The Accounting Profession: Appendixes to Major Issues: Progress and
Concerns (Letter Report, 09/24/96, GAO/AIMD-96-98A).

Pursuant to a congressional request, GAO presented the appendices to its
study of the accounting profession's response to recommendations, made
by major study groups over the past two decades, to improve accounting
and auditing standards and the performance of independent audits under
federal securities laws.

GAO presented appendices containing information on: (1) 37 major studies
of the accounting profession conducted between 1972 and 1995; (2) major
recommendations and actions taken since 1972 to improve auditing and
financial reporting, organized by the categories of auditor
independence, audit quality, standard setting, and expanded reporting
and auditor services; (3) various accounting and auditing associations'
statements, releases, and opinions regarding accounting and auditing
standards; (4) experts consulted for the review; and (5) comments from
various accounting and auditing associations and the Securities and
Exchange Commission.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-96-98A
     TITLE:  The Accounting Profession: Appendixes to Major Issues: 
             Progress and Concerns
      DATE:  09/24/96
   SUBJECT:  Auditing standards
             Accountants
             Audit reports
             Accounting procedures
             Financial records
             Standards evaluation
             Quality control
             Securities regulation
             Reporting requirements

             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Committee on Commerce, House
of Representatives

September 1996

THE ACCOUNTING PROFESSION -
APPENDIXES TO MAJOR ISSUES: 
PROGRESS AND CONCERNS

GAO/AIMD-96-98A

The Accounting Profession

(917645)


Abbreviations
=============================================================== ABBREV

  AcSEC - Accounting Standards Executive Committee
  ADC - acquisition, development, and construction
  AICPA - American Institute of Certified Public Accountants
  AIMR - Association for Investment Management and Research
  AMEX - American Stock Exchange
  APB - Accounting Principles Board
  ASB - Auditing Standards Board
  ASR - accounting series release
  AU - Auditing section of AICPA Professional Standards looseleaf
     service
  AudSEC - Auditing Standards Executive Committee
  BL - Bylaws section of AICPA Professional Standards looseleaf
     service
  BRT - Business Round Table
  CEO - chief executive officer
  CON - statement of financial accounting concepts
  COSO - Committee of Sponsoring Organizations of the Treadway
     Commission
  CPA - certified public accountant
  CPE - continuing professional education
  EDP - electronic data processing
  EITF - Emerging Issues Task Force of the FASB
  ET - Ethics section of AICPA Professional Standards looseleaf
     service
  FAF - Financial Accounting Foundation
  FASAC - Financial Accounting Standards Advisory Council
  FASB - Financial Accounting Standards Board
  FDI Act - Federal Deposit Insurance Act
  FDICIA - Federal Deposit Insurance Corporation Improvement Act of
     1991
  FEI - Financial Executives Institute
  GAAP - generally accepted accounting principles
  GAAS - generally accepted auditing standards
  GASB - Governmental Accounting Standards Board
  MAS - management advisory services
  MD&A - management's discussion and analysis
  NAA - National Association of Accountants
  NASD - National Association of Securities Dealers
  NYSE - New York Stock Exchange
  OTC - over-the-counter
  PCPS - Private Company Practice Section of the AICPA
  PITF - Professional Issues Task Force of the SECPS
  POB - Public Oversight Board
  QCIC - Quality Control Inquiry Committee
  QREC - Quality Review Executive Committee
  QR - Quality Review Program Manual
  RICO - Racketeer Influenced and Corrupt Organizations Act
  S&L - savings and loan
  SAS - statement on auditing standards
  SEC - Securities and Exchange Commission
  SECPS - SEC Practice Section of the AICPA
  SFAS - statement of financial accounting standards
  SOP - statement of position
  SRO - self-regulatory organization
  SSAE - statement on standards for attestation engagements

Letter
=============================================================== LETTER


B-258991

September 24, 1996

The Honorable John D.  Dingell
Ranking Minority Member
Committee on Commerce
House of Representatives

Dear Mr.  Dingell: 

These appendixes to our report, The Accounting Profession:  Major
Issues:  Progress and Concerns, (GAO/AIMD-96-98), contain the
individual recommendations made by the major study groups affecting
the accounting profession from 1972 through 1995 and the actions
taken on those recommendations.  We have organized the individual
recommendations by the five major issues that frequently reoccurred
throughout our study period.  The American Institute of Certified
Public Accountants (AICPA), the Financial Accounting Standards Board
(FASB), and the Securities and Exchange Commission (SEC) assisted us
in identifying the actions taken in response to the individual
recommendations.  These appendixes also include (1) a summary of the
major studies, including the studies' report titles and information
on the membership of the study groups, (2) a list of experts on the
subject of accounting and auditing we consulted with and other
knowledgeable individuals we interviewed in conducting the study, (3)
copies of written comments received from the AICPA, FASB, and the SEC
on a draft of this report, and (4) a list of major GAO contributors
to this study. 

Sincerely yours,

Charles A.  Bowsher
Comptroller General
of the United States


MAJOR STUDIES OF THE ACCOUNTING
PROFESSION FROM 1972 THROUGH 1995
=========================================================== Appendix I

Study/Date/Members         Background
-------------------------  -----------------------------------------------------
1. Establishing Financial  In March 1971, the AICPA appointed the Wheat
Accounting Standards,      Committee to study the establishment of accounting
Report of the Study on     principles and make recommendations for improving
Establishment of           that process. The Committee was formed in response to
Accounting Principles      the wave of criticism on corporate financial
(Wheat Committee), AICPA,  reporting during the mid-1960s arising from the rapid
March 1972                 expansion of accounting firms, the development of
                           increasingly complex and innovative business
Francis M. Wheat,          practices, and the corporate merger movement. The
Chairman                   Wheat Committee concluded that there needed to be a
John C. Biegler            substantial change in the structure for establishing
Arnold I. Levine           financial accounting standards to insure public
Wallace E. Olson           confidence in the way financial information is
Thomas C. Pryor            reported. The Wheat Committee recommended creating a
Roger B. Smith             Financial Accounting Foundation, a Financial
David Solomons             Accounting Standards Board, and a Financial
                           Accounting Standards Advisory Council.

2. Objectives of           In April 1971, the AICPA appointed the Trueblood
Financial Statements,      Committee to provide a statement of basic objectives
Report of the Study Group  that would be responsive and relevant to the needs of
on the Objectives of       users. Previously issued objectives, while
Financial Statements       appropriate, were stated in relatively abstract
(Trueblood Committee),     terms, which offered little practical guidance in the
AICPA, October 1973        preparation of financial statements. The Committee's
                           conclusions followed a fundamental concept that
Robert M. Trueblood,       financial statements should aid economic decision-
Chairman                   making, and it emphasized the needs of outside users
Richard M. Cyert           rather than the operating needs of business managers.
Sidney Davidson            The Committee also stated that accounting concepts
James Don Edwards          should serve the goals of both private and public
Oscar S. Gellein           sectors of the economy. The work of the Trueblood
C. Reed Parker             Committee laid the fundamental groundwork for the
Andrew J. Reinhart         Financial Accounting Standards Board's (FASB) work
Howard O. Wagner           during the 1970s on establishing a conceptual
Frank T. Weston            framework for accounting.

3. The Adequacy of         In May 1973, the AICPA appointed the Special
Auditing Standards and     Committee on Equity Funding to study whether the
Procedures Currently       Equity Funding collapse in 1973 suggested a need for
Applied in the             changes in generally accepted auditing standards. The
Examination of Financial   Committee concluded that, except for certain
Statements, Report of the  observations relating to the confirmation of
Special Committee on       insurance in force and auditing related party
Equity Funding, AICPA,     transactions, generally accepted auditing standards
February 1975              were adequate and there were no changes called for in
                           the procedures commonly used by auditors.
Martin L. Stone,
Chairman
J.T. Arenberg, Jr.
Leo E. Burger
Robert C. Holsen
A.E. Mackay

4. Federal Regulation and  In April 1975, the Moss Subcommittee undertook a
Regulatory Reform, Report  comprehensive study of federal regulatory agencies
by the Subcommittee on     that included an assessment of the independence,
Oversight and              performance, and economic effects of the activities
Investigations of the      of regulatory agencies under the Subcommittee's
Committee on Interstate    jurisdiction. This study was prompted by attacks on
and Foreign Commerce,      federal regulation and the Subcommittee's obligation
U.S. House of              to measure the performance of agencies it created.
Representatives (Moss      The study attempted to determine the true problems of
Subcommittee), October     regulation, their nature and extent, and, if needed,
1976                       possible remedies. The study found that all
                           organizations investigated suffered a critical
John E. Moss, Chairman     defect--an insufficient response to the public they
Richard L. Ottinger        were created to serve. The Subcommittee's
Robert (Bob) Krueger       recommendations related mostly to actions the SEC
James M. Collins           could take to improve the corporate governance
Norman F. Lent             function. Several recommendations involved corporate
Anthony Toby Moffett       boards of directors and/or their audit committees and
Matthew J. Rinaldo         the evaluation and reporting on corporate internal
Jim Santini                control systems.
W. Henson Moore
W.S.(Bill) Stuckey, Jr.
Samuel L. Devine
James H. Scheuer
Henry A. Waxman
Philip R. Sharp
Andrew Maguire
Harley O. Staggers

5. The Accounting          The Metcalf Subcommittee staff began this study in
Establishment, a Staff     1975 to provide the Congress and the public with an
Study prepared by the      understanding of the various private organizations
Subcommittee on Reports,   and federal agencies involved in establishing and
Accounting, and            administering accounting practices which have
Management of the          substantial impact on federal policies and programs,
Committee on Government    as well as private economic decisions. The study was
Operations, U.S. Senate    precipitated by continual revelations of previously
(Metcalf Subcommittee),    unreported wrongdoing by major corporations, as well
March 1977                 as a series of corporate failures and financial
                           difficulties which had come to light. The staff
Lee Metcalf, Chairman      study's recommendations dealt with the issues of
John L. McClellan          setting accounting and auditing standards, auditor
Bill Brock                 independence, and audit quality.
Edmund S. Muskie
Charles H. Percy
Sam Nunn
Lowell P. Weicker, Jr.
John Glenn

6. The Structure of        In 1976, the Board of Trustees of the Financial
Establishing Financial     Accounting Foundation (FAF) asked the Structure
Accounting Standards,      Committee to perform a comprehensive review of the
Report of the Structure    operations of FASB and the Financial Accounting
Committee, the Financial   Standards Advisory Council (FASAC) and recommend any
Accounting Foundation,     changes needed in their size, composition, and
April 1977                 functions. This review was undertaken for a number of
                           reasons, one of them being the unusually vocal
Russel E. Palmer,          criticism of FASB. The Structure Committee concluded
Chairman                   that the process of setting accounting standards
J.O. Edwards               should remain in the private sector, and FASB is the
James Don Edwards          right body to discharge that responsibility. The
Walter P. Stern            Committee's report contains recommendations
Alva O. Way                concerning the structure of FASB's constituency
John C. Whitehead          relationships, the organizational structure of FASB
                           and staff, the process of issuing a statement, and
                           the structure of FASB's communications.

7. Improving the           In 1975, the Metcalf Subcommittee began an inquiry
Accountability of          into various accounting practices and
Publicly Owned             responsibilities of the federal government. The study
Corporations and Their     was initiated because of concerns over the activities
Auditors, Report of the    and accountability of publicly owned corporations
Subcommittee on Reports,   arising from a series of unexpected corporate
Accounting, and            failures and disclosures of widespread questionable
Management of the          and illegal acts by management. The report summarizes
Committee on Governmental  the Subcommittee's views regarding the way in which
Affairs, U.S. Senate       existing accounting and financial reporting practices
(Metcalf Subcommittee),    should be improved to benefit the public. The
November 1977              Subcommittee's recommendations included actions
                           needed to improve/ensure audit quality, auditor
Lee Metcalf, Chairman      independence, and the detection and reporting of
Henry M. Jackson           illegal acts.
Sam Nunn
John C. Danforth
Charles H. Percy

8. The Commission on       In 1974, the AICPA appointed the Cohen Commission to
Auditors'                  develop conclusions and recommendations on the
Responsibilities: Report,  appropriate responsibilities of independent auditors.
Conclusions and            The Commission was tasked to consider whether a
Recommendations (Cohen     generally perceived gap between what the public
Commission), AICPA, 1978   expects or needs and what auditors can and should
                           reasonably expect to accomplish actually existed. If
Manuel F. Cohen,           such a gap existed, the Commission was to determine
Chairman                   how the disparity could be resolved. The Cohen
Lee J. Seidler             Commission found that a significant gap did exist
Walter S. Holmes, Jr.      between the performance of auditors and the
LeRoy Layton               expectations of users of financial statements, and
William C. Norby           traced the gap to the accounting profession's failure
Kenneth W. Stringer        to react and evolve quickly enough to changes in the
John J. van Benten         American business. Its conclusions and
                           recommendations address auditor independence,
                           education, auditor communications, responsibilities
                           for the detection of fraud, quality control
                           mechanisms, and a broader audit function beyond the
                           financial statements.

9. Report of the Special   In June 1977, the AICPA appointed the Oliphant
Committee of the AICPA to  Committee to study the structure within the AICPA for
Study the Structure of     developing auditing standards to determine what
the Auditing Standards     changes, if any, were necessary to improve the
Executive Committee        process. The AICPA appointed this Committee in
(Oliphant Committee),      response to concerns over the Cohen Commission's
AICPA, May 1978            recommendations relating to setting auditing
                           standards. The Committee concluded that there were
Walter J. Oliphant,        steps that could be taken to improve the
Chairman                   effectiveness of setting auditing standards.
Ivan O. Bull               Accordingly, the Oliphant Committee proposed that the
Philip L. Delliese         Auditing Standards Executive Committee (AudSEC) be
Samuel A. Derieux          reconstituted within the AICPA as the AICPA Auditing
Louis M. Kessler           Standards Board (ASB) and made several
                           recommendations pertaining to the mission and
                           structure of this new board.

10. Scope of Services By   In July 1978, the Public Oversight Board (POB)
CPA Firms, Report of the   reported on its views with respect to the scope of
Public Oversight Board of  services for member firms of the SEC practice
the SEC Practice Section,  section. The Executive Committee of the SEC Practice
Division for CPA Firms,    Section requested the POB's views in response to
AICPA, March 1979          questions concerning whether engaging in management
                           advisory services (MAS) for audit clients creates a
John J. McCloy, Chairman   conflict of interest. In general, the POB concluded
Ray Garrett, Jr.           that maintenance of independence should be the only
William L. Cary            limitation on scope of services and that independence
John D. Harper             be assessed after giving consideration to potential
Arthur M. Wood             benefits derived from furnishing various services.
                           The POB recommended reliance on existing programs and
                           procedures and suggested that adherence to the
                           portions of the existing MAS Professional Standards
                           and the Code of Professional Ethics dealing with
                           independence be made a condition of membership in the
                           SEC Practice Section.

11. Interim Review of the  In 1979, the Structure Committee of the FAF undertook
FASB and FASAC, Report of  an interim review of FASB and FASAC to follow up on
the Structure Committee,   progress made by FASB and FASAC in responding to the
Financial Accounting       Committee's findings from its 1977 review (see number
Foundation,                6 above). The Committee reported that both FASB and
May 1979                   FASAC have initiated desirable changes to the
                           standard-setting process going beyond the Committee's
J.O. Edwards, Chairman     1977 report recommendations. The Committee's interim
William H. Dougherty,      report suggests areas for further improvement
Jr.                        including increasing public awareness, reaching out
Richard S. Hickok          to all major constituents, experimenting with FASAC
Harvey Kapnick             committees, improving utilization of task forces, and
Walter P. Stern            enhancing the quality of staff.
John C. Whitehead

12. Operating Efficiency   In 1982, the Structure Committee of the FAF undertook
of the FASB, Report of     a review of the efficiency of FASB. This review was
the Structure Committee,   conducted in line with the bylaws of FAF, which
Financial Accounting       require a periodic review of the basic structure of
Foundation, August 1982    establishing and improving standards of financial
                           accounting. The Structure Committee's overall
Charles G. Steele,         conclusion was that FASB was operating efficiently
Chairman                   and effectively, that is, appropriate standard-
Kenneth S. Axelson         setting systems were in place and functioning well.
William H. Dougherty,      The Committee's recommendations call for improved
Jr.                        relationships and communications with constituencies,
Paul J. Dunphy             increased responses on FASB products, accelerated
Thomas L. Holton           progress on certain concepts statements, and timely
Warren J. Robertson        guidance for questions concerning implementation of
Hyman Weinberg             standards and for emerging issues.

13. Report of the Special  In January 1985, the Board of Trustees of the FAF
Review Committee,          initiated actions to assess the extent and nature of
Financial Accounting       concerns about the standards-setting process and to
Foundation,                begin simultaneously a study of the composition of
1985                       FASB and criteria for selection of its members. These
                           actions were taken in response to concerns expressed
R. Leslie Ellis,           by certain constituents about the composition and
Chairman                   operations of FASB. The work of the Special Review
Charles T. Horngren        Committee of the FAF concluded that there is strong,
Thomas L. Holton           widespread support for FASB and its operations, and
John H. Poelker            there is very little evidence of deep dissatisfaction
John F. Ruffle             in any segment of the constituency. However, the
                           Committee found some concerns with the qualifications
                           of the FASB Chairman and members, the composition of
                           FASB, the process of selecting members, the lengthy
                           time frame imposed by FASB's due process, and
                           inhibitions on free exchange of ideas caused by the
                           "sunshine rule." The Committee made several
                           recommendations to address these concerns.

14. Challenge and          In 1985, in response to what it termed a "twin crisis
Opportunity for the        in credibility and liability" (emanating from a
Accounting Profession:     succession of spectacular business failures that were
Strengthening the          seen as audit failures), Price Waterhouse developed a
Public's Confidence, the   program of action to enhance the credibility and
Price Waterhouse           viability of the accounting profession. The principal
Proposals, 1985            components of this program include: expanding
                           auditing standards to reduce the risk that management
Joseph E. Connor,          fraud will go undetected, enhancing self-regulation,
Chairman                   and seeking equity in civil liability.

15. Restructuring          In October 1983, the AICPA appointed the Anderson
Professional Standards To  Committee to study the relevance and effectiveness of
Achieve Professional       professional standards in today's environment. The
Excellence in a Changing   AICPA initiated the study in response to concerns
Environment, Report of     over the profession's ability to serve the public
the Special Committee on   interest and retain public confidence in a rapidly
Standards of Professional  changing environment. The Committee concluded that
Conduct for Certified      some legitimate concerns had been raised about
Public Accountants         certified public accountants' behavior and commitment
(Anderson Committee),      to quality and reached a strong consensus that the
AICPA, April 1986          accounting profession must make substantial reforms
                           in the way it achieves adherence to its standards.
George D. Anderson,        The Committee's report contains sweeping revisions to
Chairman                   the AICPA's Code of Professional Ethics and
Robert L. Bunting          substantial reforms in the way adherence to
Joseph P. Cummings         professional standards is achieved.
James Don Edwards
Robert C. Ellyson
Francis A. Humphries
Richard Kasten
James Kurtz
Bernard Z. Lee
Herman J. Lowe
Archie E. MacKay
William L. Raby
Frank S. Sato
Ralph Saul
John P. Thomas
Kathryn D. Wriston

16. The Future Relevance,  In 1986, the heads of seven major accounting firms
Reliability, and           submitted recommendations to the AICPA Board of
Credibility of Financial   Directors to improve the relevance, reliability, and
Information,               credibility of financial information. The firms'
Recommendations to the     initiative was prompted by the swift pace and impact
AICPA Board of Directors   of changing business and economic conditions and the
by seven major accounting  firms' recognition of the accounting profession's
firms (Big 7), April       obligation to assure the utility of audited financial
1986                       statements. The firms' recommendations addressed the
                           need for more information on risks and uncertainties
J. Michael Cook, Deloitte  in financial reporting, auditor independence, peer
Haskins & Sells            review, an enhanced ASB, and other issues.
William L. Gladstone,
Arthur Young
Ray J. Groves, Ernst &
Whinney
Larry D. Homer, Peat,
Marwick, Mitchell & Co.
Edward A. Kangas, Touche
Ross & Co.
Duane R. Kullberg, Arthur
Andersen & Co.
Peter R. Scanlon, Coopers
& Lybrand

17. Financial Reporting    In June 1986, GAO participated in a congressional
and the Role of            hearing, before the Subcommittee on Oversight and
Independent Auditors,      Investigations of the House Committee on Energy and
Statement of Charles A.    Commerce, on financial reporting, the role of
Bowsher, Comptroller       independent auditors, and the SEC's oversight of the
General of the United      accounting profession. The hearing was part of a
States, June 1986          series of hearings prompted by alleged audit
                           failures. At that hearing, GAO testified that the
                           public expects improvements in the areas of early
                           warning disclosures, fraud detection, compliance with
                           laws and regulations, internal controls, and peer
                           review. GAO encouraged the accounting profession and
                           the SEC to take action in these areas.

18. Report of the Task     In 1985, the AICPA established the Task Force on
Force on Risks and         Risks and Uncertainties to consider ways to improve
Uncertainties, AICPA,      disclosure about the risks and uncertainties that
July 1987                  faced business enterprises in light of the volatile
                           business environment of the 1980s. The Task Force
Arthur Siegel, Chairman    concluded that a business enterprise should disclose
James P. Colford           more information about the risks and uncertainties
John D. Collins            facing it as of the date of the financial reports.
Phillip W. Crawford        The Task Force's recommendations focused primarily on
Richard Dieter             increased disclosures of significant risks and
John E. Ellingsen          uncertainties that stem from the necessary use of
Rosemary E. McGovern       estimates in the preparation of financial statements
Rudolph W. Schattke        and from significant concentrations in aspects of the
Roger W. Trupin            entity's operations.

19. Report of the          The Treadway Commission, formed in 1985, was a
National Commission on     private-sector initiative jointly sponsored by the
Fraudulent Financial       AICPA, the American Accounting Association, the
Reporting (Treadway        Financial Executives Institute, the Institute of
Commission), October       Internal Auditors, and the National Association of
1987                       Accountants. The Commission was created to identify
                           the causal factors that can lead to fraudulent
James C. Treadway, Jr.,    financial reporting and steps to reduce its
Chairman                   incidence. The Commission's conclusions highlighted
William M. Batten          the need for improvements in areas including
William S. Kanaga          corporate reporting on internal controls, the
Hugh L. Marsh, Jr.         establishment of independent audit committees,
Thomas I. Storrs           auditor detection and reporting of fraud, and steps
Donald H. Trautlein        needed to help ensure audit quality. The Treadway
                           Commission's report contained numerous
                           recommendations to deter fraudulent financial
                           reporting which were addressed to the management of
                           public companies, independent public accountants, the
                           SEC and other regulatory agencies, and educators.

20. Letter to the          GAO's 1988 letter to the Chairman discusses items
Honorable Fernand J. St    that GAO believed should be addressed in any
Germain, Chairman,         legislation to provide new securities powers to
Committee on Banking,      banks. Specifically, GAO felt that two further items
Finance and Urban          should be added to the proposed legislation
Affairs, House of          (Depository Institutions Act of 1988) to ensure that
Representatives, GAO,      safeguards are in place and are functioning properly
(B229444) August 1988      to ensure the safety and soundness of the nation's
                           banks. The first item addresses the need for a
                           requirement for independent financial audits of banks
                           and bank holding companies that have a securities
                           affiliate including requiring a financial audit of
                           the securities affiliate. The second item addresses
                           internal control and compliance reporting by
                           management and the independent auditor.

21. The Structure for      In January 1988, the FAF's Committee to Review
Establishing Financial     Structure for Financial Accounting Standards was
Accounting Standards, the  appointed to review the structure and operations of
Report of the Financial    FASB and FASAC, as required by FAF's bylaws. The
Accounting Foundation's    Committee concluded that despite the concerns
Committee to Review        expressed by the business community and public
Structure for Financial    accounting profession about certain aspects of FASB
Accounting Standards,      activities, the makeup, organization, and operations
January 1989               of FASB are basically sound. The Committee's report,
                           however, does include several recommendations to
Thomas L. Holton,          strengthen FASB.
Chairman
R. Leslie Ellis
Robert E. Frazer
Ray J. Groves
Charles T. Horngren
Robert A. Mellin
J. Ronald Morgan
Earle E. Morris, Jr.
John E. Poelker
Edus H. Warren, Jr.

22. CPA Audit Quality:     Prompted by the savings and loan (S&L) crisis of the
Failures of CPA Audits To  1980s, the Committee on Banking, Finance and Urban
Identify and Report        Affairs, House of Representatives, asked GAO to
Significant Savings and    review the quality of audits of S&Ls in the Dallas
Loan Problems, (GAO/       Federal Home Loan Bank District. GAO concluded that,
AFMD-89-45) February 1989  for 6 of 11 failed S&Ls in its review, CPAs did not
                           adequately audit and/or report the S&L's financial or
                           internal control problems in accordance with
                           professional standards. GAO recommended that the
                           AICPA provide improved guidance for ensuring that S&L
                           audits are performed in a quality manner by (1)
                           revising the AICPA industry audit guide for savings
                           and loan associations and (2) communicating results
                           presented in this GAO report to all AICPA members.

23. CPA Audit Quality:     In 1987, the Chairman, Oversight and Investigations
Status of Actions Taken    Subcommittee, House Committee on Energy and Commerce,
To Improve Auditing and    asked that GAO review the implementation of the
Financial Reporting of     changes to improve auditing and financial reporting
Public Companies, (GAO/    of public companies and that GAO identify related
AFMD-89-38) March 1989     recommendations which would require legislative or
                           regulatory actions in order to be implemented. This
                           request was sparked by the well-publicized business
                           failures which raised questions about the
                           effectiveness of the independent audit of public
                           companies and the SEC's oversight of the public
                           accounting profession. GAO concluded that the public
                           accounting profession and others have taken positive
                           actions to address concerns about audit quality and
                           the accuracy and reliability of financial disclosures
                           of public companies. However, the report notes that
                           actions remain to be taken. GAO made recommendations
                           to the SEC and the AICPA regarding additional steps
                           needed to improve audit quality and financial
                           disclosures.

24. Bank Failures:         To address concerns about the steadily increasing
Independent Audits Needed  number of failures of insured banks, GAO undertook a
to Strengthen Internal     review to summarize data on internal weaknesses and
Control and Bank           environmental factors which bank examiners cited for
Management, (GAO/AFMD-     insured banks which failed in 1987, to determine the
89-25) May 1989            extent to which insider abuse and fraud were present
                           in 1987 failed banks and to identify potential areas
                           of concern. GAO found that serious internal control
                           weaknesses contributed significantly to virtually all
                           the bank failures in 1987. GAO also found that only
                           about a third of the banks that failed in 1987 had
                           audits by independent public accountants. GAO
                           recommended that each insured bank have an annual
                           independent audit and provide auditor reports on
                           internal controls and compliance with laws and
                           regulations.

25. Thrift Failures:       In response to a large number of thrift failures and
Costly Failures Resulted   the resulting thrift industry crisis, GAO initiated a
From Regulatory            review to provide perspective on factors that
Violations and Unsafe      characterized those thrift failures that have caused
Practices, (GAO/AFMD-89-   some of the larger losses to the Federal Savings and
62) June 1989              Loan Insurance Corporation, and especially to
                           determine whether violations of federal laws or
                           regulations, related unsafe practices, and fraud and
                           insider abuse were present. GAO found indications of
                           fraud or insider abuse at all the failed thrifts in
                           GAO's sample. GAO recommended that the Congress pass
                           legislation that among other things, would require
                           management and auditor reporting to the federal
                           regulator on internal controls and on compliance with
                           laws and regulations in order to reduce thrifts'
                           vulnerability to fraud and insider abuse.

26. Prevention,            In 1990, the Comptroller General testified before the
Detection, and Reporting   Subcommittee on Telecommunications and Finance, House
of Financial               Committee on Energy and Commerce, on GAO's support of
Irregularities, Statement  proposed amendments to the 1934 act to strengthen
of Charles A. Bowsher,     both management and auditor responsibilities for
Comptroller General of     detecting and reporting irregularities. GAO made
the United States, (GAO/   recommendations concerning management and auditor
T-AFMD-90-27) August 1990  responsibilities for internal controls and compliance
                           with laws and regulations, the need to strengthen
                           audit requirements, methods of responding to audit
                           discoveries, and the jurisdiction of the SEC. GAO
                           also made suggestions concerning audit committees,
                           peer reviews, notification of auditor changes, and
                           sharing reports and information with independent
                           public accountants concerning regulators' knowledge
                           of potential mismanagement, fraud, or abuse by
                           companies.

