsible
solely to the public. Furthermore, all segments of the public affected





22


by accounting standards should be represented in the decision-making
process.
As intended by Congress in the Federal securities laws, the SEC
provides a public forum for setting accounting standards through its
rule-making procedures. However, the SEC's long association with
the private accounting establishment and insistent determination to
rely i upon its accounting pronouncements cast substantial doubt on the
SEC's ability to establish accounting standards which would restore
public confidence in corporate financial reporting.
Other alternatives would be to establish financial accounting stand-
ards through a Federal board similar in operation to the CASB or
establishment of accounting standards by the General Accounting
Office. Public participation and strong oversight by Congress are
essential to -;ifeguarding the public interest in any standard-setting
pIrocedure adopted.
6. The Federal Government should establish auditing standards
1'11ed by independent auditors to certify the accuracy of corporate
financial statements and supporting records. Again, participation by
all segments of the public is necessary to develop auditing standards
that will re-t ore public confidence in the integrity of corporate reports.
In view of the substantial record of previously unreported corporate
wrongdoing which has been revealed during the past few years, a spe-
cial review of pri-ent auditing standards should be undertaken to de-
termnine their adequacy prior to considering their adoption by the
Federal Governi iment. Auditing standards could be established by the
General Accountino- Office, the SEC, or by Federal statute.
7. The Federal Government should itself periodically inspect the
work of independent auditors for publicly-owned corporations. Such
a mandatory inspection program should be designed to provide assur-
ance to the public and Congrres, that independent auditors are per-
forming their responsibilities competently in accordance with proper
standards of conduct. Periodic quality reviews could be conducted 1by
the General Accounting Office, the SEC, or a special audit inspection
ag ency.
8. The Federal Government should re-tore public confidence in the
actual independence of auditors who certify the accuracy of corporate
financial statements under the Federal securities laws by promulgating
and enforcing strict standards of conduct for such auditors. Those
standards should specifically prohibit activities by auditors which
impair their independence in fact or appearance. Direct or indirect
repi -,v(,ntation of clients' interests and performance of non-accointing
nianaement advisory services for public or private clients are two
activ-ities which are particularly incompatible with the responsibilities
of independent auditor- and should be prohibited by Federal stand-
ards of conduct.
The SEC is the appropriate agency to promulgate and enforce
standards of conduct under its authority to determine the qualifica-
tions of independent auditors.
9. The Federal Government should require the Nation's 15 large st
accounting( firms to report basic operational and financial data an-
nually. Thoe fii'm-s operate as partnerships and are not retired to
report such information to the public, but they perform public respon-
sibilities as independent auditors for the vast majority of the Nation's





23


sizable publicly-owned corporations. Congress and the public need
basic information on the organization, activities and financial statiiu
of the 15 largest accounting firms in order to evaluate their perform-
ance of important public responsibilities under the Federal securities
laws.
The subcommittee collected certain basic information on the "Big
Eight" accounting firms, but this study finds that there is a need for
more comprehensive information to be collected by the Federal Gov-
ernment on an annual basis. Such information should clearly disclose
the financial position, operations, and various activities of large, ac-
counting firms. The appropriate Federal agency to collect such infor-
mation is the SEC.
10. The Federal Government should define the responsibilities of
independent auditors so that they clearly meet the expectations of
Congress, the public, and courts of law. Independent certification con-
cerning the accuracy of corporate records and the fair presentation of
financial information is essential to successfully protecting the public
through adequate disclosure of corporate activities, as intended by
Congress in the Federal securities laws. The independent auditor's
certification included in corporate reports should be understood by all
auditors to mean that financial information is presented fairly and
that corporate records are complete and accurate.
Independent audits that do not ensure fairness and accuracy are
useless as a basis for public reliance upon information disclosed by
publicly-owned corporations. Limited responsibility audits that pro-
vide only vague indications of fairness and accuracy, which are
advocated by certain segments of the accounting establishment,
result in substantial costs without achieving the assurance necessary
to make the present disclosure system operate effectively. If independ-
ent auditors cannot provide proper certification of information
reported by publicly-owned corporations, then the Federal Govern-
ment should seek alternative methods of performing that necessary
function.
11. The Federal Government should establish financial accounting
standards, cost accounting standards, auditing standards and other
accounting practices in meetings open to the public. Accounting prac-
tices involve broad social and economic issues which should not be
decided in private, and do not qualify as exemptions under Federal
statutes regarding open meetings.
12. The Federal Government should act to relieve exce-ssive concen-
tration in the supply of auditing and accounting services to major
publicly-owned corporations. The Department of Justice and the Fed-
eral Trade Commission should investigate and determine whether
violations of the Federal antitrust laws have resulted from excessive
concentration in the supply of such services among all industries or
within specific industries. Congress should consider other methods of
reducing concentration in the supply of auditing and accounting serv-
ices to major corporations.
13. The Federal Government should retain accounting firms which
act as independent auditors only to perform auditing and accounting
services. The Federal Government should not contract with such firm-
for the performance of management advisory services or otelir con-





24


suiting services which are incompatible with the responsibilities of
independent auditors.
14. The Securities and Exchange Commission should treat all inde-
pendent auditors equally in disciplinary and enforcement proceedings
under the Federal securities laws. Large accounting firms and their
partners should receive the same sanctions as individual CPAs and
small firms for similar offenses. The SEC and other Federal agencies
should not rely on private parties and organizations to conduct com-
pliance reviews ordered as a result of disciplinary or enforcement pro-
ceedings, but should conduct such reviews themselves. Public
confidence in the enforcement of Federal statutes and regulations is
impaired when public responsibility is delegated to private parties
and organizations which may be self-interested.
15. The membership of the Cost Accounting Standards Board
should not be dominated by repre-entatives of industry and account-
ing firms which may have vested interests in the standards established
by the board. By statute, industry is guaranteed one position on the
five-member CASB, and the remaining two appointed members from
the private sector should be independent of real or potential conflicts
of interest. The appointed member from the Federal Government
should be rotated among the many Federal departments and agencies
affected by CASB standards, and should not always represent the
Department of Defense.
16. Federal employees should not serve on committees of the Amer-
iIan Institute of Certified Public Accountants or similar organizations
that are assigned to directly or indirectly influence accounting policies
and procedures of the Federal Government. Federal employees should
remain free from the appearance of conflicts of interest regarding the
fair and objective performance of their public duties,;.











CHAPTER I. THE "BIG EIGHT" ACCOUNTING FIRMS

INTRODUCTION
The accounting profession is dominated by eight giant accounting
firms, collectively known within the busing ies and finanlcial community
as the "Big Eight." The "Big Eight" are so large and influential in
relation to other CPA firms that they are able to control virtually all
aspects of accounting and auditing in the United States.
Listed alphabetically, the names and addresses of the "Big Eight"
accounting firms are as follows:
Arthur Andersen & Co., 69 West Washington Street, Chicago, Illi-
nois 60602.
Arthur Young & Co., 277 Park Avenue, New York, New York 10017.
Coopers & Lybrand, 1251 Avenue of the Americas, New York, New
York 10020.
Ernst & Ernst, 1300 Union Coimmerce Building, Cleveland, Ohio
44115.
TT, skins & Sells, 1114 Avenue of the Americas, New York, New York
10036.
Peat, Marwick, Mitchell & Co., 345 Park Avenue, New York, New
York 10022.
Price Waterhouse & Co., 1251 Avenue of the Americas, New York,
New York 10020.
Touche Ross & Co., 1633 Broadway, New York, New York 10019.
The "Big Eight" firms exercise influence far beyond that ,"..ch is
indicated by the number of CPJs they em ov- or the nmn'l-- -If
clients they audit. For exainiple, the Aiiierican Institute of Certified
PunblicAccountants (AICP.A)* ,i.t I,,t i there were 150,00 to 1 60.000
CPAs licensed to practice in the lnitel State; at tlie ,-i of 1975.
About 118,000 CP -s are members of the \ATPA. Of that number.
appr.xiTiiately 17.400 or 15 i percentt of the ATCPA 'nl .ei,,1.HVr l fl' Ri-
ated with the "Biz Eight." acco uL firms. Thus, t i Bi 7 t'
firm. have only 11 or 12 percent of th.e Nation's CP .s w .or1 V r
them.
'Thlle .our, of tile % .mendoie- influeve, wield, t e "'" Ei t"
accounting firms is slated to the si:; an, i"lh:' ,.i f t, ir fcliento
rather thai to the n.i, )er of imdividal a..-..ita',t -- iat wit'
these firms. ,ihe vast ':ii.1jol ty of 1:r'_',, *rr i'ti *n 1, Tici i I.,I
tie. li11< of tle Natiwils eisn .i-...ilthi eip x f t e "r
Eight'" fir,-1 1 tbeir in(de)endent :iuto ,.r 1 f.r :(r !ti -. "'i -
ane related to t1ie -ize of the buisim ii sli ivic ai -
formed. Thus, )big clients provide tile "lig Light" itll thie p r-
tunity to e. .i big accom citing fees.
*The AICPA is thie largest andn most -rcztii iiin-iii 'fessionl .'r; mination rewsr ntnf
the interests of (''As. The manner in which the ATCPA is iiiiiate'd :'; he i'.- ...'l"
is dscrihedI fully in subsequent sections of t,-i study.
(25)





26


The amount of wealth received by the "Big Eight" firms through
fees for their services is to some extent proportionate to the amount of
economic wealth controlled by their clients. Since. their clients control
a large proportion of the Nation's economic wealth, the "Big Eight"
accounting firms receive the substantial accounting fees associated
with that wealth. Revenues generated by the practice of accounting in
the United States are concentrated among the "Big Eight" accounting
firms in the samie way that the Nation's economic wealth is concen-
t: citedd among their clients.
There are thir.e distinct methods by which the "Big Eight" firms are
able to use their wealth and position to influence economic and social
events in the united States. As will be shown throughout this study,
the "Big Eight" accounting firms actively use all three methods to pro-
imote their intere'Is.
(1) "Big Eight" firms aver able to exercise substantial influence di-
rectly ,' caiise of their siz, and their considerable financial resources.
Ap1irt front their partners and principals, they collectively employ
over 48,(.I0 people. The "Big Eight" accounting firms had estimated
total j,'o revenues of over '2 billion in 1975, with net earnings ap-
pr7oximatin mor. than $5O00 million. The total employment and finan-
cial resources directly controlled by the "Big Eight" are very substan-
tial. but there is an unequal distribution of those resources. among them
because the eight firms are of differing size>.
(2) The influence of the "Big Eight" firms is also exercised through
independent organizations. As described subsequently, the AICPA is
so thoroughly dominated by the "Big Eight" firms that it has become
a conduit for collectively expressing their views and promoting their
interv -ts. The American Accounting Association is also influenced by
the "Bio Eilght" firms through financial support and individual mem-
bership. This, the "Big Eight" are able to use their influence to affect
the activities of independent organizations, and avoid the appearance
of directly promoting their own interes-ts.
(3) FiMaily. the "Big Eight" are able to exercise substantial influ-
ence indiieotlv through their clients. Decisions made by these firms on
auditing and accounting matters have an important impact on the
economic and social activities of their clients. The large corporate
clients of the "Big Eight" heavily influence the economy, as well as
society in general. Accounting is the language by which businesses
report the results of their activities, and the "Big Eight's" dominion
over the language of accounting used by their clients is a source of
great influence for these firms.
Tlie "Bir Eight" accounting firms perform a variety of manage-
Sauiiir andkiother
inentt advisory services in addition to tax advice, auditing, and other
accounting services. Management advisory services offered by them in-
clude executive recruiiitment, product and market analysis, plant layout,
attumial s1er-vice.-. id financial ma nagement services.. All of the "Big
Eight" firiis employ specialists who are not CPAs to increase their
expertise in the performance of management advisory services. The
"Bir Eight" are much more than just accounting firms.
ThIere are many basic similarities among the "Big Eight" accounting
firms, and( they are often grouped together for the purpose of
(lescribling their activities. While it is useful to describe the activities of
tli, "Bigc Eight" firms as a group, they are not equal in all respects.





27


They do not all offer exactly the same services, and their clients are not
all of the same size or quality. In terms of annual revenues, the "Big
Eight" accounting firms are of varying -izes. probably ranging from
less than $200 million to more than $500 million for individual firm-.
Analysis of the information collected by this subcommittwii illuttratrs
some of the differences, as well as the similarities, among the "Big
Eight" firms.
Because of their exteni-ive influence and their role- 1z the indep'nld-
ent auditors for the Nation's largest corporations, the "Big Eight" ai'-
counting firms have a great impact on accounting practice- which are
promulgated or approved by the Federal Government. Their broad
range of political activities and management advisory services al-o
affect policies and programs of the Federal Governo ent. Tlii-.
Congress and the public must have knowledge of the "Big Eight"
accounting firms and their activitio- in order to properly formulate
Federal policies and accounting practice., which are significantly af-
feted by the "Big Eight" firms.

SUBCOMMITTEE REQUESTS FOR INFORMATION
This subcommittee began its present study of the rclationizhip be-
tween the accounting profession and Federal accounting practices be-
cause there was a clear need for reliable information concerning the
accounting profession and its activities. Unfortunately, reliable in-
formation on the accounting profession is not regularly available to
Congress and the public because CPAs generally practice accounting !
as biisines partnerships. Business partnerships are not required to re-
port publicly any information on their financial standing, or their
activities. Unlike publicly-owned corporations, business partnerships
may reveal to the public only such information as they desire.
Preliminary research and inquiries by illhe -iibcommittee staff to
members of the accounting profession indicated that the only way for
this subcommittee to obtain reliable information on the accounting
profession would be to request such information directly from ac-
counting firms themselves. Accordingly, a questionnaire requesti-n
basic information on accounting firms was prepared and sent to each
of the "Big Eight" accounting firms on December 19, 1975. (See
Appendix A, p. 191.) The subcommittee sent its initial questionnaire
only to the "Big Eight" firms because it was believed those firms would
be able to provide this subcommittee with the bulk of the information
need(led to perform its study of Federal accounting practices.
The responses of the "Big Eight" firms to the subcommittee's
December 19, 1975 questionnaire are included in Appendix A, p. 190..
Although the information requested was bvicc desEriptive d(lata andl(l did
not involve disclosure of trade secrets, two of the "Big Ei!iht" ri's
asked that their responses be kept confidential. Coopers & Lyb;and
requested partial confidentiality for its response, but "reluctantly"
acquiesced when informed of the open resnonses by six other firn-.
(See. Appendix A. p. 288.) Touche Ross & Co. originally asked that its
entire response be kept confident iil, but finally agreed to permit pub-
lie use of all information except data relating to anionits of Federal
contracts performed by the firm. (See Appendix A. p. 404.)
Information which cannot be disclo-ed to Members of Conlres. and
the public is useless as a means of informning them about the sub-





28


stantial impact of major accounting firms on Federal accounting
practices. This subcommittee cannot fulfill its responsibilities by col-
lecting information needed by Congress and the public, and then re-
fusing to make such information available to them. Information on
Federal contract expenditures is not confidential, but the subcommit-
tee granted the Touche Ross & Co. request in order to expedite com-
pletion of the initial phase of the subcommittee's study of Federal
accounting practices.
This subcommittee sent two supplemental requests for information
to the "Big Eight" accounting firms. By letter of 8 April, 1976, the
subcommittee asked for copies of any testimony or presentations
by each "Big Eight" firm before Congress, a State legislature, or a
Federal or State regulatory commission since 1 January, 1975. (See
Appendix C. p. 569.) All of the "Big Eight" firms cooperated in
providing that information, although a few firms did not respond
completely.
The subcommittee's request for public testimony and presentations
covered a time span of only 15 months. However, the subcommittee
received a large volume of materials in response to its request due to
abundant acti, ity by "Big Eight" firms in this area. The subcom-
mittee staff has reviewed all of the materials submitted, and some
examples of the materials received are included in Appendix C.
They are described and referenced subsequently in this study.
The last subcommittee request for information from the "Big
Eight" was by letter of 7 June, 1976. (See Appendix D, page 845.)
That letter asked for data on the annual compensation received by
each of the three highe-t paid individuals in each firm, and the
number of women and blacks who are partners of each firm. A3 sub-
sj quently (h'd-eribed in this document, certain Federal agencies rely
Ain pivatc ori i ]ations dominated by the "Big Eight" firms to
reformr m important public nv-ponsibilities azigned to those agen-
ci::. Congre-- :nd the public need to know the financial interests of
;1:vate groutl- which perform public responsibilities assigned to
Federal agencies. Tliev must al-o know whether :such private groiuis
adcw, atelv rep:'-ent all ctors of the public.
(.. lv Artliiir Andersen & Co. and Price Waterhouse & Co. re-
AV I,. .,;pete V to the slbcommii" tee's 7 ioe, 1976 request. Five
i' the ;inami.: firms reil -t i to pvvide information on the coi pen-
;t I .;r:ejd :.y their t,' iuht ':id pt:rtners, but did provide
inf. ', ii n o(l their umb.r of wi.,nen and black pariner-. Touclo
c -..C. I.r'fused to provi le anv information at all. Tie "-O.',
wi ig iC .IAt" ..',is are included in Appendix D twe'ninning on

le t.e ;. mai' functicr.s of this stuvy is to provide a re:Ady
0' of 1nfor1-ation to Conw.' and the 1,'ublic n the .'lationship
.v,.., t.e accounting fl rof '--ion .f 1 d the F"ederal Goven Ii uent.
4',(c,- of this inIfo ati ion LIas iAden unavailable previIously to either
t, ress or tilie pu11ic. This -ii,conmmnittee has u::.d it-. r,.-our'es to
11..ct -une 1 ;i, inlormation on m: jor accounting irms which should
', "-ub} ielV a '; ii;' nbe.
i.rt of the data u- id in this study included information on other
".,ior accointinmi firnl- in addition to the "Big Eight" firms. Some
-''(tions of this document provide information on the next seven
la-r-est accounting firms after the "Big Eight." Those seven firms







are placed by the AICPA in the largest-size category for its advisory
committees, along with "Big Eight" firms. The 15 large-t accounting
firms in the Nation are a useful and reasonably complete groupings
for purposes of measuring the influence of major accounting firms on
the Federal Government.
At times, this study will refer to the next seven largest accounting
firms in the Nation after the "Big Eight" firm-. Listed alphabetically,
the names and addresses of the next seven largest accounting fiin-
are as follows:
Alexander Grant & Co., 1185 Avenue of the America-. New York,
New York, 10036.
Hurdman and Cranstoun. 140 Broadway, New York, New York
10005.
J. K. Lasser & Co., 10 East 53rd Street, New York, New York 10022.
Laventhol & Horwath, 919 Third Avenue, New York, New York
10017.
S. D. Leidesdorf & Co., 100 East 42nd Street, New York. New
York 10017.
Main Lafrentz & Co., 20() Park Avenue, New York, New York
10017.
Seidman & Seidman. 15 Columbus Circle. New York. New York
10023.