27. Failed Banks:          GAO analyzed 1988 and 1989 bank failures to identify
Accounting and Auditing    the impact of accounting and internal control
Reforms Urgently Needed,   weaknesses on those failures and the critical need
(GAO/AFMD-91-43) April     for reforms to minimize future losses to the Bank
1991                       Insurance Fund and the taxpayer. GAO initiated this
                           review to address congressional and public concerns
                           that the external reports prepared by banks, both
                           annual financial statements and call reports, did not
                           always alert users to the troubled financial
                           condition of banks in a timely manner. GAO concluded
                           that accounting rules for recognizing losses were
                           seriously flawed, impeding early warning of troubled
                           banks, and that internal control weaknesses were a
                           major cause of bank failures. GAO made several
                           recommendations concerning an early warning system,
                           the role of the audit committees, the independent
                           auditor's review of the quarterly financial reports,
                           and auditor's communications with regulators
                           regarding internal control weaknesses and
                           noncompliance with laws and regulations.

28. Letter to the          As requested, the Comptroller General provided GAO's
Honorable Ron Wyden,       views on how internal controls could be strengthened
House of Representatives,  to further protect investors and limit the
GAO, (B-240516)            government's exposure to major losses, such as the
May 1, 1991                massive bailout of the savings and loans sector
                           during the 1980s and its severe economic consequences
                           for investors and government alike. This request was
                           made in response to fundamental questions concerning
                           corporate accountability, the effectiveness of
                           corporate governance and regulation, and the adequacy
                           of audit requirements. GAO's letter highlights the
                           severity of internal control weaknesses and outlines
                           the type of legislative remedies required, such as
                           greater reporting on internal controls, stronger
                           roles for audit committees, and direct reporting of
                           illegal acts.

29. Audit Committees:      This GAO report examines the extent to which audit
Legislation Needed to      committees of large banks had the independence,
Strengthen Bank            expertise, and information needed to properly carry
Oversight, (GAO/AFMD-92-   out their functions and provides further support for
19) October 1991           earlier GAO recommendations. GAO undertook this
                           review as a result of the record number of failing
                           banks during the 1980s. The study found that many
                           audit committees lacked the independence, expertise,
                           and information necessary to properly oversee bank
                           operations. The report reiterates recommendations
                           made by GAO in an April 1991 report on failed banks
                           (see number 27 above) which calls for legislation
                           concerning audit committee requirements; internal
                           control reporting by management; and internal control
                           reporting, compliance reporting, and reporting on
                           quarterly data by the independent auditor.

30. Employee Benefits:     The Chairmen of the House Subcommittee on Oversight
Improved Plan Reporting    and the House Subcommittee on Labor-Management
and CPA Audits Can         Relations requested that GAO identify problems in the
Increase Protection Under  performance of employee benefit plan audits. This
ERISA, (GAO/AFMD-92-14)    request resulted from significant deficiencies in
April 1992                 audits of private employee benefit plans as
                           identified by the Department of Labor's Office of
                           Inspector General in November 1989. GAO's review of a
                           sample of plan audits also found serious audit
                           weaknesses, many of which stemmed from a lack of
                           auditor knowledge about special considerations
                           associated with auditing employee benefit plans. GAO
                           recommended, among other things, that the AICPA
                           improve its audit guide concerning audits of employee
                           benefit plans and that the AICPA communicate to its
                           membership the results of investigations of deficient
                           plan audits.

31. In the Public          The POB issued this report in response to a request
Interest, Issues           from representatives of a number of accounting firms
Confronting the            that the POB consider whether it could support the
Accounting Profession, a   accounting profession's efforts to obtain relief from
special report by the      what the profession believed to be an excessive
Public Oversight Board of  burden of litigation. The POB concluded that the
the SEC Practice Section,  litigation risks confronting the profession pose
AICPA, March 1993          serious dangers to its ability to perform its
                           assigned role in society. The POB also addressed some
A.A. Sommer, Jr.,          of the criticisms pertaining to the profession's
Chairman                   performance. The POB's report contains 25 recommended
Robert K. Mautz, Vice      actions to enhance the usefulness and reliability of
Chairman                   financial statements; strengthen the performance and
Melvin R. Laird            professionalism of the public accounting profession,
Paul W. McCracken          including the ability of auditors to detect fraud and
Robert F. Froehlke         irregularities; and improve self-regulation.

32. Meeting the            In June 1993, the Board of Directors of the AICPA
Financial Reporting Needs  issued a policy statement which details the steps
of the Future: A Public    necessary to improve the value of financial
Commitment From the        information and the public's confidence in it. The
Public Accounting          policy statement describes how public confidence in
Profession, AICPA Board    the financial reporting system has been shaken in
of Directors, June 1993    recent years by highly publicized business failures
                           and includes actions the Board believes are needed to
                           solidify the public trust in the financial reporting
                           system. The statement identifies five principal goals
                           for reform concerning the prevention and detection of
                           fraud, the utility of financial reporting, the
                           independence and objectivity of independent auditors,
                           unwarranted litigation, and strengthening the
                           accounting profession's disciplinary system.

33. Financial Reporting    AIMR's report sets forth the position of investment
in the 1990s and Beyond,   advisors and financial analysts on the universe of
Association for            financial reporting as it affects analysis today and
Investment Management and  into the next century. The report explains the
Research (AIMR), November  function of financial analysis, its sources and uses
1993                       of information, and speaks to the trends that are
                           expected to change practices in both analysis and
Peter H. Knutson           accounting during the next decade or more. AIMR's
                           conclusions and recommendations call for a
                           substantial expansion in the quality and quantity of
                           financial information now being reported. AIMR also
                           recommends increased participation by financial
                           statement users in the accounting standard-setting
                           process.

34. Staff Report on        This SEC staff report responds to the March 18, 1993,
Auditor Independence,      request from Congressman Edward J. Markey, Chairman
report prepared by the     of the Subcommittee on Telecommunications and Finance
Office of the Chief        of the House Committee on Energy and Commerce, that
Accountant, Securities     the SEC study the need for, and any impediments to,
and Exchange Commission,   the independence of public accountants in performing
March 1994                 their responsibilities under the federal securities
                           laws. This request was made in consideration of a
                           proposed bill to make the auditing profession more
                           accountable to the investing public. The SEC's report
                           provides background information on the issue of
                           auditor independence, discusses the Commission's
                           independence rule and related interpretations and
                           pronouncements of the AICPA and other nations'
                           independence requirements, and discusses recent and
                           certain current proposals regarding independence
                           issues. The report concluded that the combination of
                           the extensive systems of independence requirements
                           issued by the Commission and the AICPA, coupled with
                           the Commission's active enforcement program, provide
                           investors reasonable safeguards against loss due to
                           the conduct of audits by accountants that lack
                           independence from their audit clients. Therefore, the
                           SEC concluded that no further legislation or rules or
                           regulations were necessary at that time with respect
                           to auditor independence.

35. Financial              In response to congressional requests, GAO undertook
Derivatives: Actions       a review of derivative products to determine among
Needed To Protect the      other things whether existing accounting rules
Financial System, (GAO/    resulted in financial reports that provided market
GGD-94-133) May 1994       participants and investors adequate information about
                           firms' use of derivatives. This review was sparked by
                           congressional efforts to better anticipate and
                           prevent future financial crises. GAO found that
                           accounting standards for derivatives were incomplete
                           and inconsistent and have not kept pace with business
                           practices. GAO made recommendations to FASB and the
                           SEC concerning the development and issuance of
                           accounting and disclosure requirements for
                           derivatives, the adoption of market value accounting
                           for all financial instruments, and the requirements
                           for independent audit committees and internal control
                           reporting for SEC registrants that are major end
                           users of derivatives.

36. Strengthening the      In February 1994, the POB appointed the Kirk Panel to
Professionalism of the     (1) assess the working relationship among the SEC,
Independent Auditor,       FASB, the auditing profession, and the business
Public Oversight Board     community and (2) identify and evaluate steps to
Advisory Panel on Auditor  bolster the objectivity, independence, and
Independence (Kirk         professionalism of the auditing firms. The Kirk Panel
Panel), September 1994     was appointed in response to a January 11, 1994,
                           speech, given by Walter Schuetze, the Chief
Donald J. Kirk, Chairman   Accountant of the SEC, which questioned the
George D. Anderson         independence of auditors. The Panel concluded that at
Ralph S. Saul              this time there is no need for additional rules,
                           regulations, or legislation dealing with auditor
                           independence. However, the Panel made several
                           suggestions to strengthen auditor independence, to
                           bring auditing into the mainstream of corporate
                           governance, and to restore auditing to its important
                           role in our society. These suggestions cover issues
                           such as auditor independence; more involvement of the
                           boards of directors and audit committees with the
                           independent auditor; the relationships between the
                           accounting profession, standard setters, and the SEC;
                           and litigation reform.

37. Improving Business     In 1991, the AICPA Board of Directors formed the
Reporting -A Customer      Jenkins Committee to address concerns about the
Focus: Meeting the         relevance and usefulness of business reporting. The
Information Needs of       Committee's charge was to recommend (1) the nature of
Investors and Creditors,   information that should be made available to others
Comprehensive Report of    by management and (2) the extent to which auditors
the Special Committee on   should report on the various elements of that
Financial Reporting        information. The Committee concluded that a lot is
(Jenkins Committee),       right with today's business reporting in that it
AICPA, 1994                generally provides users with essential information
                           that heavily influences their decisions. In
Edmund L. Jenkins,         particular, financial statements are viewed as an
Chairman                   excellent framework for capturing and organizing
Gregory J. Jonas,          financial information. However, many users are
Executive Director         strongly critical of certain aspects of today's
Michael H. Sutton, Vice    reporting. Accordingly, the Committee made
Chairman                   recommendations to standard setters, the Congress,
Lonnie Arnett              regulators, and the accounting profession to improve
Raymond J. Bromark         the types of information in business reporting, to
Edmund Coulson             improve financial statements and related disclosures,
Robert K. Elliott          to improve auditor involvement with business
Larry Grinstead            reporting, and to facilitate change in business
William W. Holder          reporting.
Robert L. Israeloff
Gaylen N. Larson
Joseph D. Lhotka
James C. Meehan
Harold L. Monk, Jr.
Edward F. Rockman
Barry N. Winograd
--------------------------------------------------------------------------------

MAJOR RECOMMENDATIONS FROM 1972
THROUGH 1995 AND ACTIONS TAKEN TO
IMPROVE AUDITING AND FINANCIAL
REPORTING
========================================================== Appendix II



                                    Table II.1
                     
                               Auditor Independence


                                                  Recommendation  Recommendation
Recommendation           Action taken             made by/date    directed to
-----------------------  -----------------------  --------------  --------------
1-6. The SEC should                               Moss
promulgate rules                                  Subcommittee
necessary to assure                               (1976)
that

1. ...a director of a    No action taken.                         SEC
publicly owned
corporation receives
compensation and
independent staff
sufficient to perform
responsibly his board
duties.

2. ...a majority of the  See action taken for                     SEC
board is independent of  recommendations 4 and
senior management and    63.
operating executives
and from any other
conflicts of interest.

3. ...the board reviews  No action taken.                         SEC
and approves the
corporation's code of
business conduct and
system of internal
controls.

4. ...the board's        NYSE listing                             SEC
auditing and nominating  requirements mandate
committees are           independent audit
comprised of a majority  committees. NASD
of independent           requires all national
directors.               market system companies
                         to have audit
                         committees with a
                         majority of independent
                         directors, as does the
                         AMEX. FDICIA requires
                         independent audit
                         committees for certain
                         large banks and
                         thrifts. The AICPA
                         believes that SEC
                         registrants and other
                         publicly accountable
                         entities should be
                         required to have
                         independent audit
                         committees whenever
                         practicable. (See June
                         1993 policy statement
                         of the AICPA Board of
                         Directors.)

5. ...the board's        No action taken by the                   SEC
auditing committee has   SEC. FDICIA specifies
available to it          certain resources for
independent expert       audit committees of
advisors.                large banks and
                         thrifts.

6. ...the board has the  Media accounts have                      SEC
authority to hire and    reported situations
fire the independent     where boards have
accountant, legal        exercised their clear
counsel, the general     authority in this
counsel, and senior      respect. For example,
operating executives.    since 1991, "activist
                         boards have forced out
                         more than two dozen
                         chief executives of
                         major U.S.
                         corporations" (The Wall
                         Street Journal, June
                         15, 1994).

7. The Congress should   No action taken. Since   Metcalf         Congress
consider methods of      this recommendation was  Subcommittee
increasing competition   issued, the environment  Staff Study
among accounting firms   in which accounting      (1977)
for selection of         firms practice has
independent auditors     changed substantially.
for major corporations.  The abolition of
One alternative is       ethical prohibitions
mandatory change after   against advertising and
a given period of years  solicitation, intense
or after any finding by  fee pressure, and
the SEC that the CPA     disagreements that
firm failed to exercise  damage auditor/client
independent action to    relationships lead
protect investors and    hundreds of companies
the public. Another      to change auditors each
alternative could be to  year. See action taken
require more than one    for recommendation 29
accounting firm be on    for information about
the ballot at annual     requirements and
stockholders' meetings.  studies related to
                         auditor rotation.

8. The federal           No action taken.         Metcalf         Federal
government should        However, key             Subcommittee    government
require the 15 largest   information about the    Staff Study
accounting firms to      largest firms is widely  (1977)
report basic and         reported in the trade
operational data         press.
annually.

9. The federal           No action taken.         Metcalf         Federal
government should act                             Subcommittee    government
to relieve excessive                              Staff Study
concentration in the                              (1977)
supply of auditing and
accounting services to
major publicly owned
corporations.

10. The Department of    The Department of        Metcalf         Department of
Justice and the Federal  Justice and the Federal  Subcommittee    Justice and
Trade Commission should  Trade Commission have    Staff Study     Federal Trade
determine whether        made investigations      (1977)          Commission
violations of federal    that have resulted in
antitrust laws have      changes in AICPA's Code
resulted from excessive  of Professional
concentration in the     Conduct, but not in
supply of auditing and   determinations of any
accounting services      violations of federal
among all industries or  antitrust laws in the
within specific          supply of auditing and
industries.              accounting services.

11. The Congress should  No action taken.         Metcalf         Congress
consider other methods                            Subcommittee
of reducing                                       Staff Study
concentration in the                              (1977)
supply of auditing and
accounting services to
major corporations.

12. The federal          No action taken.         Metcalf         Federal
government should                                 Subcommittee    government
retain accounting firms                           Staff Study
that act as independent                           (1977)
auditors only to
perform auditing and
accounting services and
not to perform
management advisory
services or other
consulting services.

13. The accounting       NYSE listing             Metcalf         Accounting
profession or the SEC    requirements mandate     Subcommittee    profession or
should immediately       independent audit        (1977)          SEC
require that publicly    committees. NASD
owned corporations       requires all national
establish independent    market system companies
audit committees         to have audit
composed of outside      committees with a
directors as a           majority of independent
condition for being      directors, as does
accepted as a client by  AMEX. FDICIA requires
an independent auditor.  independent audit
                         committees for large
                         banks and thrifts. The
                         AICPA believes that SEC
                         registrants and other
                         publicly accountable
                         entities should be
                         required to have
                         independent audit
                         committees whenever
                         practicable. (See June
                         1993 policy statement
                         of the AICPA Board of
                         Directors.)

14. Audit committee      See action taken for     Metcalf         Public
members should be free   recommendation 13.       Subcommittee    companies or
of any significant                                (1977)          SEC
involvement with the
management of a
corporation, such as
commercial or
investment banking
relationships, outside
legal counsel,
management consulting,
or major commercial
relationships.

15. Rotating the audit   No action taken.         Metcalf         Public
committee's chairman                              Subcommittee    companies or
could increase its                                (1977)          SEC
independence.

16. Corporate audit      The Good Practice        Metcalf         Public
committees should        Guidelines for the       Subcommittee    companies or
establish sound          Audit Committee          (1977)          SEC
policies to prevent      suggested in Appendix I
hidden remuneration of   to the Treadway Report
executives through use   call for a review of
of corporate assets for  the in-house policies
housing, personal        and procedures for
loans, club              regular review of
memberships, and         officers' expenses and
personal travel or       perquisites. (Recent
pleasure.                media accounts
                         reporting abuses in
                         this area that were
                         detected by audit
                         committees should have
                         the positive effect of
                         focusing other audit
                         committees on those
                         guidelines.)

17. Accounting firms     The disclosure of        Metcalf         Accounting
which audit publicly     financial data, with     Subcommittee    profession
owned corporations       which some firms         (1977)
should be required to    experimented, tends to
publicly disclose        focus attention on a
financial data and       firm's perceived
important operating      ability to pay damages
information.             in litigation rather
                         than on its quality
                         controls. However,
                         substantive operating
                         information about,
                         e.g., personnel, number
                         of SEC clients, pending
                         litigation, the
                         composition of fees,
                         management advisory
                         services fees for SEC
                         clients, and mergers,
                         is required to be
                         reported and is in the
                         SECPS public files.

18. Reports by           The SECPS membership     Metcalf         Accounting
accounting firms should  requirements specify     Subcommittee    profession
include sufficient       that the annual reports  (1977)
information on client    of member firms include
relationships so that    statistical information
the accounting           about fees and the
organization and the     nature of services
SEC can monitor          rendered that AICPA
compliance with          believes meet the
appropriate standards.   information needs of
                         the SEC.

19. An audit committee   Although AICPA believes  Metcalf         SEC
should have sole         audit committees         Subcommittee
authority to hire and    generally have this      (1977)
fire the independent     authority, it has not
auditor and set the      been mandated.
auditor's fee.

20. The audit committee  SECPS membership         Metcalf         Accounting
should meet privately    requirements (SECPS      Subcommittee    profession or
with the independent     Reference Manual         (1977)          SEC
auditor, receive full    ï¿½1008.(i)) mandate an
reports from the         annual report to the
auditing firm on its     audit committee of each
findings, and be         SEC client on the total
informed of all          fees received from the
services being provided  client for management
to the corporation by    advisory services
the auditing firm.       during the year under
                         audit and a description
                         of the types of such
                         services rendered.
                         Also, see discussions
                         of communications
                         requirements in SAS 53
                         on errors and
                         irregularities, SAS 54
                         on illegal acts by
                         clients, and SAS 61 on
                         communication with
                         audit committees, and
                         note that "Information
                         and Communication" is
                         one of the five
                         components of internal
                         control under the COSO.

21. The primary mission  The primary purpose of   Metcalf         Accounting
of the organization of   the SECPS is to          Subcommittee    profession
accounting firms (see    maintain and improve     (1977)
recommendation 20 in     the quality of practice
"Audit Quality"          before the Commission.
section), as envisioned  The SEC's 1994 Annual
by the subcommittee,     Report indicates that
will be to assure that   this objective is being
the two essential        achieved.
qualities of
independent auditors--   As part of this program
professionalism and      of improvement, in
independence--are not    March 1980, the SECPS
sacrificed through such  issued the Position
practices as             Paper of Task Force on
unrealistic cost         Certain Aspects of the
cutting and time         Auditor's Work
constraints in pursuit   Environment. The SECPS
of commercial success.   membership requirements
                         also mandate the
                         preparation and
                         dissemination to all
                         personnel of a
                         "Statement of Firm
                         Philosophy." The
                         illustrative statement
                         provided by the SECPS
                         Reference Manual
                         ï¿½1000.42 emphasizes the
                         need for an overriding
                         commitment to high-
                         quality professional
                         performance.

22. Public advocacy on   Public advocacy on       Metcalf         Accounting
behalf of a client,      behalf of a client is    Subcommittee    profession
receiving gifts and      not proscribed, but the  (1977)
discounts from clients,  AICPA's Professional
and maintaining          Ethics Executive
relationships which      Committee has issued an
detract from the         Interpretation
appearance of arm's-     (Interpretation 102-6 -
length dealings with     -August 1995) that
clients are not          calls attention to
appropriate activities   applicable ethical
for independent          precepts when members
auditors.                advocate a client's
                         position, and an ethics
                         ruling (see ET ï¿½191.008
                         of the AICPA
                         Professional Standards
                         looseleaf service)
                         states that acceptance
                         of a gift of more than
                         token value may impair
                         the appearance of
                         independence. Also, the
                         Code of Professional
                         Conduct is constantly
                         updated to deal with
                         new situations or
                         concerns. An important
                         recent action was the
                         proscription of most
                         loans from clients.
                         Finally, the SEC's
                         Staff Report on Auditor
                         Independence states on
                         page 34 that "the
                         problem of an
                         appearance of 'client
                         advocacy' may not be
                         susceptible to
                         correction through
                         additional, objective
                         independence
                         interpretations or
                         rules."

23. There must be a      For the reasons stated   Metcalf         Accounting
requirement that         in its report, Scope of  Subcommittee    profession
independent auditors of  Services by CPA Firms,   (1977)
publicly owned           the POB rejected the
corporations perform     notion of arbitrary and
only services directly   sweeping restrictions
related to accounting.   on useful services
Nonaccounting            provided by CPA firms.
management services,     However, the SECPS does
such as executive        prohibit member firms
recruitment, marketing   from performing the
analysis, plant layout,  following services for
product analysis, and    SEC audit clients:
actuarial services, are  psychological testing,
incompatible with the    public opinion polls,
public responsibilities  merger and acquisition
of independent auditors  assistance for a
and should be            finder's fee, and
discontinued.            certain executive
Management services      recruitment and
relating to accounting   actuarial services.
are confined to the
limited area of
providing certain
computer and systems
analyses that are
necessary for improving
internal control
procedures of
corporations.

24. Independent          The AICPA believes,      Metcalf         Accounting
auditors should          generally, that such     Subcommittee    profession
discontinue all          employment from time to  (1977)
placement of departing   time is an inevitable
employees with their     consequence of the
corporate clients.       training and experience
                         that the public
                         accounting profession
                         provides to its staff;
                         is beneficial to all
                         concerned, including
                         society in general; and
                         should not be
                         proscribed. However,
                         the June 1993 policy
                         statement of the AICPA
                         Board of Directors does
                         call on the SEC and
                         other regulatory bodies
                         to prohibit public
                         companies and other
                         organizations with
                         public accountability
                         from hiring the partner
                         responsible for their
                         audit for one year
                         after the partner
                         ceases to serve that
                         client. (ET ï¿½191.154
                         provides guidance to a
                         firm when an individual
                         participating in an
                         engagement is
                         considering or has
                         accepted employment
                         with the client.)

25. Public disclosure    The AICPA does not       Metcalf         Accounting
would be enhanced by     believe disclosure       Subcommittee    profession
stating whether          would be enhanced by     (1977)          and SEC
competitive bidding      adoption of this
practices are used in    recommendation. Some
contracting for          users would assume that
services with            auditor selection is
independent auditors.    enhanced by a
                         competitive bidding
                         process, while others
                         would fear that process
                         has led or will lead to
                         a reduction in the
                         scope or quality of
                         services. With no more
                         facts than this at
                         their disposal, users
                         would only be confused.
                         The AICPA believes the
                         focus should be on
                         quality, not fees, and
                         for that reason agrees
                         with the POB that the
                         SEC should require SEC
                         registrants to disclose
                         whether their auditors
                         have had a peer review,
                         the date of the most
                         recent review, and its
                         results.

26. The problems of      This was done via ASR    Metcalf         SEC
appearing to audit       250 and 264, issued in   Subcommittee
one's own work and       1978 and 1979,           (1977)
unfair competition can   respectively. For the
arise even when          reasons stated in ASR
independent auditors     296 and 297, the SEC
provide accounting-      rescinded these
related management       releases in 1981. For
services for audit       additional background
clients. Because so      and information, see
many parties outside     the SEC's Staff Report
the accounting           on Auditor
profession are directly  Independence, March
interested, the SEC      1994. That report notes
should use public rule-  (see p. 34) that there
making to consider       has been no dramatic
proposals for            increase in the
surmounting such         management advisory
problems and to          services provided to
implement public policy  SEC clients, which
in the area of           suggests that "a
management services.     fundamental change in
                         SEC regulations is not
                         necessary at this
                         time."

27. Concerned directors  As indicated on page 30  Metcalf         Public
and audit committees     of the SEC's Staff       Subcommittee    companies or
should carefully review  Report on Auditor        (1977)          SEC
the policies of their    Independence, March
corporations to assure   1994, the SEC has found
that the auditor's       that "audit committees
independence does not    consisting principally
appear to be             of nonemployee
compromised.             directors actively were
                         reviewing management
                         advisory activities and
                         auditors generally were
                         not performing those
                         services believed to
                         have an impact on their
                         independence."

28. There must be an     The AICPA has removed    Metcalf         Accounting
immediate end to         those proscriptions      Subcommittee    profession
artificial professional  from its Code of         (1977)
restrictions against     Professional Conduct,
advertising, talking     and firms freely
with another firm's      advertise and solicit
clients, and talking     clients and the
with another firm's      employees of other
employees about          firms. Such
possible employment      proscriptions are still
without first informing  maintained by some
that firm. Prohibitions  state boards of
by accounting            accountancy, but the
organizations in some    AICPA has no authority
states against           over these independent
competitive bidding      regulatory agencies.
should also be removed.

29. Rotation should be   SECPS membership         Metcalf         Accounting
studied more by the      requirements require     Subcommittee    profession
accounting profession    that the audit partner-  (1977)          and SEC
and the SEC in order to  in-charge of an SEC
better determine         engagement be rotated
potential benefits and   after he or she has
problems. At a minimum,  served in that capacity
personnel assigned to a  for 7 consecutive
specific audit within    years. (Recognizing the
an accounting firm       problems of smaller
should be rotated.       firms, and with the
                         concurrence of SEC
                         staff, this requirement
                         does not apply to such
                         firms if they audit
                         less than five SEC
                         clients.) In addition,
                         the SECPS has studied
                         this recommendation
                         extensively and in 1992
                         issued a Statement of
                         Position regarding
                         mandatory rotation of
                         audit firms of publicly
                         held companies, which
                         explains why that
                         proposal is neither
                         necessary nor
                         appropriate. Finally,
                         after discussing the
                         various costs and
                         benefits of audit firm
                         rotation, the SEC's
                         Staff Report on Auditor
                         Independence advises
                         against mandatory
                         rotation by legislation
                         or rule-making at this
                         time.

30. Public accounting    These services are       Cohen           Accounting
firms should not engage  proscribed by the        Commission      profession
in employment            membership requirements  (1978)
recruiting or placement  of the SECPS.
of individuals who
would be directly
involved in the
decision to select or
retain independent
auditors.

31. The auditor's        A 1979 interpretation    Cohen           Accounting
standard of care when    (AU ï¿½9336.04-05)         Commission      profession
he uses a specialist     confirms that when a     (1978)
who is an employee of    specialist employed by
his firm should be       the audit firm provides
extended beyond what is  advisory services to a
required under existing  client and the auditor
standards on the use of  uses that work, the
a specialist to treat    guidance in SAS 11
the work of that         should be followed. SAS
employee no differently  11 was subsequently
than the work of a       superseded by SAS 73,
qualified employee of    issued in July 1994,
the client.              and that guidance is
                         embodied in the
                         revision.

32. No prohibition of    Although the SECPS       Cohen           Accounting
management services is   proscribes certain       Commission      profession
warranted (other than    other services           (1978)
the limitation on        (psychological testing,
placement and            public opinion polls,
recruitment noted in 30  and merger and
above).                  acquisition assistance
                         for a finder's fee),
                         the SECPS and
                         the profession concur
                         with this
                         recommendation. (See
                         section in the POB
                         report on Scope of
                         Services by CPA Firms,
                         1979.)

33. The board of         SECPS membership         Cohen           Public
directors (or its audit  requirements (SECPS      Commission      companies and
committee) should        Reference Manual         (1978)          accounting
consider all the         ï¿½1008.(i)) mandate an                    profession
services provided by     annual report to the
the independent          audit committee of each
auditor. The             SEC client on the total
independent auditor      fees received from the
should inform the board  client for management
or audit committee of    advisory services
all the services         during the year under
provided to the          audit and a description
company; the             of the types of such
relationship of those    services rendered.
services, or lack        Also, see discussions
thereof, to the audit    of communications
function; the fees for   requirements in SAS 53,
those services; and the  on errors and
fact that information    irregularities; SAS 54,
acquired in providing    on illegal acts by
the other services must  clients; and SAS 61, on
be considered by the     communication with
auditor in fulfilling    audit committees, and
his audit                note that "Information
responsibilities.        and Communication" is
                         one of the five
                         components of internal
                         control under the COSO
                         report.