OTHER INFORMATION OX THE "BIG EIGHT" ACCOrNTING FIRMS
The subcommittee has also received information concernin"o the
activities of "Big Eight" firms from sourvos other than the "Big
Eight" themselves. Information was requested from the AICPA.
the Financial Accounting Standards Board (FASB) and its private
sponsoring groups. certain Federal agencies, and varioiiz other public
and private sources. A maior portion of that information is included
in this study, and is described and referenced in subsequent ectAion-.
The subcommittee staff hlas held numerous discussions with repre-
sentatives of "Big Eight" firms, members of other accounting firms.
Federal officials, and representatives, of the AICPA and the FASB.
Many articles, newspaper reports, public statements, and government
reports have been reviewed. Unsolicited information has also been
received by the subcommittee.
Arthur Andersen & Co. has published an annual report for the
past three years giving some detail on its activities. The information
reported by Arthur Andersen & Co. is intended to promote the firmn's
own interests, and is not verified by any outside sources. Allowing for
those limitation.:, however, the Arthulr Andersen & Co. annual report
is a useful source of information on the activities of one "Big Eighit"
firm. It is also useful as a irauge for evaluating the information sub-
mitted by other "Big Eight" firms. Copies of The Artlhur Andersen
& Co. annual report may be obtained directly from that firm.

SIZE OF THE "BIG EIGHT" ACCOUNTING FIRMS
The subcommittee has condensed much of the information it ,l-
lected from the "Big Eight" firms into Table I on )pagre 30. The table
facilitates comparisons among the firms and illustrates their cub-
stantial size. both individually and collectively.






TABLE I.-SUMMARY OF CERTAIN INFORMATION CONTAINED IN RESPONSES


Arthur
Young


Coopers &
Lybrand


Haskins & Peat, Marwick,
Sells & Mitchell


1. Please state the number of offices which your firm maintains within the
United States (if more than 1 partnership, corporation or other entity
exists in the United States, please furnish all names and answer subse-
quent questions accordingly).-- ---------------------------
2. Please indicate the number of States, territories or possessions of the
United States in which your firm maintains an office or affiliated office...---
3. Please state the number of cities outside the United States in which your
firm maintains offices or has an affiliation ----------------------
4. Please state the number of partners in your firm located in the United
States (include only certified public accountants).-------------------
5. Please state the number of principals located in your offices in the United
States who are not certified public accountants .-----------------
6. Please state the total number of employees of your firm within the Uniteo
States, excluding only partners and principals.------
7. P;ease indicate the approximate percentage of total revenues for services
performed by your firm in the following categories:
A. Auditing and accounting-..--------------------------- ----
B. Tax services ...--------- ---. . .--
C. Management advisory services including executive recruitment,
product analysis, marketing analysis, and plant layout---------
D. Actuarial services- - - - - - - - - - - -
E. Services performed for Federal, State or local governments--.
F. O their . .. .-- -.- - -. .
8. Please state if your firm renders management or other advisory services in
the following categories:
A. Executive recruitment--------------------------
B. Marketing analysis -----------------------------------
C. Plant layout----------- --------------------
D. Product analysis .. . .-------
E. Actuarial services -------------------------------------------
F. Federal advisory committees ----------------------------
11. Please state the number of other publicly held corporations for which
your firm is the independent auditor, and the number of privately held
corporations for which your firm is the independent auditor:
(a) other publicly held corporations------------------------------
(b) privately held corporations.---------------------------------
12. Please indicate the total number of partners, principals and employees of
your firm who are members of the American Institute of Certified Public
Accountants-..------------------.-------------------------------
13. Please state if your firm has made financial contributions, directly or
indirectly, to the Financial Accounting Standards Board. If so, please
indicate the amount of contributions made annually to date (in thou-
sands of dollars):
A. 1972------..---------------------------------------
B. 1973----.......------..----------------------------------
C. 1974----------.......... -----------------------------
D. 1975-.....-------- ------.-------------------------------


1 48
3 31
58
7 698

8 65

8,554

66
18
16
o10 3



No
No
No
No
No
(Ic)


(22)
(22)


2,352


2 64
4 35

150

414
50

4,800

69
17
14
115-10


Yes
(17)
(17)
(17)
(17)
(17)


23430
24 1,950


2,140


. . .200 200.. .-
200 200
200 200


81
36
242

521
44
6,189

69
19
10
2
12 2


Yes
1s Yes
Is Yes
No
Yes
Yes


561
4,877

2,280



90
150
200
200


112
45
146
484

20

5,795

73
17
9
1


Yes
Yes
Yes
Yes
No
No


23 700
239,000

262,730


93
40
137

443
9 12

4,798

74
15
5
<5
6 -

Yes
No
No
No
19 No
19 No


369
4,798

1,235


100
5 45

199
791
90
8,227

68
21
11
13 1
4


Yes
Yes
Yes
Yes
Yes
Yes


745
22,500

(27)


6 33


9 18


5,933


6
2


523
2S 4, 787


2,200


4,219


14
(14)
(16)


380
1,516


281,458


" 200 200 200 200 200
200 200 200 200 200
200 200 200 200 200


Arthur
Andersen


Ernst &
Ernst


Price
Waterhouse


Touche
Ross


OF THE "BIG EIGHT" ACCOUNTING FIRMS


TO THE DECEMBER 19, 1975 QUESTIONNAIRE








16. Please state your firm's annual gross revenue from services performed for
Federal departments, agencies, subdivisions or authorities during each
year from Jan. 1, 1970 to Dec. 31, 1975: 29
1970 .......--------------------------------------------------
1971 --..-.-.-.--.---------. --------------------------------
1972 ...- ....... -------------------------------------------
1973..--------- --------------------------------------------
1974--.....--.-.. ------------- -----------------------------
1975..--------- --------------------------------------------
17. Please state if your firm maintains a department, division or office for the
procurement of Federal, State, and local government contracts.


I Excluding Puerto Rico.
2 Including Puerto Rico.
3 30 States and Puerto Rico: 31 total.
4 33 States and the District of Columbia, and Puerto Rico: 35 total.
5 42 States and Guam, the District of Columbia, and Puerto Rico: 45 total.
6 32 States and Puerto Rico: 33 total.
7 Arthur Andersen has 698 partners; 638 presently are on assignment in the United States and 60
normally assigned in the United States are temporarily assigned outside the United States.
SArthur Andersen has 56 principals presently on assignment in the United States and 9 principals
temporarily on assignment outside the United States: Total of 65.
SAll management advisory service personnel.
10 The 3 percent reported as services performed for Federal, State or local governments is included
in the amounts reported in A, B, and C.
Services performed for Federal, State and local governments amount to 5 to 10 percent of the
total of A, B, and C.
12 The 2 percent reported as services performed for Federal, State and local governments is in-
cluded in the amounts reported in A, B, C, and D.
13 The 1 percent reported as actuarial services and the 4 percent reported as services performed
for Federal, State and local governments are included in the amounts reported in A, B, and C.
14 Actuarial services performed by Touche Ross Stennes.
is Confidential at the request of Touche Ross & Co.
**1i "F. Federal advisory committees individual members of our firm have served on several
U.S. Federal advisory committees. Payments recieved for such individual activities and remitted to
the firm have bean insignificant in amount."
**i7 "Our firm renders services in executive recruitment. We have performed services in the areas
of marketing analysis, product analysis and plant layout, however our work in these areas represents
an insignificant portion of our management advisory services and is normally limited to fact gathering
or is incidental to our work in other areas such as cost accoiintinp. and managerial control systems.
We do not perform actuarial services, nor do we serve on Federal advisory committees."
i Services performed in rarietinR analysis and plant layout are minimal. At the present time,
Mr. Frank Grey, a member of Coopers & Lybrand, is seivirnig as a member of the SEC Advisory Com-
mittee on Real Estate.
i**' "Actuarial services: Haskins & Sells does not provide what we consider to be 'actuarial
services.' We do utilize actuarial s ill' as required in our auditing arid accounting and accordingly
any use of these skills is classified in our statistical records as auditing and arciunting. services. We
estimate, however, that the revenue that 'night be related to use of these skills is a small fraction of
1 percent of our total revenue. Services for giierriiii.ilt entities: We perform niiditin, and i(oi',nliiiW,


and management advisory services for governmental entities. Data regarding our services is normally
classified in our statistical records by the nature of the services performed and not by the type of
entity served. We estimate, however, that revenues from our services for Federal, State, and local
governments amount to less than 5 percent of our total revenues."
20 Actuarial services provided by Touche Ross Stennes.
**2t "F. Only on a voluntary basis at no expense to the Government. At present, Mr. D. V. Burch-
field, a partner, is serving on the General Services Administration Advisory Committee on Cash
Management."
2 Arthur Andersen states that it has 6,000 clients not listed on either the New York or American
stock exchanges, it gives no breakdown of this figure for public and private corporations.
23 Number given by firm is approximate.
24 Figure includes only those private corporations which had annual fees over $7,500.
25 Figure does not include nonprofit corporations or clients that are not corporations.
20 AICPA membership: partners, 484; employees, 2,246; total, 2,730.
27 AICPA membership not known by Peat, Marwick & Mitchell. Membership ison an individual basis.
28 AICPA membership: partners, 442; employees, 1,016; total, 1,458.
29 Each firm has reported revenues for 12-month periods, ending at various times. Reporting period
for each firm as follows: Arthur Andersen: 12 months ending Mar. 31, (1970-74) Aug. 31, 1975;
Arthur Young: 12 months ending Dec. 31; Coopers & Lybrand: 12 months ending Dec. 31; Ernst &
Ernst: 12 months ending Dec. 31; Haskins & Sells: 12 months ending approximately May 31; Peat,
Marwick & Mitchell 12 months ending June 30; Price Waterhouse: 12 months ending June 30.
30 Data for 12-month period ending Aug. 31, 1970, not submitted by Arthur Andersen.
31 Data for 12-month period ending June 30, 1970, not submitted by Peat, Marwick & Mitchell.
**32 "No specific division, department or office for obtaining government contracts. All offices
may perform services under Federal, State or local government contracts. Arthur Young has 5
offices where services performed are predominantly under Government contracts."
**33 "The firm does not maintain a department division or office for the procurement of Fed-
eral, State, and local governmentt contracts, however, we do have certain persons who are involved
in responding to Government Rk P's."
**34 "Haslins & Sells does not maintain a department, division or office for the procurement
of Federal, State or local government contracts. Relationships with government entities are handled
by the practice office responsible for performance of the services required. This means that the
relationships with Federal entities are largely the risponv.ibilitv of individuals in the Washington, D.C.
office who have experience in Federal aLtivitie. and tend to specialize in this aspect of the practice "
Note: Double asterisk denotes firm's full response to subconiiiiiltee.


(30)
$528,000
$2,454,000
$1,772,000
$3,801,000
$1, 197,000
Yes


$430,000
$270,000
$1,320,000
$2,960,000
$4,010,000
$4,650,000
32 Yes


$532,000
$757,000
$589,000
$1,063,000
$789,000
$1,473,000
33 No


$584,000
$952,000
$1,533,000
$1,106,000
$701,000
$1,025,000
Yes


$185,000
$540,000
$1,120,000
$1,165,000
$920,000
$1,160,000
34 No


(31)
$4,310,000
$3, 540, 000
$2,970,000
$3, 250,000
$4, 020,000
No


$2,000
$52,000
$69,000
$258,000
$172,000
$1,320,000
Yes





32


The "Big Eight" firms all have strong national and international
operations with many offices throughout the United States and the
world. For example, Table I shows that the number of offices in the
United States operated by "Big Eight"' firms ranges from Arthur
Andersen & Co.'s 48 offices in 31 States and territories to Ernst &
Ernst's 112 offices in 45 States and territories. The average number of
domestic offices operated by a "Big Eight" firm is 80 offices in 38 States
and territories.
Each of the "Big Eight" firms maintains an extensive network of
offices and affiliations outside the United States. As shown by Table
I, the number of international offices and affiliations ranges from 58
for Arthur Andersen & Co. to 242 for Coopers & Lybrand. Four of the
firms each have more than 100 international offices and affiliations.
The number of major corporations for which "Big Eight" firms
-erve as the independent auditor is also impressive. Of the 2,641 cor-
porations listed on either the New Vork Stock Exchange or the
American Stock Exchange in 1974, 2,248 or 85 percent are audited
by one of the "Big Eight" accounting firms. (See Appendix B,
p. 411.) In addition, Table I on page 30 shows that the "Big
Eight"' firms audit several thousand other publicly and privately
owned businesses.
"Big Eight" firms have many partners and employ large staffs to
perform services for their clients. In the United States, Price Water-
house & Co. has the fewest partners (348). and Peat, Marwick,
Mitchell & Co. has the most (791). Most of the firms have between
4(00 and 525 partners. Partners are responsible for the results of serv-
ices performed by accounting firms.
Table I shows that Arthur Andersen & Co. has the largest staff
(8,554). Touche Ross & Co. has the smallest staff (4,219). Excluding
partners and principals, the "Big Eight" firms collectively employ
a total of 48,.515 people. The majority of employees are professional
staff, and the remainder are clerical employees.
Considering that most CPAs practice accounting with fewer than
10 partners, the "Big Eight" accounting firms are truly giant organi-
zations. With operations spanning the United States and the world,
they are the counterpart in the field of accounting to the multinational
corporations in the business field. The supply of accounting services
for major international corporations is essentially concentrated among
only the "Big Eight" accounting firms.

SERVICES OFFERED BY THE "BIG EIGHT" ACCOUNTING FIRMS
The "Big Eight" accounting firms offer a broad range of services to
clients and potential clients. They offer services which have tradi-
tionally been performed by CPAs, as well as additional non-account-
ing services.
The responses of the "Big Eight" firms to information requests by
this subcommittee provide some detail on the types of services they
perform. Table I on page 30 shows the percentage of total revenues
earned by each firm from the performance of specific services. The
major categories of services performed by "Big Eight" firms are
au(itilng and accounting services, tax services, and management advi-
-ory services.





33


AUDITING AND ACCOUNTING SERVICES
Auditing and accounting services involve designing a reliable -yv-
tern of recordkeeping for businesses, checking the r'cordkeepintr :vs-
tern periodically to assure that it is effective, providing ;.isrtaiice
in presenting financial information so that it accurately conveys tlile
resiilts of business activities, and certifying financial statement for
accuracy. These are the basic services which have been performed tra-
ditionally by the accounting profession. The need for expertise in
providing such services to businesses is the priiimary reason for the
development of tle accounting profession an-,l thi licensing of ('PA-.
Enactment of the Federal securities laws in 1933 and 1934 amplified
the need for effective auditing and accounting servicr-s by qualifi,,,
independent accountants. Because their major clients :lare publicly-
owned corporations, the "Big Eight"' firms have been especially af-
fected by thle Federal securities laws. Auditing and account iLIg -trv-
ices performed by independent auditors under the Federal securitioz
laws were intended to benefit the public, rather than the managements
of the businesses being audited. The requirement that independent
auditors be primarily responsible for protecting investors, creditor-.
and other third parties has created a special po-ition in society for
CPAs who choose to act as independent auditors. They are supposed
to provide independent certification that publicly-owned corporations
are accurately presenting the results of corporate activities.
Auditing and accounting services performed by "Big Eight" ac-
conunting firms for publicly-owned corporations are optimally bene-
ficial to both corporate managements and outside parth--. all of whom
should be interested in having an accurate pre-entation of corporate
financial results. Corporate iiimanagements should benefit by having ac-
curate information for use in operating their busine-e- more effi-
ciently. Outside parties such as inv estors, creditors, and governmental
authorities, should benefit because they may safely rely upon rlie inde-
pendently audited information reported by corporations.
Performance of traditional auditing" and accounting service- a:- the
independent auditors for the vast majority of the Nation's large cor-
porations is the most important source of revenues for the "Bigr Eigrht"
accounting firms. On the average, approximately 70) percent of the
revenues received by a "Big Eight" firm results from performing
aud(liting and accounting servi.ce. Price Waterhouse & Co. ranks high-
est in this regard, at 76 percent of total revenue-, and Touche Ros- &
Co. ranks the lowest, at 62 percent of total revenues.

TAX SERVICFQS
Tax services are another important -ovre of revemncs for (C'lAs.
The "Big Eiglt" firms average abliit 18 pei cent of their toItal revenllI-
from tlhe performance of tax services.
Toucihe Ross & Co. derives the highe-t proportion of total rev-niie-
from performing tax services (24 percentt. has.kins-s & sc]l ra-Ik- low-
est in this comparison, dleriving l. pe rtenlt of total reven-ues from tax
services.
The performance of tax services hias _tr'own more important as a rev-
enue source because tax provisioin- at the Federal, State and lo.al level,;





34


have become more complex during the past 25 years. As governments
increasingly have used tax laws to achieve economic and social goals.
expertise in tailoring business operations to maximize the benefits
available under the tax laws has become a valuable financial resource
to businesses.
MANAGEMENT ADVISORY SERVICES
Performance of management advisory services has also become an
important source of revenues for the "Big Eight" accounting firms.
The relative importance of management advisory services to revenues
ranges from 5 percent of total revenues for Haskins & Sells to 16 per-
cent of revenues for Arthur Andersen & Co. The average for the firms
is about 11 percent of total revenues.
All of the "Big Eight" accounting firms employ specialists who are
not CPAs to perform management advisory services. Many of the sen-
ior specialists have become "principals" in the "Big Eight" accounting
firis. Only CPAs may legally become partners in a CPA firm, but
the "principals" who are not CPAs enjoy most of the same benefits as
the partners in "Big Eight" firms.
Table I on page 30 shows that the number of "principals" employed
)by a "Big Eight" firm tends to parallel the prol)ortion of total rev-
enues derived from performing management advisory services. Has-
kins & Sells lhas only 12 "principals" who are not CPAs, but Arthur
Andersen & Co. has 65. and Peat, Marwick, Mitchell & Co. has 90
"pi- incipals." The "Big Eight" firms collectively employ a total of 332
"principals" who occupy senior positions within the firms, but are not
CPAs.
This subcommittee asked each of the "Big Eight" firms if it pro-
vided certain specified types of management advisory services. The
firms' re1-ponzs are summarized in Table I. Arthur Andersen & Co.
performs a sub-tantial amount of management advisory services, but
dli-- not perform any of the services specified by the subcommittee
in its que-tionnaire. The following is a brief description of the pri-
mary tys of management advisory services performed by large
accounting firms, along with the number of "Big Eight" firms that
provide each service.
E',c tive Rc frnim nat.-All of the "Big Eight" firms except
Arthur Andersen & Co. provide executive recruitment services. This
service involves either finding a new executive to satisfy a client's
particular needs, or finding a suitable position at another company for
an executive who is no longer needed by a client.
The "Big Eiriht" firms are generally involved with recruiting
high-level ex.,'iitives to occupy senior management positions. Because
of their broad range of bilsin e-s connections and their reputations as
auditors for providing expert financial services, the "Big Eight" firms
are a natural source of inquiry for clients seeking important execu-
tives. The "Bic Eight"' firms have capitalized on their position of in-
fluence by marketing executive recruitment services.
.lfar~etfgq A n/lqst^.-Marketing analysis involves performing
studies to determine the feasibility of -elling a client's products or
servick- to a particular market. This service may include identifvinz
likely ',i-tomers. survveoying the attitudes of consumers, or finding





35


areas of excess disposable income. Four of the "Big Eight"' firii-
provide marketing analysis services.
Plant Layout.-Plant layout services involve organizing clients
plant facilities to maximize their productive capabilities. Thi'ls service
includes providing expertise in efficiently or-anizing, phy-ical plant-.
as well as recognizing the best ways to maximize employee .-0o11Dm.r,-
within a plant complex. Four of the "Big Eight" firm-, provide plant
layout services.
Product Analysis.-This service involves analyzing a client's prod-
uct to determine its value to customers who may be interoc-ted in pur-
chasing the product. Three of the "Big Eight" firms provide prodii,-t
analysis services.
A tuarial Servi'e..-Actuarial services involve forecasting how
much money must be contributed from a client's earnings each year
to fund its pension program on a sound financial basis. Client com-
panies with pension plans for their employees are re(llired to fund
their pension programs over a number of years on a financially sound
basis. Actuarial services are provided by three of the "Big Eight"
firms that have acquired actuarial firms throuigl mergers.
Financial .Managernent Scr,";(-es.-Although this subcommittee did
not ask the "Big Ei ght" firms in its questionnaire if they perform
financial management services, subsequent conversations with mem-
bers of "Big Eight" firms indicate that all of them provide suIch
services. Financial management services involve designing and im-
plementing electronic data processinL and other services which help
managements of client companies make financial decisions. Computer
forecating models and inventory control systems are examples of
financial management services.
The "Biz Eight" accounting firms provide a broad range of services
traditionally performed by CPAs, as well as non-accounting services
which are performed by management consulting firms. The rapid
growth of management advisory services as a source of revenues for
"Big Eight" firms has impaired their ability to act as independent
auditors for publicly-owned corporations. The "Big Eight" firm are
involved in providing management advisory services to varvinr de-
grees, but all of the firms derive substantial revenues from perform-
ing such services.

CONCENTRATION OF MAJOR CORPORATE CLIENTS AMfONG TItE "BIG
EIGHT" ACCOUNTING Fir.Ms
In its 19 December, 1975 questionnaire to the "Big Eight" account-
ing firms, this subcommittee requested the names of their corporate
clients that have securities listed on either the New York Stock Ex-
change or the American Stock Exchange. All of the "Big FiLht" firn-
provided that information in their responses which are contained in
Appendix A.
The subcommittee requested that information because it is well-
known that all of the major corporations in the United States have
securities listed on either the New York Stock Exchange or the A.mer-
ican Stock Exchange. It is also generally recognized flthat most of the
major corporations in the United States employ one of the "Big





36


Eight" accounting firms as their independent auditor. There is a need
for Congress and the public to have reliable data on the extent to
which the "Big Eight" accounting firms dominate the auditing of the
Nation's largest corporations.
The Congressional Research Service of the Library of Congress was
requested by the subcommittee to tabulate and evaluate the data on
major corporate clients that was submitted by the "Big Eight" ac-
counting firms. The Library of Congre-s report is included in Appen-
dix B at page 407. The manner in which the Congressional Re-
search Service performed its evaluation is described within the body
of the report.
The findings of the Congressional Researich Service show an extra-
ordinary degree of concentration among the "Big Eight" firms in pro-
viding auditing services to major corporations. This section briefly
numme th '".r-
summarizes the priiymay findings by the Congressional Re!earch
Service. Reference should be made to the full report for its complete
findings, along with an extensive amount of relevant financial and
employment data developed by the Library of Congress. There are
a1-o many Lar graphs and circular charts to illustrate the comparative
significance of the factual data.

CRS METHODOLOGY
At the oiiutet, two factors should be noted concerning the complete-
ltn-A and the accuracy of the Library of Congress report. The data
source- _(-ed by the Congressional Research Service and its consultants
a0,- incomplete with regard to some companies and certain types of
data for othe- companies. The report notes the companies for which
no data w;.s. found, .il the certain types of data which were not found
for other (.,,', panies.
Mitch or Ce information not found by the Congre.zional Resetr,:n]
Se! ,i.. through it.' data sources is available to the public from otlier
SoUc, -. M.., ,. 'Iys Investors Service contains some of the mi.in data,
m1d is U:iable in mcr public libraries. All of the corporation- listed
o, he "ew York Sock Excii-,e and the .Aiimerican Stock Exchanoge
are lU iif-(owm-,d a!nd ',ust Bfep p-,lal ',ot -.i,'wht contain much
of I 1 .l t ,. w-it o. -..._i -ted o ', 1 a1-o fil e -;eful
i~nf. *" .ti ,n ',-it] yede'd ,:.;,d qtate re-';1'-,torv mi,, l' ;,- .
ost li .5 i,,/t ,-,inns for wlic: le C "'. <-'nal ,e'e~1cl1
d, t_ :1, tC 1. 5-- 1... ILI nd
lit -e- .io ." I" I.'
*-,,ll ( 1 :.,i:1ll in relt'ni to the .ii y large' o pVo, I 1-
<1As 1 : _.t or i1e b : 01 i" :?i'L al a '. c .l,- ,vm ent ,1.t:,
0tiI e o' Sht,' L I r': ..t..La r, d ,tU \ Il .
imil. i t., ,,i ty >. ,f '.ta vI-.ic is --i icantlv ,efic'cit for
or' ) ,- wit" ,.,,i;ia ,1' .. is e'.,ploymnu ifov..ati,'n. Thus, the
inil. of t1 e --l-llfc f :"n..:..'-. .l on li- ..- fdi>L,'.-' of t le Colile,--ion,.
..o 10 v, Is in)igi
.1 S. ,I i I isij~s~i -..I t in ,i,11 cat: 'a',il ex, ,.)t emxloym ct.
Iu -t. :e4e pe -,' ,- nz..,y :",-',.',. ijt Vie aa d,'. ol ,, di by the C, m ',,-s-
.-, a -a", V ce fr.m other pu ic inf .1".. (I,, .rrf'o I v -. 1_11e
iiflh)l '!t":, .',,int "- tii(t t1':,, nisj .inir ",ror':i atioIl w ..',ild Iltrre~aS tfli.
.,, ,.I "' the (onii onal Besearch Serv.ic ill its analysis
of "il TEi,.1 ftin dominance. Therefore. tle find n-,s of the Colt-
>,. ma)t Y.c-,,earch u(rvice are ln(ierstated to the. extent I hat missing
dlatia .,- not available for its analysis. The dominnm'e of the "Big





37


Eight" firms in all categories is even greater than shown by the Library
of Congress report, and is significantly greater concerning the number
of employees hired by corporate clients of the "Big Eight" firms.
Another problem arose concerning the accuracy of the. Library of
Congress report because 24 corporations were claimed as clieiits by
more than one "Big Eight" accounting firm. Those corporations and
the "Big Eight" firms claiming them as clients are listed in Attachment
2 of the report. As noted in the report, the Congressional Re(,eirch
Service counted each of those 24 corporations as clients of both "Big
Eilrt" firms claiming them as clients.
Because those 24 corporations appeared on the client lists of two
"Big Eight" firms, their individual financial and employment data
was included in the Congressional Research Service analysis of each
"Big Eight" firm claiming them as a client. Thus, there is a very sm ll
amount of double-counting in the Congressional Resea;IrchI Servie,
analysis.
The subcommittee staff checked with one of the "Big Eight" firms
to discover why seven of its clients were also listed as clients of other
"Big Eight" firms. It was found that the primary reason is the timing
difference when a corporation changes from one "Big Eight" auditor
to another. Unless all of the "Big Eight" firms list their clients as- of
the same date, a corporation changing auditors may appear on more
than one client list.
The financial and employment data of the 24 double-counted corpo-
rations is small in relation to the total data used by the Congres-ioniial
Research Service in its analysis, and the result of doublb-, ounting their
data has no significant effect on the Congressioal Re-earch %rvice
findings.
The Congressional Research Service analysis accurately portrays
the total domination of the "Big Eight" firms as independent audi-
tors of the corporations listed on the New York Stock Exclhange, and
the American Stock Exchange. The analysis shows the vast economic
impact, of the "Big Eight" firms' corporate clients in terms of sales, net
income, taxes, employees, and assets. Each of the "Big Eight" accounit-
ing firms is evaluated according to the economic Atrenirth of its cor
porate clients.

POWERS AND RESPONSIBILITIES OF INDEPENDENT AIDI)ITOI`
The powers and responsibilities of the "Big Eight" firms a inde-
pendent auditors should be noted when interpreting the findings in the
Library of Congress report. Each of the corporations identified as
clients of the "Big Eight" firms must have its financial statements cer-
tified for accuracy by the "Big Eight" firm retained as its independent
auditor. The independent auditor must agree that the accounting
methlods used by a corporate client result in a fair pre-entation of the
corporation's financial affairs.
At present, there is flexibility in the type of accounting methods
which may be usedl by a corporation to record the s:me biusi-
ness transaction. It (aII be vitally important to a corporations to have an
independent auditor who agree, that a certain accounting nmtthod is
proper when applied to a specific business transact ion, annd that fi-
nancial statements using the desired a.cou ting method accurately





38


portray the results of corporate operations. The financial results of
corporate activities reported to the public can differ dramatically, de-
pending on the type of accounting methods used to record business
transactions.
Within the flexible guidelines presently used by independent audi-
tors, a "Big Eight" firm has an extensive amount of discretionary
authority to approve or disapprove the use of a certain accounting
method to record a specific business transaction. Agreement by the
independent auditor with a client's management on accounting mat-
ters can mean the difference between reporting healthy profits or
severe losses. Professor Briloff's statement in Appendix K at page 1609
describes several cases where agreeable independent auditors per-
mitted corporate clients to report "profits" that did not exist.
The power of approval over accounting methods used by corporate
clients in financial statements is only part of the influence wielded
by "Big Eight" accounting firms. As described in subsequent sec-
tions of this study, the "Big Eight" firms have strong influence over
the promulgation of accounting methods that are available for use
by corporate clients in the first place. The AICPA, which is con-
trolled by the "Big Eight" firms, controls the Financial Accounting
Standards Board which establishes acceptable accounting methods.
As independent auditors, the "Big Eight" firms are also responsible
for checking the accounts of corporate clients to satisfy themselves
that the business transactions reflected by financial statements actually
occurred. They decide how much checking should be done, and which
areas of corporate activity, if any, should be scrutinized most
ca( refully.
Independent auditors have extensive influence over the financial
results of corporate operations reported to investors, creditors, gov-
ernmental authorities, and the public. The "Big Eight" accounting
firms exercise their extensive influence as independent auditors for the
Nation's largest corporations. The financial data used by the Con-
gressional Research Service in its analysis results from accounting
and auditing decisions made by corporate managements with the
agreement of their "Big Eight" firm auditors.
The integral role of the "Big Eight" firms in determining the
amount of sales, net income, income taxes, and assets reported by
their corporate clients listed on the New York Stock Exchange and
the American Stock Exchange must be remembered when evaluating
the findings of the Congressional Reseairch Service. Financial data
of the "Big Eight" firms' corporate clients clearly shows that they
have enormous impact on the Nation's economy. The "Big Eight"'
firms heavily influence the financial data reported by their corporate
clients.
CRS FINDINGS
The Congresional Research Service found that there are a total of
2,641 corporations listed on the New York Stock Exchange and the
American Stock Exchange. The "Big Eight" firms claim 2,248 or 85
percent of the total number of corporations listed on those exchanges
as clients. The corporate clients of the "Big Eight" firms control most
of the Nation's business wealth.





39


Using average annual data for the years 1974 and 1975. the Congres-
sional Research Service compared data of thle "Bir Eight" firm-
clients that are listed on the two major exchningrs with data reported
by the Department of Labor and the Department of Commerce. Ap-
proximately one-third of the Nation's 62.5 million employee- in non-
agricultural and nongovernmental establishments are employed by
the corporate clients of the "Big Eight" accounting firms. Tho-e -aam
clients accounted for one half of the $2.552 billion in -ailv- for the
manufacturing, trade, and retail sectors. About ,4 percent of the .75.4
billion of corporate profits after taxes was earned by the "Big Eight"
firms' clients.
The Congressional Researcll Service analyzedl the impact of the "Big
Eight" firms' clients listed on each of thle two nuiajor exchanl ,T-:. The
New York Stock Exchange reported that the securitiess of 1.54" corpo-
rations were listed on its exclhante in 1974. Of tho-ze corporation-. 1.417
or 92 percent are clients of "Big Eight" accounting firms.
The "Big Eight" firms have 831 clients listed on the A1melri'can1 Stock
Exchange. That amounts to 76 percent. of the 1,)9q ,orporzitiol- listed
on that exchange in 1974. Tlius, the dominance of the "Big Eight"
accounting firms is much more pronounced on the New York Stock
Excliange where the Nation's "blue-chip stock" corporations atr, regis-
tered. On both major exchanges, the "Big Eight" firms control the
independent auditing for the bulk of tlhe registerd corporations.
For all the corporations listed on the New York Stock Exchange,
the following percentages show what proportion of the rn-pective data
categories is associated with clients of the "Big Eight" firms:
94 percent of all sales (revenues) received,
94 percent of all profits earned,
90 percent of all income tax,,s paid,
94 percent of all people employed.
94 percent of all assets owned.
For all the corporations listed on the Amnerican Stock Exchange. the
following percentage es show what proportion of the re-pective data
categories is a;issociited with clients of the "Big Eight" firm-:
67 percent of all sales (revenues) received.
67 percent of all profits earned,
66 percent of all income taxes paid,
61 percent of all people employed.
73: percent of all assets owned.
With regard to the "income taxes paid" category, the Congres.ional
Research Service notes that the data reflects income taxt- paid to all
government authorities, not just tlhe Federal Govei'n- ent. Studies
perfori-ied by this subcommittee show that many large corporate
clients of "Big Eight" firms pay minimal or no Fedeiral incolie taxes.
The Congressional Researich Service also ineasured( the doi inance of
the "Big Eight" firms as independent auditors for the Nation's 5)
largest corporations, ranked in each of five c;at lorie:---sals. in ome.
taxes, employees. anll assets. The an;hlysi slih\v< that 1,17 of the 50
These percentage figures are based on the number of cli-nts reported by the "FlI
Eight" firniN and the total number of rei.tcred ci'rpir:itions rpirtri I'y the \, li,,i-m'es.
'sing the number oti clients reported by the i3 I.'.-ht" tirins and the total number if
cnrporn t ions on the *'xciilignes for which data was received or ,int found, the Cii 'rr.-,,i:l
Research Service comniputed percentage Le figures that are imlrginilly smaller (d'11 ill iiTh
of its different methodology. (See Appendix B, pnages 419 ;and. 420.)





40

largest corporations in all of the categories are audited by one of the
"Big Eight" accounting firms. Thus, the "Big Eight" firms have com-
plete control over the independent auditing of the Nation's 50 largest
corporations in each category measured.
In its report, the Congressional Research Service evaluated the
relative positions of the individual "Big Eight" accounting firms.
All of them are large organizations with extensive influence, but some
are more influential than others. The individual influence of the "Big
Eight" firms relates to the identity and size of their corporate clients.
The "Big Eight" firms divide into three basic groups according to
the number and economic power of corporations that are clients of the
individual "Big Eight" firms. Price Waterhouse & Co. is in a class of
its own as the most influential of the "Big Eight" firms. The second
most influential group includes Arthur Andersen & Co., Coopers &
Lybrand, Haskins & Sells, and Peat, Marwick, Mitchell & Co. The
third group is comprised of Ernst & Ernst, Arthur Young & Co., and
Touche Ross & Co.
For all of the data categories measured, the three groups of "Big
Eight" firms demonstrate the relative influence exercised by indi-
vidual firms. The "Big Eight" firms exercising the most influence have
a greater number of major corporate clients, and their clients possess
greater economic power.
The following tables are based on data contained in the Library of
Conge.-s report. They show the relative influence of individual "Big
Eight" firms in terms of the economic power exercised by their corpo-
rate clients listed on each of the two major stock exchanges. The "Big
Eight" firms are -oparated according to their three basic influence
groups.
The percentages shown in the tables relate the clients of each "Big
Eight" firm to all of the corporations listed on the designated stock
exchange in each data category.