34. Professional         SAS 22 includes as a     Cohen           Accounting
standards should         planning procedure       Commission      profession
require that public      discussing matters that  (1978)
accounting firms         may affect the audit
establish policies and   with firm personnel
procedures to assure     responsible for
that knowledge gained    nonaudit services to
from other services is   the client, and an
made available to the    interpretation (AU
partner in charge of     ï¿½9311.01-.03) addresses
the audit so that he     that subject.
can consider its
implications for the
audit function,
including assuring that
consulting personnel
who are not CPAs are
made aware of the
public accounting
firm's professional
responsibility as an
independent auditor.

35. Professional         SAS 50 provides          Cohen           Accounting
standards should be      performance and          Commission      profession
expanded to cover the    reporting standards for  (1978)
provision of advice on   reports on the
accounting principles.   application of
They should identify     accounting principles.
appropriate              The statement requires
considerations in order  communication with the
to avoid activities      continuing accountant
which do, or appear to,  to ascertain relevant
jeopardize               facts so as to provide
independence.            additional assurance
                         about the quality of
                         the advice given.

36. All companies        This was done via ASR    Cohen           Public
should disclose in       250 and 264, issued in   Commission      companies or
their management         1978 and 1979,           (1978)          SEC
reports information on   respectively. For the
the nature of other      reasons stated in ASR
services provided to     296 and 297, the SEC
them by their            rescinded these
independent auditors.    releases in 1981. For
                         additional background
                         and information, see
                         the SEC's Staff Report
                         on Auditor
                         Independence, March
                         1994.

37. The board of         Although AICPA believes  Cohen           Public
directors, through its   audit committees         Commission      companies or
outside directors or     generally have and       (1978)          SEC
audit committee if such  exercise this
exist, should be         authority, it has not
responsible for          been mandated. As
recommending to          indicated on page 30 of
shareholders the         the SEC's Staff Report
appointment of           on Auditor
independent auditors     Independence, March
and for evaluating the   1994, the SEC has found
relationship between     that "audit committees
the auditor and          consisting principally
management.              of nonemployee
                         directors actively were
                         reviewing management
                         advisory activities and
                         auditors generally were
                         not performing those
                         services believed to
                         have an impact on their
                         independence."

38. The type of          SAS 61 para. 11          Cohen           Accounting
disclosure in financial  requires all             Commission      profession
statements required by   significant              (1978)
the SEC in ASR 194       disagreements to be
concerning               discussed with the
disagreements when a     audit committee. SAS 7
change of auditors is    para. 6-7 requires the
made should be required  predecessor auditor to
for all financial        "respond promptly and
statements.              fully" to certain
                         inquiries made by the
                         successor auditor,
                         including
                         "disagreements with
                         management as to
                         accounting principles,
                         auditing procedures, or
                         other similarly
                         significant matters."
                         SAS 50 provides
                         performance standards
                         and reporting guidance
                         with respect to written
                         reports and oral advice
                         on the application of
                         accounting principles.

39. Rotation of firms    SECPS membership         Cohen           Accounting
should not be required.  requirements require     Commission      profession
Many of the asserted     that the audit partner-  (1978)
advantages of rotation   in-charge of an SEC
can be achieved if the   engagement be rotated
public accounting firm   after he or she has
systematically rotates   served in that capacity
the personnel assigned   for 7 consecutive
to the engagement.       years. After discussing
                         the various costs and
                         benefits of audit firm
                         rotation, the SEC's
                         Staff Report on Auditor
                         Independence advises
                         against mandatory
                         rotation by legislation
                         or rule-making at this
                         time.

40. Public accounting    In March 1980, the       Cohen           Accounting
firms should not         SECPS issued the         Commission      profession
abandon time budgets,    Position Paper of Task   (1978)
but they must improve    Force on Certain
current methods,         Aspects of the
particularly for the     Auditor's Work
evaluation of variances  Environment. The SECPS
and their effect on the  membership requirements
evaluation of            also mandate the
personnel.               preparation and
                         dissemination to all
                         personnel of a
                         "Statement of Firm
                         Philosophy." The
                         illustrative statement
                         provided by the SECPS
                         Reference Manual
                         (ï¿½1000.42) emphasizes
                         the need for an
                         overriding commitment
                         to high-quality
                         professional
                         performance.

41. Individual           See action taken for     Cohen           Accounting
accounting firms should  recommendation 40.       Commission      profession
immediately undertake                             (1978)
to conduct studies to
determine the extent of
excessive time and
budget pressures and
the effects on their
practices.

42. To reduce client     No action taken.         Cohen           SEC
pressures, a brief                                Commission
statement should be                               (1978)
required on each page
of the press release or
other dissemination of
early earnings release
that might read as
follows: "The
accompanying results
have been prepared by
management; they may be
subject to significant
revision upon
examination by the
independent auditors."

43. Auditors should      See action taken for     Cohen           Accounting
carefully assess the     recommendation 40.       Commission      profession
effect of time/                                   (1978)
deadline pressures on
their work and refuse
to accept such
deadlines when they are
imposed in opposition
to their judgment.

44. Accepting an audit   Antitrust                Cohen           Accounting
engagement with the      considerations           Commission      profession
expectation of           precluded ethics action  (1978)
offsetting early losses  on this recommendation.
or lower revenues with   However, the SECPS peer
fees to be charged in    review standards
future audits            address the substance
represents a threat to   of the concern by
independence.            requiring the selection
Consequently, the        of some initial audits
Ethics Division of the   in a firm's peer review
AICPA should consider    (SECPS Reference Manual
this problem.            ï¿½2000.70(c)).

45. All firms should     This broad area has      Cohen           Accounting
develop for their        been left to firms,      Commission      profession
staffs carefully drawn   although the SECPS       (1978)
rules on gifts and       membership requirement
discount purchases from  for a "Statement of
clients, and the AICPA   Firm Philosophy" draws
should provide more      the attention of
definitive guidance on   personnel to the
what amounts can be      special importance of
considered "token."      independence. The
                         professional ethics
                         division did not find
                         it necessary to define
                         "token," believing that
                         term is clear in
                         itself.

46. Experimentation      The disclosure of        Cohen           Accounting
with disclosure of       financial data, with     Commission      profession
financial and            which some firms         (1978)
nonfinancial data by     experimented, tends to
firms is encouraged,     focus attention on a
but there is no          firm's perceived
overriding need for a    ability to pay damages
requirement in that      in litigation rather
regard.                  than on its quality
                         controls, and has not
                         been required. However,
                         SECPS member firms are
                         required to disclose
                         substantive operating
                         information about,
                         e.g., personnel, number
                         of SEC clients, pending
                         litigation, the
                         composition of fees,
                         management advisory
                         fees for SEC clients,
                         and mergers in the
                         annual reports included
                         in the SECPS public
                         files.

47. The auditor should   Disclosure of whether    Cohen           Accounting
be required to be        the auditor is expected  Commission      profession
present and available    to be present at the     (1978)
to answer questions at   shareholders' meeting
the annual meeting of    and available to answer
the shareholders.        questions is required
                         in the proxy statement.

48. There are many       No broad proscriptions   POB             Accounting
potential benefits to    have been established,   (1979)          profession
be realized by           and none, in the
permitting auditors to   AICPA's opinion, are
perform management       required.
advisory services for
audit clients that
should not be denied to
such clients without a
strong showing of
actual or potential
detriment. The
profession, therefore,
should be careful not
to impose unnecessarily
broad prophylactic
rules with respect to
management advisory
services and
independence.

49. Mandatory            See action taken for     POB             Accounting
limitations on scope of  recommendation 48.       (1979)          profession
services should be
predicated only on the
determination that
certain services, or
the role of the firm
performing certain
services, will impair a
member's independence
in rendering an opinion
on the fairness of a
client's financial
statements or present a
strong likelihood of
doing so. Recognizing
that independence in an
absolute sense cannot
be achieved, when
evaluating whether
certain services should
be prohibited, it is
necessary to consider
the potential benefits
derived from the
service and balance
them against the
possible to apparent
impairment to the
auditor's objectivity.

50. At this time no      See action taken for     POB             Accounting
rules should be imposed  recommendation 48.       (1979)          profession
to prohibit specific
services on the grounds
that they are or may be
incompatible with the
profession of public
accounting, might
impair the image of the
profession, or do not
involve accounting or
auditing related
skills.

51. The existing         See the SECPS            POB             Accounting
limitations on           membership requirement   (1979)          profession
management advisory      in the SECPS Reference
services concerning      Manual (ï¿½1000.08(h)),
independence contained   which specifically
in professional          proscribes providing
standards and the Code   for SEC audit clients
of Professional Ethics   the following types of
embrace several          services: psychological
provisions that are      testing, public opinion
helpful in ensuring      polls, merger and
that independence will   acquisition assistance
be maintained.           for a finder's fee,
Compliance with those    certain executive
applicable provisions    recruitment services,
should be made a         and certain actuarial
condition of membership  services to insurance
in the SECPS, and peer   companies.
reviews should be
required to test for
compliance.

52. SECPS members        See the SECPS            POB             Accounting
should be required to    membership requirements  (1979)          profession
include in their annual  in the SECPS Reference
disclosure statements    Manual (ï¿½1000.08(g)(12)
filed with the SECPS     and (13)) and the
disclosure of gross      additional disclosure
fees both for            requirements in the
management advisory      SECPS Reference Manual
services and tax         (ï¿½1000.08(g)(15)).
services performed for
audit clients expressed
as a percentage of
aggregate fees charged
during the reporting
period.

53. An accounting firm   See the SECPS            POB             Accounting
should not provide       membership requirement   (1979)          profession
actuarial services for   in the SECPS Reference
an insurance company     Manual
audit client unless      (ï¿½1000.08(h)(5)).
those services are
supplemental to primary
actuarial advice
furnished by another
actuary not associated
with the accounting
firm.

54. The POB accepts the  The proscription         POB             Accounting
recent action of the     referenced in this       (1979)          profession
executive committee      recommendation has been
proscribing certain      maintained. See SECPS
executive recruiting     Reference Manual
services inasmuch as     (ï¿½1000.08(h)(4)).
the services proscribed
are perceived by others
as having a strong
likelihood of impairing
independence, are
available from other
responsible sources,
and do not otherwise
produce sufficient
countervailing
benefits. In general,
however, the POB is
reluctant to support
prohibitions against
useful services which
are based primarily on
appearance without an
adequate basis in fact.

55. Nonattest services   See action taken for     Anderson        Accounting
should not be limited    recommendation 48.       Committee       profession
by imposition of                                  (1986)
arbitrary restrictions.
Rather, the
acceptability of an
activity must be
determined by AICPA
members in keeping with
the spirit of the Code
of Professional Ethics.

56. To provide further                            Anderson        Accounting
guidance, the Standards                           Committee       profession
of Professional Conduct                           (1986)
require that members
should:                  Participation in an
                         AICPA-approved practice
(a) practice in firms    monitoring program,
that have in place       which is mandatory,
internal quality-        provides reasonable
control procedures to    assurance as to a
ensure that services     firm's compliance with
are delivered in a       the quality control
competent manner and     standards of the
are adequately           profession in the
supervised;              conduct of its
                         accounting and auditing
                         practice. This was also
                         specifically
                         implemented in Article
                         VI in ET ï¿½57.
(b) determine whether,
in their individual      Specifically
judgments, the nature    implemented in Article
or magnitude of other    VI in ET ï¿½57 and Rule
services provided to an  102 and its
audit client over time   interpretation.
might create, or appear
to create, conflicts of
interest in the
performance of the
audit function for that  Specifically
client; and              implemented in Article
                         VI in ET ï¿½57.
(c) assess whether, in
their individual
judgments, an activity
is consistent with
their role as
professionals--for
example, it is a
reasonable extension or
variation of existing
services offered by the
member or others in the
profession.

57. In order to make     This recommendation was  Anderson        Accounting
professional standards   implemented in the       Committee       profession
more relevant and        revised Code of          (1986)
effective, the           Professional Conduct,
structure of the         adopted January 12,
Institute's Code of      1988.
Professional Ethics
should be recast into    Broad standards cannot
two basic sections:      be enforced, per se.
                         However, they serve as
(a) Standards of         guides to the
Professional Conduct,    professional ethics
which will be            division in evaluating
enforceable, and         the significance of
(b) Rules of             infractions of specific
Performance and          rules.
Behavior.

58. The Standards of                              Anderson        Accounting
Professional Conduct                              Committee       profession
will contain six                                  (1986)
articles.                See Preamble to Code of
                         Professional Conduct
(a) Purpose              (ET ï¿½51.02).

                         See Introduction to
(b) Applicability        Code of Professional
                         Conduct, as well as the
                         Applicability section
                         (ET ï¿½91.02).
(c) Responsibilities
                         See Article I of the
                         Code of Professional
(d) Explicit standards   Conduct (ET ï¿½ 52.01).
(dealing with the
public interest,         See Articles II, III,
integrity, objectivity   IV, V, and VI of the
and independence, due    Code of Professional
care, and scope and      Conduct (ET ï¿½53.04 to
nature of services)      57.03).

(e) Performance
standards                Performance standards
                         are set forth in Rule
                         201 (ET ï¿½201.01-.02).
(f) Compliance
                         Compliance with
                         standards is covered by
                         Rule 202 (ET ï¿½ 202.01).

59. The Rules of                                  nderson A       ccounting
Performance and                                   Committee       profession
Behavior should                                   (1986)
include:                 See Rule 101 and
                         related A
(a) independence,        interpretations and
                         rulings in ET ï¿½100.

(b) general standards,   See Rule 202 in ET
                         ï¿½200.
(c) compliance with
standards,               See Rule 202 in ET
                         ï¿½200.
(d) accounting
principles,              See Rule 203 in ET
                         ï¿½200.
(e) confidential client
information,             See Rule 301 in ET
                         ï¿½300.
(f) contingent fees,
                         See Rule 302 in ET
(g) acts                 ï¿½300.
discreditable,
                         See Rule 501 in ET
(h) advertising and      ï¿½500.
other forms of
solicitation,            See Rule 502 in ET
                         ï¿½500. This rule and its
                         interpretations bar
                         only false, misleading,
(i) commissions, and     or deceptive acts in
                         advertising or
                         solicitation.

                         See Rule 503 in ET
                         ï¿½500. This rule bars
                         commissions only when a
                         member also performs a
                         review or examination
                         of historical or
                         prospective information
(j) form of practice     or performs a
and name.                compilation of
                         financial statements
                         expected to be used by
                         third parties and does
                         not disclose a lack of
                         independence, all
                         pursuant to an
                         agreement with the
                         Federal Trade
                         Commission.

                         See Rule 505 in ET
                         ï¿½500.

60. Current rule 504 in  There is no rule on      Anderson        Accounting
the Code of              incompatible             Committee       profession
Professional Ethics on   occupations.             (1986)
incompatible
occupations should be
deleted.

61. The accounting       The ASB issued SAS 61    Big 7           Accounting
profession should        on communication with    (1986)          profession
enhance the public's     audit committees, and
perception of the        the POB issued a report
independence and         in 1979 on its study of
objectivity of           management advisory
auditors.                services.

62. Eliminate the        The SEC revised its      Big 7           Accounting
potential abuse of       Form 8-K requirement.    (1986)          profession,
"opinion shopping" by    Moreover, firms that                     SEC, and other
such steps as the        are members of the SEC                   regulators
following:               Practice Section must
                         notify the chief
(a) The SEC should       accountant of the SEC
strengthen the Form 8-   within 5 business days
K requirement on         when they resign or are
auditor changes as to    terminated as auditors
the level of             of an SEC registrant.
disclosures and the      FDICIA requires large
degree of follow-up      banks and thrifts to
when there are reported  provide written
differences as to        notification to the
accounting or auditing   FDIC and other
matters.                 appropriate federal or
                         state banking
(b) Regulatory agencies  regulatory agencies of
other than the SEC       the resignation or
should require           dismissal of an auditor
disclosures concerning   or the engagement of a
auditor changes similar  new auditor, including
to those required by     reasons for the change,
the SEC in Form 8-K.     within 15 calendar days
                         of the change. Section
(c) Peer reviewers       (g)(5) requires any
should scrutinize all    independent public
engagements assumed      accountant performing
since the last peer      services required by
review where there were  FDICIA to notify the
disclosures (in Form 8-  FDIC if the accountant
K and similar filings)   ceases to perform those
of a significant         services.
disagreement or the      This requirement is now
former accounting firm   a part of the SECPS
resigned.                Standards for
                         Performing and
(d) Auditing standards   Reporting on Peer
should require a         Reviews. SAS 53
successor auditor to     identifies a situation
focus more sharply on    where there is not
auditor-change           sufficient information
circumstances where      available from the
there is no Form 8-K or  predecessor auditor as
similar filing.          one of the factors that
                         should be considered in
                         assessing risk at the
                         financial statement
                         level. Also SECPS peer
                         review standards
                         contain specific
                         requirements for
                         reviewing client
                         acceptance
                         documentation on SEC
                         clients as part of the
                         process of selecting
                         engagements for review.
                         The Private Securities
                         Litigation Reform Act
                         of 1995 (ï¿½301) requires
                         a registrant to notify
                         the SEC when an auditor
                         reports to the
                         registrant's board of
                         directors that it has
                         become aware of certain
                         illegal acts of the
                         registrant that are
                         material to its
                         financial statements.
                         If the registrant fails
                         to provide that notice,
                         then the auditor must
                         send to the SEC a copy
                         of the report it gave
                         to the board.

63. The boards of        NYSE listing             Treadway        SEC
directors of all public  requirements mandate     Commission
companies should be      independent audit        (1987)
required by SEC rule to  committees. Following
establish audit          this recommendation,
committees composed      the SEC wrote to the
solely of independent    other exchanges and the
directors.               NASD, encouraging them
                         to review their audit
                         committee requirements.
                         In response, the NASD
                         strengthened its
                         recommendation that all
                         national market system
                         companies have audit
                         committees with a
                         majority of independent
                         directors into a
                         requirement, and the
                         AMEX adopted a similar
                         requirement. FDICIA
                         requires independent
                         audit committees for
                         large banks and
                         thrifts. The AICPA
                         believes that SEC
                         registrants and other
                         publicly accountable
                         entities should be
                         required to have
                         independent audit
                         committees whenever
                         practicable. (See June
                         1993 policy statement
                         of the AICPA Board of
                         Directors.)

64. Audit committees     The COSO report          Treadway        Public
should be informed,      adequately describes     Commission      companies or
vigilant, and effective  the roles and            (1987)          SEC
overseers of the         responsibilities of
financial reporting      audit committees and
process and the          the report has been
company's internal       widely publicized with
controls.                a special effort to
                         reach corporate
                         directors. However,
                         this must be an ongoing
                         effort because media
                         reports indicate a need
                         to continue to enhance
                         compliance with this
                         recommendation.

65. All public           The AICPA has no         Treadway        Public
companies should         specific information as  Commission      companies
develop written          to implementation of     (1987)
charters setting forth   this recommendation;
the duties and           however, see the action
responsibilities of      taken for
their audit committees.  recommendation 64.
The boards of directors
should approve the
charters, review them
periodically, and
modify them as
necessary.

66. Audit committees     The AICPA has no         Treadway        Public
should have adequate     specific information as  Commission      companies
resources and authority  to implementation of     (1987)
to discharge their       this recommendation;
responsibilities.        however, this notion is
                         implicit throughout the
                         COSO report.

67. All public           This recommendation has  Treadway        SEC
companies should be      been discussed with the  Commission
required by SEC rule to  SEC, but no formal       (1987)
include in their annual  action has been taken
reports to stockholders  yet. See the action
letters signed by the    taken for
chairmen of the audit    recommendation 82.
committees describing
the committees'
responsibilities and
activities during the
year.

68. Management should    SAS 61 requires that     Treadway        Public
advise the audit         the auditor, when he or  Commission      companies
committee when it seeks  she is aware that        (1987)
a second opinion on a    management has
significant account      consulted with another
issue.                   auditor, discuss with
                         the audit committee
                         significant matters
                         that were the subject
                         of the consultation.

69. Audit committees     The AICPA has no         Treadway        Public
should oversee the       specific information as  Commission      companies
quarterly reporting      to implementation of     (1987)
process.                 this recommendation;
                         however, the roles and
                         responsibilities of the
                         audit committee are
                         discussed in the COSO
                         report and quarterly
                         reporting is covered by
                         that report.

70. The audit committee  No specific action has   Treadway        Public
should review            been taken on this       Commission      companies
management's evaluation  recommendation.          (1987)
of factors related to    However, see the action
the independence of the  taken for
company's public         recommendation 71.
accountant. Both the     Also, there are a
audit committee and      number of SECPS
management should        membership requirements
assist the public        designed to foster
accountant in            independence, such as
preserving his           peer review, concurring
independence.            partner review, audit
                         partner rotation,
                         reporting certain
                         firmwide data on
                         management advisory
                         services, proscriptions
                         of certain services,
                         and publication of a
                         statement of firm
                         philosophy.

71. Before the           As indicated on page 30  Treadway        Public
beginning of each year,  of the SEC's Staff       Commission      companies
the audit committee      Report on Auditor        (1987)
should review            Independence, the SEC
management's plans for   has found that "audit
engaging the company's   committees consisting
independent public       principally of
accountant to perform    nonemployee directors
management advisory      actively were reviewing
services during the      management advisory
coming year,             activities and auditors
considering both the     generally were not
types of services that   performing those
may be rendered and the  services believed to
projected fees.          have an impact on their
                         independence."

72. When a public        The SEC revised its      Treadway        SEC
company changes          Form 8-K requirements    Commission
independent public       to provide for           (1987)
accountants, it should   increased disclosure
be required by SEC rule  and speedier
to disclose the nature   notification when there
of any material          is a change of
accounting or auditing   auditors. Also, SAS 61
issue discussed with     requires discussion
both its old and new     with the audit
auditor during the 3-    committee of
year period preceding    significant accounting
the change.              policies and any
                         disagreements with
                         management. SAS 50
                         provides tightened
                         standards on reports on
                         the application of
                         accounting principles.
                         Finally, SECPS
                         membership requirements
                         (SECPS Reference Manual
                         ï¿½1000.08(m)) requires
                         that the SEC be
                         notified within 5
                         business days when
                         there is a change of
                         auditors. The Private
                         Securities Litigation
                         Reform Act of 1995
                         requires auditors to
                         report to the SEC
                         certain uncorrected
                         illegal acts committed
                         by registrants.

73. The SEC should       The SEC has not changed  GAO             SEC
reverse its decision to  its requirements, but    (1989)
not require all public   has written to the NASD
companies to establish   and to all stock
an audit committee and   exchanges (except the
adopt a requirement for  NYSE) to urge them to
public companies to      upgrade their listing
establish such           requirements in this
committees.              regard. As a result the
                         AMEX and the NASD have
                         strengthened their
                         audit committee
                         requirements.

74. The AICPA, or the    See the SECPS            GAO             AICPA, SEC, or
SEC if it concludes it   membership requirement   (1989)          Congress
has the authority,       in the SECPS Reference
should require           Manual (ï¿½1000.08(m)),
accountants to report    which requires that the
directly to the SEC      SEC be notified within
when they resign or are  5 business days when
terminated. However, if  there is a change of
the AICPA or the SEC     auditors. The Private
does not adopt such a    Securities Litigation
requirement,             Reform Act of 1995
legislation would be     (ï¿½301) requires
necessary to require     auditors to report to
direct notification to   the SEC certain
the SEC.                 uncorrected illegal
                         acts committed by
                         registrants.

75. The Congress should  Securities laws were     GAO             Congress
amend securities laws    not amended; however,    (1990)
to require public        FDI Act ï¿½36(g)(1)
companies and insured    addresses audit
depository institutions  committee requirements
to have audit            for large banks and
committees made up of    thrifts (1990).
outside directors who
are totally independent
in fact and appearance
and have no impairment
which would keep them
from acting in the best
interest of
stockholders and the
public.

76. The Congress should  No action taken.         GAO             Congress
amend securities laws                             (1990)
to require auditors to
promptly inform
appropriate regulatory
authorities when they
resign or are
terminated.

77. The Congress should  See FDI Act ï¿½36(g)(1).   GAO (1991)      Congress
enact legislation
requiring that as a
condition for federal
depository insurance,
depository institutions
have truly independent
audit committees made
up solely of outside
directors with duties
that include reviewing
with management and the
independent accountant
the basis for the
reports of management
and the independent
accountant.

78. The Congress should  See FDI Act ï¿½36(g)(1).   GAO             Congress
enact legislation that                            (1991)
requires large
institutions to
maintain audit
committees that (a)
include members with
banking or related
financial management
expertise, (b) include
an attorney member or
have their own outside
counsel, and (c) do not
have members that are
large customers of the
institutions.

79. Organizations        FDI Act ï¿½36 (g)(1)       GAO             Congress
should be required to    includes audit           (1991)
establish totally        committee requirements
independent audit        for large banks and
committees made up       thrifts. Stock
solely of outside        exchanges also mandate
directors. These         audit committee
committees would review  requirements. See
the basis for internal   action taken for
control assessments and  recommendation 13.
reports of both
management and the
independent auditors.

80. Audit committees     No action taken.         GAO             Congress
should have written                               (1991)
charters that are
approved and reviewed
periodically by the
organizations' boards
of directors, and have
adequate resources and
authority to discharge
their responsibilities.

81. The Congress should  FDI Act ï¿½36(g)(5)        GAO             Congress
enact legislation        requires independent     (1991)
requiring that           accountants of large
independent public       banks and thrifts to
accountants acting as    notify FDIC if they
auditors of federally    cease to be accountants
insured financial        for the institutions
institutions be          (U.S.C. 1831m(g)(5)).
required to notify the   Institutions are
regulators of the        required by FDI Act
timing and reasons for   ï¿½36(h)(2)(B) to notify
changes in their status  regulators (see U.S.C.
as auditors of           1831m(h)(2)(B)).
federally insured
financial institutions.

82. The SEC should       This recommendation was  POB             SEC
require each registrant  discussed in a meeting   (1993)
to include in a          between AICPA
document containing the  representatives and the
annual financial         Chairman of the SEC on
statements a statement   December 15, 1993.
by the audit committee   Under SEC rules,
(or by the board if      companies making proxy
there is no audit        solicitations must
committee) that          describe the functions
describes its            performed by the audit
responsibilities and     committee. Also, when a
tells how they were      company changes
discharged. This         auditors, certain
disclosure should state  disclosures are
whether the audit        required regarding
committee members (or    whether the audit
board members) (a) have  committee recommended
reviewed the annual      or approved the change
financial statements,    and whether it
(b) have conferred with  consulted with the
management and the       former accountant
independent auditor      concerning
about them, (c) have     disagreements with
received from the        management and certain
independent auditor all  other matters. No
information that the     further action was
auditor is required to   taken.
communicate under
auditing standards,
(d) believe that the
financial statements
are complete and
consistent with
information known to
them, and (e) believe
that the financial
statements reflect
appropriate accounting
principles.

83. Audit committees     This recommendation was  POB             Public
(or the boards if there  discussed in a meeting   (1993)          companies
are no audit             between AICPA
committees) should       representatives and the
assume the following     Chairman of the SEC on
responsibilities         December 15, 1993. No
relating to an SEC       further action was
registrant's             taken.
preparation of annual
financial statements:
(a) review the annual
financial statements,
(b) confer with
management and the
independent auditor
about them, (c) receive
from the independent
auditor all information
that the auditor is
required to communicate
under auditing
standards, (d) assess
whether the financial
statements are complete
and consistent with
information known to
them, and (e) assess
whether the financial
statements reflect
appropriate accounting
principles.

84. The AICPA should     The professional ethics  POB             Accounting
undertake a project to   division issued          (1993)          profession
sharpen further the      Interpretation 102-6 in
distinction between      August 1995 that
client advocacy and      sharpens that
client service and       distinction, and the
incorporate that         POB believes it is
distinction into the     responsive to its
profession's Code of     recommendation.
Professional Conduct.
Individual accounting
firms should constantly
review their programs
regarding client
advocacy and client
service to strengthen
the desire of each
audit partner to
protect the firms'
independence.

85. Accounting firms     Representatives of the   POB             Accounting
should take special      SECPS and the POB have   (1993)          profession
care to ensure that      met with the chairmen
their participation in   of FASB, the ASB, and
the standard-setting     AcSEC to discuss this
process is               subject. The chairmen
characterized by         of the ASB and AcSEC
objectivity and          have reminded their
professionalism.         members of the need to
Standard setters and     insure that objectivity
leaders of the           is maintained in the
profession should        standard-setting
discuss and address the  process. Also, see
issues related to        action taken for
client advocacy in the   recommendation 84.
standard-setting
process and establish
ways of identifying and
correcting aberrant
behavior when it
occurs.

86. Accounting firms'    Following a meeting      POB             Accounting
consultation policies    with the SEC chief       (1993)          profession
and procedures should    accountant and his
ensure that client       staff in January 1994,
accounting issues are    the POB decided to
not discussed with SEC   withdraw this
staff without the        recommendation because
benefit of consultation  it appears such
at the appropriate       consultation is taking
level within the firms.  place before firms
                         discuss issues with SEC
                         staff.