PERCENTAGE OF SALES OF ALL CORPORATIONS LISTED ON THE EXCHANGES FOR WHICH A "BIG EIGHT"
FIRM ACTS AS INDEPENDENT AUDITOR

New York American
Stock Stock
Exchange Exchange

Price Waterhouse & Co ------------------------------------------------ 23.8 15.7
Arthur Andersen & Co----------- --------------------------------------- 14.6 8.6
Coopers & Lybrand .--..--.- ---------..-------.....---------....--------------------- 11.7 6.3
Haskins & Sells........----------------------------------------------------- 12.5 5.5
Peat, Marwick, Mitchell & Co.------.- ---------------------------------------- 11.5 8.4
Arthur Young & Co ---------------------------------------------------6.9 8.2
Ernst & Ernst---------............--------...-------------------------------------- 6.9 8.8
Touche Ross & Co.---------... ---------------...------------------------- -- 5.8 5.4


93.7 66.9


Total-.--







41


PERCENTAGE OF NET INCOME OF ALL CORPORATIONS LISTED ONr THE EXCHANrGES FOR WHICH A "BIG
ACTS AS INDEPENDENT AUDITOR

fe.,. York
Stock
E,.change.


Price Waterhouse Co---...---------------------


FIGHT' FIRM



American
Stock
Exchange


28.1
15.6
13.4
12.7
9.6


Arthur Andersen & Co...--- .---------------...----------------------- ------
Coopers & Lybrand........--------.---------.........................----------------------------..
Haskins & Sells------..------------------.---------------------------------
Peat, Marwick, Mitchell & Co---..-----...--.---.--.-----.------.------------

Arthur Young & Co.- ....-----.--. ------------------------.--. --------.-..
Ernst & Ernst ...------------------------------------ ------------------. ----
Touche Ross & Co-----------------------------------------------.. --------

Total---------------------------------------------------------------


19.3
11.2
5.7
7.0
5.5


5.8
6.3
2.6

94. 1


7.8
5.4
4.8
66.7


PERCENTAGE OF INCOME TAXES OF ALL COMPANIES LISTED ON THE EXCHANGES FOR WHICH A "BIG EIGHT" FIRM
ACTS AS INDEPENDENT AUDITOR


New York
Stock
Exchange


Price Waterhouse & Co.----------------------


Arthur Andersen & Co----------------------------------------------
Coopers & Lybrand---.......-------... --.... ------------------..... ---------
Haskins & Sells.----.- ...-----------........ --------------------------
Peat, Marwick, Mitchell & Co--..--- .. ---- -- ------ ---
Arthur Young & Co -..--..------ ---------------- --- -------
Ernst & Ernst ..-------..---........--. -----------. -------------- -----..--
Touche Ross & Co... ---.------------------------------------------ ----

Total-- ..... --. .--------..- ...-----..-----------------------


rnme'ican
Stock
Exchange


36.0
13.1
10.1
8.7
7.0


89.9


19.1

10.4
7.9
5.0
5.6


65.8


PERCENTAGE OF EMPLOYEES OF ALL CORPORATIONS LISTED ON THE EXCHA jGES
ACTS AS INDEPEIIDEIT AUDITOR


FOR WHICH A "l.IG EIGHT FIPr.t


New York
Stock
Exchanpie


Price Waterhouse & Co..--------------------.............--...-----...------------..
Arthur Andersen & Co----------------------...--------------...---------..-
Coopers & Lybrand.----------..---...-......--.......--...............--...
Haskins& Sails.-------..----.---.---------............----.....----....-.....-..-.---...-....
Peat, Marwick, Mitchell & Co----------------------------------------.................................................

Arthur Young & Co---------..--.-----------------.------------------------
Ernst & Ernst ---...-..- .........- .......- ......- ...- .......- ............-
Touche Ross & Co -- - - - - - - - - - - . . .

Total................................................................


American
Stock
Eich ,n:'e


19.6
14.8
10.0
14.8
14.0


13.5


5.6 9.4
7.2 : 3
8.1 4.3
94.1 1i 2


Price Waterhouse & Co__ _





42


PERCENTAGE OF TOTAL ASSETS OF CORPORATIONS LISTED ON THE EXCHANGES FOR WHICH H A "BIG EIGHT" FIRM
ACTS AS INDEPENDENT AUDITOR

New York American
Stock Stock
Exchange Exchange
Price Waterhouse & Co.-------.-----------------------------------------................................ 20.3 13.8
Arthur Andersen & Co--------------.---------...--------------------------.......................... 13.9 12.5
Coopers & Lybrand ----------------------------------------- -------..--- 13.1 6.8
Haskins &S3lls-- ------------------------------.............---------------------........... 13.8 8.5
Peat, Marwick, Mitchell & Co.------------------------------------------------...................... 16.6 10.1
Arthur Young & Co ------ -------------------------------- 4.6 9.5
Ernst & Ernst --- ----. --- ..---- .-.-- ..---..-.-.- ...---..- ..- ..... .. .... 7.7 6.6
Touche Ross & Co ---------------------- -------- ---- -- 3.7 5.0
Total ----..-- --------.-.. --------- ---- ----.-------.. . -------- 93.7 72.8

The influence of individual "Big Eight" accounting firms as shown
in the preceding tables is truly extraordinary. Price Waterhouse &
Co. alone audits 24 percent of the total sales and 28 percent of the
total net earnings for all the corporations listed on the New York
Stock Exchange. Tie next four most influential "Big Eight" firms-
Arthllur Andersen & Co.. Coopers &, Lybrand, Ilaskins & Sells, and
Peat, Marwick, Mitchell & Co.-collectively are the auditors for 50
percent of the total sales and 51 percent of the total net earnings for
all of the corporations listed on the New York Stock Exchange.
Thus, the five most influential "Big Eight" accounting firms col-
lectively are the independent auditors for 74 percent of the total sales
and 79 percent of the total net earnings for all the corporations listed
on the Nation's largest exchange, the New York Stock Exchange.
That is a phenomenal degree of concentration in the performance of
independent auditing services for the largest corporations in the
United States.
The "Big Eight" position is almost as concentrated on the Ameri-
can Stock Exchange. Again, Price Waterhouse & Co. is the most
influential "Big Eight"' firm. About 16 percent of the total sales'and
19 percent of the total net income for corporations listed on the
American Stock Exchange is audited by Price Waterhouse & Co. alone.
When the four "Big Eight"' firms in the second most influential group
are combined with Price Waterhouse & Co., those five accounting firms
act as independent auditors for 45 percent of the total sales and 49
percent of the total net income for all the corporations listed on the
American Stock Exchange.
The extraordinarily high concentration of independent auditing
influence held by the five most influential "Big Eight" accounting
firniis is spread across both major stock exchanges, but is focused
especially onl tlie 50 largesf corporations in thle United States. The
(Conlre(,sioila] Re-arch Service found tlat Price Waterhouse & Co.
is Ihe independent auditor for 17 of the 50 largest corporations in the
Ilnited States, ranked according to sales. WVhen the 50 largest cor-
p)orations are ranked according to net income. Price AWaterhouse &
(Co. is the in rTle nex four most influential "Big Eight" firms-Arthur Ander-
sen & Co.. Coopers & Lvhrand, Haskins & Sells, and Peat, Marwick.
Mitchell & Co.-collectively are the independent auditors for 25 of





43


the 50 largest corporations ranked by sales, and 28 of the 50 largest
corporations ranked according to net income. Combining their clients
with those of Price Waterhouse & Co. shows that the five most in-
fluential "Big Eight" firms audit 42 of the 50 largest corporations in
the United States, ranked according to sales. When ranked( by net
income, 44 of the 50 largest corporations are audited by those five
"Big Eight" firms.
The Library of Congress report prepared for this subcommittee
also analyzed the concentration of "Big Eight" firms as independent
auditors for the ten largest corporations in each of six selected in-
dustries. Those industries are natural resources, banks and bank hold-
ing companies, chemicals, drugs and pharmaceuticals, general
machinery and equipment, and electric power companies and holding
companies. The results of the analysis generally show that two or
three "Big Eight" firms are the independent auditors for most of the
ten largest corporations in a particular industry.
Price Waterhouse & Co. is strongly entrenched as the independent
auditor for certain of the top ten corporations in all six in(ldustries
selected. However, Price Waterhouse & Co. hlas especially strong
influence over the accounting methods used by the natural resource
industry because the firm is independent auditor for six of the ten
largest corporations in that group. All of the top ten natural resource
corporations are major oil and gas companies, and the accounting
methods used by such corporations have been the subject of much
controversy.
EFFECTS OF CONCENTRATION
There are many disturbing aspects to the extremely high concen-
tration of major corporate clients audited by the "Big Eight" ac-
counting firms. The most important problem is the anti-competitive
effect of such concentration on the supply of independent auditing
services to the largest corporations in the United States. Because of
the special role of independent auditors in the economy, the concen-
tration of auditing influence among the "Big Eight" firms presents
some unique problems, in addition to the traditional problems associ-
ated with anti-competitive practices.
Traditionally, lack of competition creates problems concerning the
price of goods and services, their quality, the terms upon which they
are offered, and the development of improved goods and reduce the value of existing goods and services. The traditional prob-
lems associated with lack of competition and excessive market con-
centration may be evident in the supply of auditing, accounting, and
othlier services by the "Big Eight" firms to major corporations. The
extremely high concentration of iLmajor corporate clients a niongr the
"Big Eight" firms-and especially among the five most inifliuential
"Big Eight" firms-certainly presents a situation calling for further
investigation into the alnti-coimpetitive effect: whichll may rivamably
be expected to result frm such concentration.
Moreover, the special role of the "Big Eight" firms as independent
ati(litors would amuravate tlh. anti-colmpetitive sitllaition which cail
result from excessive market concentration. For example, perforiman'e
of management advisory services for a corporate client is a natunir:l
"tie-in" to the performance of independent auditing services for the


67-159 0 77 5





44


same client, since the client's management can reasonably expect the
independent auditor to favorably audit the results of its own work.
Regular business consulting firms cannot implicitly offer the expecta-
tion that their services will be approved by a client's independent
auditor.
Another unique problem resulting from the special role of inde-
pendent auditors is the broad scope of their practice. As previously
noted, the "Big Eight" firms as independent auditors have extensive
influence over the financial re-ults reported to the public by corporate
clients. To a degree unparalleled by other groups in the private
sector, the primary business of the "Big Eight" firms is to be intimately
involved in the presentation of corporate financial rev:ults.
The success or failure of financial results reported to the public
usually determines the future acceptance of management by a cor-
poration's shareholders and creditors. The extensive influence main-
tained by a "Big Eight" accounting firm over the financial success of
a corporate client in one particular industry may also exist for one
or more other corporate clients in the same industry. As documented in
the Library of Congress report, Price Waterhouse & Co. is the inde-
pendent auditor for several major corporate competitors in the six
industries surveyed. Other "Big Eight" firms also act as independent
auditors for more than one of the major corporate competitors in a
single industry.
The "Big Eight" firms not only concentrate their influence among
major competitors in a single industry, but spread their concentrated
influence through other major industries. Independent auditing is one
service required by all major corporate competitors in all industries.
The spread of "Big Eight" firm concentration through major in-
dustries is one of the primary factors contributing to the vast size
and influence of the "Big Eight" firms.
Price AVaterhouse & Co.. as noted previously, exercises concentrated
influence in the natural resources industry by acting as the independent
auditor for six of the ten largest corporate competitors in that indus-
try. Simultaneously. Price Waterhouse & Co. exercises the same type
of concentrated influence in the general machinery and equipment
industry, as the independent auditor for four of the top ten competing
corporations. Similar influence is exercised concurrently in other in-
dustries by Price Waterhouse & Co. and other "Big Eight" accounting
firms.
The "Big Eight" firms also have a forum for privately meeting
together and discussinr subjects of mutual interest through their
membership in the AICPA. which they control. At the suggestion of
some big accounting firms, the AICPA established five advisory com-
mittees reprsentin y different segments of the ATCPA's membership
to promote their respective interests within the AICPA. (See page 83
for a description of the AICPA's advisory committee system.)
One of the five AICPA advinry committees is assigned to represent
the interest s of the Nation's 15 laruiet accounting firms. That advisory
committee has 11 members, eiht of whom permanently represent the
interests of the individual "Bicg Eight" accounting firms. At their
periodic meetings, the members have discussed such topics as the need
for a political action committee to influence members of Congress.





45


Their AICPA advisory committee is one organized forum where
the "Big Eight" firms have the opportunity to meet privately and pro-
nmote anti-competitive activities. The AICPA proviiles other forul1is
where some or all of the "Big Eight" firms could( promote aiit i-compet-
itive activities. The AICPA has nimany committees that meet to formu-
late. AICPA policies and programs in specific areas of interest to
CPAs. As described sIlbsequently in this study, all of the AI(IPA
committees dealing with important matters of interest are dominated
by representatives of the "Big Eight" firms.
Any of those committees could act as a vehicle for promoting anti-
competitive activities in a specific area of interest. Example.- of AICPA
actions which could be construed as promoting anti-competitive prac-
tices include the dissolution of the AICPA's committee to aid displaced
CPA firms, and adoption of a plan sponsored by the "Big Eight" to
have large accounting firms voluntarily inspect one another to assure
quality of practice. Both actions were criticized by small CPA firms.
and both are described subsequently in this study. (See pages 101 and
114.)
A further disturbing aspect of the extraordinary influence concen-
trated among the "Big Eight" firms is that it appears to be increas-
ing. As a byproduct of the corporate merger movement that has
concentrated control over the Nations economic resources among fewer
and fewer institutions and individuals, small and medium-sized CPA
firms have been displaced as independent auditors by the "Big Eight"
and other large accounting firms. When smaller companies are merged
into larger corporations, which generally have a "Big Eight" firm as
independent auditor, the CPA firms that formerly audited the sinall
companies usually lose their clients to the "Bi(. Eight" firms.
Displacement of small CPA firms by "Big Eight" firms also occurs
when companies "go public" by selling their shares to the public. Vn-
derwriters and bankers often inform companies that a nationally
known firm must be retained as independent auditor in order to sell
securities to the public at the highest possible price, or obtaill a nec-
essary loan. An article in the June, 1971 issue of the Journal of
Accountancy, entitled "Displacement of Auditors When Clients Go
Public." described the displacement of small CPA firms by larger
firms. (See Appendix K, page 1743.)
Concentration of auditing influence among the "Big Eight" ac-
counting firms has occurred through direct mergers of small CPA
firms into the large national firms, as well. Sometimes the small CPA
firms have no choice but to mergre with large national firms that have
taken major clients from the small CPA firms. A few of the "Big
Eight" firms have achieved significant growth through a programs of
mergers with smaller firms.
This subcommittee has received complaints about anti-co(npetiti t,
practices by "Big Eight" firms from the n' counting profes-sion illnd tlhe
business sector. Most of the complaints have come from CPAs asso-
ciated with small and mnediimii-sized CPA firms. They lhave encourmwged
the subcommittee and the Federal Governnment to correct the anti-
competitive situation which they believe exiAts. Examples of the tylpe
of complaints expressed by smaller accounting firms are included in
Appendix K.





46


One of the complaints about anti-competitive practices by "Big
Eight" firms was from Kenneth Leventhal & Co., which claims
that it is the 25th largest accounting firm in the Nation. Kenneth Lev-
enthal & Co. offered to provide material support for its charge, but a
subcommittee request for such materials has failed to elicit any re-
sponse. (See Appendix K, page 1731.)
The information which this subcommittee has received from the
"Big Eight" firms and other sources clearly shows an excessively high
concentration of auditing influence among the "Big Eight" firms. The
degree of concentration in providing independent auditing services to
major corporations is so great that it constitutes evidence of a serious
lack of competition. The "Big Eight" firms control the performance of
vitally important independent auditing services for the bulk of the
economic power held by the corporations on the New York Stock Ex-
change and the American Stock Exchange.
This study notes the adverse effects of excessive concentration in the
performance of independent auditing services. More research is needed
to document fully the extent of the anti-competitive situation repre-
sented by the excessive concentration of influence among the "Big
Eight" accounting firms. Enough is presently known to justify imme-
diate action by Congress and Federal agencies to restore competitive
balance in the performance of independent auditing services for major
corporations. Because independent auditors serve a special purpose in
the Nation's economy, factors other than restoring competition must
also be considered to assure that independent auditing services are
performed properly.

PROFITABILITY OF THE "BIG EIGHT" ACCOUNTING FmMS
A successful accounting practice is a very lucrative enterprise. The
"Big Eight" firms have augmented traditionally profitable accounting
services with an array of profitable management advisory services that
do not involve accounting expertise.
Because CPAs generally practice accounting as business partner-
ships which do not report to the public, there is little data available
to the public on the profitability of accounting firms. However, some
data is available within the accounting profession. This subcommittee
has reviewed certain data on the profitability of accounting firms, and
its conclusions have been confirmed by practicing CPAs, as well as
unsolicited data received by the subcommittee.
Accounting firms are service organizations which do not require
substantial tangible assets or capital expenditures to operate. Office
expenses and staff salaries are the major deductions in computing,
the net profit available for the partners in an accounting firm after
operating expenses have been deducted from their total revenues. As a
result, profit margins are usually quite high.
A CPA practicing on his own in a sole proprietorship cnn net
better than 50 percent of his total revenues as profit for himself. The
average partnership of CPAs can earn more than 40 percent of its
total revenues as net profit. Even though the net profit margin is typi-
cally lower for a partnership than for a single practitioner, individual
partners tend to earn more money than single practitioners because
partnerships have proportionately greater revenues.







The proportion of overhead expenses rises as the size of a partner-
ship increases, but the ability to provide services also increases. The
increased ability to provide services means that a larger partnership
can serve more clients and bigger individual clients. The resulting in-
crease in total revenues more than compensates for the higher propor-
tion of overhead expenses, and generally enables individual partners
in larger partnerships to earn more money.
Arthur Andersen & Co. has voluntarily reported that it had total
revenues of $386,341,000 and net earnings of $90,818,000 for its fiscal
year ending 31 August, 1975. The firm's net profit margin was 23.5
percent. Arthur Andersen & Co.'s 1975 financial statements are in-
cluded in Appendix A at page 200 as an example of the types
of expenses involved in operating one of the "Big Eight" accounting
firms.
The net profit margins of "Big Eight" firms are lower than those of
smaller accounting firms 1)ecause of the substantial overhead expenses
involved with operating such lar.xe organizations. Partners of "Big
Eight" firms are compensated for increased overhead expenses by the
tremendous volume of revenues their firms are able to generate.
The subcommittee staff estimates that all of the "Big Eight" ac-
counting firms have net profit margins in the range of 25 percent.
Based on the staff's estimate that the "Big Eight" firms have total an-
nual revenues of over $2 billion, their total net earnings are more than
$500 million each year. That is a substantial sum of money to be appor-
tioned among the few thousand individuals who are the partners of
the Nation's eight largest accounting firms. Arthur Andersen & Co.
reported that the average earnings for each of the firm's active part-
ners at the end of its 1975 fiscal year was $9.,152. The financial rewards
of partnership in a "Big Eight" firm are obviously quite attractive
under their existing system of accounting practice.
The top partners of the "Big Eight" accounting firms are the policy-
makers who decide which direction the firms shall take in providing
services to clients. As noted previously, the "Big Eight" firms have
substantial direct and indirect impact on Federal accounting practices.
as well as other policies and programs of the Federal Government.
Therefore, it is important to know the financial interests of those
individuals.
In order to evaluate the financial interests of the top partners in the
"Big Eight" firms, this subcommittee requested the total annual com-
pensation earned by each of the three highest-paid individuals in each
of the "Big Eight" firms.
Only Arthur Andersen & Co. and Price Waterhouse & Co. cooper-
ated with the subcommittee by providing the requested information.
Most of the remaining "Big Eight" firms said that (data on comipensia-
tion was not relevant to the subcommittee's study, and that revealing
such data would amount to an invasion of privacy.
Several firms expressed concern flat the subcommittee would not
understand the ,co)ipensation of top partners becaiise their compensa-
tion is not truly comparable with the comipens.ition earned by co'rpo-
rate executives. The responses from all of the "Big Eight" firms are
included in Appendix D beginnin-ig on p)ige 847.
The open responses of Arthur Andersen & Co. and Price Water-
house & Co. show that the concerns of the othlier "Big Eight" firms are





48


unwarranted. The compensation of top partners reported by Arthur
Andersen & Co. and Price Waterhouse & Co. are certainly substantial,
but are not greatly out of line with the salaries of top executives of
major corporations which are clients of these multimillion dollar ac-
counting firms. Arthur Andersen & Co.'s response also provides a
detailed description of the manner in which the firm's top partners are
compensated, and how their compensation differs from compensation
of corporate executives.
The annual compensation of each of the three highest-paid partners
at Arthur Andersen & Co. is $429,843, $388,716, and $349,609. Price
Waterhouse & Co. states that its three highest-paid partners earn
respectively $316,134, $297,920, and $281,275. The compensation fig-
ures reported by the two firms may have been computed by different
methods, and thus may not be completely comparable.
Sources within the accounting profession have told the subcommit-
tee staff that top partners at other "Big Eight" firms earn more
than the amounts reported by Arthur Andersen & Co. and Price
Waterhouse & Co. The subcommittee is unable to substantiate or dis-
miss such reports because six of the "Big Eight" firms refused to pro-
vide factual information.
The reasonability of compensation earned by top partners of "Big
Eight" firms is not the concern of this subcommittee. The information
reported on compensation of top partners is relevant to this study
because it clearly indicates that, by any definition, the policymaking
partners at "Big Eight" firms have a very substantial financial inter-
est in preserving the existing style and scope of practice which they
now enjoy. Substantive changes in accounting standards or the type
of services which may be offered by "Big Eight" firms could signif-
icantly affect the earnings of partners in those firms.
Partners in "Big Eight" firms have substantial financial interests
at stake in preserving the status quo regarding the structure of the ac-
counting profession, the standards CPAs must follow, and the broad
scope of accounting and non-accounting services which are offered by
large accounting firms. The substantial financial interests of the "Big
Eight" firms indicate that those firms have a strong vested interest in
avoiding changes in the present system which might reduce the fin-
ancial value of their services to clients. Correction of improper, but
profitable, practices by accounting firms through internal self-reform
appears unlikely in view of the financial interests held by the "Big
Eight" firms, which dominate the accounting profession.

INDEPENDENCE OF THE "BIG EIGHT" ACC('OUNTING FIRMS
The "Big Eight" accounting firms primarily affect the Federal
Government and its programs through their role as the independent
auditors for the vast majority of the Nation's largest corporations.
Eighty-five percent of the corporations listed on either the New York
Stock Exchange or the American Stock Exchange employ a "Big
Eight" firm to act as their independent auditor. The "Big Eight"
firms have great influence over the reported operating results of
major corporations because the firms dominate both the development
and application of auditing and accounting standards used by their
clients.
Enactment of the.Federal securities laws created a special role in
society for CPAs who act as independent auditors. Because the Fed-





49


eral securities laws were specifically enacted to protect the interests of
investors and other third parties, independent auditors owe their
primary allegiance to the persons who rely on financial stateilents,
rather than the corporations that issue financial statements. The in-
dependent auditing provisions of the Federal securities laws are the
key to their effectiveness because disclosure of material information
is the basis for protecting the public from poorly managed corpora-
tions. To be useful in protecting the public, however, information dis-
closed on corporate activities must be accurate.
A three-party relationship exists for CPAs who serve as inde-
pendent auditors of publicly-owned corporations. The three parties
in interest are the CPA, the client corporation, and the public. Al-
though the independent auditor is retained and paid by the corpo-
rate client, the Federal securities laws clearly require that the services
of the independent auditor be performed for the benefit of the public.
Corporate managements may also benefit from the application of
auditing and accounting services designed to produce accurate infor-
mation on the results of corporate activities, but the Federal securi-
ties laws were not enacted for their protection.
Members of the public expect that an independent auditor will pro-
tect their interests and will not promote his client's interest at their
expense. It is improper for independent auditors to act as advocates
on behalf of their clients' interests.
The major responsibility of independent auditors is to perform their
services while maintaining strict independence from their clients, both
in fact and in appearance. Public confidence in the accuracy and use-
fulness of corporate financial information depends upon a firm belief
that such information has been checked and certified by qualified audi-
tors who are truly independent. Confidence in the independence of
auditors requires that they have no direct or indirect interests in the
affairs of their clients.
In administering the Federal securities laws. the. Securities and
Exchange Commission (SEC) has defined the qualifications. of ac-
countants who may act as independent auditors. (See Appendix I.
p. 1431.) The SEC "will niot recognize any certified public accountant
or public accountant as indel)endent who is not in fact independent.."
The SEC further requires:
In determining whether an accountant may in fact be not in-
d(lependent with respect to a particular person, the Coin '-r-ion
will give appropriate consideration to all relevant circiinmstan'..
including evidence bearing on all relationship- betwev( tlip ac-
cointafit and tliat person or any affiliate thereof, and w:1] not
confine itself to the relationship- existing in connection with t"P,,
filing of reports with the Coin liss]ion.
Thus, the requirements are clear that a (PA acting as an in1fl1'.' l -
ent auditor of a publicly-owniied corpo'a tinI mn1- 1- iW'lcI,'ndent ir
fact with reg'2ard to his total re1;itioi-hip with that co,!ornite client.
F]he stan],ardis of conduct followed t)y imlependent ;11(litoI- must pre-
serve their independence. Actix itk-, (;f CPA- which pro-iote tlh
inter(t- o()f co.l po.Iate clients role publicc confidence 'ra lin, the
independence of auditoris.
By inindatin,)" the p-rac'tice of independent aliditing, Coiires-
created a -pecial position for CPAs that is iniatchied 1) anyv other
profession or btisiness in the private -citor. Independent auditor- are
different fromm other participants in the Natioi's economy for the very





50


reason that they are endowed with the reputation for objectivity and
impartiality associated with the concept of independence. They alone
are regarded as the disinterested umpires who assure that self-inter-
ested businessmen accurately report the results of their activities, as
required by the Federal securities laws.
Enactment of the Federal securities laws imparted special stature to
the accounting profession, while guaranteeing CPAs a consistent
demand for their services as independent auditors. The "Big Eight"
and other large accounting firms readily accepted the special stature
associated with their designated role as independent auditors, but they
have not fully accepted the special responsibilities which accompany
the position of independent auditor. In fact, they have used their des-
ignated reputation for independence to market a variety of non-
accounting services.
This subcommittee has collected an abundance of materials demon-
st nting activities of "Big Eight" accounting firms which impair their
ability to act as independent auditors for the vast majority of the
Nation's large corporations. Many examples have been selected from
those materials, and are included in this study to illustrate the type
of activities undertaken by "Big Eight" firms which contradict their
claim to act independently in the public interest. The "Big Eight"
accounting firms are in fact not independent (See p. 54.)
The lack of independence of "Big Eight" firms results from the
scope of client services they perform for profit and the activities they
undertake on their own. This section summarizes the types of "Big
Eight" activities which conflict with their role as independent audi-
tors. The subsequent sections describing each of the "Big Eight" firms
individually include specific examples of the activities summarized
in this section.
MANAGEMENT ADVISORY SERVICES
Performance of management advisory services is the primary prob-
lem area regarding the services offered by "Big Eight" firms for profit.
The performance of management advisory services necessarily in-
volves the "Big Eight" firms in the business operations of their corpo-
rate clients. Their involvement in the business operations of their
clients conflicts with the "Big Eight" firms' obligation to be inde-
pendent in fact from their clients. The "Big Eight" firms cannot act
effectively as independent auditors when they have financial and
professional interests in the business operations of their clients.
The management advisory services described at page 34 are ex-
amples of the conflicting interests which arise when an independent
auditor becomes involved in the business of a client. Seven of
the "Big Eight" firms provide executive recruitment services for their
clients. Those firms are involved in placing influential executives who
have a bearing on the business operations of their clients. As such,
those seven firms have a direct financial and professional interest in
assuring that the executives recruited through their efforts are suc-
cessful in helping the business operations of their clients.*
This subcommittee has received a detailed description of the manner in which the
performance of ni:inm.miient advisory services, especially executive recruitment, by ac-
countiing firms directly conflicts with their responsibility to be independent in fact and
appearance from the interests of corporate clients. The description is included as part of
a letter from the president of a professional personnel agency which must compete against
the undue adlvaitngpe of independent auditors who also provide executive recruitment
services. (See Appendix K, ptia' 1736E.





51

If executives recruited by "Big Eight" firms are not successful, then
the financial value of the firms' executive recruitment services to clients
is impaired, and may result in a loss of revenues for "Big Eight" firms.
Failure in performing management advisory services also impairs the
overall professional reputation of "Big Eight" firms. The value of all
services performed by "Big Eight" firms is enhanced by the repu-
tation for accuracy which is associated with the concept of independent
auditor. Failure in providing any area of services may damage. the pro-
fessional reputation for competence needed by "Big Eight" firms to
act effectively as independent auditors.
Even if the "Big Eight" firms are successful in providing manage-
ment advisory services, questions may be raised concerning the pro-
cedures and standards used to audit a client which employs executives
recruited by its independent auditor. There may !be reasonable doubts
as to the thoroughness of the independent audit or the suitability of the
accounting standards used in preparing the client's financial state-
ments. Such doubts arise because the independent auditor has a direct
financial and professional interest in having the client appear success-
ful in its reports to the public.
The public may reasonably doubt the ability of a "Big Eight" firm
to act as independent auditor for a corporate client where one or more
of the client's influential executives have been recruited by the "Big
Eight" auditor. Similarly, corporate shareholders and others may
wonder if a "Big Eight" firm is being retained as a corporation's inde-
pendent auditor primarily because of the relationship existing between
the "Big Eight" firm and the influential executives it recruited.
Reasonable doubts are necessarily raised when an independent auditor
becomes involved in the business operations of a client.
The conflicts of interest which arise when an independent auditor
recruits executives for its clients also arise in regard to the perforni-
ance of other management advisory services by independent auditors.
For example, a "Big Eight" firm that performs a marketing study
which causes a client to market a new product has a direct financial
and professional interest in the success of that product. Because of its
self-interest in having that segment of the client's business Zucceed.
the "Big Eight" firm cannot act independently as the auditor for such
a, client. The same problems occur when a "Big Eight" firm performs
plant layout, product analysis, and similar services for its clients.
The performance of actuarial services by "Big Eight" accounting
firms presents an even greater conflict of interest. Contributions by
corporations to employee pension plans generally have a direct and
substanltial impact on corporate earnings. When an accounting firm
provides actuarial services relating to such plans for a corporate client.
the firm is directly involved in working with the client's management
on matters which may substantially affect the client's earniurs. An
ac.-ountin(y firm ca inot properly act as the independent auditor for
such a client.
Financial management services also involve conflicts of intere-t
when performed bv "Bicr Eizht" accounting firmnns for their client-.
Not only do the "Big Eilit" firnis become involved in man;i enient
information svsteiiis tliat influence the dir'vetion of a client's busi-
ness; they may be put in the position of auditing the reliability and
accuracy of their work. The "Big Eizht" firms cannot ble independent





52


in fact from clients that are using their financial management
services.
TAX SERVICES
Management advisory services are only one of the activities con-
tributing to the lo-s of independence by the "Big Eight'" accounting
firms. Tax services are another area where the "Big Eight" firms
have impaired their ability to act as independent auditors.
The firms actively engage in advocacy of clients' positions regard-
ing taxation of corporations. Their views on tax issues parallel the
views expressed by the managements of their corporate clients and
business lobbying groups. They support increased investment tax
credits, more liberalized depreciation methods, continuation of tax
credits rather than deductions for taxes paid to foreign governments,
idfor paid fmouneiofahhl
and other procedures designed to increase the amount of cash held
by big corporations.
The "Big Eight" accounting firms have not recognized the distinc-
tion between an independent auditor's proper concern with the effi-
cient application of existing tax laws and partisan advocacy to change
the sul)stance of tax laws. Advocacy of controversial positions on
political issues involving the fair distribution of taxes results in a
loss of independence because the auditor's interests become associated
with tlhe interests of his clients or some other special interest group.
Public confidence in the impartiality and objectivity of independent
auditors is seriously eroded when the "Big Eight" firms openly pro-
mote the tax views of their corporate clients.
Many segments of the public to whom independent auditors are
responsible may not agree with the political views promoted by the
"Big Eight" firms on behalf of the managements of their corporate
clients. Nevertheless, "Big Eight" firms appear before Congress. State
legislatures. and Federal and State agencies to testify as to how cor-
porations should be taxed to correct alleged unfair tax burdens on
busint"-s,.z. Political activity by "Big Eight" firms on controversial
tax issues is one example of the manner in which auditor. lose inde-
pendence through deliberate identification with the narrow self-
interests of corporate clients.

REPRESENTATION OF CLIENTS' INTE:RESTs
The "Big Eight" accounting firms readily identify with the self-
interests of corporate managements on many controversial issues in
addition to the fairness of corporate taxation. They testify before
State regulatory commissions on the amount of profits which should
be earned by regiulated utilities, and in support of automatic cost
adjustment clauses which circumvent the regulatory process. "Big
Eight" firms support inclusion of construction work in progress in
regulated utility rate bils,., as well as charcgin r utility customers
for Federal income taxes that are never paid to the Federal
Government.
They testify before Concress in support of higher oil and natural
gas prices, and for faster write-offs of production costs. "Big Eight"
firms write to Federal agencies to urge adoption of rules that would





53


have the Federal Government pay private contractor: for "co-ts"
that are not normally accepted costs at all. They oppose more striin',g(ent
Federal regulations on reporting by corporations, and recommend
that the Federal Government not adopt uniform accounting
methods.
All of these are examples of the biased positions taken by "Big
Eight" accounting firms which are incompatible with their role as
independent auditors. Sometimes they promote a parti- ,n view on
a controversial issue as a "public service" on their own initiative. At
other times they make a presentation on behalf of a client for ;i fee.
Independent auditors are endowed with a public reputitation for
impartiality and objectivity because of the special role assigned to
them by Congress in the Federal securities laws. Their statements
and recommendations are accorded great respect and credibility
because of the general belief that such statements and recommen-
dations are made independently.
When the management, of a regulated utility or a recognized utility
consultant testifies that utility profits are insufficient, the self-interest
of those testifying is clearly evident, and their testimony is accepted
accordingly. However, testimony by an independent auditor that
certain policies result in insufficient utility profits often seems more
credible because of the reputation for impartiality and objectivity
associated with independent auditors. The "Big Eight" accounting
firms have recognized the market value of their reputations as inde-
pendent auditors. They use their special position to promote the
vested interests of corporate clients for a profit.
Another example where the "Big Eight" firms lose independence
by identifying themselves with partisan business interests is their
association with recognized bu-iness lobbies. Partners of "Big Eight"
accounting firms testify before Congrecs and State authorities as
leaders of the Chamber of Commerce. The reputations of the firms
and the mantle of the Chamber thus are bestowed upon the interests
of the firm's large corporate clients.
(Specific examples of activities causing loss of independence are
described in relation to individual firms beginning on page 54. Ref-
erence should also be made to partisan political activities of the
AICPA which is controlled by the "Big Eight" firms and acts on
their behalf. See pae 101.)
In view of the SEC requirement that CPAs must be independent
in fact in regard to all relationships with clients, questions arise as
to how the "Big Eight" firms have been permitted to pursue their
varied activities. The answers lie in the "Big Eight" firms' doliullance
over the self-regulatory apparatus of the accounting profes-ion, and
the reliance of the SEC on the ATCPA. The AICPA, which i- con-
trolled by the "Big Eight" firms, develops the behavior standards
that are generally recognized by the SEC and State regulatory Thor'ds.
Under the control of the "Big Eight" accounting firmt,,. the AICPA
has encouraged CPAs to perform a broid range of i-inagement
advisory services. The ATCPA has albo developed ethial -.4lindards
for CPAs that apparently do not prohibit the partisan relation-hips
of the "Big Eight" firms with their corporate clients. For its 1);irt.
the SEC has relied upon the AICPA to determine whlt standards
of conduct are proper for CPAs. The close relationship betwNven the





54


SEC and the AICPA is described in subsequent sections of this
study.
The Nation's large publicly-owned corporations are ably staffed
with their own accountants who prepare and advocate corporate
views on accounting matters. There is no need for the "Big Eight"
accounting firms to engage in their many controversial nonaccount-
ing activities, other than to earn more money or ingratiate themselves
with corporate clients.
The traditional public image of the "Big Eight" accounting firms
as impartial and objective experts is not founded on fact, and is mis-
leading as to their true status. As political partisans and purveyors of
nonaccounting services, they become loyal agents of the clients which
employ their services. As independent auditors, the "Big Eight" firms
are unable to perform their responsibilities in a manner which coinm-
mands public confidence.