87. The concurring       The SECPS adopted an     POB             Accounting
partner, whose           amendment to its         (1993)          profession
participation in an      concurring partner
audit is a membership    review membership
requirement of the       requirements in April
SECPS, should be         1994 in response to
responsible for          this recommendation.
assuring that those      When such consultation
consulted on accounting  occurs, the concurring
matters are aware of     reviewer must be
all of the relevant      satisfied that the
facts and                conclusions reached are
circumstances,           appropriate in light of
including an             all the relevant facts
understanding of the     and circumstances. See
financial statements in  SECPS Reference Manual
whose context the        (ï¿½1000.39(b)).
accounting policy is
being considered. The
concurring and
consulting partners
should know enough
about the client to
ensure that all of the
relevant facts and
circumstances are
marshalled, and also
possess the increased
detachment that comes
from not having to face
the client on an
ongoing basis.

88. The audit committee  See action taken for     POB             Public
or the board of          recommendation 83.       (1993)          companies
directors should be
satisfied that the
audit fee negotiated by
it or management for
the entity's audit is
sufficient to assure
the entity will receive
a comprehensive and
complete audit.

89. SEC registrants and  This recommendation was  AICPA Board of  SEC
other publicly           discussed at a meeting   Directors
accountable entities     between the AICPA's      (1993)
should be required to    leadership and the
have audit committees    Chairman of the SEC at
composed entirely of     a meeting on December
independent directors    15, 1993. See action
whenever practicable.    taken for
                         recommendation 63.

90. The SEC should       See action taken for     AICPA Board of  SEC
require audit            recommendation 83.       Directors
committees to include    Under SEC rules,         (1993)
statements in annual     companies making proxy
reports describing       solicitations must
their responsibilities   describe the functions
and how these            performed by the audit
responsibilities were    committee.
discharged.

91. The audit committee  See action taken for     AICPA Board of  Public
members should be        recommendation 83.       Directors       companies
charged with specific                             (1993)
responsibilities,
including overseeing
the financial reporting
process and
recommending
appointment of the
entity's auditors.

92. Public companies     This recommendation was  AICPA Board of  Public
and other organizations  discussed at a meeting   Directors       companies
with public              between the AICPA's      (1993)
accountability should    leadership and the
be prohibited from       Chairman of the SEC at
hiring the partner       a meeting on December
responsible for their    15, 1993. No further
audit for 1 year after   action was taken.
the partner ceases to
serve that client.

93. Financial            Regulators do not        GAO             Financial
regulators should        believe it is            (1994)          regulators
establish specific       appropriate to mandate
requirements for         the composition of
independent,             audit committees.
knowledgeable audit
committees.

94. The SEC should       The SEC does not         GAO             SEC
ensure that SEC          believe it is            (1994)
registrants that are     appropriate to adopt a
major end users of       federally imposed
complex derivative       mandate governing the
products establish and   composition of audit
implement corporate      committees for all
requirements for         public companies.
independent,
knowledgeable audit
committees.

95. The POB, the SEC,    The AICPA supports this  Kirk Panel      POB, SEC, and
and others should        recommendation. See      (1994)          public
support proposals to     action taken for                         companies
enhance the              recommendation 63.
independence of boards
of directors and their
accountability to
shareholders. Stronger,
more accountable
corporate boards of
directors will
strengthen the
professionalism of the
outside auditor,
enhance the value of
the independent audit,
and serve as the
investigating public.

96. Independent          The AICPA has appointed  Kirk Panel      Accounting
auditing firms,          a Special Committee on   (1994)          profession
regulators, and          Assurance Services
overseers of the public  (Elliott Committee) in
accounting profession    recognition of the
need to focus on how     special significance of
the audit function can   the CPA's
be enhanced and not      responsibility and
submerged in large       ability to provide
multiline public         independent assurance
accounting/management    and the need to
consulting firms.        consider how to improve
                         that function in a
                         rapidly changing
                         environment.

97. To increase the      The SECPS Response to    Kirk Panel      Public
value of the             the POB Advisory Panel   (1994)          companies
independent audit,       on Auditor Independence
corporate boards of      was published in August
directors and their      1995. It endorses this
audit committees must    recommendation.
hear from independent
auditors their views as
professional advisors
on the appropriateness
of the accounting
principles used or
proposed to be adopted
by the company, the
clarity of its
financial disclosures,
and the degree of
aggressiveness or
conservatism of the
company's accounting
principles and
underlying estimates.

98. The accounting       The SECPS Response to    Kirk Panel      Accounting
profession should look   the POB Advisory Panel   (1994)          profession
to the representatives   on Auditor Independence
of the shareholders--    was published in August
the board of directors-  1995. It recognizes the
-as the client, not      important stewardship
corporate management.    responsibilities of
Boards and auditors      boards of directors and
are, or should be,       notes that to be
natural allies in        effective,
protecting the           communications on
shareholder interest.    accounting matters must
                         involve the board and
                         its audit committee,
                         management, and the
                         independent auditor.

99. Auditors must        The SECPS Response to    Kirk Panel      Accounting
assume the obligation    the POB Advisory Panel   (1994)          profession
to communicate           on Auditor Independence
qualitative judgements   was published in August
about accounting         1995. It endorses this
principles,              recommendation.
disclosures, and
estimates. By doing so,
independent auditors
can add to the
effectiveness of boards
of directors in
monitoring corporate
performance on behalf
of shareholders and in
assuring that
shareholders receive
relevant and reliable
financial information
about company
performance and
financial condition.

100. Because they share  The AICPA and FASB are   Kirk Panel      Accounting
the objective of         committed to working in  (1994)          profession,
providing the public     a cooperative way with                   AICPA, FASB,
with relevant and        the SEC. Although from                   and SEC
reliable financial       time to time
information, the public  relationships have been
accounting profession,   strained, the process
the standard setters,    of resolving conflict
and the SEC must have    is a positive one. In
more cooperative, less   that connection, the
adversarial              POB report itself is a
relationships. CPA       response to criticisms
firms should be careful  voiced by the former
in how they communicate  chief accountant of the
their views to FASB,     SEC and the stock
the SEC, their clients,  compensation issues
and the public at        have been addressed by
large. The SEC should    FASB. Also, the new
help identify            AICPA Financial
accounting practice      Reporting Coordinating
problems and look to     Committee, formed to
the private sector       follow up on the
standard setters to      recommendations of the
solve them--only being   Jenkins Committee, has
a standard setter of     already met with the
"last resort" and only   SEC to exchange ideas
after appropriate due    and views on key
process.                 issues.
--------------------------------------------------------------------------------


                                    Table II.2
                     
                                  Audit Quality


                                                  Recommendation  Recommendation
Recommendation           Action taken             made by/date    directed to
-----------------------  -----------------------  --------------  --------------
1. The AICPA's Auditing  SAS 53 para. 5, which    AICPA Special   Accounting
Standards Executive      superseded the earlier   Committee on    profession
Committee should         SAS 16, makes it clear   Equity
consider restating       that the auditor has a   Funding
those sections of SAS 1  responsibility to        (1975)
which relate to the      "design the audit to
auditor's                provide reasonable
responsibility for       assurance of detecting
detection of fraud. The  errors and
auditing profession      irregularities that are
should, on an ongoing    material to the
basis, continue to       financial statements."
improve the efficiency   Moreover, the June 1993
of customary audit       policy statement of the
procedures to the end    AICPA Board of
that probability of      Directors is
discovery of material    unequivocal in
frauds continues to      articulating the
increase within the      profession's position:
limits of                "The public looks to
practicality.            the independent auditor
                         to detect fraud, and it
                         is the auditor's
                         responsibility to do
                         so." In May 1996, the
                         ASB exposed for comment
                         a proposed standard
                         that would amend SAS 53
                         to provide better
                         guidance to auditors in
                         detecting fraud.

2. The AICPA's Auditing  The AICPA industry       AICPA Special   Accounting
Standards Executive      audit guide on stock     Committee on    profession
Committee should         life insurance           Equity
consider whether the     companies identifies     Funding
Life Insurance Audit     the circumstances in     (1975)
Guide requires           which the auditor
clarification with       should ordinarily
regard to the            confirm insurance
confirmation of          policies in force with
policies with            policyholders.
policyholders.

3. Circumstances such    AU ï¿½334 of the AICPA     AICPA Special   Accounting
as those which were      Professional Standards   Committee on    profession
present...highlight the  was last modified in     Equity
fact that transactions   1983. Interpretation 6   Funding
between related parties  (AU ï¿½9334.16), issued    (1975)
pose serious problems.   in 1986, provides
The committee did not    additional guidance on
attempt to reach any     the nature and extent
conclusions regarding    of auditing procedures
the problems inherent    for examining related-
in auditing such         party transactions.
transactions since the   Also, audit risk alerts
auditing standards       and industry audit and
executive committee of   accounting guides
the AICPA is currently   frequently focus on
studying the need for    audit problems with
additional auditing      respect to related
procedures in            parties and related-
connection with          party transactions.
related-party
transactions.

4. A CPA who falsifies   This is the              Moss            SEC
or contributes to the    responsibility of the    Subcommittee
falsification of books   SEC Division of          (1976)
and records should be    Enforcement, and both
suspended from           individuals and firms
practicing before the    have been suspended
SEC.                     from practice before
                         the SEC as a result of
                         the Division's
                         activities.

5. The SEC should        Although the SEC has     Moss            SEC
prescribe by rule        not issued a rule in     Subcommittee
standards of conduct     this respect, the        (1976)
for independent          objectives of this
accountants and          recommendation are
auditors and for         being achieved because
accounting firms         the SEC does speak on
practicing before the    independence matters
SEC and should take      and enforces compliance
disciplinary action as   with the technical
may be necessary to      standards of the
assure adherence to      profession and audit-
such standards.          related SECPS
                         membership requirements
                         in disciplinary
                         hearings involving
                         CPAs.

6. Legislation amending  See action taken for     Moss            Congress
section 10(b) of the     recommendation 39.       Subcommittee
Securities and Exchange                           (1976)
Act of 1934 is needed
to protect the public
against negligence by
accountants and others,
regardless of intent to
deceive or defraud.

7. To inform the public  No action taken.         Moss            SEC
of the nature and        However, SAS 54          Subcommittee
extent of illegal and    provides guidance on     (1976)
questionable activities  the auditor's
in which corporations    consideration of the
may be engaged, more     financial statement
detailed public          effect of illegal
disclosure in            act(s) and on the
communications to the    adequacy of disclosure
shareholders and the     in the financial
media is necessary of    statements. In
all companies,           addition, the SAS
including detailed       states that the auditor
descriptions of the      should consider the
nature and purpose of    implications of an
the payments and the     illegal act on other
basis of their           aspects of the audit,
illegality and how much  particularly the
corporate employees and  reliability of
management knew about    representations by
the payments.            management.

8. The SEC should refer  The SEC consults with    Moss            SEC
to the Justice           the Justice Department   Subcommittee
Department cases where   when appropriate.        (1976)
the senior management
or the corporation's
independent auditors
had knowledge of, or
participated in,
illegal payments that
were not truthfully
disclosed in the
corporate books or
records.

9. The Congress should   The Private Securities   Metcalf         Congress
amend federal            Litigation Reform Act    Subcommittee
securities laws to       of 1995 (ï¿½201) allows    Staff Study
restore the right of     damaged individuals to   (1977)
damaged individuals to   sue auditors jointly
sue independent          and severally if the
auditors for negligence  auditor knowingly
under the fraud          committed a violation
provisions of the        of the securities laws
securities laws.         and proportionately if
                         the auditor was found
                         negligent.

10. The federal          The SEC oversees the     Metcalf         Federal
government itself        AICPA's SECPS peer       Subcommittee    government
should periodically      review program. See      Staff Study
inspect the work of      action taken for         (1977)
independent auditors     recommendation 31.
for publicly owned
corporations. This
could be done by GAO,
the SEC, or by a
special audit
inspection agency.

11. The federal          The SEC monitors         Metcalf         Federal
government should        auditor compliance with  Subcommittee    government
promulgate and enforce   professional standards   Staff Study
strict standards of      through its oversight    (1977)
conduct for auditors     of the AICPA's SECPS
who verify the accuracy  activities and the
of corporate financial   actions of the SEC
statements under the     Enforcement Division.
federal securities
laws. The SEC is the
appropriate agency to
promulgate and enforce
the standards of
conduct.

12. The SEC should       The AICPA believes the   Metcalf         SEC
treat all independent    SEC treats all           Subcommittee
auditors equally in      independent auditors     Staff Study
disciplinary and         equally in disciplinary  (1977)
enforcement proceedings  and enforcement
under the federal        proceedings.
securities laws. Large   The SEC, through the
firms should receive     POB and its own
the same sanctions as    oversight of the SECPS
small firms. The SEC     peer review program,
and other federal        has not considered it
agencies should conduct  necessary to undertake
compliance reviews       its own compliance
themselves rather than   reviews.
rely on private parties
and organizations to
conduct the reviews.

13. The independent      The auditor's standard   Metcalf         Accounting
auditor's report         report was revised by    Subcommittee    profession
accompanying corporate   SAS 58 (superseded by    (1977)
financial statements     SAS 79) to include a
should be more           positively worded
descriptive of the       description of the
auditor's work.          auditor's procedures.
However, an expanded     The new report refers
description of the       to "reasonable
functions and            assurance" and "in all
limitations in the       material respects," but
audit process must not   it does not include
become a list of         language intended to
disclaimers which        disclaim
substitute for the       responsibility.
auditor's overall
professional opinion
that the financial
statements fairly
represent business
activities and that
appropriate standards
have been consistently
applied.

14. Any illegal          SAS 54 requires the      Metcalf         Accounting
activities discovered    auditor to know whether  Subcommittee    profession
by an independent        the audit committee is   (1977)
auditor must be          adequately informed
reported immediately to  about possible illegal
a corporation's audit    acts and advises the
committee and the        auditor that a duty to
appropriate government   notify parties outside
authorities.             the client may exist.
                         Withdrawal from the
                         audit engagement is a
                         possible action under
                         SAS 54, and SECPS
                         membership requirements
                         (SECPS Reference Manual
                         ï¿½1000.08(m)) specify
                         that the auditor report
                         that fact to the SEC
                         within 5 business days.
                         Also, under ï¿½301 of the
                         Private Securities
                         Litigation Reform Act
                         of 1995, auditors are
                         required to report the
                         illegal act to the SEC
                         if the company does not
                         take appropriate
                         action.

15. Questionable         See action taken for     Metcalf         Accounting
activities must be       recommendation 14.       Subcommittee    profession
reported immediately to                           (1977)
the audit committee and
should be closely
followed by the
independent auditor to
determine if public
disclosure and
notification of
government authorities
are required.

16. The standard of      Paragraphs 13-15 of SAS  Metcalf         Accounting
materiality which        54 provide guidance to   Subcommittee    profession
governs public           the auditor on           (1977)
disclosure of specific   evaluating the
corporate activities     materiality of illegal
must be reviewed to      acts, noting that the
assure that it is        auditor should consider
properly serving the     both the quantitative
public.                  and qualitative
                         materiality of the act.
                         Paragraphs 16-17
                         discuss implications
                         for the audit and
                         required communication
                         with audit committees
                         of all but
                         inconsequential acts.

17. Auditors should      Through the Foreign      Metcalf         Accounting
apply high professional  Corrupt Practices Act    Subcommittee    profession
standards in forming an  of 1977, SAS 54 (which   (1977)
opinion on questionable  discusses the
acts and should not      implications of illegal
rely solely on a strict  acts on the audit,
list of rules to         particularly on the
determine whether an     reliance that can be
act is right or wrong.   placed on management
                         representations), and
                         the AICPA's annual
                         audit risk alerts,
                         auditors have been
                         sensitized to the
                         significance of
                         questionable acts.

18. Research into        This is an ongoing       Metcalf         Accounting
improved auditing and    effort. Major AICPA      Subcommittee    profession
detection of management  activities include the   (1977)
fraud should be          work of the SECPS QCIC,
increased.               summarized in each
                         SECPS annual report;
                         the information
                         provided in the annual
                         general and industry-
                         specific audit risk
                         alerts; the new series
                         of practice alerts
                         being issued by the
                         SECPS; and articles in
                         the Journal of
                         Accountancy, including
                         two titled "Lessons
                         Auditors Ignore at
                         Their Own Risk" by the
                         chairman and staff of
                         the QCIC. The June 1993
                         policy statement of the
                         Board of Directors
                         describes the AICPA's
                         commitment to continued
                         efforts in this area.

19. Independent          The independent auditor  Metcalf         Accounting
auditors should monitor  would be guided by       Subcommittee    profession
compliance with          various SASs,            (1977)
policies established by  especially SASs 8, 53,
corporate audit          54, and 55. However,
committees to prevent    unless aggregate
hidden remuneration of   management compensation
executives through use   was material to the
of corporate assets for  financial statements,
housing, personal        specific work in this
loans, club              area would normally
memberships, and         have to be dealt with
personal travel or       in the engagement
pleasure, and should     arrangements.
assure that amounts and
types of all management
compensation are
reported to
shareholders and the
public.

20. A program            The AICPA established    Metcalf         Accounting
realistically designed   the SECPS of the         Subcommittee    profession
to meet public concerns  AICPA's Division for     (1977)
should start with an     CPA Firms in 1977 for
organization of          that purpose.
accounting firms that
serve or want to serve
as independent auditors
for publicly owned
corporations.

21. Every facet of the   All SECPS activities     Metcalf         Accounting
organization of          are under the oversight  Subcommittee    profession
accounting firms (see    of the independent POB,  (1977)
recommendation 20)       only one of whose five
activities should be     members has an
governed by an           accounting background.
executive board
comprised of persons
from a broad spectrum
of interests and
backgrounds, including
those outside the
accounting profession.

22. The organization of  The SECPS Executive      Metcalf         Accounting
accounting firms (see    Committee has the        Subcommittee    profession
recommendation 20) must  authority to establish   (1977)
have the capability to   enforceable membership
establish and enforce    requirements that can
minimum standards of     and do deal with
auditor performance and  professional practice
behavior which will      matters.
satisfy the need for
independent assurance
that corporate
financial reports
fairly reflect
corporate activities.

23. The organization of  AICPA members may        Metcalf         Accounting
accounting firms (see    engage in the practice   Subcommittee    profession
recommendation 20) must  of public accounting     (1977)
include all accounting   with a firm that audits
firms that audit         one or more SEC clients
publicly owned           only if that firm is a
corporations.            member of the SECPS.
                         Over 1,260 firms are
                         now SECPS members; they
                         audit the financial
                         statements of about
                         16,000 SEC clients,
                         representing the vast
                         majority of publicly
                         traded SEC registrants.
                         There are approximately
                         200 CPA firms not
                         associated with the
                         SECPS or the AICPA that
                         serve as auditors for
                         about 300 generally
                         small or inactive SEC
                         clients.

24. The organization of  The SECPS has been       Metcalf         Accounting
accounting firms (see    effective in achieving   Subcommittee    profession
recommendation 20) must  compliance with its      (1977)
have the power to        membership requirements
impose sanctions on      and, although sanctions
errant members that      have been imposed on
directly affect their    firms, has generally
continued ability to     found the threat of
audit such               sanctions sufficient to
corporations.            obtain compliance by
                         member firms. However,
                         the SECPS does not have
                         the power to suspend or
                         terminate a member
                         firm's right to
                         practice before the
                         SEC.

25. No accounting firm   A corrective action      Metcalf         Accounting
should be able to audit  available to the SECPS   Subcommittee    profession
publicly owned           and one that has been    (1977)
corporations without     used 58 times as of
meeting the              June 30, 1994, the date
organization of          of the most recent
accounting firms' (see   SECPS annual report, is
recommendation 20)       a requirement to employ
performance and          an outside consultant
behavior standards.      acceptable to the SECPS
                         peer review committee
                         to perform preissuance
                         reviews of all or
                         selected financial
                         statements or other
                         specified procedures,
                         to provide substantive
                         assurance that the firm
                         will perform quality
                         audits for its SEC
                         clients. However, there
                         are approximately 200
                         CPA firms not
                         associated with the
                         SECPS or the AICPA that
                         serve as auditors for
                         about 300 generally
                         small or inactive SEC
                         clients.

26. The SEC should be    The SEC's 1994 Annual    Metcalf         SEC
responsible for          Report to Congress       Subcommittee
oversight of the         states that the SEC      (1977)
organization of          continued its oversight
accounting firms (see    of the SECPS and
recommendation 20) to    comments favorably on
protect the public       the peer review and
interest.                QCIC activities of the
                         SECPS.

27. The SEC should       The SEC issues an        Metcalf         SEC
periodically inform the  annual report to the     Subcommittee
Congress of the          Congress which briefly   (1977)
organization of          mentions SECPS peer
accounting firms' (see   review and QCIC
recommendation 20)       activities. Also, the
activities.              SECPS and the POB issue
                         separate annual
                         reports.

28. The organization of  According to the         Metcalf         Accounting
accounting firms (see    SECPS's annual report    Subcommittee    profession
recommendation 20)       for the year ended June  (1977)
should establish a       30, 1994, the SECPS had
program of external      conducted and accepted
quality review for       2,911 peer reviews of
member firms to be       member firms. Eleven
performed every 3 years  percent of the reports
or as shown to be        were qualified or
necessary.               adverse. As a result of
                         those reviews, 414
                         firms, or 14 percent of
                         the firms reviewed,
                         were required to take
                         additional corrective
                         measures to provide
                         added assurances that
                         quality control
                         deficiencies have been
                         or are being remedied.

29. The quality review   As of January 1990,      Metcalf         Accounting
program for independent  AICPA members may        Subcommittee    profession
auditors of publicly     engage in the practice   (1977)
owned corporations       of public accounting
should be mandatory.     with a firm that audits
                         one or more SEC clients
                         only if that firm is a
                         member of the SECPS and
                         complies with the peer
                         review membership
                         requirements. Over
                         1,260 firms are now
                         SECPS members; they
                         audit the financial
                         statements of about
                         16,000 SEC clients,
                         representing the vast
                         majority of publicly
                         traded SEC registrants.
                         There are approximately
                         200 CPA firms not
                         associated with the
                         SECPS or the AICPA that
                         serve as auditors for
                         about 300 generally
                         small or inactive SEC
                         clients.

30. Quality reviews      Peer reviews are         Metcalf         Accounting
should be conducted by   conducted by teams       Subcommittee    profession
broad-based teams        appointed by the SECPS   (1977)
appointed by the         or by firms that meet
executive board of the   SECPS criteria in the
organization of          circumstances. All
accounting firms (see    reviews are subject to
recommendation 20), and  POB oversight,
should include members   including visits during
from outside the         the course of the
accounting organization  review. The POB reports
and some who are not     annually on the results
accountants.             of its oversight
                         activities.

31. The reports of the   Peer review reports are  Metcalf         Accounting
quality review teams     maintained in a public   Subcommittee    profession
(see recommendation 30)  file at AICPA            (1977)
should be submitted to   headquarters in New
the SEC and made         York and can be
available to the         obtained upon written
public.                  or telephone request.
                         All reports of firms
                         with SEC clients are
                         sent to the SEC for
                         review. The SEC staff
                         randomly inspects peer
                         review reports and
                         working papers and the
                         POB's oversight files.

32. The primary mission  A primary objective of   Metcalf         Accounting
of the organization of   the SECPS is to          Subcommittee    profession
accounting firms (see    maintain and improve     (1977)
recommendation 20) will  the quality of practice
be to assure that the    before the SEC. The
two essential qualities  SEC's 1994 Annual
of independent           Report indicates this
auditors--               objective is being
professionalism and      achieved. As part of
independence--are not    this program of
sacrificed through such  improvement, in March
practices as             1980, the SECPS issued
unrealistic cost         the Position Paper of
cutting and time         Task Force on Certain
constraints in pursuit   Aspects of the
of commercial success.   Auditor's Work
                         Environment. The SECPS
                         membership requirements
                         also mandate the
                         preparation and
                         dissemination to all
                         personnel of a
                         "Statement of Firm
                         Philosophy." The
                         illustrative statement
                         provided by the SECPS
                         Reference Manual
                         (ï¿½1000.42) emphasizes
                         the need for an
                         overriding commitment
                         to high-quality
                         professional
                         performance.

33. Disciplinary         The committees and       Metcalf         Accounting
actions should be        staff of the             Subcommittee    profession
expedited and should be  professional ethics      (1977)
based on failure to      division have been
follow high              increased to deal with
professional standards   cases, especially cases
rather than violation    referred by
of legal standards.      governmental entities,
                         in a more expeditious
                         way. In May 1993, the
                         AICPA Council
                         authorized the division
                         to resolve ethics
                         complaints by
                         settlement in addition
                         to its existing
                         authority to refer
                         matters to the Joint
                         Trial Board. Further,
                         in June 1994, the
                         Professional Ethics
                         Executive Committee
                         agreed to amend its
                         operating policies,
                         with respect to cases
                         in litigation, to
                         require firms to
                         provide on a timely
                         basis the name of the
                         partner(s) involved and
                         evidence that
                         litigation exists that
                         could be unfairly
                         prejudiced by an ethics
                         investigation.

34. The identities of    The names of             Metcalf         Accounting
offenders must be        individuals whose        Subcommittee    profession
disclosed to the         membership in the AICPA  (1977)
public.                  is suspended or
                         terminated by the Joint
                         Trial Board or pursuant
                         to a settlement
                         agreement are published
                         in The CPA Letter. The
                         SEC also publishes the
                         results of its
                         enforcement
                         proceedings.

35. Independent          The auditor has no       Metcalf         Accounting
auditors should have     contractual arrangement  Subcommittee    profession
access to significant    with third parties in    (1977)
financial data           connection with an
concerning the           audit that would
corporation being        require them to provide
audited, even though     information. However,
held by other            if, in the auditor's
corporations and         professional judgment,
individuals, when it is  information is required
shown to be necessary.   that is not made
                         available, professional
                         standards require the
                         auditor to treat that
                         as a scope limitation
                         and to consider whether
                         an unqualified report
                         can be issued, thus
                         effectively achieving
                         the objective of the
                         recommendation.

36. Under certain        See action taken for     Metcalf         Accounting
conditions, direct       recommendation 35. In    Subcommittee    profession
communication among      addition, SAS 70         (1977)
auditors should be       provides guidance on
facilitated and          the factors an auditor
responses to audit       should consider when
confirmation requests    auditing the financial
should be required.      statements of an entity
                         that uses a service
                         organization to process
                         certain transactions.

37. The professionalism  The Cohen Commission     Metcalf         Accounting
of auditors would be     considered and rejected  Subcommittee    profession
enhanced considerably    this recommendation.     (1977)
by requiring the         The fact is that in
individuals in charge    today's environment,
of the audit for each    the auditor's report
corporate client to      more than ever is a
sign their names         report by a firm, given
personally on the        concurring review
auditor's report to the  partners, consulting
public, along with the   partners, etc., and all
name of the accounting   the partners of a firm
firm they represent.     are held liable for the
                         statements in that
                         report.

38. The preparatory      The AICPA has worked     Metcalf         Accounting
education of             diligently to improve    Subcommittee    profession
individuals who enter    the quality of           (1977)
the profession of        accounting education.
independently auditing   Numerous graduate
publicly owned           professional schools
corporations should be   and programs of
strengthened through     accounting now exist.
such means as the        Those applying for
establishment of         AICPA membership who
professional schools of  first become eligible
accounting.              after the year 2000 to
                         take the CPA
                         examination will be
                         required to have
                         obtained 150 semester
                         hours of education,
                         including a bachelor's
                         degree or its
                         equivalent.

39. Independent          The Private Securities   Metcalf         Congress and
auditors of publicly     Litigation Reform Act    Subcommittee    SEC
owned corporations       of 1995 holds auditors   (1977)
should be liable for     proportionately liable
their negligence to      for negligently
private parties who      violating the
suffered damages as a    securities laws.
result.

40. Access to the        The securities laws,     Metcalf         Congress and
judicial process for     including the Private    Subcommittee    SEC
parties claiming         Securities Litigation    (1977)
damages must be          Reform Act of 1995 do
allowed.                 not interfere with this
                         right for cases having
                         merit. It is entirely
                         appropriate to "screen
                         out" frivolous cases.

41. Auditors found       See action taken for     Metcalf         Congress
negligent should not     recommendation 39.       Subcommittee
have their liability                              (1977)
artificially limited by
law.