ILLUSTRATIVE QUESTIONABLE ACTIVITIES OF INDIVIDUAL "BIG EIGHT"
ACCOUNTING FIRMS
The "Big Eight" accounting firms are involved in a wide variety
of activities which significantly affect practically all segments of the
Nation's economy, as well as society in general. The Federal Govern-
ment and its policies and programs are especially influenced by the
"Big Eight" firms. This section provides some examples of their
activities by describing specific projects of individual "Big Eight"
firms.
This subcommittee received a large volume of materials in re-
sponse to its request to the "Big Eight" firms for copies of their
recent presentations before Congress, State legislatures, and Federal
and State regulatory agencies. Additional materials from other
sources have been collected and reviewed by the subcommittee staff.
Review of all the materials received by the subcommittee has revealed
that these firms have been involved in a substantial number of im-
proper or questionable activities.
The materials described in this section have been selected to illus-
trate the different types of improper or questionable activities prac-
ticed by "Big Eight" firms. They do not provide a comprehensive
description of all the improper or questionable activities practiced
by each firm. Some of the particular characteristics of individual "Big
Eight" firms are also illustrated by this section.
An indication of the scope of activities practiced by individual
firms is provided by the index to materials submitted by each firm.
The indices submitted by some "Big Eight" firms are far more de-
scriptive than others, but all of the indices submitted are useful as
indicators. The volume of materials submitted was so great that only a
small portion of it is included in this study as examples of their
activities.
Although the examples included in this study are not comprehen-
sive. they do illustrate the serious problems which exist regarding
the activities of "Big Eight" firms. Three of the firms have been
officially disciplined by the SEC for improper activities. Other sections
of this study provide additional examples of questionable activities by
organizations controlled by the "Big Eight" firms.





55


ARTHUR ANDERSEN & CO.
Arthur Andersen & Co. is widely regarded as the most aggressive
"Big Eight" firm in terms of promoting the positions adopted by the
firm on political and accounting issues. News accounts often refer to
it as the "maverick" within the accounting profession. Materials re-
viewed by the subcommittee staff confirm that Arthur Andersen & Co.
is aggressive in promoting interests of the firm and its clients.
The response of Arthur Andersen & Co. to this subcommittee's
information request is included in Appendix C beginning on page 571.
It is the only major CPA firm which provides information to the
public concerning its financial position. An important part of the
firm's public information program is the annual report which it
voluntarily prepares each year. Because of space limitations, Arthur
Andersen & Co.'s 1975 annual report is not included in this study.
However, the financial statements from its 1975 annual report are
included in Appendix A at page 200. Complete copies of its annual
report can be obtained directly from Arthur Andersen & Co.
Arthur Andersen & Co. and Price Waterhouse & Co. are the only
two "Big Eight" firms which cooperated fully in providing informa-
tion to this subcommittee. Many of the other major accounting firms
have criticized the public information program of Arthur Anderslen
& Co. The proportionately greater number of questionable or improper
activities by Arthur Andersen & Co. noted in this study do not neces-
sarily imply that the firm engages in such activities more than other
"Big Eight" firms. Instead, it may reflect the fact that Arthur
Andersen & Co. has been more open and forthright in providing in-
formation on its activities to this subcommittee.
Arthur Andersen & Co.'s annual reports are a useful source of
information for understanding the activities of a large and influential
accounting organization. However, limitations resulting from the ob-
vious promotional nature of the reports, and the fact that the financial
statements are not independently certified, must be recognized when
using them.
It was the first "Big Eight" firm to have its operations reviewed by
an "independent" public review board. (See Appendix C, page 648.)
Not surprisingly, the public review board found that Arthur An dersuin
& Co. "conscientiously and competently carried out" its responsi-
bilities. In fact, the public review board was not independent and did
not represent the public. Arthur Andersen & Co. selected the five
review board members and paid each of them $20,000.
The review board praised the firm's operations, and openly advo-
cated Arthur Andersen & Co.'s views concerning the need for "infla-
tion-adjusted" accounting methods, which was not relevant to evaliat-
ing the firm's efficiency and competence.
Arthur Andersen & Co.'s review board also recommended that tlie
firm's partners should reduce their independence by becoming mre-
active in politics, and by seeking employment in industry after retire-
ment. The real usefulness of the review board's report li,,s iiot in its
recommendations and findings, but in ably demonstrating the probl)lels
and conflicts of interest involved with permitting major accounting
firms to review themselves for competeliice and indepeiideince.





56


The SEC has issued Accounting Series Release 157 condemning
faulty auditing practices by Arthur Andersen & Co. The SEC state-
ment also criticizes intentional efforts by Arthur Andersen & Co. to
mislead the SEC staff. (See Appendix C, page 638.) In another case,
Arthur Andersen & Co. failed to follow up information it was given
that Merck & Co., one of its clients, was making questionable foreign
payments. Arthur Andersen & Co. reportedly knew that at least one
such payment was illegal. (See Appendix C, page 649.)
Arthur Andersen & Co. recently filed a complaint with the SEC
alleging that the SEC has illegally acted to require CPAs to state
whether an accounting change by a client is preferable. The complaint
also alleges that the SEC illegally requires CPAs to follow all past
and future accounting standards established by the private sector's
Financial Accounting Standards Board (FASB). Arthur Andersen
& Co. has brought suit in Federal court to enforce its complaint
against the SEC.
Arthur Andersen & Co.'s description of its complaint and the firm's
reaction to criticism of its complaint are included in Appendix C at
page 650. News articles describing the complaint and criticism of
Arthur Andersen & Co. within the accounting profession are also
included.
The process by which the FASB establishes accounting standards
that are recognized by the SEC is fully described in subsequent sec-
tions of this study. Arthur Andersen & Co. has raised valid questions
concerning the legality of the process by which the SEC grants official
recognition to accounting standards developed by the FASB.
Regarding its efforts to influence Federal and State authorities,
Arthur Andersen & Co. has provided this subcommittee with an ex-
cellent synopsis of the many presentations made by the firm's repre-
sentatives. (See Appendix C, page 573.) The index and synopsis
clearly show the wide variety of questionable activities which the firm
has undertaken. Some of those activities were performed for clients,
some were performed as a "public service," and others were performed
for groups such as the Chamber of Commerce.
An example of Arthur Andersen & Co.'s "public service" efforts is
the firm's statement before the House Ways and Means Committee,
dated 15 July, 1975. (See Appendix C, page 624.) That statement
openly advocates retention of controversial foreign tax benefits for
multinational corporations. The views expressed agree with the views
expressed by big business lobbyists, but Arthur Andersen & Co.'s
reputation as an independent auditor lends more credibility to its
partisan statements.
The public review board hired by Arthur Andersen & Co. stated:
"The firm does not, we understand, engage in lobbying efforts on be-
half of clients. Also, the firm will not, as a matter of policy, undertake
tax engagements which require a legislative solution." Although Ar-
thur Andersen & Co.'s statement in strong support of controversial
foreign tax benefits for corporations was performed as a "public
service," existing and potential corporate clients of Arthur Andersen
& Co. could be expected to view favorably the firm's advocacy of big
business interests.





57


Another example of questionable or improper activities by Arthlur
Andersen & Co. is the statement made by one of its partners as vice
president of the Greater Boston Chamber of Commerce. (See Appen-
dix C, page 622.) That statement uses strong rhetoric iand i-IIading
factual assertions to oppose the creation of a public power authority in
Massachusetts. Arthur Anderlen & Co. is the independent auditorr for
several of the Nation's largest electric utility monopolies that ire ve-
hemiently opposed to municipal or State owner-hip of electric power
facilities.
Arthur Andersen & Co. submitted many more examples of its ac-
tivities than could be included in this study because of space limita-
tions. However, certain other examples should at least be mentiownel :
Arthur Andersen & Co. testified on behalf of four electric util-
ities before the Florida legislature recommending that contro-
versial accounting methods be used to charge utility customers for
taxes which are not paid by electric utilities.
An Arthur Andersen & Co. partner presented a statement
on behalf of the Greater Boston Chamber of Commerce in oppo-
sition to electric rates designed to conserve electric energy and
reduce costs for residential customers. The statement said that
customers would not save much, but that 36,000 jobs would be lost.
Arthur Andersen & Co. testified as a "public service" before the
Nevada legislature in regard to controversial iinethods of setting
utility rates. Arthur Andersen & Co. advocated use of fuel adjust-
ment clauses, inclusion of construction work in progress in Htility
rate bases, and use of accounting methods that charge customers
for taxes that are not paid. All of tho-ci rate-making methods
unfairly increase the cash flow of utilities at the expense of
customers.
Arthur Andersen & Co. testified before the Subcommittee on
Energy and Power of the House Committee on Inter-taite and
Foreign Coin i-ierce in support of including construction work iJ,
progress in electric utility rate bases. Adoption of that recom-
miendation would unfairly raise the price of electricity for
customers.
An Arthur Andersen & Co. partner testified on behalf of the
Greater Boston Chamber of Commerce in support of Massachu-
setts State taxes that would retain a flat taix rate iitheri than a
graduated rate. decrease the taxes on unearneod income, in'rt.i
the deduction for capital gainy, to 50 percent, inT'a-, the sa es
tax, aind widen the sales tax base.

ARTHIUR YOUNG x CO.
Arthur Young & Co. is one of the si-zniller 'Big EIiht" a.',ountig
firms. The firmly's response to this subcommittee's uw!quet f,-r informla-
tion is included ini ApIpendix C beginning on l pie 65e The irlex t,,
materials subml)ittel grive- ,,nme exaiiqld.s of ilje.-timo:,ble :1cietivitie- by
the firm. (See -Appendix C, p. 659.)
Arthur Young & Co. is the independent auditor for Lld.or ,] Air-
craft, Corp. Lockheed has had financial problems for -eveal rears.





58


As independent auditor for Lockheed, Arthur Young & Co. has ap-
proved the use of accounting methods which possibly misrepresent
Lockheed's actual financial situation. To the extent that it has ap-
proved such accounting methods, Arthur Young & Co. has served the
interests of Lockheed's management rather than the public interest.
The accounting practices used by Lockheed have been described
to the subcommittee by Dr. Abraham Briloff, Emanuel Saxe Distin-
guished Professor of Accounting, Baruch College, City University of
New York. His letter also describes the failures of the SEC and the
General Accounting Office to perform proper oversight of Lockheed's
accounting practices in accordance with the loan guarantee enacted by
Congress. (See Appendix K, p. 1605.) Because of the Federal loan
guaran tee for Lockheed, possibly misleading accounting practices used
by the company and approved by Arthur Young & Co. are an area of
special interest to the public, and should be further investigated by
Congress.
Arthur Young & Co. is the accounting firm hired last year by Peat,
Marwick. Mitchell & Co. to provide an "independent" review of the
firm's quality of practice. Arthur Young & Co. concluded after its
review that Pea t. Marwick, Mitchell & Co. had appropriately compre-
hensive quality control procedures. It also was "favorably impressed"
with Peat, Marwick, Mitchell & Co.'s commitment to conduct its prac-
tice in accordance with professional standards. As described subse-
quently, the SEC had found multiple cases of improper and faulty
auditing by Peat, Marwick, Mitchell & Co. (See Appendix C, p. 736.)
The Wall Street Journal recently reported that Pullman Inc. used
Arthur Young & Co., its independent auditor, as a conduit for making
questionable payments overseas. Arthur Young & Co. became involved
in the affairs of Pullman Inc. by passing $5,000 to a foreign taxpayers'
association. "presumably" for the purpose of bribing tax officials in
that foreign country. (See Appendix C, p. 665.)
Partners of Arthur Young & Co. have made (list curbing public state-
mients regarding the proper role of independent auditors. In an inter-
view with Forbes magazine, one top partner stated that independent
auditors should not be expected to discover multi-million dollar slush
funds, that independent auditors report to corporate managements
and have little responsibility to the board of directors and the public,
that independent auditors should have a "positive" attitude about
using "imaginative" accounting methods for clients so that they will
not be regarded as a "no" fellow bv a client's management, and that
the independent auditing relationship should be used to market man-
agement advisory services to clients. (See Appendix C, p. 663.)
Another top Arthur Young & Co. partner has stated that the real
problem with business ethics concerning illegal bribery of foreign
officials is that the Federal Government has not given businessmen
prior guidelines on the type of illegal bribes which will be accepted as
proper in reporting to the public. Without such guidelines, business-
men are unfairly deprived of knowing when it is all right to commit
illegal bribery abroad. (See Appendix C, page 664.)





59


COOPERS & LYBRAND
The response of Coopers & Lybrand to this subcommittee's informa-
tion request is included in Appendix C at page 666. The index to mate-
rials submitted indicates the type of activities in which the firm has
engaged.
One example of Coopers & Lybrand's promoting the interests of its
clients on controversial issues is the firm's comments to the Federal
Power Commission (FPC) regarding the treatment of income taxes
in setting rates for electricity. (See Appendix C, page 674.) After
noting that the firm is the independent auditor for several electric
utilities, Coopers & Lybrand advocates the use of "normalized" ac-
counting for taxes which increases the cash flow of the firm's electric
utility clients at the expense of customers using electricity. Coopers &
Lybrand quotes with approval statements by the AICPA and the
President's Labor-Management Committee which support the i-v of
rate-making methods to increase the cash flow of electric utilities.
The Coopers & Lybrand comments also state that money paid by
electricity customers for Federal income taxes which are not paid by
electric utilities is really a donation by the Federal Government.
rather than by the customers. This subcommittee has conducted re-
search showing that electricity customers are often charged sub-tan-
tial amounts for Federal income taxes which are never paid to the
Federal Government by electric utilities. As a result, customers of
those utilities have been substantially overcharged, despite the claims
of Coopers & Lybrand to the contrary.
In another letter of comment to the FPC, the firm supported the
inclusion of construction work in progress in the rate bases of utilities.
as well as the use of more generous earnings allowances for utilities.
Adoption of the Coopers & Lybrand proposals would result in higher
rates for customers. Use of such accounting procedures can raise elec-
tricity rates substantially without alerting customers to the ways in
which they are being overcharged. Thus, the use of complex account-
ing procedures, such as those advocated by Coopers & Lybrand, have
been strongly promoted by electric utilities in recent years.
Although Coopers & Lybrand acts as independent auditor for regu-
lated utilities, the firm has instructed certain regulatory commissions
on how to set utility rates. Customers in those jurisdictions may be
subject to overcharges, based on the type of rate-making standards
it has advocated before the FPC. Independent auditors cannot prop-
erly be involved in enriching regulated utilities at the expense of
utility customers.
Coopers & Lybrand was also the auditor for a number of cor-
porations whoso insolvencies led to severe criticism of the firm's prac-
tices. These included Mill Factors Corp., R. Hoe & Co., International
Controls Corp., and Continental Vending Machine Corp. In the t1 ter
case, two Coopers & Lybrand partners and one manager were indicted
and convicted for fraud.


67-159 0 77 6





60


ERNST & ERNST
The response of Ernst & Ernst to this subcommittee's request for
information is included in Appendix C, at page 686. As shown by the
index to materials submitted, many of the firm's activities are clearly
incompatible with its position as an independent auditor.
One example is its letter of comment to the Cost Accounting Stand-
ards Board (CASB) regarding a CASB proposal to recognize a por-
tion of government contractors' profits as a "cost" to le charged to the
Federal Government. That proposal has since been adopted by the
five-member CASB which includes a partner of Ernst & Ernst.
The firm supported the CASB proposal, but was concerned that it did
not go far enough. (See Appendix C, page 695.)
In its letter to the CASB, the firm advocated establishment of alter-
native, contradictory accounting definitions for the purpose of charg-
ing more costs to the Federal Government while reporting greater
profits to the public. The letter states:
We are in general agreement with the concept that the cost
of capital should be recognized as an explicit cost of a con-
tract, and that a contractor need not record this cost in his
accounting records for financial statement purposes since this
concept is not now recognized as a generally accepted ac-
counting principle and may never be so recognized.
The Ernst & Ernst letter also argues for a higher rate to compen-
sate contractors, a larger base to which the rate would apply, and
the consideration of more accounting methods to compensate for
'costs" that are not actually incurred.
The readiness of "Big Eight" accounting firms to promote alterna-
tive accounting svytemrs for the purpose of guaranteeing profits of
their corporate clients illustrates the poor chance of establishing
uniform and meaningful accounting standards under the leadership
of the "Big Eight"' firms. In this particular case. Ernst P: Ernst was
advocatiicn the use of "costs" which are not normally recognizol as
cozts at all for the snle purpose of increasing contractor charges to
the Federal Government. A variable definition of "cst:t-" may benefit
the corporate clients of Ernst & Ernst. but it hinders the develop-
ment of efficient and proper accounting practices by the Federal
Government.
Another example of activities by Ernst & Ernst is the study it per-
formed for the State of Kentucky on the propriety of fuel adjustment
claiih-I- lused by elect i ic utilities. The major findings of that voluminous
- :Idv ,re sir mmiilarized in the letter of transmittal from flie firm to the
chairma i of the committee whichit authorized the study. (See Appendix
C. i".'r 92.)
T'ie, Ernst & Ernst study recommended that fuel adjuiti ment clauses
sh ouild continue to be u-el by electric utilities" in Kentucky. The study
found th:it there was evidence of bard bNargininirff for the best fuel
prices 1)v the utilities, and thai there are strong incentives to seek
the ,ii'st fuel ices, even thollLrh the c -is t, a automatically I):--ed to
colisnrnei -. It should he noted that the firm's find ,r- are contrary to
O1 (, evide('ce p)reselte(d to Co0 Ln': (ll d nring extenIsive hearings on the
mise of aIit olllnatic fuel a(j14i-f :ie t clau1 se-.