42. The organization of  SECPS peer review        Metcalf         Accounting
accounting firms         standards (SECPS         Subcommittee    profession and
envisioned by the        Reference Manual         (1977)          SEC
subcommittee (see        ï¿½2000.137) state that
recommendation 20) and   "(t)he review should be
the SEC should focus     concerned with the
attention on both        accounting and auditing
domestic and             engagements performed
international            by the U.S. offices of
operations of            the reviewed firm
independent auditors     selected for review and
when formulating         with the supervision
appropriate standards    and control, in
and a responsive         accordance with U.S.
quality review program.  professional standards,
                         on work of segments of
                         such engagements
                         performed by foreign
                         offices...." The SECPS
                         made significant
                         efforts to obtain
                         agreement by other
                         countries to an
                         extension of peer
                         review to the work
                         performed in those
                         countries, but was
                         unable to overcome the
                         legal and other
                         barriers to access by a
                         U.S. organization to
                         the foreign
                         accountant's
                         confidential work
                         product.

43. In performing its    The AICPA believes the   Metcalf         SEC
enforcement functions,   SEC applies sanctions    Subcommittee
the SEC should apply     in a consistent manner.  (1977)
equal sanctions for
similar offenses to all
independent auditors
without regard to size
of accounting firms.

44. The SEC must play    The SEC works closely    Metcalf         SEC
an important role in     with the ASB. The SEC    Subcommittee
improving the            highlights areas that    (1977)
performance of           need improvement in its
independent auditors     Accounting and Auditing
for publicly owned       Enforcement Releases.
corporations.

45. The SEC must         The SEC has reported to  Metcalf         SEC
enforce the federal      the Congress annually    Subcommittee
securities laws and      on the exercise of its   (1977)
exercise close           responsibilities.
oversight of the
accounting organization
(see recommendation 20)
to assure that the
public policy goals in
this report are
implemented.

46. The auditor's        The auditor's standard   Cohen           Accounting
standard report should   report, as revised by    Commission      profession
be revised and should    SAS 58 and since         (1978)
also clearly describe    superseded by SAS 79,
the work of the auditor  is responsive to this
and his findings and     recommendation.
avoid unclear
terminology concerning
details.

47-49. An auditor's                               Cohen
report should state its                           Commission
messages explicitly.                              (1978)
Specifically, it should
state that

47. ...financial         See AU ï¿½508.8(c).                        Accounting
statements are the                                                profession
representation of
management.

48. ....accounting       AU ï¿½508.8(f)(2)                          Accounting
principles appropriate   requires the auditor to                  profession
in the circumstances     state in the auditor's
were used.               report that "an audit
                         includes... assessing
                         the accounting
                         principles used and
                         significant estimates
                         made by management."

49. ...the auditor used  See AU ï¿½508.8(g).                        Accounting
judgment in auditing.                                             profession

50-54. The acceptance                             Cohen
and discharge of added                            Commission
responsibilities should                           (1978)
be communicated by the
auditor to users of his
work. The additional
messages, for example,
should cover

50. ...other             See action taken for                     Accounting
information in           recommendation 72 for                    profession
documents accompanying   the auditor's
the audited financial    responsibilities. The
statements.              auditor's report was
                         not modified to report
                         on the execution of
                         those responsibilities.
                         To do so in today's
                         environment would
                         unduly expose the
                         auditor to additional
                         liability. However, SAS
                         61 requires the auditor
                         to explain his or her
                         responsibility for
                         other information
                         accompanying the
                         financial statements to
                         the audit committee.

51. ...association with  Interim information                      Accounting
interim information.     accompanying audited                     profession
                         financial statements of
                         public companies is
                         marked as "unaudited"
                         but is required to be
                         reviewed under SAS 71.
                         However, the auditor's
                         report is not modified
                         unless the information
                         is omitted or the
                         auditor has not made
                         such a review. These
                         requirements are
                         believed to be
                         acceptable to the SEC.

52. ...internal          As noted in responses                    Accounting
accounting controls.     to numerous                              profession
                         recommendations above,
                         neither management nor
                         the auditor of an
                         entity, with the
                         exception of certain
                         federally insured
                         depository
                         institutions, is
                         required to issue a
                         public report on an
                         entity's internal
                         controls. (SAS 60 does
                         mandate a report,
                         generally to the audit
                         committee, on
                         reportable conditions
                         noted during an audit
                         of financial
                         statements.) The AICPA
                         has recommended that
                         such a requirement be
                         enacted by the SEC.

53. ...corporate codes   There is no requirement                  Accounting
of conduct.              for the auditor to                       profession
                         review the company's
                         code of conduct. SAS
                         78, which amended SAS
                         55 to conform to the
                         COSO report, Internal
                         Control--Integrated
                         Framework, requires the
                         auditor to obtain an
                         understanding of all of
                         the elements of the
                         internal control
                         structure. COSO's
                         report (issued in 1992
                         and amended in 1994)
                         has drawn the attention
                         of preparers, auditors,
                         and regulators to the
                         significance of
                         internal controls. That
                         document points out
                         that the codes of
                         conduct are widely used
                         and may be part of the
                         control environment,
                         but properly warns that
                         "existence of a written
                         code of conduct, and
                         even documentation that
                         employees received and
                         understand it, does not
                         ensure that it is being
                         followed. Compliance
                         with ethical
                         standards...is best
                         ensured by top
                         management's actions
                         and examples..." Full
                         implementation of this
                         recommendation is
                         therefore contingent on
                         a requirement for
                         written codes of
                         conduct which, for that
                         reason, may not be
                         necessary for all
                         companies, and on
                         implementation of the
                         recommendation in the
                         June 1993 policy
                         statement of the AICPA
                         Board of Directors for
                         management and auditor
                         reports on the system
                         of internal control
                         over financial
                         reporting.

54. ...meetings with     The auditor is required                  Accounting
the audit committee.     under SAS 61 to                          profession
                         communicate certain
                         matters to the audit
                         committee, but those
                         communications are not
                         mentioned in the
                         auditor's report.

55. The auditor's        The auditor's standard   Cohen           Accounting
report should omit       report no longer         Commission      profession
reference to             includes a reference to  (1978)
consistency.             consistency. However,
                         SAS 58 para. 11
                         (superseded by SAS 79)
                         requires an explanatory
                         paragraph (not a
                         qualification of the
                         auditor's opinion),
                         pursuant to SEC wishes,
                         when there has been a
                         material change in
                         accounting principles
                         or in the method of
                         their application.

56. The present method   SAS 1 ï¿½543 was reviewed  Cohen           Accounting
of referring to other    but not revised in this  Commission      profession
auditors should be       regard. In part, there   (1978)
eliminated. Either one   was concern by smaller
of two methods would     firms that a change
provide users with       would unfairly cause
sufficient information   their displacement.
on the responsibilities
taken:

(a) the auditor can do
enough additional work
so that he does not
need to refer to the
other auditor or

(b) management could
present (or in some
cases list) the reports
of the other auditors.

57. The auditor should   Disclosure of whether    Cohen           Accounting
be required to be        the auditor is expected  Commission      profession
present and available    to be present at the     (1978)
to answer questions at   shareholders' meeting
the annual meeting of    and available to answer
the shareholders.        questions is required
                         in the proxy statement.

58. The phrase "present  The SEC objected to      Cohen           Accounting
fairly" should be        this proposal and the    Commission      profession
deleted from the         phrase is retained in    (1978)
auditor's report.        the auditor's standard
                         report. However, SAS 69
                         clarifies the meaning
                         of the phrase,
                         discusses the
                         considerations
                         pertinent to a decision
                         as to whether financial
                         statements "present
                         fairly," and
                         establishes a hierarchy
                         of GAAP to assist the
                         auditor in reaching
                         conclusions in that
                         regard.

59. An audit should be   Specifically             Cohen           Accounting
designed to provide      implemented in SAS 53    Commission      profession
reasonable assurance     para. 5.                 (1978)
that the financial
statements are not
affected by material
fraud.

60. Since an auditor     SAS 53 para. 8           Cohen           Accounting
cannot be expected to    establishes the          Commission      profession
detect all frauds, a     standard of due care,    (1978)
standard of              and para. 9-25 provide
professional skill and   guidance on the
care is needed to        considerations
evaluate the             applicable and
performance of           procedures appropriate
auditors.                to meet that standard.

61-68. The standard of                            Cohen
skill and care                                    Commission
(referred to in                                   (1978)
recommendation 60)
would call upon the
auditor to

61. ...establish an      Required by Statement                    Accounting
effective client         on Quality Control                       profession
investigation program.   Standards No. 1, System
                         of Quality Control for
                         a CPA Firm,
                         communicated in, for
                         example, the AICPA's
                         1993 General Audit Risk
                         Alert para. 123-124.

62. ...take immediate    See SAS 53 para. 26-29                   Accounting
steps if evidence        for a discussion of                      profession
indicates that           circumstances in which
management is            withdrawal from an
untrustworthy,           existing engagement is
including, if            required or might be
necessary, resigning     appropriate. The
from the engagement.     Private Securities
                         Litigation Reform Act
                         of 1995 also requires
                         notification
                         responsibilities.

63. ...observe           Although efforts to                      Accounting
conditions suggesting    improve guidance on                      profession
predispositions to       fraud detection are and
management fraud.        must be ongoing, this
                         matter has been fully
                         addressed. See, for
                         example, SAS 53 para.
                         12; the AICPA's 1993
                         General Audit Risk
                         Alert para. 90-92; and
                         The CPA Letter, January
                         1994, "The Auditor's
                         Responsibility to
                         Detect Fraud."

64. ...maintain an       See SAS 53 para. 10;                     Accounting
understanding of a       SAS 22, as amended (AU                   profession
client's business and    ï¿½311.06-.10); and the
industry.                AICPA's General Audit
                         Risk Alert.

65. ...extend the study  The objectives of this                   Accounting
and evaluation of        recommendation have                      profession
internal controls to     been achieved to a
all controls that have   large degree by the
a significant bearing    clear statement of the
on the prevention and    auditor's
detection of fraud.      responsibility in SAS
                         53 (para. 11-12), which
                         also discusses internal
                         control problems in the
                         context of the
                         assessment of audit
                         risk. In addition, SAS
                         78 requires the auditor
                         to obtain an
                         understanding of the
                         internal control
                         structure, including
                         the accounting system
                         and control procedures,
                         and identifies certain
                         types of procedures
                         designed to prevent
                         fraud. Finally,
                         implementation of the
                         recommendation in the
                         June 1993 policy
                         statement of the AICPA
                         Board of Directors for
                         management and auditor
                         reports on the system
                         of internal control
                         would result in full
                         implementation of this
                         recommendation.

66. ...seek, through a   The work of the QCIC                     Accounting
formal procedure         and the PITF, as well                    profession
developed by the         as the efforts to
profession, information  revise SAS 53 (in May
on methods of            1996, the ASB exposed
perpetrating,            for comment a standard
concealing, and          that would revise SAS
detecting fraud.         53), is responsive to
                         this recommendation. In
                         addition to information
                         in the SECPS's annual
                         report, the QCIC has
                         published two articles
                         titled "Lessons
                         Auditors Ignore at
                         Their Own Risk" and the
                         PITF is issuing a
                         series of practice
                         alerts. Other AICPA
                         publications on this
                         subject, in addition to
                         the new series of audit
                         risk alerts, include:
                         (a) "Red Flags" (1979),
                         (b) EDP-Related Fraud
                         in the Banking and
                         Insurance Industries
                         (1984), and (c)
                         Repurchase Transactions
                         (1985).

67. ...be aware of       Auditing standards are                   Accounting
possible deficiencies    continually being                        profession
in audit techniques and  updated (see, e.g., SAS
steps.                   67 on the confirmation
                         process, which is
                         directly responsive to
                         the specific problem
                         identified by the Cohen
                         Commission). Also, the
                         AICPA General Audit
                         Risk Alert (1993)
                         focuses on the risk
                         that the auditor may
                         fail to detect problems
                         and emphasizes the need
                         for professional
                         skepticism.

68. ...understand the    See SAS 53 para. 32.                     Accounting
limitations of                                                    profession
incomplete audits.

69. The auditor should   The auditor's            Cohen           Accounting
be expected to detect    responsibilities for     Commission      profession
those illegal or         the detection of         (1978)
questionable acts that   errors, irregularities,
the exercise of          and illegal acts are
professional skill and   described in SAS 53 and
care would normally      SAS 54 in a manner
uncover. In that         consistent with this
connection, it is noted  recommendation.
that the auditor will
not always be able to
detect material fraud,
and illegal or
questionable payments
present even greater
problems because the
amounts are typically
small in relation to
financial statement
amounts and collusion
is common.

70. Detection of         Paragraphs 13-15 of SAS  Cohen           Accounting
illegal or questionable  54 provide guidance to   Commission      profession
acts should be           the auditor on           (1978)
considered by the        evaluating the
auditor without regard   materiality of illegal
to traditional           acts, noting that the
standards of             auditor should consider
materiality. The         both the quantitative
auditor should consider  and qualitative
each illegal or          materiality of the act.
questionable act in      Paragraphs 16-17
light of the             discuss implications
circumstances.           for the audit and
                         required communication
This involves three      with audit committees
steps:                   of all but
                         inconsequential acts.
(a) determination of     Paragraphs 15 and 23
the extent to which the  discuss disclosure to
item might affect the    outside parties,
financial statements,    through the financial
                         statements and
(b) comparison of the    otherwise. SAS 19 para.
act with the standards   5 makes it clear that
of corporate conduct     limitations based on
established by the       materiality are not
board of directors, and  applicable to certain
                         management
(c) consideration of     representations,
the need for public      specifically, those
disclosure.              related to
                         irregularities. SAS 54
                         para. 11(c) identifies
                         additional auditing
                         procedures that should
                         be considered when the
                         auditor encounters
                         possible illegal acts;
                         determining whether an
                         act was properly
                         authorized is one.
                         Paragraph 22 says that
                         withdrawal from the
                         engagement may be
                         necessary when the
                         client does not take
                         appropriate remedial
                         action. The combination
                         of these two provisions
                         gives the auditor a
                         basis for considering
                         the standards of
                         conduct prevalent in
                         practice within the
                         entity.

71. The auditor has      SAS 12 has not been      Cohen           Accounting
only limited ability to  changed. The Cohen       Commission      profession
evaluate the quality     Commission indicated     (1978)
and completeness of      that the structure and
disclosure of legal      division of
matters. Thus, the       responsibilities in
information now          this area are not
provided by management,  efficient or effective.
substantiated by the     However, the AICPA is
assurances given by      not aware of instances
counsel to the auditor,  of misleading
should be presented      disclosures that would
directly to users of     have been prevented if
financial information.   this recommendation had
                         been implemented.

72. The auditor should   SAS 8 was not modified   Cohen           Accounting
read all of the other    for this                 Commission      profession
information              recommendation. The SAS  (1978)
accompanying audited     requires the auditor to
financial statements     read the other
and compare it to the    information and if it
information in the       is materially
financial statements     inconsistent with the
and his audit            financial statements
workpapers to assure     and not corrected, to
himself that it is not   include an explanatory
inconsistent with        paragraph in the audit
anything he knows as a   report, withhold the
result of his audit.     use of the report, or
His report should        withdraw from the
include a description    engagement. The auditor
of the work performed    is advised to consult
and his conclusions.     with legal counsel with
                         respect to material
                         misstatements that are
                         not inconsistent with
                         the financial
                         statements. Also, SAS
                         61 requires the auditor
                         to explain his or her
                         responsibility for the
                         other information to
                         the audit committee.

73. Professional         SAS 71 addresses this    Cohen           Accounting
standards should         matter in the context    Commission      profession
require that if          of interim financial     (1978)
information acquired in  information.
performing other         Professional standards
services indicates a     do not explicitly
material deficiency in   address misstatements
unaudited financial      of other types of
information issued by    unaudited financial
an audit client, the     disclosures discovered
independent auditor      in the course of
should persuade the      performing other
client to correct the    services.
information or, failing
that, assure that the
necessary disclosure is
made.

74. The guidance in SAS  FASB statements,         Cohen           Accounting
5 for evaluation of      interpretations, and     Commission      profession
financial statements     technical bulletins;     (1978)
should be expanded when  EITF consensuses; and
no established           AcSEC statements of
accounting principle is  position and practice
prescribed for a         alerts have
specific                 significantly reduced
transaction or event.    the number of
                         situations in which
                         there is no established
                         accounting principle
                         for a specific
                         transaction or event.

75. The guidance in SAS  The hierarchy of GAAP    Cohen           Accounting
5 for evaluation of      set forth in SAS 69      Commission      profession
financial statements     elevates most forms of   (1978)
should be expanded when  published guidance,
two or more alternative  including AICPA
principles are           industry audit guides
generally accepted and   and statements of
criteria for selecting   position and EITF
among them are           consensuses over
insufficient.            industry practices,
                         thus narrowing further
                         the range of acceptable
                         alternatives. Paragraph
                         6 reminds auditors to
                         "consider whether the
                         substance of
                         transactions or events
                         differs materially from
                         their form." In
                         addition, an auditing
                         interpretation (see AU
                         ï¿½9411.11-15) was issued
                         in March 1995 that
                         provides guidance when
                         management adopts
                         accounting principles
                         for new transactions or
                         events.

76. The guidance in SAS  This recommendation is   Cohen           Accounting
5 for evaluation of      addressed in             Commission      profession
financial statements     authoritative            (1978)
should be expanded when  literature (see AU
the auditor makes an     ï¿½312.27-32) and in
evaluation of the        nonauthoritative
cumulative effect of     guidance (Practice
the appropriateness of   Alert 94-1 on dealing
accounting principles    with audit
selected and estimates   differences).
made by management.

77. Appropriate          The Private Securities   Cohen           Congress
legislation should be    Litigation Reform Act    Commission
enacted to empower, but  of 1995 provides that a  (1978)
not require, courts to   court may assess
assess costs when, by    plaintiffs with the
objective standards,     costs of defending
the complaint was        against litigation in
frivolous or had little  very limited
chance of success at     circumstances.
trial.

78. Some form of         The Private Securities   Cohen           Congress
statutory limitation of  Litigation Reform Act    Commission
monetary damages is      of 1995 provides for     (1978)
essential to the         proportionate liability
continued healthy        when the CPA firm has
existence of the public  not knowingly committed
accounting profession    a violation of the
in the private sector.   securities laws.

79. The use of court     No action taken.         Cohen           Congress
appointed masters to                              Commission
make impartial                                    (1978)
expertise available to
the court should be
increased.

80. There should be no   In response to this      Cohen           Accounting
differences in the       recommendation, the      Commission      profession
standards that apply to  AICPA mounted a          (1978)
the performance of       research effort that
audits, whether the      resulted in the
audits are of public or  publication of an audit
private entities.        research monograph.
However, present         This was followed by a
guidance on the          major task force effort
application of auditing  that resulted in SAS
standards to audits of   amendments and
different size entities  interpretations as well
is inadequate. Both      as an audit procedures
users and clients would  study on audits of
be better served by      small businesses. Also,
more guidance on         SAS 61 is applicable
accounting and related   only to SEC clients and
services and on the      clients that have audit
application of auditing  committees, and other
standards to audits of   standards, such as
smaller entities.        those on the internal
                         control structure and
                         audit sampling,
                         implicitly or
                         explicitly recognize
                         that the procedures
                         followed to comply with
                         GAAS may differ
                         depending on the size
                         and related
                         characteristics of an
                         entity. In addition,
                         the AICPA has issued a
                         series of Statements on
                         Standards for
                         Accounting and Review
                         Services that address
                         the special needs of
                         private companies for
                         nonaudit financial
                         statement services.

81. Many auditing        After substantial        Cohen           Accounting
pronouncements could     study, no action was     Commission      profession
usefully provide more    taken with respect to    (1978)
specific guidance.       the recommendation.
                         However, SAS 65
                         provides more detailed
                         guidance on using the
                         work of an internal
                         auditor. Also, many
                         recent auditing
                         standards go into
                         significant detail in
                         explaining their
                         application.

82. Many, if not most,   Firms are willing to     Cohen           Accounting
of the technological     share experiences so as  Commission      profession
and methodological       to improve the quality   (1978)
advances in auditing     of professional
have been developed by   guidance, but still
accounting firms. Such   view product
innovations should be    development as
quickly and widely       proprietary and useful
disseminated.            in distinguishing their
                         services from those
                         provided by other
                         firms.

83. The standards for    Rule 201 of the Code of  Cohen           Accounting
the audit function       Professional Conduct     Commission      profession
should have broader      establishes general      (1978)
scope than the present   standards of
standards. They should   professional
be applicable whenever   competence, due
a CPA undertakes an      professional care,
audit engagement. The    planning and
restructuring should     supervision, and
include a statement of   sufficient relevant
the independent          data that are
auditor's role.          applicable to all
                         services provided by
                         all AICPA members. The
                         ASB initiated a new
                         series of attest
                         standards to govern
                         services that do not
                         involve financial
                         statements. Also, the
                         ASB has dealt with and
                         will continue to deal
                         with matters, such as
                         compliance auditing and
                         special reports, that
                         go beyond the
                         boundaries of the
                         financial statements.

84. The requirement to   SAS 58, issued in 1988,  Cohen           Accounting
express a "subject to"   provided for an          Commission      profession
qualification for        explanatory paragraph    (1978)
significant              in the auditor's report
uncertainties should be  when, for example,
eliminated.              there are material
                         uncertainties or
                         substantial doubt about
                         the entity's ability to
                         continue as a going
                         concern. SAS 79, issued
                         in December 1995 and
                         which supersedes SAS
                         58, eliminated the
                         extra paragraph for
                         uncertainties.

85. It is important to   The AICPA has worked     Cohen           Accounting
develop some high-       diligently to improve    Commission      profession
quality graduate         the quality of           (1978)
professional schools of  accounting education.
accounting. The timing   Numerous graduate
and length of the        professional schools
program will be          and programs of
determined by the        accounting now exist.
educational              Those applying for
institutions involved.   AICPA membership who
It may be a 2-or 3-      first become eligible
year program after       after the year 2000 to
obtaining a bachelor's   take the CPA
degree, a 2-or 3-year    examination will be
program after 3 years    required to have
of general education     obtained 150 semester
for business, or some    hours of education,
other variation.         including a bachelor's
However, the option of   degree or its
a 4-year liberal arts    equivalent.
undergraduate program
and a quality graduate
professional program,
similar to that of the
law, is necessary to
permit accounting to
compete on an equal
footing for students
who make their career
decisions near or after
college graduation.

86. The AICPA and state  All AICPA programs       Cohen           Accounting
CPA societies should     directed to accounting   Commission      profession
develop a form of        educators include those  (1978)
membership, such as      who are not CPAs. They
associate membership,    are invited to
that will permit         participate in
accounting educators     conferences and
who are not CPAs to      workshops on accounting
take part in state       education, efforts to
society and Institute    recruit quality
activities. Appropriate  students, and committee
criteria should be       activities, and are
developed that should    eligible for the
include passage of the   AICPA's Outstanding
uniform CPA              Educator Award.
examination, membership
on the faculty of an
accredited institution,
and an advanced degree
in accounting.

87. Public accounting    In March 1980, the       Cohen           Accounting
firms should not         SECPS issued the         Commission      profession
abandon time budgets,    Position Paper of Task   (1978)
but they must improve    Force on Certain
current methods,         Aspects of the
particularly for the     Auditor's Work
evaluation of variances  Environment. The SECPS
and their effect on the  membership requirements
evaluation of            also mandate the
personnel.               preparation and
                         dissemination to all
                         personnel of a
                         "Statement of Firm
                         Philosophy." The
                         illustrative statement
                         provided by the SECPS
                         Reference Manual
                         (ï¿½1000.42) emphasizes
                         the need for an
                         overriding commitment
                         to high-quality
                         professional
                         performance.

88. Individual           See action taken for     Cohen           Accounting
accounting firms should  recommendation 87.       Commission      profession
immediately undertake                             (1978)
to conduct studies to
determine the extent of
excessive time and
budget pressures and
the effects on their
practices.

89. Auditors should      See action taken for     Cohen           Accounting
carefully assess the     recommendation 87.       Commission      profession
effect of time/                                   (1978)
deadline pressures on
their work and refuse
to accept such
deadlines when they are
imposed in opposition
to their judgment.

90. The profession must  This has been            Cohen           Accounting
continually monitor      implemented through      Commission      profession
performance, deal        mandatory peer and       (1978)
quickly with             quality review, the
substandard              activities of the QCIC,
performance, and         accelerated ethics
attempt to anticipate    division efforts, and
future problems.         the institution of a
                         new procedure for
                         settlement agreements.

91. A voluntary program  The AICPA now has a      Cohen           Accounting
consisting of the        mandatory practice       Commission      profession
following three          monitoring requirement.  (1978)
elements would provide   To comply with that
effective professional   requirement, firms that
oversight:               audit SEC clients are
                         required to be members
(a) independent peer     of the SECPS and have a
reviews of accounting    peer review every 3
firms,                   years as well as comply
                         with a number of other
(b) detailed reports of  membership
the results of peer      requirements. The
review (a "long form     report and letter of
report") made available  comments on the peer
to concerned parties,    review, the firm's
and                      response, and other
                         specified documents are
(c) appointment by       available for public
individual accounting    inspection. All of the
firms of independent     activities of the
oversight groups,        SECPS, including its
analogous to corporate   peer review program,
audit committees,        come under the active
concerned with           oversight of the
oversight including the  independent POB. For
peer review process.     several years, the SEC
                         has reported in its
                         annual report to the
                         Congress that "the peer
                         review process
                         contributes
                         significantly to
                         maintaining the quality
                         control systems of
                         member firms and,
                         therefore, enhances the
                         consistency and quality
                         of practice before the
                         SEC."

92. Uniformity [of       This is an ongoing       Cohen           Accounting
state board regulation]  effort. The AICPA, in    Commission      profession
is needed to prevent     cooperation with the     (1978)
harmful interference     National Association of
with firms that operate  State Boards of
on a national basis      Accountancy, advocates
with national clients.   uniformity in state
                         regulation and
                         publishes a uniform
                         accountancy act.
                         Nevertheless, there are
                         still substantial
                         variations in state
                         statutes, and rules and
                         problems involving
                         interstate and
                         international
                         reciprocity have still
                         not been resolved.

93. Once a duly          The results of ethics    Cohen           Accounting
constituted              investigations are       Commission      profession
disciplinary body        still subject to         (1978)
begins its work, those   confidentiality
who initiate ethics      requirements and
actions should be        properly so because a
informed of the status   CPA's most valued asset
of the complaint. The    is his or her
practitioner should      professional
also be informed of the  reputation. Therefore,
source of the            complainants are
complaint. After the     advised that the matter
disciplinary body        will be considered and
completes its work, all  investigated if
resulting penalties      necessary. Of course,
should be well-          the names of
publicized, along with   individuals found
the practitioner's       guilty by the Joint
name. Unless the         Trial Board are
practitioner requests,   published when the
his name should not be   discipline is
published upon an        suspension or
acquittal. However, the  termination of
initiator of an ethics   membership or when a
action should be         settlement agreement
informed of the          includes such
acquittal.               suspension or
                         termination.
                         Practitioners are not
                         advised of the source
                         of the complaint
                         because that would have
                         a chilling effect on
                         those who have
                         legitimate complaints.

94. The profession's     The Professional Ethics  Cohen           Accounting
disciplinary mechanism   Executive Committee      Commission      profession
should be restrained     agreed at its May 1994   (1978)
only when the member     meeting that firms that
demonstrates that        seek deferral of a
pending litigation is    disciplinary proceeding
directly related to the  because of pending
misconduct charges and   litigation should be
there is some            required to provide the
likelihood that          names of the member(s)
litigation will be       involved and evidence
unduly influenced by     that there is
disciplinary action.     litigation that could
The burden of            be prejudiced by a
demonstrating the need   concurrent ethics
for restraint should     investigation.
fall on the member. The
disciplinary mechanism
should not be
restrained during
appeals in litigated
cases unless the member
can demonstrate that
the appeal proceeding
could result in the
introduction of new
evidence and would be
affected by
disciplinary action.

95. Punishing a firm is  This concept is          Cohen           Accounting
appropriate only when a  embodied in the SECPS's  Commission      profession
firm fails to provide    Statement of Policy on   (1978)
or enforce acceptable    the Imposition of
professional standards.  Sanctions (SECPS
                         Reference Manual
                         ï¿½1000.36).

96. The AICPA, with the  The work of the SECPS's  Cohen           Accounting
cooperation of           QCIC is responsive to    Commission      profession
accounting firms and     this recommendation. In  (1978)
through the use of       addition to information
court and SEC            in the SECPS annual
documents, should        report, the QCIC has
establish a mechanism    published one article
for timely and           titled "Lessons
continuing analyses of   Auditors Ignore at
individual cases as      Their Own Risk," and
they move through the    the PITF is issuing a
judicial or regulatory   series of practice
system.                  alerts. Other AICPA
                         publications on this
                         subject include:
                         (a) "Red Flags" (1979),
                         (b) EDP-Related Fraud
                         in the Banking and
                         Insurance Industries
                         (1984), and (c)
                         Repurchase Transactions
                         (1985).

97-98. The accounting    SAS 53 superseded SAS    Price           Accounting
profession should        16 to clarify the        Waterhouse      profession
affirmatively            auditor's                (1985)
acknowledge that the     responsibility to
auditor has the          detect fraud. Moreover,
responsibility to        the AICPA Board of
search for management    Director's June 1993
fraud that is material   Policy Statement
to the financial         reaffirmed that
statements through the   auditors have a
application of           responsibility to
professional auditing    detect fraud, and in
standards designed to    May 1996, the ASB
reduce the risk that     exposed for comment
such fraud will go       revisions to SAS 53.
undetected;
accordingly,

97. ...existing          This recommendation has                  Accounting
accounting standards     not been adopted in                      profession
should be expanded to    this form. However, SAS
include a requirement    78 (supersedes SAS 55),
that the auditor review  concerning
and evaluate the         consideration of
company's system of      internal controls in a
management controls,     financial statement
including conducting an  audit, and SAS 59
audit process to more    concerning the
adequately address the   auditor's consideration
company's financial      of an entity's ability
condition as well as     to continue as a going
its financial position.  concern, focus the
                         auditor's attention on
                         the control environment
                         and require the auditor
                         to consider whether
                         there is substantial
                         doubt about the
                         entity's ability to
                         continue as a going
                         concern. Also see SAS
                         64 and 77, which
                         supersede SAS 59.

98. ...existing          SAS 53 and SAS 78                        Accounting
accounting standards     (which supersedes SAS                    profession
should be expanded to    55) address this
include a requirement    recommendation.
that the auditor
identify symptoms
within the company's
business environment
that would indicate a
higher risk of
management fraud and
consider performing
certain substantive
tests if such symptoms
are present.

99. The public must be   The AICPA does not       Price           Accounting
provided with increased  endorse the              Waterhouse      profession
assurance as to the      recommendation for a     (1985)
effectiveness of the     statutory self-
quality control and      regulatory organization
peer review process      (SRO). It has
through which the        established an
profession assesses      effective self-
levels of performance,   regulatory system with
independence, and        independent oversight
adherence to audit       of the reviews of firms
standards.               that audit SEC
                         registrants and
                         believes that a
                         statutorily mandated
                         SRO is not necessary or
                         desirable.

100. The profession      The Private Securities   Price           Accounting
should develop a plan    Litigation Reform Act    Waterhouse      profession
of priority options to   of 1995 was passed to    (1985)
provide liability        among other things,
relief, with the         provide a more
objective of effecting   equitable approach to
a more equitable         the determination of
approach to the          liability.
determination of
liability.

101. In order to make    This recommendation was  Anderson        Accounting
professional standards   implemented in the       Committee       profession
more relevant and        revised Code of          (1986)
effective, the           Professional Conduct,
structure of the         adopted January 12,
Institute's Code of      1988.
Professional Ethics
should be recast into    Broad standards cannot
two basic sections:      be enforced, per se.
(a) Standards of         However, they serve as
Professional Conduct,    guides to the
which will be            professional ethics
enforceable, and         division in evaluating
(b) Rules of             the significance of
Performance and          infractions of specific
Behavior.                rules.

102. The Standards of                             Anderson        Accounting
Professional Conduct                              Committee       profession
will contain six                                  (1986)
articles.                See Preamble to Code of
                         Professional Conduct
(a) Purpose              (ET ï¿½51.02).

                         See Introduction to
(b) Applicability        Code of Professional
                         Conduct as well as the
                         Applicability section
                         (ET ï¿½91.02).


(c) Responsibilities
                         See Article I of the
                         Code of Professional
                         Conduct (ET ï¿½52.01).

(d) Explicit standards
(dealing with the
public interest,         See Articles II, III,
integrity, objectivity   IV, V, and VI of the
and independence, due    Code of Professional
care, and scope and      Conduct (ET ï¿½53.04 to
nature of services)      57.03).


(e) Performance
standards                Performance standards
                         are set forth in Rule
                         201 (ET ï¿½201.01-.02).
(f) Compliance
                         Compliance with
                         standards is covered by
                         Rule 202 (ET ï¿½202.01).

103. The Rules of                                 Anderson        Accounting
Performance and                                   Committee       profession
Behavior should                                   (1986)
include                  See Rule 101 and
                         related interpretations
(a) independence,        and rulings in ET
                         ï¿½100.



(b) general standards,   See Rule 202 in ET
                         ï¿½200.

(c) compliance with
standards,               See Rule 202 in ET
                         ï¿½200.

(d) accounting
principles,              See Rule 203 in ET
                         ï¿½200.

(e) confidential client
information,             See Rule 301 in ET
                         ï¿½300.

(f) contingent fees,
                         See Rule 302 in ET
                         ï¿½300.
(g) acts
discreditable,
                         See Rule 501 in ET
                         ï¿½500.
(h) advertising and
other forms of
solicitation,            See Rule 502 in ET
                         ï¿½500. This rule and its
                         interpretations bar
                         only false, misleading,
(i) commissions, and     or deceptive acts in
                         advertising or
                         solicitation.

                         See Rule 503 in ET
                         ï¿½500. This rule bars
                         commissions only when a
                         member also performs a
                         review or examination
                         of historical or
                         prospective financial
(j) form of practice     information or performs
and name.                a compilation of
                         financial statements
                         expected to be used by
                         third parties and does
                         not disclose a lack of
                         independence, all
                         pursuant to an
                         agreement with the
                         Federal Trade
                         Commission.

                         See Rule 505 in ET
                         ï¿½500.

104. The AICPA should    Participation in an      Anderson        Accounting
establish a quality      AICPA-approved practice  Committee       profession
review program and make  monitoring program was   (1986)
participation in that    made a condition of
program or in the peer   membership in January
review programs of the   1988. (See BL ï¿½220.01.)
division for CPA firms
a membership
requirement for members
in the public practice.

105. The AICPA should    This requirement was     Anderson        Accounting
adopt a requirement for  adopted in January       Committee       profession
AICPA members who        1990. (See BL ï¿½230.01.)  (1986)
practice in firms that
audit one or more SEC
registrants that would
require those firms to
be members of the
SECPS.

106-114. The AICPA                                Anderson
should establish more                             Committee
effective procedures                              (1986)
for handling complaints
and assuring compliance
with performance
standards by all
members. Specifically,
the committee
recommends a
restructuring that will

106. ...assign to the    This recommendation was                  Accounting
appropriate quality      not implemented,                         profession
review or peer review    largely because it
committees               would be seen as
responsibility for       evidence of a
investigating            reluctance to take
complaints against       disciplinary measures
firms and members in     against members who
public practice that     violate technical or
involve compliance with  ethical standards, and
technical performance    because it would change
standards.               the perceived focus of
                         quality review from
                         educational,
                         corrective, and
                         remedial actions to
                         disciplinary measures.

107. ...assign           The QREC has this                        Accounting
responsibility to the    authority. (See QR                       profession
Institute's Quality      ï¿½3000.75.)
Review Executive
Committee (QREC) for
taking disciplinary
action against enrolled
firms when they fail to
cooperate or commit an
egregious act that
could lead to dismissal
from the Quality Review
program or to other
forms of punitive
sanctions.

108. ...modify the       The Joint Ethics                         Accounting
authority of the         Enforcement Program                      profession
Professional Ethics      manual is consistent
Executive Committee and  with the
the professional ethics  responsibilities of the
division in a manner     professional ethics
consistent with the      division, and the
restructured Code and    division, rather than
assign the Professional  state CPA societies,
Ethics Executive         investigates complaints
Committee the            that involve "national
responsibility for       interests" (including
dealing with complaints  referrals from
against members that     government agencies)
involve national         and multijurisdictional
interests and            issues.
multijurisdictional
issues and for
oversight of complaints
disposed of by state
society ethics
committees.

109. ...encourage state  State CPA society                        Accounting
society ethics           ethics enforcement                       profession
committees to take a     procedures have
more active role in      improved, but it is the
dealing with complaints  view of the
against members in       professional ethics
their jurisdictions      division that such
that do not involve      procedures are more
national interest or     effectively applied at
multijurisdictional      the national level.
issues and to interface  Accordingly, the AICPA
with the Quality Review  has offered to
program in the same way  investigate all cases
as the Institute's       received by state
Professional Ethics      societies, and over 20
Executive Committee.     states accepted that
                         offer. One state
                         society, California,
                         refers all complaints
                         it receives directly to
                         the state board of
                         accountancy.

110. ...establish        See action taken for                     Accounting
procedures for           recommendation 106.                      profession
coordinating the
handling of complaints
in the professional
ethics division and in
the programs for
monitoring practice.

111. ...reconstitute     See BL ï¿½360.01 for the                   Accounting
the National Review      composition and                          profession
Board as a national      authority of the
trial board to serve as  reconstituted National
the hearing body in      Joint Trial Board.
disciplinary
proceedings against
members.

112. ...modify the       See the Joint Ethics                     Accounting
contractual agreements   Enforcement Programs                     profession
with the state CPA       manual.
societies under the
Joint Ethics
Enforcement Programs to
eliminate the Regional
Trial Boards.

113. ...establish        See BL ï¿½760.01.                          Accounting
procedures for public                                             profession
disclosure of
information on the
disposition of
complaints.

114. ...enforce the      This is done through                     Accounting
concept that the public  the AICPA quality                        profession
interest is best served  review program and the
through educational and  peer review programs of
remedial or corrective   the two sections of the
actions and only         AICPA's Division for
secondarily through      CPA Firms.
other disciplinary
measures.

115. The National Trial  See BL ï¿½760.01. While    Anderson        Accounting
Board will serve as the  the bylaws do not        Committee       profession
hearing body to dispose  presently give the       (1986)
of cases arising from    Joint Trial Board the
complaints that are not  authority to impose
resolved by the          monetary fines, the two
Institute's              sections of the AICPA's
Professional Ethics      Division for CPA Firms
Executive Committee or   have that authority.
by state society ethics
committees. The
sanctions for failure
to take corrective
action and for
egregious violations or
violations undertaken
with the intent to
mislead would include
(a) public censure and
disclosure of specified
remedial actions, with
or without a monetary
fine to defray the cost
of the proceedings, and
(b) public notice of
suspension or
termination of
membership.

116. Achieve membership  The AICPA requires that  Big 7           Accounting
in the SECPS for all     all firms with AICPA     (1986)          profession
CPA firms practicing     members among their
before the SEC.          partners or employees
                         that audit companies
                         practicing before the
                         SEC be members of the
                         SECPS. However, the SEC
                         does not mandate that
                         all CPA firms that
                         audit SEC registrants
                         belong to the SECPS.

117. If and when the     The Congress has not     Big 7           Accounting
Congress extends SEC     acted on this            (1986)          profession
jurisdiction to all      recommendation.
classes of entities
justified by the public
interest, these newly
covered classes of
companies should be
subject to SECPS
jurisdiction.

118. Enhance public      The SEC's 1994 Annual    Big 7           Accounting
confidence in the        Report to Congress       (1986)          profession
Special Investigations   comments favorably on
Committee.               QCIC activities.

119. The accounting      SAS 54 discusses the     GAO             Accounting
profession should be     consideration an         (1986)          profession
improving its efforts    auditor should give to
in determining whether   the possibility of
companies are complying  illegal acts. Although
with laws and            the SAS states that an
regulations.             audit normally does not
                         include procedures
                         specifically designed
                         to detect illegal acts,
                         para. 9 provides
                         examples of specific
                         information that may
                         raise a question
                         concerning possible
                         illegal acts. The SAS
                         includes guidance on
                         audit procedures in
                         response to possible
                         illegal acts, as well
                         as the auditor's
                         response to detected
                         acts.
                         Also, SAS 68 deals with
                         compliance auditing
                         applicable to
                         governmental entities
                         and other recipients of
                         governmental financial
                         assistance. FDI Act
                         ï¿½36(e) requires
                         auditors to report on
                         large banks' and
                         thrifts' compliance
                         with laws and
                         regulations.

120. The accounting      The revision of SAS 53   GAO             Accounting
profession should make   that was exposed for     (1986)          profession
sure that internal       comment in May 1996
controls and accounting  provides more specific
systems are in place     guidance for the
that will help prevent   auditor's use in
fraud and mismanagement  assessing the risk of
in the companies being   fraud.
audited.

121. The accounting      SAS 59 required the      GAO             Accounting
profession should        auditor who concludes    (1986)          profession
provide better           that there is
disclosure and early     substantial doubt about
warnings regarding the   the entity's ability to
condition of companies   continue as a going
that are in precarious   concern for a
positions.               reasonable period of
                         time to reflect that
                         conclusion in the
                         report and provides
                         guidance on relevant
                         disclosures. However,
                         SAS 77, issued in
                         November 1995 and which
                         supersedes SAS 59,
                         precludes the auditor
                         from using conditional
                         language in the
                         auditor's conclusion
                         about an entity's
                         ability to continue as
                         a going concern.

122. The accounting      Peer review is           GAO             Accounting
profession should        mandatory for all firms  (1986)          profession
reduce the secrecy that  that perform audits
surrounds the peer       whose partners or
review process, and      employees are members
make the process         of the AICPA. The
mandatory for all        results of peer reviews
public accounting firms  undertaken to meet
that audit public        SECPS membership
corporations and         requirements are
government entities.     maintained in a public
                         file.

123. The ASB should      The AICPA has been       Treadway        Accounting
revise the auditor's     reluctant to assume      Commission      profession
standard report to       these additional         (1987)
describe the extent to   responsibilities and
which the independent    the related risk of
public accountant has    additional liability
reviewed and evaluated   without a legislative
the system of internal   or regulatory mandate.
accounting control. The  An auditing
ASB also should provide  interpretation (AU
explicit guidance to     ï¿½9550.03) provides
address the situation    guidance to the auditor
where, as a result of    who disagrees with
his knowledge of the     management's published
company's internal       assessment of the
accounting controls,     company's internal
the independent public   controls.
accountant disagrees
with management's
assessment as stated in
the proposed management
report.

124. The ASB should      SAS 53 on errors and     Treadway        Accounting
revise standards to      irregularities was       Commission      profession
restate the independent  issued in response to    (1987)
public accountant's      this recommendation.
responsibility for
detection of fraudulent
financial reporting,
requiring the
independent public
accountant to (a) take
affirmative steps in
each audit to assess
the potential for such
reporting and (b)
design tests to provide
reasonable assurance of
detection. Revised
standards should
include guidance for
assessing risks and
pursuing detection when
risks are identified.

125. The ASB should      SAS 56 on analytical     Treadway        Accounting
establish standards to   procedures was issued    Commission      profession
require independent      in response to this      (1987)
accountants to perform   recommendation.
analytical review
procedures in all audit
engagements and should
provide improved
guidance on the
appropriate use of
these procedures.

126. The SEC should      The SEC issued a         Treadway        SEC
require independent      release on the subject   Commission
public accountants to    of timely auditor        (1987)
review quarterly         involvement with
financial data of all    quarterly reports.
public companies before  However, a regulation
release to the public.   was not issued.

127. The ASB should      SAS 58 on reports on     Treadway        Accounting
revise the auditor's     audited financial        Commission      profession
standard report to       statements was issued    (1987)
state that the audit     in 1988 in response to
provides reasonable but  this recommendation.
not absolute assurance   SAS 79 was issued in
that the audited         1995 and supersedes SAS
financial statements     58.
are free from material
misstatements as a
result of fraud or
error.

128. The SEC should      The SEC has the          Treadway        Congress
have the authority to    authority to impose      Commission
impose civil money       civil money penalties    (1987)
penalties in             in certain
administrative           administrative
proceedings (including   proceedings, but not in
Rule 2(e) proceedings)   Rule 2(e) proceedings.
and to seek civil money  The Commission may seek
penalties from a court   civil money penalties
directly in an           in injunctive
injunctive proceeding.   proceedings.

129. Criminal            The SEC has              Treadway        SEC
prosecution of           participated in a        Commission
fraudulent financial     number of programs to    (1987)
reporting cases should   coordinate enforcement
become a higher          activities by the
priority. The SEC        various federal and
should conduct an        state administrators
affirmative program to   charged with this
promote increased        responsibility.
criminal prosecution of
fraudulent financial
reporting cases by
educating and assisting
government officials
with criminal
prosecution powers.

130. The SEC must be     This is a judgment only  Treadway        Congress and
given adequate           the SEC and the          Commission      SEC
resources to perform     Congress can make.       (1987)
existing and additional
functions that help
prevent, detect, and
deter fraudulent
financial reporting.

131. The Office of the   The environment has      Treadway        Financial
Comptroller of the       changed substantially    Commission      institution
Currency, the Federal    since the Treadway       (1987)          regulatory
Reserve Bank, the        Commission issued its                    agencies
Federal Deposit          report, and FDICIA
Insurance Corporation,   imposes many new
and the Federal Home     responsibilities on
Loan Bank Board should   financial institutions,
adopt measures to carry  their auditors, and the
out their own            regulatory system, some
regulatory               of which go beyond
responsibility relating  present SEC
to financial reporting   requirements.
under the federal
securities laws.

132. The AICPA's SECPS   Required by SECPS        Treadway        Accounting
should strengthen its    Standards for            Commission      profession
peer review program by   Performing and           (1987)
increasing review of     Reporting on Peer
audit engagements        Reviews; see SECPS
involving public         Reference Manual
company clients new to   ï¿½2000.70(c).
a firm. For each office
selected for peer
review, the first audit
of all such new clients
should be reviewed.

133. The AICPA's SECPS   Revised SECPS guidance   Treadway        Accounting
requirement for a        on the scope of the      Commission      profession
concurring, or second    concurring review        (1987)
partner, review of the   requirement (SECPS
audit report should be   Reference Manual
revised as part of an    ï¿½2000.39) is
ongoing process of       appropriately
review of this           responsive to this
requirement. Standards   recommendation.
for the concurring
review should, among
other things, (a)
require concurring
review partner
involvement in the
planning stage of the
audit in addition to
the final review stage,
(b) specify
qualifications of the
concurring review
partner to require
prior experience with
audits of SEC
registrants and
familiarity with the
client's industry, and
(c) require the
concurring review
partner to consider
himself a peer of the
engagement partner for
purposes of the review.

134. Public accounting   In March 1980, the       Treadway        Accounting
firms should recognize   SECPS issued the         Commission      profession
and control the          Position Paper of Task   (1987)
organizational and       Force on Certain
individual pressures     Aspects of the
that potentially reduce  Auditor's Work
audit quality.           Environment. The SECPS
                         membership requirements
                         also mandate the
                         preparation and
                         dissemination to all
                         personnel of a
                         "Statement of Firm
                         Philosophy." The
                         illustrative statement
                         provided by the SECPS
                         Reference Manual
                         (ï¿½1000.42) emphasizes
                         the need for an
                         overriding commitment
                         to high-quality
                         professional
                         performance.

135. The SEC should      The SEC considered but   Treadway        SEC
require all public       has not implemented      Commission
accounting firms that    such a requirement.      (1987)
audit public companies   However, AICPA members
to be members of a       may engage in the
professional             practice of public
organization that has    accounting with a firm
peer review and          that audits one or more
independent oversight    SEC clients only if
functions and is         that firm is a member
approved by the SEC,     of the SECPS. Over
such as that specified   1,260 firms are now
by the SECPS of the      SECPS members; they
AICPA's Division for     audit the financial
CPA Firms.               statements of about
                         16,000 SEC clients,
                         representing the vast
                         majority of publicly
                         traded SEC registrants.
                         There are approximately
                         290 CPA firms not
                         associated with the
                         SECPS or the AICPA that
                         serve as auditors for
                         about 460 generally
                         small or inactive SEC
                         clients.

136. The SEC should      The SEC can do this,     Treadway        SEC
take enforcement action  and it has done it once  Commission
when a public            against a member firm    (1987)
accounting firm fails    whose membership in the
to remedy deficiencies   SECPS was terminated
cited by the public      pursuant to an SECPS
accounting profession's  disciplinary
quality assurance        proceeding.
program.

137. The financial       This recommendation has  Treadway        Financial
institution regulatory   been implemented by      Commission      institution
agencies and the public  regulatory action and    (1987)          regulatory
accounting profession    by the issuance of SOP                   agencies and
should provide for the   90-5 by the AICPA                        accounting
regulatory examiner and  Auditing Standards                       profession
the independent public   Division.
accountant to have
mutual access to
information they
develop about examined
financial institutions.

138. State boards of     This has been done by    Treadway        State boards
accountancy should       25 state boards. More    Commission      of accountancy
implement positive       important is the fact    (1987)
enforcement programs     that participation in
that periodically would  an AICPA-approved
review the quality of    practice monitoring
by services rendered by  program is now
the independent public   mandatory for all firms
accountants they         that have partners or
license.                 employees who are AICPA
                         members.

139. Parties charged     The AICPA believed       Treadway        Congress
with responding to       there was a pressing     Commission
various tort reform      need for reform and      (1987)
initiatives should       supported passage of
consider the             the Private Securities
implications that the    Litigation Reform Act
perceived liability      of 1995.
crisis holds for long-
term audit quality and
the independent public
accountant's detection
of fraudulent financial
reporting.

140. Business and        A number of auditing     Treadway        Educators
accounting students      texts discuss the        Commission
should be well-          regulatory scheme,       (1987)
informed about the       quality control
regulation and           standards, and practice
enforcement activities   monitoring programs.
by which government and  Also, AICPA curriculum
private bodies           recommendations specify
safeguard the financial  coverage of the
reporting system and     regulatory and legal
thereby protect the      framework that is
public interest.         designed to protect the
                         public interest.

141. Throughout the      The issuance of the      Treadway        Educators
business and accounting  "expectation gap" SASs   Commission
curricula, educators     and the COSO report has  (1987)
should foster knowledge  drawn the attention of
and understanding of     educators, including
the factors that may     textbook authors, to
cause fraudulent         matters related to
financial reporting and  fraudulent financial
the strategies that can  reporting. In addition,
lead to a reduction in   in part through grants
its incidence.           by certain individuals,
                         there has been a
                         renewed interest in
                         academia (and in the
                         business community) in
                         business ethics.

                         Specific steps taken to
                         address fraud
                         prevention and
                         detection in the
                         classroom are (a)
                         development of an
                         educator workshop on
                         fraud, (b) a fraud
                         session for the 1995
                         Accounting Educators
                         Mini-Conference, and
                         (c) solicitation of
                         teaching cases on fraud
                         which are distributed
                         to all accounting
                         program administrators.
                         Also, auditors'
                         responsibility for
                         fraud detection is
                         included in the content
                         specification outline
                         for the Uniform CPA
                         Examination.

142. The business and    See action taken for     Treadway        Educators
accounting curricula     recommendation 141. The  Commission
should promote a better  COSO report has been     (1987)
understanding of the     widely distributed to
function and the         college libraries and
importance of internal   academics.
controls, including the
control environment, in
preventing, detecting,
and deterring
fraudulent financial
reporting.

143. The business and    The Accounting           Treadway        Educators
accounting curricula     Education Change         Commission
should help students     Commission, funded by    (1987)
develop stronger         accounting firms, has
analytical, problem-     experimented with
solving, and judgment    innovative educational
skills to help prevent,  approaches and is
detect, and deter        working to disseminate
fraudulent financial     the results throughout
reporting when students  the academic community.
become participants in   It plans to issue final
the financial reporting  recommendations in
process.                 about a year. The
                         AICPA's curriculum
                         recommendations specify
                         development of
                         analytical and problem-
                         solving skills as
                         essential components of
                         accounting education.

144. The business and    See action taken for     Treadway        Educators
accounting curricula     recommendation 143. The  Commission
should emphasize         development of ethical   (1987)
ethical values by        values is specifically
integrating their        addressed throughout
development with the     AICPA curriculum
acquisition of           recommendations. In
knowledge and skills to  addition, teaching
help prevent, detect,    cases on ethics issues
and deter fraudulent     have been distributed
financial reporting.     to all accounting
                         program administrators.

145. Business schools    See action taken for     Treadway        Educators
should encourage         recommendations 141 and  Commission
business and accounting  142.                     (1987)
faculty to develop
their own personal
competence as well as
classroom materials for
conveying information,
skills, and ethical
values that can help
prevent, detect, and
deter fraudulent
financial reporting.
Business school faculty
reward systems should
recognize and reward
the contribution of
faculty who develop
such competence and
materials.

146. Professional        The Institute of         Treadway        Accounting
certification            Internal Auditors and    Commission      profession
examinations should      the AICPA have           (1987)
test students on the     undertaken practice
information, skills,     surveys, the results of
and ethical values that  which have been used to
further the              evaluate the
understanding of         appropriateness of
fraudulent financial     their respective
reporting and that       examinations. The
promote its reduction.   Institute of Management
                         Accountants and the
                         Institute of Internal
                         Auditors agreed to
                         place greater emphasis
                         on ethics in their
                         professional
                         examinations. However,
                         the national CPA
                         examination does not
                         address ethics.

147. As part of their    The sponsoring           Treadway        Accounting
continuing professional  organizations of the     Commission      profession
education, independent   Treadway Commission,     (1987)
public accountants,      acting both separately
internal auditors, and   and together, have
corporate accountants    developed training
should study the forces  programs that respond
and opportunities that   to this recommendation.
contribute to
fraudulent financial
reporting, the risk
factors that may
indicate its
occurrence, and the
relevant ethical and
technical standards.

148. Management of       FDI Act ï¿½36(c) and (e)   GAO             Congress and
banks and bank holding   require internal         (1988)          regulators
companies with           control and compliance
securities affiliates    reporting for large
should report on the     banks and thrifts.
adequacy of the
entities' internal
controls and on
compliance with laws
and regulations.
Moreover, as part of
the annual financial
audit, independent
auditors should be
required to review and
report on management
assertions regarding
internal controls and
compliance.

149. The AICPA should                             GAO             Accounting
expeditiously revise                              (1989)          profession
the AICPA Audit and
Accounting Guide for
Savings and Loan
Associations to include
specific steps for
ensuring that those
audits are performed in
a quality manner. The    See para. 6.10 and
guide should include     Chapter 9 of the
detailed discussion and  revised guide.
specific requirements
for, among other
things,                  See para. 1.31-.32 of
                         the revised guide.
(a) identifying the
nature and related
inherent risks of land   See para. 1.47-.55 and
and ADC loans,           para. 2.17 of the
                         revised guide.

(b) following up on the
work of federal
examiners,               See para. 1.47 and
                         para. 2.26 of the
(c) ensuring that        revised guide.
regulatory violations
and formal regulatory
actions are disclosed,
and



(d) properly reporting
all material weaknesses
in internal controls.

150. The AICPA should    The full text of the     GAO             Accounting
communicate the results  GAO report was           (1989)          profession
of GAO's review of the   published in the March
savings and loan (S&L)   1989 issue of the
audits and others'       Journal of Accountancy,
reviews of S&L           which is distributed to
problems. CPA firms      all AICPA members,
performing S&L audits    along with an
should review the        appropriate commentary.
quality of those audits
to help ensure that
                         See para. 5.04, 7.12,
(a) staff performing     and 16.03 of the
the audits have          revised guide.
sufficient knowledge in
S&L operations,          See para. 2.18-19 of
                         the revised guide.
(b) audit methodologies
are specifically
tailored to take into
account changes in the
operations of their      See the AICPA's 1993
individual S&L clients   General Audit Risk
and the S&L industry     Alert, section on
environment,             working paper
                         requirements.
(c) evidence of all
audit work is properly   See para. 2.17 and
documented in the        para. 2.24-.26 of the
working papers, and      revised guide.


(d) financial risks,
regulatory violations
and formal regulatory
actions, and internal
control weaknesses are
fully disclosed in
audit reports.

151. The SEC should      The SEC proposed but     GAO             SEC or
adopt a requirement      never implemented such   (1989)          Congress
that all firms           a requirement. However,
practicing before the    AICPA members may
SEC be subject to        engage in the practice
periodic peer reviews.   of public accounting
If the SEC determines    with a firm that audits
that it does not have    one or more SEC clients
sufficient authority to  only if that firm is a
do this, legislation     member of the SECPS.
would be necessary.      Over 1,260 firms are
                         now SECPS members; they
                         audit the financial
                         statements of about
                         16,000 SEC clients,
                         representing the vast
                         majority of publicly
                         traded SEC registrants.

152. The QCIC            The SEC now has access   GAO             Accounting
(formerly, the Special   to closed case           (1989)          profession
Investigations           summaries prepared by
Committee) should        the QCIC and related
provide the SEC with     POB files. The SEC has
access to all required   concluded (in its 1994
information about the    annual report) that the
cases it investigates.   QCIC process provides
                         added assurances, as a
                         supplement to the SECPS
                         peer review process,
                         that major quality
                         control deficiencies,
                         if any, are identified
                         and addressed on a
                         timely basis.