The findings of the Ernst & Ernst study may be explained by the
firm's overall work plan described in the letter of transmittal. Ernst &
Ernst met with representatives from the various electric utilities, then
had the initial drafts of its recommendations reviewed by the utilities
to assure that the study's recommendations and presentations were
"accurate and factual." Apparently, the firm did not meet with cisto-
mers and consumer groups which might oppose use of fuel adjustment
clauses, nor did the firm review its findings witli such groups to as;iire"
accuracy.
The House Legal and Monetary Affairs Subcommittee has criticized
Ernst & Ernst for the poor quality of work performed by the firm
for the Federal Law Enforcement Assistance Administration. A news-
paper account detailing the findings against Ernst & Ernst is included
in Appendix C, at page 699.
A final example of the activities of Ernst & Ernst is a recent cor-
porate tax reduction proposal by the firm to the FASB and the SEC.
The proposal would permit corporations to adopt a simple "inflation
accounting" method which would enable them to adjust asset values,
increase depreciation charges, and pay lower Federal income taxes.
Consistent with the previously described Ernst & Ernst comments to
the CASB, the proposal on taxes would permit corporations to use a
different accounting system for reporting to the public so that publicly
reported corporate profits would not be reduced. Different accounting
systems would be used to show different financial results to different
parties, depending on the image a corporation might want to project.
(See Appendix C, page 700.)

HASKINS & SELLS
The response of Haskins & Sells to this subcommittee's request for
information is included in Appendix C, at page 701. The index to mate-
rials submitted indicates the scope of activities undertaken by that
firm.
Haskins & Sells was involved in the auditing failures which allowed
the famous fraud at Equity Funding Corp. of America to continue
undetected. The trustee in bankruptcy for Equity Funding Corp. has
found that Haskins & Sells "must share significant responsibility for
the persistence of the fraud at Equity Funding." Relevant excerpts
from the trustee's report describing the fraud and the failures of the
independent auditors are included in Appendix C. at page 704.
Even a committee of the AICPA, which is controlled by the "Big
Eight" firms, has found that proper application of auditing standards
would have uncovered the fraud at Equity Funding. (See Appendix
C. page 726.)
The quality of auditing and management advisory services provided
by Haskins & Sells was the subject of criticism and limitation resulting
from the failures of four stock brokerage firms-Dempsey-Tegeler.
Francis I. du Pont & Co., Orvis Brothers & Co.. and Hayden Stone-
which were clients of Haskins & Sells.
The firm has -1so been active as a nartisan advoc;ite for the inter-
ests of electric utility monopolies. Severnil of the Nation's largest
electric utilities hire Haskins & Sells as their independent auditor.





62


Representatives of Haskins & Sells have promoted controversial rate-
making methods to benefit utilities in several parts of the Nation.
In Florida, Haskins & Sells represented the electric utilities to
lobby against a bill in the State legislature which would have per-
mitted utilities to charge customers only for the amount of taxes ac-
tually paid to the government. In New York, the firm appeared at a
public hearing held by the Federal Power Commission to argue that
construction work in progress should b)e included in electric utility
rate bases.
An excellent summary of the partisan positions taken by Haskins
& Sells on behalf of electric utilities is provided by the discussion out-
line on "regulatory reform" prepared by Haskins & Sells for the
AICPA's White House conference on 2 July, 1975. (See Appendix
C, page 727.) The "regulatory reform" recommended includes giving
electric utilities more profits through greater returns on equity, as
well as making ba.-ic changes in accounting methods to achieve greater
cash flow for utilities. All of the "reforms" advocated by IHaskins &
Sells would result in higher electric rates for consumers.

PEAT, MARWICK, MITCHELL & CO.
Peat, Marwick, Mitchell & Co. appears to be the largest of the "Big
Eight" accounting firms in terms of revenue and operations. Its re-
sponse to this subcommittee's request for information is included in
Appendix C, at page 730. The materials submitted concerning its activ-
ities would appear to show a relatively minor amount of questionable
or improper activities by the firm.
Along with Arthur Andersen & Co. and Touche Ross & Co., Peat,
Marwick, Mitchell & Co. is one of three "Big Eight" firms which have
been officially disciplined by the SEC for faulty auditing practices.
The SEC issued its criticism of Peat, Marwick, Mitchell & Co. in Ac-
counting Series Release 173. (See Appendix C, page 736.) Account-
ing Series Release 173 covers improper auditing practices by Peat.
Marwick, Mitchell & Co. in five separate cases, and provides a detailed
description of some different types of auditing abuses by "Big Eight"
firms. The five cases described involve Penn Central Co., Republic Na-
tional Life Insurance Co., Talley Industries Inc., National Student
Marketing Corp., and Stirling Homex Corp.
Peat, Marwick. Mitchell & Co. was the first "Big Eight" firm to hire
another "Big Eight" firm to review the quality of its practice. Arthur
Young & Co. was hired to perform the review. According to news
reports, Peat, Marwick, Mitchell & Co. paid $500,000 for its review.
Not surprisingly, Arthur Young & Co. produced a favorable opinion
on the quality of practice by Peat, Marwick, Mitchell & Co. about four
months after the SEC issued Accounting Series Release 173. (See
Apnendix C, page 788.)
One example of questionable activities by Peat, Marwick, Mitchell
& Co. is the firm's testimony before the House Ways & Means Com-
mittee on behalf of an oil and gas company. The testimony advocates
tax benefits for oil and gas companies, and recommends that intangible
drilling expenses be allowed as deductions for producing wells, in
addition to dry wells. (See Appendix C, page 732.)





63


PRICE WATERHOUSE & CO.
As noted by the study prepared for this subcommittee by the Library
of Congress, Price Waterhouse & Co. is the most influential "Big
Eight" accounting firm because it acts as the independent auditor for a
great number of the largest corporations in the llnited State-. Its
response to this subcommittee's request for information is included
in Appendix C, at page 789. Price Waterhouse & Co. and Arthur
Andersen & Co. were the only two "Big Eight" firms that cooperated
fully in providing information requested by this subcommittee.
The index to materials submitted by Price Waterhouse & Co. shows
that the firm is actively involved in a variety of questionable activi-
ties. The firm has taken parti.ani positions on controversial issiue- to
promote its own interests, the interests of corporate clients, anld the
interests of private business groups. It has promoted its views before
Congress, State legislatures and regulatory authorities.
A Price Waterhouse & Co. partner who serves as a director of the
United States Chamber of Commerce recently appeared before the
Senate Government Operations Committee on behalf of the Cham-
ber of Commerce. He presented the Chamber of Commerce views on
regulatory reform, which generally represent the views of large cor-
porations that are often clients of his firm. (See Appendix C, page
796.)
The quality of practice at Price Waterhoise & Co. is also subject
to question as a result of charges by the SEC of illegal and improper
activities by General Tire & Rubber Co. Price Waterhouse & Co. is
the independent auditor for General Tire. The scope of alleged im-
proper or illegal activities by General Tire which were either not
found or not required to be disclosed by Price Waterhouse & Co. is
described in a Wall Street Journal article. (See Appendix C, page
810.)
A relevant excerpt from the news article summarizes the SEC
charges against General Tire:
The complaint-the broadest against any company since
the SEC began its foreign payoffs investigations over a year
ago-charges the concern with making illegal political contri-
butions in the U.S., paying "gratuities" to military and ci-
vilian employees of U.S. agencies with which General Tire
does business, overseas bribes, violation of foreign-currency
laws, unrecorded "slush funds" and overbilling of foreign
affiliates for supplies.
Further, the company and its president, Michael Gerald
O'Neill, are accused of setting up and maintaining for many
years elaborate schemes to get around the laws of the U.S.
and various foreign countries.
In another case. Price Waterhouse knew of a $1.250,000 bribe paid
by a client, United Brands Co., to a Honduran official, but did not re-
quire that the bribe be disclosed in the financial statements of United
Brands. The details of the Price Waterhouse & Co. decision are con-
tained in a Wall Strrcf Joun.al article in Appendix C. at page SO!).





64


A special review of Gulf Oil Corporation ordered by the SEC also
raised serious questions regarding Price Waterhouse & Co.'s audit
of Gulf's internal controls and foreign subsidiaries over a period of
15 years.*
TOUCHE ROSS & CO.
The response of Touche Ross & Co. to this subcommittee's request for
information is included in Appendix C, at page 812. More than any
of the other "Big Eight firms, Touche Ross & Co. has requested confi-
dentiality for its response and refused to provide certain information
to this subcommittee. The views of the firm regarding the amount
and type of information which should be made available to
the public on major accounting firms illustrate the need for a require-
ment that the "Big Eight" and other influential national accounting
firms report periodically to the Federal Government.
Touche Ross & Co. is one of the three "Big Eight" firms which has
been officially criticized by the SEC for improper auditing practices.
In Accounting Series Release 153, the SEC de-cribed the firm's faulty
auditing practices with regard to its audit of I1.S. Financial, Inc.
The SEC recently charged Touche Ross & Co. with violating proper
.uditinjy standards in two more cases. (See Appendix C, page 820.)
The index to materials submitted bv Touche Ross & Co. shows that
the firm is very active in testifying before State regulatory cominmis-
sions in utility rate cases. As such, it has supported controversial rate-
making procedures which benefit utilities at the expense of consumers.
The firm has also testified concerning the amount of profits which
utiliti(-s should earn.

INFLUENCE OF TIlE "BIG EIGHT" ACCOUNTING FIRMS Ox FEDERAL,
STATE, AND LOCAL GOVERNMENTS
This section describes primarily the contractual and direct relation-
ships "Big Eight" firms have with governmental authorities. Because
of their broad scope of services. "Big Eight" accounting firms have the
Federal Government and many State and local governments as clients.
The "Big Eight" firms perform services for their governmental clients
on a fee basis, just as they do for clients in the private sector. Some-
times "Big Eight" firms provide their opinions to the Federal Gov-
ernment voluntarily.
Other means of influence are described in different sections of this
study. For example, the "Big Eight" firms directly and actively in-
fluence government authorities through public statements, testimony
before legislative and regulatory bodies, and lobbying efforts. Those
very influential activities are described in sections of this study dealing
with the independence and activities of individual "Big Eight" firms.
(See pp. 48 and 54.)
As noted previously, the "Big Eight" accounting firms exercise ex-
tensive indirect influence on government authorities through their
clients and throicrhl other private organizations. N[any of these ac-
tivities are described in sections of this study dealing with the AICPA,
the FASB. and the activities of individual "Big Eight" firms.
Renort of the Special Review Committee of the Board of Directors of Gulf Oil Corpora-
tion (December 10. 1975) ; ZFr v. Gulf Oil Corp. and Claude C. Wild. Jr., Civil Action
No. 75-0324, U.S. District Court (D.C.).







This subcommittee requested certain information concerning gov-
ernmnent clients in its D)ecember 19. 1975 questionnaire to the 'Big
Eight" accounting firms. Their responses are included in Appendix
A. Reference should be made to those responses for complete infor-
mation on the subjects described.
The "Big Eight" firms were asked to identify the agencies and de-
partments of Federal, State, and local governments that are their
clients. The lists of governmental clients are generally quite extensive.
Some of the "Big Eight" firms are more active than others in seeking
governmental clients, as shown by the client lists.
Table I on page 30 summarizes the information on the per(cent-
age of "Big Eight" firm revenues derived from performing services
for Federal, State, and local governments. Touche Ross & Co. re-
quested that its response be kept confidential, but the table shows that
the percentage of revenues received from governmental clients by the
other "Big Eight" firms runs from one percent for Ernst & Ernst to
between five and 10 percent for Arthur Young & Co. Although the per-
centages are low, the actual amount of revenues received from govern-
mental clients is substantial for some "Big Eight" firms because their
total revenues are very large.
The "Big Eight" firms perform a broad range of services for gov-
ernmental clients. Many of the services performed for State and local
governments are auditing and accounting services to determine the
financial status of those governments and their programs. Servi-ces per-
formed for the Federal Government include management advisory
services.
The "Big Eight" accounting firms derive multiple benefits from per-
forming services for governmental clients, not the least of which are
the substantial revenues they receive. When performing auditing and
accounting services, "Big Eight" firms wield the customary influence
of independent auditors over their clients. They are intimately in-
volved in the application of auditing and accounting methods which
may determine whether a tax increase is necessary, or whether mu-
nicipal bonds may be sold prudently. Like most clients, governments
respect the judgments of their independent auditors.
Performance of services for governmental clients may also present
"Big Eight" firms with an opportunity to benefit private clients. In
order to influence the direction of government policies and programs.
many private groups would undoubtedly advise governimental au-
thorities at no charge. However, the "Big Eight" firms have the
double 1eneufit of influencing governmental authorities while 1)eing_,
paid for their advice.
There are conflicts of interest involved because much of the advice
provided to government agencies and departments by "Big Eight"
firms directly or indirectly affects their corporate clients. Clients op-
erating in industries such as air transportation, communications, (W
electric utilities are affected by policies and procedures adopted Ih
Federal and State regulatory authorities which are also clients of
"Biq Eight" firms.
One recent example of the type of advice given to Federal agencies
by "Big Eight" firms is a Price Waterhotise & Co. stuldv of the ac-
counting policies which should he applied to cable television operators





66


by the Federal Communications Commission (FCC).* A major rec-
ommendation of the study is that "precise accounting standards are
not necessary to satisfy the FCC's present requirements." Instead, the
study recommends that the FCC accept any of the alternative account-
ing standards that are permitted by the private sector's standard-
setting bodies.
Standard-setting bodies in the private sector have always been con-
trolled by the AICPA, which is controlled by the "Big Eight" ac-
counting firms. A uniform system of meaningful accounting standards
has never been developed in the private sector. Influential corporate
clients of the "Big Eight" firms have insisted on retaining alternative
accounting standards to permit them great flexibility in reporting cor-
porate earnings. The Price Waterhouse & Co. study recommends that
the FCC not establish uniform accounting standards which would re-
strict the flexibility of cable television operators in reporting the
amount of profits they earn, even though the private sector has failed
to establish uniform standards.
Another example of consulting work by "Big Eight" firms is a
report prepared by Coopers & Lybrand for the Department of Defense
concerning the adequacy of profits earned by defense contractors. For
its "Profit '76" study, the Department of Defense wanted to determine
the attitudes of contractors toward defense procurements. Coopers &
Lybrand, which has major defense contractors as audit clients, found
that defense business is riskier than commercial business, and that
Federal procurement regulations are unnecessarily complex and
demanding.
This subcommittee requested the amount of revenues received by
"Big Eight" firms for services to the Federal Government in each of
the past six years. Their responses are summarized in Table I on page
30. The Tonche Ross & Co. revenues from Federal contracts are not
revealed in that table because the firm asked that its figures not be
separately disclosed.
The total revenues received by the "Bigr Eight" firms from the
Federal Government in each of the past six years are as follows:
1970 ----------------------------------------------------------'$2, 427, 000
1971 ----------------------------------------------------------- 8,037,000
1972 ----------------------------------------------------------_ 11, 635, 000
1973 ------------------------------------------------------ 14,197, 000
1974 ---------------------------------------------------------- 15,164, 000
1975 ----------------------------------------------------------1, 486. 000
1 Arthur Andersen & Co. and Peat, Marwick, Mitchell & Co. did not -siihmit data for 1970.
The amount of revenue: received by these firms from the Federal
Government has increased substantially in recent years, indicating
that the amount of services performed for the Federal Government
has increased. (It should be noted that Federal contract revenues
received by individual "Big Eight" firms do not correspond exactly
to the percentage of their revenues received from government clients.
The percentage figures shown in Table I include revenues from State
and local governments, as well as the Federal Government.)
*Contract FtCC-0177, "Study of Acronntlnc Policy Issues and Other Conatderatlons
Related to the FPCC Cable Bureau's Finincial Reporting System for Cable Television
Operators," submitted June 7, 1976.





67


An example of the "free" advice given to the Federal Goverinment
by "Big Eight" firms is the testimony of represent tatives from Arthur
Andersen & Co. and Price Waterhou:-e & Co. before the Special Sub-
committee on Integrated Oil Operations of the Seiate Committee on
Interior and Insular Affairs on 21 February, 1974. Their prepare(l
testimony was presented for the purpose of describing tlhe differences
between "full costing" and successfull efforts" accounting methods as
applied by oil and gas companies. (See Appendix C, page 632.)
Arthur Andersen & Co. and Price Waterhoseo & Co. both act as
independent auditors for major corporations involved in oil and gas
production. As such, both firms are supposed to remain independent
from the interests of their clients. Rather than declining to r'epond
to any questions, which might affect their firms' ability to remain inde-
pendent, the represenitatives of Arthur Andersen & Co. and Price
Waterhouse & Co. freely advocated the controversial views generally
expressed by managements of oil and g.- companie.-.
In response to questioning, both firms' representatives stated that
the 30 largest integrated oil companies are competitive, that the Fed-
eral Power Commission has restricted the supply of natural gas
through its pricing policies, and that oil and gas price, are being kept
too low by Congress. Those views are controve rsial, and do not fall
within the expertise associated with independent auditing. Neverthe-
less. the representatives from Arthur Andersen & Co. and Price Water-
house & Co. went on record advocating politically and fac-tually
controversial positions before Congress on issues of great importance
to the managements of their corporate clients in the oil and gas
business.
The "Big Eight" accounting firms provide extensive services to
Federal. State, and local governments. They are able to directly in-
fluence the course of governmental policies and programs through per-
formance of their services. Conflicts of interest occur when "Big
Eight" firms influence governmental authorities on matters which
affect their corporate clients. The "Big Eight" firms have been able
to spread the scope of their influence across both the public and pri-
vate sectors.

QUALITY OF PRACTICE BY "BIG EIG-IT" ACCOUNTING FIRMS
Application of proper accounting and auditing procedures by "Big
Eight" firms is vitally important to the Nation's economy and the
public's welfare. The effects of mistakes and improper practices by
these firms are amplified because their big corporate clients are large
enough to have substantial impact on the Nation's economy. To the
extent that large corporations are able to pursue improper or illegal
activities, through the use of deceptive accounting practices, the public
is dependent upon the "Big Eight" accounting firms for protection
against the use of such harmful practices.
Public realization of defective accounting and auditing practices
by "Big Eight" finnrms has too often come only after investors, credi-
tors, suppliers, customers, and others have suffered severe financial
losses. Many examples of improper, faulty, and incomplete accounting
and auditing practices have been brought to public attention.