153. The AICPA should    All of the guides        GAO             Accounting
issue the industry       mentioned in the GAO     (1989)          profession
audit guides currently   report have been
under revision as        updated. The AICPA has
quickly as possible and  devoted substantial
undertake an effective   resources to a program
program to keep all      to keep guides current
guides current.          for recent development,
                         including a loose-leaf
                         service, a separate
                         staff, compensated
                         authors for selected
                         guide projects, and a
                         series of annual audit
                         risk alerts for
                         existing guides, in
                         addition to the general
                         audit risk alerts.

154. The Congress        FDI Act ï¿½36(c) and (e)   GAO             Congress
should amend securities  contain provisions for   (1990)
laws to require direct   internal control and
reporting to the SEC of  compliance reporting
illegalities if the      for large banks and
management and/or board  thrifts. The Private
of directors or audit    Securities Litigation
committee of the issuer  Reform Act of 1995
does not promptly        (ï¿½301) provides for
terminate and correct    auditor reporting of
an illegality.           illegalities to the SEC
                         under certain
                         circumstances.

155. The Congress        These matters were       GAO             Congress
should amend banking     addressed in FDI Act     (1990)
laws as well as          ï¿½36(c) and (e). The
securities laws to       Private Securities
strengthen both          Litigation Reform Act
management's and the     of 1995 (ï¿½301) requires
auditor's                auditors to perform
responsibilities for     procedures to detect
evaluating and           illegal acts and to
reporting on internal    identify related-party
controls (including      transactions (but does
those directly and not   not require auditors to
directly related to the  evaluate and report on
financial statements)    internal controls).
and compliance with
laws and regulations.

156. The Congress        No action taken.         GAO             Congress
should amend securities                           (1990)
laws to require
regulators to share
reports and information
with independent public
accountants concerning
regulators' knowledge
of potential
mismanagement, fraud,
or abuse by companies.

157. The Congress        The Private Securities   GAO             Congress
should amend securities  Litigation Reform Act    (1990)
laws to strengthen       of 1995 (ï¿½301) requires
auditing procedures in   audit procedures for
three areas: related-    identifying related
party transactions,      parties, detecting
compliance with laws     illegal acts, and
and regulations, and     evaluating the ability
early warning of the     of the issuer to
collapse or demise of a  continue as a going
company.                 concern.

158. The Congress        Securities laws were     GAO             Congress
should amend securities  not amended. However,    (1990)
laws to require all      see action taken for
auditors auditing        recommendations 122 and
public companies and     166.
insured depository
institutions to obtain
a peer review.

159. The accounting      Accounting standards     GAO             Accounting
rules and audit          have not been changed.   (1991)          profession
procedures for related-  However, SAS 45 states
party transactions       that the independent
should be enhanced to    accountant should be
clarify that related-    aware that the
party transactions are   substance of a
required to be           particular transaction
accounted for and        could be significantly
reported based on their  different from its
economic substance.      form, and that the
Also, guidance should    financial statements
be provided on how to    should recognize the
determine economic       substance of particular
substance.               transactions rather
                         than merely their legal
                         form. SAS 69 states
                         that the auditor should
                         consider whether the
                         substance of
                         transactions or events
                         differs materially from
                         their form.

160. The Congress        FDI Act ï¿½36(e) requires  GAO             Congress
should enact             auditor reporting on an  (1991)
legislation requiring    institution's
that independent public  compliance with laws
accountants acting as    and regulations.
auditors of federally    However, legislative
insured financial        proposals have been
institutions be          introduced to repeal
required to report to    this requirement.
the institution and the
regulators on the
institution's
compliance with

(a) laws and
regulations that are
identified by the
regulators as relating
to safety and soundness
where compliance can be
objectively determined
and

(b) special regulatory
directives as defined
by the regulators to
maintain prudent
operations or to
restore the financial
health of the
institution.

161. The Congress        See the Private          GAO             Congress
should enact             Securities Litigation    (1991)
legislation requiring    Reform Act of 1995
that independent public  (ï¿½301). Also, SAS 53
accountants acting as    and 54 provide guidance
auditors of federally    in this area.
insured financial
institutions be
required to immediately
pursue indications of
illegality by the
institution and inform
an officer authorized
to sign management's
annual internal control
report and the audit
committee of the
institution if the
accountant determines
that an illegality
likely occurred and,
then, inform the
institution's board of
directors in a timely
manner.

162. The Congress        SAS 53 and 54 provide    GAO             Congress
should enact             guidance in this area.   (1991)
legislation requiring    The Private Securities
that independent public  Litigation Reform Act
accountants acting as    of 1995 (ï¿½301) includes
auditors of federally    requirements for
insured financial        reporting to the SEC
institutions be          illegal acts that have
required to resign from  not been properly
the audit engagement or  addressed by the
report to the            company.
regulators on the
illegality, or both, if
the illegality is
substantial and the
institution does not
take corrective action.

163. To encourage        See action taken for     GAO             Congress
better compliance with   recommendations 160 and  (1991)
laws and regulations,    161.
auditors should be
required to promptly
and fully notify audit
committees and
appropriate regulatory
authorities of
significant illegal
acts that are not
corrected.

164. The Congress        FDI Act ï¿½36(g)(3)(A)(i)  GAO             Congress
should enact             establishes access to    (1991)
legislation that         working papers.
requires the regulators  However, legislation
to periodically review   has not been enacted to
the independent          require regulatory
auditor's procedures     review or reliance.
and working papers for
large institutions as a
basis for regulatory
reliance thereon.

165. The Congress        No action taken.         GAO             Congress
should enact                                      (1991)
legislation requiring
that the regulators
biennially
report to the Congress
on the effectiveness of
the auditing and
management reforms at
large institutions and
that GAO review the
regulators' evaluation
and report to the
Congress.

166. Independent public  The Congress required    GAO             Congress
accountants acting as    peer review for          (1991)
auditors of federally    auditors of large banks
insured financial        and thrifts. See FDI
institutions should be   Act ï¿½36(g)(3)(B).
required to undergo
periodic peer review,
such as that prescribed
by the AICPA's self-
regulatory program, or
another such quality
assurance program
acceptable to the
regulators.

167. The Congress        Sharing of information   GAO             Congress
should enact             under the FDI Act is     (1991)
legislation (a)          incumbent on auditors
requiring that federal   and management, but not
regulators of            regulators. FDI Act
depository institutions  ï¿½36(g)(4) addresses
share with the           removal of auditors.
institution's
independent public
accountant their
knowledge of potential
illegal acts by the
institution, with
exceptions for ongoing
litigation and
investigations, and
(b) authorizing the
regulators to remove
the auditors for cause
with appropriate due
process.

168. The AICPA should    The AICPA revised its    GAO             AICPA
clarify audit            audit guide on employee  (1992)
requirements in its      benefit plans and
audit guide of employee  publicized the results
benefit plans to         of GAO's review of CPA
strengthen audits of     audits of pension plans
employee benefit plans.  (GAO/AFMD-92-14) to its
                         membership in a 1991
                         industry risk alert.

169. The AICPA should    The AICPA publicized     GAO             AICPA
communicate to its       the results of GAO's     (1992)
membership the results   review of CPA audits of
of investigations of     pension plans (GAO/
deficient employee       AFMD-92-14) to its
benefit plan audits.     membership in a 1991
                         industry risk alert.
                         Also, the AICPA's
                         December 1991 Journal
                         of Accountancy provided
                         information about the
                         investigations of
                         employee benefit plan
                         audits.

170. Accounting firms    The new series of PITF   POB             Accounting
should assure that       practice alerts,         (1993)          profession
auditors more            articles that will be
consistently implement,  placed in the Journal
and be more sensitive    of Accountancy
to the need to exercise  illustrating actual
the professional         frauds, and the AICPA
skepticism required by,  audit risk alert series
the auditing standard    put firms and members
that provides guidance   on notice as to their
on the auditor's         responsibilities and
responsibility to        the need for
detect and report        professional
errors and               skepticism.
irregularities.

171. The ASB, the        See action taken for     POB             Accounting
Executive Committee of   recommendation 170. In   (1993)          profession
the SECPS, or some       addition, in May 1996,
other appropriate body   the ASB exposed for
should develop           comment revisions to
guidelines to assist     SAS 53 on errors and
auditors in assessing    irregularities and
the likelihood that      changes to other
management fraud, which  standards in response
may affect financial     to this recommendation.
information, may be
occurring and to
specify additional
auditing procedures
when there is a
heightened likelihood
of management fraud.

172. The AICPA's AcSEC   SOP 94-6 was issued in   POB             Accounting
should promptly adopt a  December 1994.           (1993)          profession
Statement of Position
providing guidance on,
and requiring
disclosure of
information about, the
nature of risks and
uncertainties
associated with the
reporting entity's
operations and
financial condition.

173. The accounting      See the Private          POB             Accounting
profession should        Securities Litigation    (1993)          profession
support carefully        Reform Act of 1995
drafted legislation      (ï¿½301).
requiring auditors to
report to the
appropriate
authorities, including
the SEC, suspected
illegalities discovered
by the auditor in the
course of an audit if
the client's management
or board of directors
fails to take necessary
action with respect to
such suspected
illegalities and the
auditor believes that
they are or may be
significant to the
entity. The profession
should seek adequate
guidance as to the
types of illegalities
that would be
encompassed by this
requirement.

174. The ASB should      This recommendation was  POB             Accounting
revise the auditor's     not adopted by the ASB.  (1993)          profession
standard report to make  However, SOP 94-6 on
the prospective nature   risks and uncertainties
of certain accounting    does require disclosure
estimates clear,         of the use of estimates
including a caveat that  in financial
the estimated results    statements.
may not be achieved.
This communication
should not be written
as a defensive
retrenchment by the
auditing profession,
but rather as a more
realistic and
reasonable explanation
of the limitation of
assurance that can be
provided on certain
accounting estimates.

175. The following       An auditing              POB             Accounting
recommendation of the    interpretation (see AU   (1993)          profession
Macdonald Commission     ï¿½9411.11-15) was issued
should be adopted by     in March 1995 that
ASB in the United        provides guidance when
States: "When new        management adopts
accounting policies are  accounting principles
adopted in response to   for new transactions or
new types of             events.
transactions or new
kinds of assets or
obligations, the
auditor should be
satisfied that the
accounting policies
adopted properly
reflect the economic
substance of the
transaction, asset, or
liability in accordance
with the broad theory
governing present-day
financial reporting and
the established concept
of conservatism in the
face of
uncertainty."(Report of
the Commission to Study
the Public's
Expectations of Audits,
(Macdonald Commission),
June 1988.)

176. Peer reviewers      Amended guidance         POB             Accounting
should evaluate a CPA    addressing this          (1993)          profession
firm's consultation      revision has been
process by which it      developed and adopted
reaches specific         by the SECPS peer
accounting conclusions,  review committee.
and should also inquire
whether that process
leads to accounting
that is appropriate in
the circumstances. In
testing compliance with
a firm's consultation
policies and
procedures, a firm's
peer review team should
evaluate the quality of
the conclusions
reached.

177. The concurring      The SECPS adopted an     POB             Accounting
partner, whose           amendment to its         (1993)          profession
participation in an      concurring partner
audit is a membership    review membership
requirement of the       requirements in April
SECPS, should be         1994 in response to
responsible for          this recommendation.
assuring that those      When such consultation
consulted on accounting  occurs, the concurring
matters are aware of     reviewer is required to
all of the relevant      be satisfied that the
facts and                conclusions reached are
circumstances,           appropriate in light of
including an             all the relevant facts
understanding of the     and circumstances. (See
financial statements in  SECPS Reference Manual
whose context the        (ï¿½1000.39(b)), revised
accounting policy is     in November 1995.)
being considered. The
concurring and
consulting partners
should know enough
about the client to
ensure that all of the
relevant facts and
circumstances are
marshalled, and also
possess the increased
detachment that comes
from not having to face
the client on an
ongoing basis. The
concurring partner
should have the
responsibility to
conclude whether the
accounting treatment
applied is consistent
with the objectives of
recommendation 175.

178. Financial           The Private Securities   POB             Congress
responsibility among     Litigation Reform Act    (1993)
those involved in a      of 1995 (ï¿½201) provides
financial failure or in  for proportionate
fraudulent financial     liability for auditors
reporting should be      found to have
allocated in proportion  negligently violated
to responsibility for    the securities laws.
losses suffered.
Accordingly, "separate
and proportionate"
liability legislation
applicable to both
federal and state
claims should be
enacted by the
Congress. The civil
liability provisions of
RICO should be amended
to eliminate treble
damages in cases that
arise under the federal
securities laws.

179. The Congress        There is no federal law  POB             Congress
should adopt preemptive  to achieve this          (1993)
legislation to permit    objective. However,
the practice of          most states allow firms
accountancy in a form    to practice as limited
that appropriately       liability partnerships
limits the liability of  which limits the
individual members of    liability of partners
the firm.                not at fault.

180. The SEC should      Although suggested as a  POB             SEC
amend its rules to       possible alternative     (1993)
require SEC registrants  within SEC's 1987 rule
to disclose whether      proposed on peer
their auditors have had  review, no action was
a peer review, the date  taken.
of the most recent peer
review, and its
results.

181. The SECPS's         The SECPS Executive      POB             Accounting
membership requirements  Committee formed the     (1993)          profession
should be changed to     PITF. With the
require member firms to  concurrence of the POB,
modify their quality     the SECPS will not
control systems to       change its membership
specify that they take   requirements but has
the following steps in   requested that the QCIC
response to allegations  revise its procedures
of deficiencies in the   to include determining
conduct of an audit of   that a firm that is the
financial statements of  subject of such an
an SEC client (or        allegation conducted
another client           the appropriate
encompassed by the QCIC  analysis. The QCIC has
process) that are made   approved in concept
in litigation against    procedures for ensuring
the member firm or its   that its proceedings
personnel, or in any     determine that member
public proceeding or     firms have
investigation by a       appropriately
regulatory agency.       undertaken actions
                         responsive to items one
(a) perform a complete   through five of the POB
internal analysis of     recommendations.
the audit; review all
relevant work papers,
correspondence, and
other files; and
interview members of
the engagement team,

(b) assess the
capabilities of the
senior audit personnel
and determine whether
the firm should
monitor, reassign, or
terminate such
personnel,

(c) identify any
problems with the
firm's quality control
system or training
activities,

(d) identify any
implications of the
allegations relating to
the adequacy of
auditing, quality
control, or accounting
standards,

(e) identify any
implications of the
allegations relating to
the adequacy of
guidance with respect
to the manner in which
audits are conducted,
including the
evaluation of risks in
audits, and relating to
variations in practice
and the interpretations
of standards that
should be resolved,
and

(f) communicate the
implications identified
in items (d) and (e) in
a structured manner to
the QCIC.

182. The peer review     In view of actions       POB             Accounting
performance standards    taken for                (1993)          profession
should be amended to     recommendations 181 and
require peer reviewers   183 and the related
to test firms'           QCIC involvement, no
compliance with these    separate action by the
modifications (see       peer review committee
recommendation 181) to   is necessary.
their quality control
system.

183. The QCIC            The new series of        POB             Accounting
procedures should be     practice alerts issued   (1993)          profession
modified to require the  by the PITF is sent to
QCIC to develop          all SECPS member firms
additional procedures    and also published in
to permit it, on the     The CPA Letter.
basis of its analysis
of the QCIC cases and
the information
reported to it under
the expanded membership
requirements discussed
above, to facilitate
the resolution of
unresolved audit
practice issues and to
formulate, either by
itself or in
collaboration with
other appropriate
bodies, practice and
guidance directions to
the accounting
profession in a
retrievable format,
such as EITF Abstracts,
which present issues
considered by FASB's
EITF.

184. The SECPS's         The SECPS has amended    POB             Accounting
membership requirements  its requirements to      (1993)          profession
relating to CPEs should  specify that
be revised to require    professionals spending
that a substantial       25 percent or more of
number of the required   their time in providing
hours of continuing      accounting or audit
education relate to      services or with
accounting and           supervisory or review
auditing.                responsibilities with
                         respect to such
                         engagements, except
                         compilations, must
                         obtain at least 40
                         percent of their annual
                         CPEs on subjects or
                         matters related to
                         accounting or auditing.
                         This change became
                         effective for
                         continuing professional
                         years beginning on or
                         after January 1, 1995.

185. Every participant   This recommendation was  AICPA Board of  Management,
in the financial         discussed in a meeting   Directors       advisors, and
reporting process        between AICPA            (1993)          regulators
should bring to the      representatives and the
independent auditor's    Chairman of the SEC on
attention instances of   December 15, 1993. No
suspected financial      further action was
fraud. This includes     taken.
management officials
and advisors such as
attorneys and
government regulators.

186. The system of       See action taken for     AICPA Board of  Congress
joint and several        recommendation 178.      Directors
liability should be                               (1993)
replaced with
proportionate liability
except in cases of
"knowing fraud."

187. A strengthened      A bill (S.1976, "Public  AICPA Board of  Accounting
system should be         Securities Reform Act    Directors       profession and
established to           of 1994"), introduced    (1993)          Congress
discipline individual    on March 24, 1994, by
CPAs and firms that are  Senator Dodd and
guilty of substandard    publicly supported by
work or professional     the AICPA, included
misconduct. This system  provisions that would
should be national in    establish a "public
scope and reside in the  auditing self-
profession with          disciplinary board,"
oversight by the         which, as described in
government. It should    the bill, would
apply to auditors of     accomplish the
SEC registrants and      objective of timely and
other publicly           effective discipline.
accountable entities.    This legislation was
                         not enacted.

188. Investigative and   QCIC pursues quality     AICPA Board of  Accounting
disciplinary actions     control implications of  Directors       profession
should take place        alleged audit failures   (1993)
regardless of whether    irrespective of ongoing
legal proceedings were   litigation.
also under way.

189. It is urgent that   The SEC expressed        Kirk Panel      SEC
the SEC take the lead    qualified support for    (1994)
in helping the           the Private Securities
profession reduce        Litigation Reform Act
exposure to unwarranted  of 1995.
litigation. There are
dangers, not just to
the profession but to
the investing public,
if the current
liability situation
continues to drift
without SEC leadership.
--------------------------------------------------------------------------------


                                    Table II.3
                     
                           Setting Accounting Standards


                                                  Recommendation  Recommendation
Recommendation           Action taken             made by/date    directed to
-----------------------  -----------------------  --------------  --------------
1. A new foundation, to  FAF was created in       Wheat           Accounting
be called the Financial  1972. The 16-member      Committee       profession
Accounting Foundation,   Board of Trustees is     (1972)
should be established,   responsible for (a)
separate from all        selecting and
existing professional    evaluating the members
bodies. It would be      of FASB and GASB, (b)
governed by a board of   seeing that the
trustees composed of     necessary funds are
nine members, whose      provided, and (c)
principal duty would be  overseeing the
to appoint the members   standard-setting
of a financial           process for fairness,
accounting standards     neutrality, and
board and to raise the   openness.
funds for its
operations.

2. A financial           FASB was established in  Wheat           Accounting
accounting standards     1973. The members of     Committee       profession
board should be          FASB serve full-time     (1972)
established with seven   and are fully
(full-time, fully        remunerated. They are
remunerated) members.    required to serve all
The board's function     ties with the
would be to establish    institutions they
standards of financial   served previously.
accounting and           Three members of the
reporting. The board of  present board come from
trustees would appoint   public accounting, two
members of the           from financial
standards board and      management, one from
designate one of them    the investment
as chairman. Members of  community, and one from
the standards board      academia. All possess
would have no other      extensive experience in
affiliations. Four of    the financial reporting
them would be CPAs       field. The original
drawn from public        recommendation that
practice. The other      four members be drawn
three would not need a   from public practice
CPA certificate but      was intended to address
should possess           an early AICPA concern
extensive experience in  and, over time, that
the financial reporting  concern faded.
field.

3. When a standard is    Dissents by members to   Wheat           Accounting
adopted by the           the FASB statements are  Committee       profession
requisite majority, it   published. However,      (1972)
should be published      because AICPA members
without dissents.        are required by Rule
                         203 of the Code of
                         Professional Conduct to
                         comply with the FASB
                         statements and because
                         the SEC requires
                         compliance with those
                         statements, the AICPA
                         does not believe
                         publishing dissents
                         weakens the FASB
                         statements.

4. The standards board   Since the late 1970s,    Wheat           Accounting
should, to the fullest   all FASB meetings        Committee       profession
extent possible, carry   attended by three or     (1972)
out its functions in     more board members are
public.                  open to the public. See
                         also "The 'Process' in
                         Due Process: A Behind-
                         The-Scenes Look at
                         Standards Setting," by.
                         A. Clarence Sampson,
                         the FASB Status Report
                         224, October 14, 1991,
                         for an informative
                         discussion of how FASB
                         obtains public input
                         and at the same time
                         undertakes to educate
                         the public concerning
                         matters on its agenda.

5. Interpretations,      Interpretations are      Wheat           Accounting
when necessary, should   issued by FASB, and      Committee       profession
be issued with the full  FASB interpretations     (1972)
authority of the         have the same authority
standards board.         as the FASB statements
                         under SAS 69.

6. The board of          FASAC was established    Wheat           Accounting
trustees should          and has evolved over     Committee       profession
establish a financial    the years. It presently  (1972)
accounting standards     consists of over 30
advisory council (about  members, with its own
20 members) to work      chairman and executive
with the standards       director. Forty-three
board as advisors.       percent of the members
Members would be         either are involved in
appointed by the         financial management or
trustees for 1-year      are the CEOs of their
terms which could be     respective entities.
renewed indefinitely.    CPA firms, the
They would be entitled   securities industry and
to reimbursement of      other users of
expenses, but no         financial statements,
remuneration, and would  and academics are also
be drawn from a variety  represented on FASAC.
of occupations, but not
more than one-fourth of
the members should be
drawn from any single
sphere of activity. The
chairman of the board
would also be, ex
officio, chairman of
the advisory council.

7. The functions of the  See FAF's 1994 Annual    Wheat           Accounting
advisory council would   Report for details.      Committee       profession
include providing        Among other things,      (1972)
advice to the standards  that report points out
board as to its          that FASAC conducts a
priorities, helping it   formal annual survey of
to set up task forces,   its members' views
reacting to proposed     about FASB projects and
standards, and           priorities, considers
otherwise assisting the  how FASB is allocating
standards board when     its resources, and
called upon to do so.    discusses not only
                         active FASB technical
                         projects but other
                         issues currently facing
                         the accounting
                         profession.

8. In the transition     The last APB Opinion,    Wheat           Accounting
from the APB to the      no. 31, was issued in    Committee       profession
standards board,         June 1973.               (1972)
opinions that have
reached the exposure
draft stage should be
carried through to
completion by the APB.
Other matters on the
APB's agenda should be
transferred to the
standards board.

9. Financial accounting  FASB has been very       Wheat           FASB
research projects        selective in its         Committee
should be rigorously     sponsored research       (1972)
controlled by the        reports in recent years
standards board and by   and has restricted this
its research director    activity to areas
to ensure that they are  directly relevant to
directly germane to the  current and potential
board's needs and are    projects. FASB takes
carried out              advantage whenever
expeditiously.           possible of the
                         extensive academic
                         research being done
                         without FASB
                         sponsorship, and has
                         been successful in
                         encouraging academic
                         researchers to conduct
                         research relevant to
                         its projects.

10. Financial            See action taken for     Wheat           FASB
accounting research      recommendation 9.        Committee
projects should be                                (1972)
carefully defined to
assure that what needs
to be researched is
researched.

11. In financial         Project task forces      Wheat           FASB
accounting research      have generally taken an  Committee
projects, full use       advisory role in FASB-   (1972)
should be made of task   commissioned projects.
forces established with
the cooperation of the
advisory council.

12. Authors of           Authors are consulted    Wheat           FASB
financial accounting     as necessary and         Committee
research studies should  appropriate.             (1972)
be fully consulted in
drafting proposed
standards and their
related history.

13. The basic objective  The Trueblood report     Trueblood       FASB
of financial statements  led FASB to embark on    Committee
should be to provide     its conceptual           (1973)
information useful for   framework project, a
making economic          similar basic objective
decisions.               of financial reporting
                         in CON 1 para. 34. The
                         FASB concepts
                         statements deal with
                         the objectives of
                         financial reporting,
                         the qualitative
                         characteristics of
                         accounting information,
                         and the elements of
                         financial reporting.
                         These statements deal
                         with matters that are
                         the subject of this
                         recommendation.

14. An objective of      The objectives of        Trueblood       FASB
financial statements     financial statements     Committee
should be to serve       are set forth in CON 1   (1973)
primarily those users    para. 28 and 30.
who have limited
authority, ability, or   CON 1 para. 24-27
resources to obtain      discusses the users of
information and who      financial statements.
rely on financial
statements as their
principal source of
information about an
enterprise's economic
activities.

15. An objective of      See CON 1 para. 37-39.   Trueblood       FASB
financial statements                              Committee
should be to provide                              (1973)
information useful to
investors and creditors
for predicting,
comparing, and
evaluating potential
cash flows to them in
terms of amount,
timing, and related
uncertainty.

16. An objective of      See CON 1 para. 42-48.   Trueblood       FASB
financial statements                              Committee
should be to provide                              (1973)
users with information
for predicting,
comparing, and
evaluating enterprise
earning power.

17. An objective of      See CON 1 para. 50-53.   Trueblood       FASB
financial statements                              Committee
should be to supply                               (1973)
information useful in
judging management's
ability to utilize
enterprise resources
effectively in
achieving the primary
enterprise goal.

18. An objective of      See CON 1 para. 54.      Trueblood       FASB
financial statements                              Committee
should be to provide                              (1973)
factual and
interpretative
information about
transactions and other
events that is useful
for predicting,
comparing, and
evaluating enterprise
earning power. Basic
underlying assumptions
with respect to matters
subject to
interpretation,
evaluation, prediction,
or estimation should be
disclosed.

19. An objective should  See CON 1 para. 41 and   Trueblood       FASB
be to provide a          CON 5 para. 26-29 for    Committee
statement of financial   concepts concerning the  (1973)
position useful for      statement of financial
predicting, comparing,   position.
and evaluating
enterprise earning       See CON 5 para. 36-37
power. This statement    for concepts concerning
should provide           incomplete cycles.
information concerning
enterprise transactions  See CON 5 para. 88-90
and other events that    for discussion of
are part of incomplete   recognition of current
earnings cycles.         values.
Current values should
also be reported when    Controversy continues
they differ              among users as well as
significantly from       preparers and auditors
historical cost. Assets  concerning adoption of
and liabilities should   a fair value accounting
be grouped or            model, but disclosure
segregated by the        of some kinds of
relative uncertainty of  current value data has
the amount and timing    been accepted. FASB has
of prospective           required disclosure of
realization or           the current value of
liquidation.             financial instruments
                         (SFAS 107) and has
                         required that certain
                         debt and equity
                         securities be reported
                         at fair value (SFAS
                         115). SFAS 33, issued
                         in 1979, required
                         disclosure of
                         supplementary
                         information about the
                         effects of inflation
                         and changes in specific
                         prices, but that
                         requirement was changed
                         to encouragement by
                         SFAS 89.

20. An objective should  See CON 5, para. 30-57   Trueblood       FASB
be to provide a          and para. 83-87 for a    Committee
statement of periodic    discussion of concepts   (1973)
earnings useful for      of earnings and
predicting, comparing,   comprehensive income.
and evaluating           This issue remains
enterprise earning       controversial. In June
power. The net result    1996, FASB issued an
of completed earnings    exposure draft,
cycles and enterprise    Reporting Comprehensive
activities resulting in  Income, of a proposed
recognizable progress    standard that would
toward completion of     require explicit
incomplete cycles        reporting of
should be reported.      comprehensive income as
Changes in the values    well as net income.
reflected in successive  Comments on this
statements of financial  exposure draft are due
position should also be  in October 1996. The
reported, but            Jenkins Committee has
separately, since they   learned that users want
differ in terms of       information about the
their certainty of       portion of a company's
realization.             reported earnings that
                         is stable or recurring
                         and that provides a
                         basis for estimating
                         sustainable earnings.

21. An objective should  SFAS 95 regarding the    Trueblood       FASB
be to provide a          statement of cash        Committee
statement of financial   flows, issued November   (1973)
activities useful for    1987, established
predicting, comparing,   standards for cash flow
and evaluating           reporting. It
enterprise earning       superseded APB Opinion
power. This statement    No. 19 and required a
should report mainly on  statement of cash flows
factual aspects of       as part of a full set
enterprise transactions  of financial statements
having or expected to    for all business
have significant cash    enterprises in place of
consequences. This       a statement of changes
statement should report  in financial position.
data that require
minimal judgment and
interpretation by the
preparer.