68


Dr. Abraham J. Briloff has documented and clearly explained the
accounting abuses by "Big Eight" firms in two revealing books.* He
summarized his research on accounting abuses in testimony before the
Subcommittee on Oversight and Investigation of the House Commit-
tee on Interstate and Foreign Commerce on 21 May, 1976.
His statement before the House Subcommittee on Oversight and
Investigation appears in Appendix K, page 1609. Reference should be
made to Profes-or Briloff's statement for a comprehensive description
regarding the quality of practice by "Big Eight" accounting firms.
Four of the firms have already been cited for abusive accounting
practices through actions in the courts and by the SEC. The SEC
formally disciplined three firms through issuance of accounting re-
leases. Those firms are Arthur Ander-en & Co., Peat, Marwick,
Mitchell & Co., and Touche Ross & Co. The SEC disciplinary reports
are referenced in the section of this study describing activities of indi-
vidual "Big Eight" firms. (See page 54.)
The trustee in bankruptcy for Equity Funding Corporation of
America has found that Haskins & Sells "must -hare significant re-
sponsibility for the persistence of the fraud at Equity Funding."
Relevant excerpts from his report are referenced in the section of this
study on IHaskins & Sells. (See page 61.)
The problems reliulting from defective audits by "Big Eight" firms
derive in large part from their lack of independence as auditors. In-
formation received by this subcommittee generally confirms that the
first loyalty of these firms is to the managements of corporate clients
who retain them and authorize payment of their fees.
During conversations with the subcommittee staff, representatives
of "Big Eight" firms and the AICPA have argued that independent
audits of large corporations cannot be expected to provide real assur-
ance that corporate financial statements are accurate. The leadership
of the AICPA has advocated that the public should not expect too
much from independent auditors of corporations. In line with that
view. the AICPA is considering proposing Federal legislation which
would limit the legal liability of independent auditors in civil court
suits, and protect CPAs from the consequences of their negligence.
As described in subsequent sections of this study dealing with the
AICPA, the "Big Eightt" firms and the AICPA have been instrumen-
tal in helping to convince the public that independent auditors can
affirm the accuracy of financial and other types of information. Al-
though th.y have complained that they are powerless to prevent abiiues
hy corrupt corporirte an';ement. thev have oppo-d legislation that
would provide criminal actions against corporate executives who
deliberately mislead independent auditors.
The po;if ion of the AICPA and the "Big Eight" firms is that multi-
million dollar sums are immaterial to the operations of maior cor-
porations, and that independent auditors should not be expected to ac-
count aciciiratelyv for iu-h -iins. (See p 1i'e 121.) That view ignore;,
the Alact that multimillion dollar sums are very material in their
il-h,-1 ut, im)pari on individuals and certain sergmleits of the econ-
omy. Paradoxically, the AICPA and the "Big Eight"' accounting
BrIloff,. Abraham J. "Fnnc.9eiitnhlr- Accounting," Harper & Row. New Ynrk. N.Y.
(1972) : "More Debits Than Crr-rlit," Harper & Row, New York. N.Y. (1976).





69

firms advocate a lower level of accountability as corporations grow
larger.
Large organizations increase the opportunity for improper activi-
ties by corporate personnel. As described subsequently (se( page 101),
the answer of the AICPA and the "Big Eight" firms to the problem
of corporate accountability is to lower the expectations of Federal offi-
cials and the public through legislative and publicity campaigns to re-
educate the public.
The real need is to improve independent auditing capabilities zo that
the public, as well as concerned corporate managers, can be assured
that corporate accounts are accurate.











CHAPTER II. ORGANIZATION OF THE AMERICAN IN-
STITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
INTRODUCTION
As previously mentioned, the AICPA is the preeminent profes-
sional organization in the field of accounting. Other than the Federal
agencies and State boards of accountancy which hold the ultimate
authority to determine accounting matters, the AICPA is the most
powerful and influential force in shliaping the environment in which
accountants operate.
The AICPA has extended its power and influence beyond its posi-
tion as the dominant private accounting organization through close
relationships with Federal agencies and State boards of accountancy
that regulate the accounting profession. The dependence of those gov-
ernmental agencies upon the information and activities of the AICPA
is the key to its extraordinary and continuing influence.
The organization and procedures of the AICPA are a primary
reason for its position of power. The AICPA is presently organized
to reflect and effectively project the interests of the most powerful ac-
counting firms-the "Big Eight"-and, to some extent, the next seven
largest accounting firms.
This organizational focus has benefitted the AICPA by permitting
a more easily identified sense of purpose, while also providing the
necessary resources to accomplish its goals. The coordination of pur-
pose with resources-which strengthens the AICPA as an organiza-
tion-is possible because of the vast amount of wealth and influence
controlled by a small number of very large accounting firms. If the
same amount of wealth and influence were apportioned among a
greater number of accounting firms, the community of interest guid-
ing the actions of the AICPA would be significantly reduced, and its
organizational purpose would probably become more diffused as a
consequence.
The organizational structure of the AICPA permits a dominant
role for the "Big Eight" and next seven largest accounting firms. It
also ensures a stable transition of power so that tho'e persons manag-
ing the organization have great control over the selection of the per-
sons who will come into power.
The maintenance of power over the AICPA by the persons pres-
ently in control is illustrated by the description of the Nominations
Committee in the 1975-76 AICPA Committee Handbook. The stated
objective of the Nominations Committee. which plays an important
part in the transfer of power, is "to provide for continuity of leader-
ship and add distinction to the organization by nominating the best
of the profession for officers, Council and the Board of Directors."
Continuity of policy and perspective requires organized procedures
for the selection of like-minded nominees for positions of influence.
(70)







The Nominations Committee is instrumental in selecting the mem-
bers for five of the six membership groups compri-ing the AICPA
council. Those five groups in fiscal 1976 accounted for 198 of the 252
council members, or 79 percent of the council membership. In turn, as
explained subsequently, the Nominations Committee is colifirmed by
the council.
The following is an analysis of the AICPA bylaws which govern
its procedures. The analysis shows an array of procedural techniques
for maintaining the status quo regarding control of the AICPA and
its activities. From a purely organizational viewpoint, the persons
presently controlling the AICPA are in the most favorable position
to exercise the procedural tools for their continuing benefit.

COUNCIL
The council is the basic body for exercising the powers of the
AICPA, including the authority to prescribe its policies and pro-
cedures, and to enact resolutions binding upon the board of directors,
officers, committees, and staff. During fiscal 1976, the council was
comprised of 252 members. The membership should decline soon to
about 200 when the number of elected members is reduced from 137
to 85 as required in the bylaws. The council meets twice a year to
perform its functions.
The council is comprised of six membership groups, each of which
is selected by different methods (see Chart 2 on following page).
Each council member is entitled to one vote regardless of his method
of selection.









ORGANIZATION OF THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS


VICE CHAIRMAN OF THE BOARD
Designated as the next Chairman
Recommends candidates for nomi-
nations committee


PRESIDENT
Executive authority over all policies
and programs of the Al CPA
Speaks for AICPA


H


SAICPA STAFF


CHAIRMAN OF THE BOARD
Appoints Committees
Speaks for AICPA
Presides at meetings
Recommends candidates for nominations committees
Trustee of Financial Accounting Foundation


SENIOR TECHNICAL
COMMITTEES
Independently speak for the AICPA
in their respective subject areas



COMMITTEES AND BOARDS
Perform work for the AICPA in
various subject areas


NOMINATIONS COMMITTEE
Selects official nominees
Apportions the number of elected council
members from each state.


BOARD OF DIRECTORS
Makes policy and administers resources of the AICPA
Approves appointments to senior technical committees
Reports to the Council
Elects Financial Accounting Foundation which controls
Financial Accounting Standards Board.


1975-76 COUNCIL (252 MEMBERS)
Holds ultimate authority over AICPA


7 O CRS E TE 1 MEMRS 9 MEMBERS 24 PAST PRESIDENTS/ 54 DESIGNATED COUNCIL
7 OFFICERS 137 ELECTED 21 MEMBERSATA OF THE BOARD CHAIRMEN OF THE REPRESENTATIVES OF
OF THE AICPA MEMBERS AT LARGE OF DIRECTORS BOARD STATE SOCIETIES

Nominated by the Nomi- Nominated by the Nomi- Nominated by the Nomi- Nominated by the Nomi- Members of the Council Chosen by the state
nations Committee. nations Committee. nations Committee. nations Committee. for life, provided mem- societies according to
Elected by the Council Elected automatically Elected by the Council Elected by the Council bership in the AICPA their own rules.
for a 1-year term. unless independent for 3-year staggered for 3-year staggered is continued.
nominations are filed. terms. terms.
Elected to 3-year stag-
~~~______~_____ gered terms.


-I


a =--


0





73


The five groupss whose members serve on the coun,'il as a result of
selection by the Nominations Commlittee are the officers, elected mem-
bers, members at large, member- of the board of director-, and past
presidents/chairmen of i lIe boa rd.

OFFICERS
Seven of the eight officers of the AICPA are council members as
required in the bylaws. Only the secretary is excluded, and h', is not
required to be a member of the AICPA as are the others. All of thr.
officers are elected by the council by majority vote. Sit officer- ar.-
nominated by the Nomiinations Committee. The pr-sident and seore-
tary, both full-time and salaried, are recommended to the council by
the board of directors.
The Nominations Committee nominates the chairman o)f the board,
vice chairman of the board, three unpaid vice pv.-idrnts (termed
volunteers) and the treasurer in advance of the council meeting. No
nominations are permitted from the council floor at the meetings
where elections are held. This procedural technique pre ents election
of officers due to aroused feelings or personal lobbying which may
occur at a council meeting. Continuity of leadership i,; maintained
through this procedure.
Independent nominations may be made by any 20 members of the
council, if filed with the secretary at least four months prior to the
annual meeting of the AICPA. As the Nominations Committee pub-
lishes its nominees to the membership at least five month ; prior to the
annual meeting, this process allows ample time for all parties to
develop support for their nominees, and avoids surprise; which may
be detrimental to continuity of leadership.
All of the officers serve one-year terms, except the presi tent and sec-
retary. They are paid employees of the AICPA and serve unlimited
terms. Only the treasurer may succeed himself.
According to the bylaws, the chairman of the board hns the wide.-'
individual authority within the AICPA. Hle presides at meetings of
the AICPA membership, the council, and the board of directors. tie
appoints the members of committees and boards, as well as determin-
ing the duties, powers, responsibilities, and procedures of the cornm-
mittees and boards. The power to appoint committees im; very signi-
ficant since most of the AICPA's activities are handled by committee-.
The chairman also acts as spokesman for the AICPA and appears on
its behalf before other organizations.
Under the bylaws, the vice chairman is designated as the next chliair-
man of the board, a provision which ensures stability and continuity
in the most powerful position in the AICPA. Everyone knows who)
the next chairman will be a year in advance, and there is ample time
to confirm that he will continue existing policies upon a;.s ingi
power. The vice chairman also presides at meetings in the absence of
the chairman and familiarizes him-elf with the duties of chairman.
The three elected vice pre.-idents perform various duties assi.!ned to
them, and one is designated to preside at meetings of the AICPA
membership or the council when the chairman and vice chairman are
absent.







The treasurer handles financial matters and advises the board of
directors on such affairs. The secretary performs the normal duties of
corporate secretary.
Second only to the chairman in authority is the president, who has
full charge of the AICPA's daily affairs. The bylaws give the presi-
dent full responsibility for the execution of policies and programs
of the AICPA. He is also designated as a spokesman for the organiza-
tion and controls its staff. As noted previously, the president is salaried
and serves an indefinite term.

ELECTED MEMBERS
The second-and the largest-membership group within the council
is the elected members. The bylaws require that each State with one
or more members in the AICPA have at least one representative on
the council directly elected by the membership of that State's profes-
sional CPA society.
The number of directly elected council representatives from each
State is determined by the Nominations Committee on the basis of
the number of AICPA members from each State. There were 137
elected members on the fiscal 1976 council, but that number will
diminish to 85 in future years due to the departure of existing elected
members whose terms were not affected by the size limitations required
in the bylaws.
Although this group of council members is elected by a majority of
the votes cast in each State society election, the procedures by which
candidates are nominated and elected gives great control over the se-
lection process to the AICPA's Nominations Committee. At least eight
months prior to the annual meeting of the AICPA, the Nominations
Committee requests two suggested candidates from a State society for
each vacancy to be filled. The Nominations Committee then nominates
the candidate it prefers at least six months prior to the meeting. The
bylaws specifically state that the Nominations Committee "shall .give
due consideration to the names so submitted, but shall not be required
to select its nominees from among such names. In the absence of a
satisfactory response from any such state society, the Nominations
Committee shall select the nominees from such state."
This important provision means that the Nominations Committee
can contravene the wishes of a State society as to who should be the
official nominee from that State if the State society attempts to nomi-
nate someone who is unacceptable to the Nominations Committee. The
ability of the AICPA's Nominations Committee to influence or even
decide who represents State societies is even more substantial because
of the automatic election provision for unopposed official nominees.
The nominees of the Nominations Committee are automatically de-
clared elected by the secretary if no independent nominations are filed.
Thus, the official nominees of the Nominations Committee have a great
advantage in being elected to serve on council.
Independent nominations may be made by any 20 AICPA members
from a State where an election is to be held, but such nominations must
be filed with the Secretary at least four months prior to the annual
meeting of the AICPA.
If independent nominations are properly filed, then the secretary
mails ballots to all AICPA members in that State at least 90 days





75


prior to the annual meeting of the AICPA. To be counted, ballots
must be returned to the secretary at least 45 days before the annual
meeting. A majority of the votes returned by that date is needed to
elect a member to the council.
The process for choosing elected members for the council is similar
to the election of officers, in that it avoids surprises at the annual meet-
ing of the AICPA and gives a decided advantage to nominees chosen
by the AICPA's Nominations Committee. Unlike the officers. however,
the elected members are chosen in advance of the annual meeting.
Elected members of the council serve a three-year term with a I imit of
two consecutive terms. The terms are staggered so that approximately
one-third of the elected members stand for election each year. This
procedure is yet another way of preserving organizational stability
and continuity.
MEMBERS AT LARGE
The third group of members on the council as a result of Nomina-
tions Committee influence is the members at large. The bylaws
require that seven AICPA members be elected annually by the council
without regard to their States of residence to serve as members at large
on the council. Members at large serve three-year terms, so there are a
total of 21 members at large represented on the council. Con-ecutive
terms are limited to two.
The members at large are nominated and elected in the same manner
as the officers of the AICPA. They are elected by council after advance
nomination by the Nominations Committee. Floor nominations are
not permitted, but any 20 council members may make independent
nominations in advance through the same procedures followed for
independent nomination of officers.
Continuity of established policies is enhanced through the election
of members at large because prominent members of the accounting
profession may be elected to the council without regard to propor-
tional representation based on AICPA membership in each State.
Council representation of the elected members group is proportional,
and a State like New York-which is a center of business and account-
ing-may not be able to elect all of its prominent State society
members according to a strictly proportional system of council
representation.
Electing members at large permits flexibility in having certain
persons represented on council who are not otherwise included in the
group of persons exercising the basic powers of the AICPA. For
example, the managing partners of four of the "Big Fight" accoint-
ing firms were on the fiscal 1976 council through election as mnembners
at large, and six of the 21 members at large were from New York.

BOARD OF DIRECTORS
The fourth membership group on the council is the nine elected
members of the board of directors. The bylawvs provide that all mem-
bers of the board are c-.r offir'io members of the council. The board of
directors is nominated and elected under the same bylaw as tllhe
officers and members at large, so the Nominations Committee plays the
same influential role in the board's selection. Advance nomination and
election by the council ensure tliat the elected board mlemlbers will


67-159 0 77 7





76


reflect the prevailing views within the AICPA. Independent nomina-
tions in opposition to the Nominations Committee's slate of candidates
are also rest ricted in the same manner as independent nominations for
officers and members at large.
According to the bylaws, the board of directors includes nine pres-
ent or former members of the council elected to the board to serve a
three-year term. There is no limit to the number of terms which may be
served by an individual, but consecutive terms are not permitted. Con-
tinuity is assured by having only one-third of the board elected each
year. The staggered three-year terms for the board members are the
-aine as for the elected members and members at large. The full board
of directors plays an important part in the operations of the AICPA,
as will be subsequently explained.

PAST PRESII)ENTS AND BOARI) C(tAI.\IRMEN
The fifth group of council members who serve as a result of Nomina-
tions Committee influence is the past presidents and chairmen of the
board. The bylaws provide that all past elected presidents and chair-
men of the board shall be council members for life, as long as they
continue to be members of the AICPA. Although the chairman of the
board is now the highest elected officer and the president is a paid
employee, presidents of the AICPA were elected volunteers prior to
January, 1974.
The Nominations Committee is responsible for nominating the
officers who are then elected by council. All past presidents and chair-
men of the board owe their current position on the council to their
original nomination and election to office, so the Nominations Commit-
tee is very influential in the selection of this membership group.
On the fiscal 1976 council, there were 24 members who were past
presidents or chairmen of the board, including one member who was
also a member of the board of directors. The number of past presidents
and chairmen of the board on council fluctuates according to individ-
ual lifespans and continued membership in the AICPA. Continuity
of AICPA policies is obviously greatly enhanced by the continuing
presence on council of individuals who previously held the top policy-
making position.

DESIGNATED STATE REPRESENTATIVES
The sixth-and final-group of members on the council is the 54
designated council representatives of State societies. The bylaws pro-
vide that each State society may designate one of its members as its
representative on the council according to any method the State society
may deem appropriate. Representatives from professional accounting
societies in U.S. territories and possessions are included in this group.
Designated council repre(-entatives of State societies -erve one-year
terms with a limit of six consecutive terms. Tlhe accepted practice is
to desi-nate the president of each State society as its council repre-
sentative.
This is the only membership group on the council where the Nomi-
nations Committee does not influence the selection of council members.
In that sense, it is the most democratic because the central power struc-