22. An objective of      Financial forecasts      Trueblood       FASB
financial statements     have not been required   Committee
should be to provide     by FASB or others. The   (1973)
information useful for   Jenkins Committee has
the predictive process.  learned that investors
Financial forecasts      and creditors need
should be provided when  forward-looking
they will enhance the    information on which to
reliability of users'    base their own
predictions.             projections, but they
                         do not expect
                         management to provide
                         projections or
                         forecasts. Users also
                         want more information
                         about operating
                         opportunities and risks
                         that are relatively
                         near-term and
                         relatively certain and
                         quantifiable.

23. An objective of      Measuring and reporting  Trueblood       FASB
financial statements     on social interactions   Committee
should be to report on   in financial statements  (1973)
those activities of the  is in its infancy. Some
enterprise affecting     applications of
society that can be      existing GAAP deal with
determined and           enterprise issues
described or measured    affecting society.
and that are important
to the role of the
enterprise in its
social environment.

24. The SEC should       The SEC continues to     Moss            SEC
prescribe by rule a      look to FASB to set      Subcommittee
framework of uniform     accounting standards     (1976)
accounting principles.   and exercises oversight
                         over the process, as
                         explained in its
                         various annual reports
                         to the Congress. The
                         FASB concepts
                         statements, statements
                         of financial accounting
                         standards,
                         interpretations, and
                         other guidance provide
                         the framework
                         contemplated in this
                         recommendation. The SEC
                         issues accounting
                         guidance in the form of
                         rules or
                         interpretations when it
                         thinks it necessary or
                         appropriate.

25. The Congress should  Congressional            Metcalf         Congress
exercise stronger        committees exercise      Subcommittee
oversight of accounting  oversight of the SEC,    Staff Study
practices promulgated    other regulatory         (1977)
or approved by the       bodies, and the
federal government and   accounting profession.
more leadership in       FASB representatives
establishing goals and   have appeared before
policies.                various congressional
                         committees.

26. The federal          The Congress has not     Metcalf         Federal
government should        acted on this            Subcommittee    government
directly establish       recommendation, relying  Staff Study
financial accounting     on oversight by the SEC  (1977)
standards for publicly   of standards set in the
owned corporations. An   private sector by FASB.
alternative could be to  The SEC's annual
use a board similar to   reports to the Congress
the Cost Accounting      cover its oversight of
Standard Board or to     the accounting
establish standards by   standards-setting
GAO.                     process.

27. The federal          See action taken for     Metcalf         Federal
government should        recommendation 26.       Subcommittee    government
establish financial                               Staff Study
accounting standards,                             (1977)
cost accounting
standards, auditing
standards, and other
accounting practices in
meetings open to the
public.

28. The nature of the    FASB involves its        FAF             FASB
standard-setting         constituencies in all    (1977)
process requires the     aspects of the
involvement of all       standards-setting
those who might be       process, including the
affected. Therefore,     selection of its
FASB should lead its     projects, the
constituency and be      preparation of
prepared to follow when  discussion memorandums
a constituent can        and exposure drafts,
demonstrate a better     and the conduct of
way for the              field tests. FASB also
constituency overall.    has made a significant
                         effort to communicate
                         developments to its
                         constituencies,
                         including liaisons with
                         interested professional
                         and business groups.
                         FASB's decisions are
                         made in meetings open
                         to the public and are
                         widely reported. FASB
                         frequently revises its
                         proposals when
                         constituents point out
                         ways to achieve better
                         standards.

29. The makeup of FASAC  FAF appointed an         FAF             FASAC
should be carefully      independent chair to     (1977)
reviewed to make sure    FASAC. As of May 1996,
that it includes a       there were 33 FASAC
representative cross     members of whom 43
section of FASB's        percent represented
constituencies,          preparers, 27 percent
including preparers,     represented auditors,
attestors, educators,    12 percent represented
analysts and advisors,   users, and 18 percent
creditors and            represented educators
investors, government,   and others.
and the public.
Further, the membership
must be carefully
reviewed to make sure
that all are working
members who will take
the time and give the
effort to consider
FASB's technical
concerns. FASAC should
be headed by its own
part-time chairman, a
preeminent individual.
The chairman would be
responsible to see that
FASAC acted as a
"window to the world"
in communicating the
thoughts and progress
of FASB to the
constituency and
feeding back ideas for
improvement.

30. FAF should be        FAF replaced the AICPA   FAF             FASB/FAF
reconstituted to         as the sole elector of   (1977)
include as its           FAF trustees with a
"members" one            panel comprised of one
representative of each   representative from
of the six sponsoring    each of FAF's six
organizations.           sponsoring
                         organizations. As of
                         July 1996, the head of
                         each sponsoring
                         organization is an
                         elector of FAF
                         trustees.

31-33. The                                        FAF
responsibilities of the                           (1977)
four primary accounting
standard-setting bodies
would be

31. ...FAF and the FAF   Recommendations were                     FAF
Board of Trustees.       generally adopted and
(a) The members of FAF   are reflected in
would no longer be the   current operating
Board of Directors of    procedures.
the AICPA, but would be
composed of individuals
representing each of
the sponsoring
organizations. Their
responsibility would be
to elect the FAF Board
of Trustees.
(b) The FAF Board of
Trustees would select
their Chairman and
establish their
committees to recommend
FASB members, fund
FASB's activities, and
perform the oversight
role. The FAF Board of
Trustees would elect
FASB members.
(c) The FAF Board of
Trustees would meet
with FASB at least
quarterly to review
performance against
plan and discuss
operating matters with
FASB.

32. ...the Advisory      Recommendations were                     FASAC
Council.                 generally adopted and
(a) The Advisory         are reflected in
Council members would    current operating
be appointed by the      procedures.
Trustees, the same as
at the present.
However, the FASAC
Chairman would be paid
by and report to FAF.
(b) FASAC would
facilitate the work of
FASB by suggesting from
its membership
participants to serve
on task forces. Also,
it would assist in
obtaining staff and
research help for FASB
from among the
constituency.
(c) FASAC, either in
whole or through
committees, would
become knowledgeable on
the major issues under
consideration by FASB.
It would discuss those
issues with its
constituent groups and
ultimately with FASB.
The Chairman would see
that those views were
crystallized for FASB's
consideration.

33. ...FASB.             Recommendations were                     FASB
(a) FASB members would   generally adopted and
be appointed by the      are reflected in
Trustees, based on       current operating
their knowledge of       procedures.
accounting, finance,
and business, and their
concern for the public
interest. The prior
affiliation of a
potential FASB member
would be considered
only to the extent of
obtaining the proper
mix of talent.
(b) FASB would continue
to have sole
responsibility for the
development and
promulgation of
standards, and would be
responsible for
selecting and managing
the members of its
organization required
to do this work. To the
extent the internal
organization lacks the
personnel resources to
accomplish its work
adequately and on time,
FASB would be expected
to delegate staff and
research work outside
the organization,
retaining its decision-
making authority over
all that work. FASB
would continue to
pursue every
opportunity to involve
their constituents in
the standard-setting
process, soliciting
their input, asking for
their reactions, and
looking for new ideas.
FASB will carefully
guard its independence
but it will see its
constituents as
participants in the
process.
(c) FASB would maintain
continuous
communication with
FASAC, as necessary to
report FASB's views and
progress and to gather
FASAC's views and
suggestions. FASB would
not be bound by the
views of FASAC, but
would be expected to
listen carefully.
(d) FASB would meet at
least quarterly with
the FAF Board of
Trustees to review
operating results.

34. FASB should improve  The resources were       FAF             FASB
its staff relationship.  provided to strengthen   (1977)
FASB should delegate as  the FASB staff,
much work as possible    accelerate its work
to the staff, and it     pace, and improve the
should remain in the     effectiveness of FASB's
decision-making mode.    operations. Since 1977,
But FASB must have       staff work for FASB,
additional qualified     not individual members.
staff so that the        Also in 1977, FASB
system can work, and     began a recruiting
then it must be careful  program designed to
to let the staff         double the size of the
exercise the             Research and Technical
responsibility it has    Activities Division
given them. FASB must    staff. Also, efforts
work with the managers,  were under way to
helping them keep their  increase experience
projects moving, and     levels and abilities of
helping the staff grow.  the staff.

35. The role of FASB's   This recommendation was  FAF             FASB
Research Director        adopted in full by FASB  (1977)
should be more broadly   in 1977. The Director
defined, and his         of the Research and
responsibilities should  Technical Activities
be put on a level at or  Division continues to
almost equal to that of  perform that role.
the FASB members. The
entire research staff
should be consolidated
under the Research
Director.

36. An appropriately     The research and         FAF             FASB
high authority within    technical staff of FASB  (1977)
the FASB structure       was substantially
(probably the Research   increased in size and
Director but perhaps     was upgraded in terms
his associate) should    of experience and
be specifically charged  knowledge through
with the responsibility  selective recruitment
to develop the research  policies, including an
staff.                   increase in the number
                         of FASB Fellowships,
                         and an in-house
                         professional
                         development program.

37. FASB should be       FASB continues to        FAF             FASB
encouraging its staff    actively seek out        (1977)
people to accept         speaking engagements
speaking engagements     and opportunities to
and writing              issue publications.
opportunities because
those outside
involvements have a
number of benefits.

38. FASB should          The other development    FAF             FASB
continue its program of  of subtle but strong     (1977)
exploiting the           significance in 1979
resources available in   was the broadening of
the task forces.         public participation in
Specifically, the task   FASB's research and
forces should be asked   decision-making
to review and comment    processes. Since FASB
on all of the FASB       began operation in
issuances related to     1973, there also has
their projects,          been recurring
beginning with the       discussion of possible
discussion memo but      ways of "leveraging"--
also including the       of making use of the
exposure draft and the   work of other
final statement. The     organizations and the
task force members       expertise of outside
should be enlisted in    individuals. Activities
the campaign to take     both before and after
the pronouncement to     issuance of SFAS 33 are
the public, encouraging  illustrative of
a public discussion of   increased constituent
the issues and           participation. FASB
explaining the           formed task groups in
decision. Further, FASB  six industries to
should experiment with   identify special
the task force idea to   measurement problems
see if the task forces   and propose solutions.
can be used to leverage
FASB.

39. FASB has a positive  In 1977, FASB began      FAF             FASB
responsibility to        having open meetings.    (1977)
encourage and promote    In that year it began
the broadest possible    publishing a status
participation in the     report titled The
due process, and FAF     Board's Plan for Work
has recommended several  on Technical Projects
modifications in the     and Other Technical
present procedures to    Activities, which was
encourage a broader      meant to make public
response. FASB should    meetings more
publish an action        meaningful to FASB's
document, as the basis   constituency. FASB also
for the public hearing.  began mailing of a
                         Notice of Meetings. The
                         Notice provides dates,
                         times, and a brief
                         summary of agendas. The
                         above documents have
                         evolved into a weekly
                         Action Alert and
                         generally a monthly
                         Status Report that have
                         grown and evolved since
                         the FAF
                         recommendations.

40. FASB should          FASB does hold public    FAF             FASB
experiment with several  hearings, but the        (1977)
different approaches to  formats have changed
the public hearing       over time and do not
process: (a) one         reflect the recommended
alternative is that      format. Debates of the
FASB consider            sort described do occur
sponsoring a public      at FASAC and other
proceeding where         forums.
proponents of a
particular view on an
issue could be invited
to argue their
position, debating it
with others who have
presented papers
advocating an opposite
point of view, or (b)
FASB might select
representative papers
submitted to them and
ask the preparers of
those papers to engage
in a public debate with
FASB or staff expert on
the subject.

41. To help FASB meet    This is a continuing     FAF             FASB
its own production       effort of FASB and is    (1977)
plans, it should         part of its current
maintain a more          strategic plan.
explicit, more
effective control
system. We strongly
recommend that FASB
establish a more formal
monitoring and follow-
up program which will
help FASB members
follow the progress of
projects and take
appropriate remedial
action when necessary.

42. FASB should discuss  The most dramatic        FAF             FASB
the issues involved in   change in 1977 was       (1977)
the subjects under       emergence of meetings
deliberation, in public  of FASB, FASAC, task
forums and particularly  forces, the Screening
with FASAC.              Committee on Emerging
                         Problems, as well as
                         the FAF Board of
                         Trustees, into the
                         "sunshine."

43. An economic impact   In 1977, independent     FAF             FASB
analysis should be       research studies were    (1977)
included in important    commissioned on the
exposure drafts.         impact of FASB
Similarly each exposure  Statements 5 and 8, and
draft and each final     three of those studies
pronouncement should     were published in 1978.
review FASB's tentative  Also, in 1977, a call
conclusions as to the    was issued for
objectives of financial  independent research
statements and should    papers on the impact of
explain how the          financial accounting
proposed pronouncement   standards in general.
fits into the overall    Papers selected from
framework.               among the submissions
                         that resulted from that
                         call were presented at
                         a conference on
                         economic consequences
                         sponsored by FASB in
                         1978. It is anticipated
                         that improvements in
                         research techniques for
                         measuring actual or
                         potential economic
                         impact of financial
                         accounting standards
                         will be a continuing
                         concern of FASB.
                         However, the FASB
                         concepts statements
                         emphasize neutrality in
                         setting accounting
                         standards. FASB does
                         not set standards to
                         achieve particular
                         economic consequences,
                         but wants to be aware
                         of the consequences of
                         its actions. The "Basis
                         for Conclusions"
                         sections of FASB
                         exposure drafts and
                         statements discuss,
                         where appropriate, the
                         concepts underlying
                         those accounting
                         standards.

44. When FASB votes on   The voting requirement   FAF             FASB
a pronouncement, a       for adoption of          (1977)
simple majority should   pronouncements by FASB
suffice.                 was reduced from five
                         affirmative votes among
                         the seven members to a
                         simple majority. The
                         FAF Board of Trustees
                         subsequently revised
                         the voting procedures
                         to require a super
                         majority effective in
                         1991 (switched back to
                         five of seven members).

45. FASB should express  See action taken for     FAF             FASB
its tentative views on   recommendations 39 and   (1977)
the major issues         42. Also, FASB has, on
instead of publishing a  occasion, used
neutral discussion       "Preliminary Views"
memorandum. FASB         documents or similar
should, as a matter of   publications to obtain
policy, discuss in       discussion on its
public the issues it is  initial conclusions.
deliberating.

46. FASB must actively   See action taken for     FAF             FASB
search for ways to       recommendations 39, 42,  (1977)
gather informal but      and 45. Also, FASB
public input from        frequently meets with
concerned constituents.  groups of constituents.
It has been suggested
that FASB arrange for
informal meetings on a
regular basis in the
major metropolitan
areas among FASB
members, staff, and
constituents. It has
also been suggested
that FASB sponsor
seminars dealing with
general accounting
problems as well as
specific issues
presently under
consideration. Those
informal contacts will
help FASB members and
staff deal more
effectively with the
issues on their agenda;
in addition, they will
help bring FASB closer
to its constituency.

47. FASB must have a     FASB meets frequently    FAF             FASB
coordinated campaign to  with groups of           (1977)
convince the public of   constituents, but does
the validity of its      not have a formal
statements once they     postissuance program to
are adopted.             discuss views of
                         constituents.

48. FASB should          As noted in its various  FAF             FASB
continue to maintain a   reports to the           (1977)
close but open working   Congress, the SEC and
relationship with the    its staff work closely
SEC, talking about       with FASB in an ongoing
major issues and agenda  effort to improve the
additions. The FASB      standard-setting
staff should also        process. The FASB
maintain a day-to-day    liaison with the SEC
working relationship     includes regular staff
with the SEC staff, as   communication,
one approach to the      quarterly briefings for
current practice.        the Chief Accountant's
                         office staff, and
                         periodic meetings
                         between FASB and SEC
                         Commissioners.

49. FASB should          In 1977, FASB announced  FAF             FASB
continue to be           its intent to evaluate   (1977)
available to hear        its statements that had
appeals of issued        been in effect for at
pronouncements. FASB     least 2 years. For
should also experiment   example, as a result of
with a formal            such evaluations,
postenactment review     FASB's controversial
process. After the       SFAS 8 on foreign
financial community has  currency translation
had 1 or 2 years'        was rescinded and
experience with a FASB   replaced by SFAS 52,
pronouncement, FAF       and SFAS 96 on income
suggests that FASB take  taxes was rescinded and
a retrospective look at  replaced by SFAS 109.
the logic in that        FASB's operating
pronouncement and the    procedures require all
implementation problems  requests for
it may have created.     reconsideration be
                         evaluated in an open
                         meeting. The EITF
                         provides a forum for
                         airing and resolving
                         questions about FASB
                         pronouncements.

50. A change in the      In 1977, the FAF Board   FAF             FASB
funding system is        of Trustees adopted a    (1977)
important to maintain    resolution limiting
the credibility of       contributions to FAF to
FASB's independence and  $50,000 from any firm
also to provide a sense  in a single year. That
of assurance for FASB    change took effect in
and the staff.           1978. In 1977, efforts
                         to broaden the base of
                         support for FAF were
                         successful, especially
                         in the industry sector.

51-58. Recommendations                            Metcalf
of the FAF Structure                              Subcommittee
Committee (made in                                (1977)
1977) endorsed by the
Metcalf Subcommittee

51. ...open all aspects  All FASB meetings are                    FASB
of FASB to public view.  open to the public.
                         Also, see "The
                         'Process' in Due
                         Process: A Behind-The-
                         Scenes Look at
                         Standards Setting," by
                         A. Clarence Sampson,
                         the FASB Status Report,
                         224, October 14, 1991.

52. ...increase the      Involvement of all                       FASB
involvement in FASB      members of FASB's
from all segments of     constituency in its
its broad constituency.  work is reflected in
                         the activities of
                         FASAC, the various task
                         forces appointed to
                         assist FASB in the
                         development of
                         standards, the public
                         hearings and comment
                         process, and FASB's
                         EITF. The FASB Status
                         Report is a
                         communications device
                         that seeks, among other
                         things, to encourage
                         involvement by
                         individuals who are not
                         members of those
                         groups.

53. ...strengthen the    FASB is effectively                      FASB
organization of FASB.    organized and fully
                         staffed to carry out
                         its mission.

54. ...accelerate the    FASB has issued 125                      FASB
FASB work pace.          statements, as well as
                         many interpretations,
                         technical bulletins,
                         and EITF consensuses.
                         Some in the preparer
                         community have
                         complained that FASB is
                         doing too much, too
                         fast, but such
                         complaints are the
                         inevitable result of
                         mandates for change.

55. ...establish         The FASB technical plan                  FASB
planning goals.          is published in its
                         Status Reports.

56. ...issue documents   The FASB Status Reports                  FASB
explaining proposed      and Action Alerts
standards in layman's    discuss current
language before public   projects in layman's
hearings are held.       terms.

57. ...systematically    All requests to                          FASB
review existing          reconsider a standard
standards.               are discussed by FASB
                         in an open meeting.
                         Also, the EITF
                         addresses emerging
                         issues in open
                         meetings.

58. ...broaden the base  The FAF annual reports                   FASB
of FASB financial        discuss the source of
support.                 contributions.

59. All segments of      See FAF annual reports   Metcalf         FAF
FASB's broad             for the composition of   Subcommittee
constituency must be     FAF, FASB, and FASAC.    (1977)
fairly represented at    Also, see action taken
all levels of FASB's     to recommendation 90.
operation--from FAF,     FAF believes that all
FASB, and its staff to   constituencies are
the advisory councils    adequately represented.
and task forces. FASB's  Also, efforts to
broad constituency       enhance the involvement
includes the public,     of preparers and users
the investors and        are ongoing. See, for
creditors, the           example, the July 8,
analysts, the            1986, response of FASB
investment advisers and  Chairman Kirk to the
underwriters, the        Phase II report of the
preparers, the           Special Review
attestors, the           Committee of the FAF
educators, and the       Board of Trustees.
governments.

60. FASB should adopt    FAF has adopted,         Metcalf         FASB
and strictly enforce     maintained, and          Subcommittee
new rules that will      enforced rules to        (1977)
correct the              ensure the fact and
deficiencies in its      appearance of
policies, which are      independence by FASB
designed to prevent      members and staff. Note
FASB members and senior  that a July 1985 study
staff.                   conducted by Louis
                         Harris and Associates,
                         Inc., for FAF,
                         consisting of personal
                         interviews with 451
                         leaders in the
                         financial, investment,
                         and accounting
                         communities, revealed
                         that by an 81 to 15
                         margin, those leaders
                         believe FASB is
                         objective in its
                         decision-making to
                         ensure the neutrality
                         of information
                         resulting from its
                         standards. According to
                         FASB, most criticisms
                         of FASB are that it is
                         too independent, too
                         conceptual, and too
                         theoretical. FASB is
                         not aware of any
                         instances in which the
                         personal or financial
                         integrity of FASB or
                         its staff has ever been
                         criticized.

61. FASB should make a   This information is      Metcalf         FASB
wide public              reviewed by the FAF      Subcommittee
distribution of          Board of Trustees, but   (1977)
information reported by  is not available for
individuals under its    public comment.
conflict-of-interest
policies through such a
medium as its annual
report.

62. FASB should          Meetings of FASB are     Metcalf         FASB
annually publish a list  announced in the Action  Subcommittee
of the meetings held     Alert. Private meetings  (1977)
with various parties     (meetings with staff
and interest groups,     and with one or two
along with a synopsis    FASB members) are not
of the topics            published. Any meeting
discussed.               with outsiders that
                         involves three or more
                         FASB members is a
                         public meeting.

63. Immediate            This is an area that     Metcalf         FASB
recognition should be    has been frequently      Subcommittee
given to the financial   reviewed--and still is.  (1977)
reporting problems of    FASB and AICPA actions
small businesses and     in this area have
the accounting firms     focused on disclosures
that serve them.         and on the use of other
Reporting requirements   bases (tax, cash) of
that are necessary for   accounting,
publicly owned           particularly when
corporations may be      financial statements
inappropriate for small  are not audited. In
businesses.              1995, FASB began a
                         project to evaluate
                         disclosure
                         effectiveness and
                         issued a paper for
                         public comment (FASB is
                         currently considering
                         comments received).
                         FASB members and staff
                         meet regularly with
                         small business groups
                         and hold regular
                         meetings with the users
                         of small business
                         financial statements
                         and with bankers who
                         serve small businesses.
                         FASB representatives
                         have been active
                         participants in the SEC
                         Government Business
                         Forum on Small Business
                         Capital Formation since
                         its founding over 10
                         years ago.

64. Increased            See action taken for     Metcalf         FASB and
representation in        recommendation 52. In    Subcommittee    accounting
standard-setting bodies  particular, FASB         (1977)          profession
from small businesses    members and staff do
and accounting firms     not represent any
must be achieved.        particular group. They
Organization of          meet with the PCPS
standard-setting bodies  Technical Issues
should be improved to    Committee on a regular
focus knowledgeable      basis to obtain input
attention on the         about the special needs
problems of small        of private companies
businesses and the       and the CPAs who serve
accounting firms which   them. Industry and
serve them.              small CPA firm
                         representatives are
                         included on AcSEC and
                         on the various AICPA
                         industry committees,
                         and the ASB includes
                         representatives of
                         small CPA firms.

65. Uniformity in the    FASB concepts emphasize  Metcalf         FASB and
development and          that similar             Subcommittee    accounting
application of           transactions must be     (1977)          profession
accounting standards     accounted for
must be a major goal of  similarly. FASB
the standard-setting     statements,
system.                  interpretations, and
                         technical bulletins;
                         EITF consensuses; and
                         AcSEC statements of
                         position and practice
                         alerts, coupled with
                         the GAAP hierarchy and
                         related requirements
                         established in SAS 69,
                         have significantly
                         narrowed the number of
                         alternatives available
                         to management. Also,
                         AICPA industry audit
                         and accounting guides
                         are being used as a
                         vehicle to achieve more
                         uniform application of
                         accounting principles.
                         For example, the
                         banking guide and the
                         savings institutions
                         guide, which differ in
                         some respects, were
                         combined into one guide
                         (issued in April 1996).

66. Until uniformity in  See action taken for     Metcalf         FASB and
the development and      recommendation 65.       Subcommittee    accounting
application of           Interestingly, users     (1977)          profession
accounting principles    have informed the
is achieved, the public  Jenkins Committee that
should be informed of    information about a
the effect on financial  company that is
statements from using a  consistent over time is
particular accounting    valued more highly than
standard to report a     information that is
transaction, rather      comparable between two
than using any of the    or more companies--
acceptable               they believe
alternatives.            differences in
                         accounting principles
                         and methods of
                         application should be
                         permitted as long as
                         there is disclosure.

67. The SEC must         See the SEC's annual     Metcalf         SEC
vigorously oversee the   reports to the Congress  Subcommittee
present accounting       for a description of     (1977)
standard-setting system  its oversight.
on behalf of the
public. The standards
and operation of the
system should not be
accepted automatically
by the SEC, but should
be evaluated and
questioned to determine
if they meet the public
policies set forth by
the Congress.

68. The SEC's annual     See the 1978 SEC staff   Metcalf         SEC
report to the Congress   report, The Accounting   Subcommittee
on accounting matters    Profession and the       (1977)
should comment on        Commission's Oversight
progress made in         Role, various SEC
reaching the public      annual reports to the
policies established by  Congress, as well as
the Congress.            SEC testimony in
                         various congressional
                         hearings over the
                         years.

69. There is continued   The SEC, through its     Metcalf         SEC
need for the SEC to      programs and             Subcommittee
exercise vigorously its  activities, has          (1977)
own rule-making and      continued to oversee
enforcement activities   and regulate the
in order to achieve      securities markets and
reforms.                 related financial
                         disclosures.

70. A separate note,     FASB did not agree that  Cohen           Accounting
similar to that for      there was a need to      Commission      profession
accounting policies,     amend SFAS 5 for this    (1978)
should be required for   recommendation.
uncertainties.           Moreover, SOP 94-6 on
                         disclosure of risks and
                         uncertainties explains
                         that the required
                         disclosures "...are not
                         mutually exclusive. The
                         information required by
                         some may overlap.
                         Accordingly, they may
                         be combined in various
                         ways, grouped together,
                         or placed in diverse
                         parts of the financial
                         statements, or included
                         as part of the
                         disclosures made
                         pursuant to the
                         requirements of other
                         authoritative
                         pronouncements."

71. FASB should amend    FASB did not formally    Cohen           FASB
APB Opinion 20 to        address this             Commission
require a standard note  recommendation. Note,    (1978)
to financial statements  however, the present
covering accounting      requirement imposed by
changes (both changes    the ASB for an
in accounting            explanatory paragraph
principles and changes   in the auditor's report
in accounting            when there has been a
estimates).              material change.

72. While these efforts  In 1981, FASB undertook  FAF             FAF, FASB, and
of FASB to reach a       three new activities to  (1979)          FASAC
wider public are         increase public
significant, more is     awareness of its
needed. The FAF Board    activities: (a)
of Trustees, FASB, and   produced an audio/
FASAC should consider    visual presentation
developing additional    stressing the openness
programs to increase     and responsiveness of
public awareness of      the FASB procedures,
FASB, its current        (b) distributed a book
activities, plans, and   titled Understanding
accomplishments.         Inflation Accounting,
                         and (c) started a new
                         publication titled
                         Highlights of Financial
                         Reporting Issues,
                         designed to help
                         constituents who are
                         not technically
                         oriented understand the
                         implications of major
                         FASB projects. FASB has
                         continued to do these
                         kinds of public
                         awareness steps and
                         many more. Examples
                         include FASB's recent
                         series of special
                         reports, scores of
                         articles in magazines,
                         an informational video,
                         and a worldwide web
                         site.

73. FASB should          One development in 1979  FAF             FASB
experiment more with     was the broadening of    (1979)
hearings in other parts  public participation in
of the country. FASB     FASB's research and
might consider not       decision-making
having full attendance   processes. Activities
at all FASB hearings.    both before and after
                         issuance of SFAS 33 are
                         illustrative of
                         increased constituent
                         participation.
                         Following the issuance
                         of a discussion
                         memorandum in July
                         1979, arrangements were
                         made with three
                         societies of financial
                         analysts and three
                         chapters of Robert
                         Morris Associates for
                         them to sponsor
                         seminars based on the
                         discussion memorandum.
                         FASB members and staff
                         participated in each of
                         the sessions. FASB has
                         continued its efforts.
                         A more recent example
                         was in 1993 when FASB
                         held a hearing in
                         Silicon Valley,
                         California on stock
                         compensation.

74. It may be necessary  Today, most FASB         FAF             FASB
for FASB to publicize    documents include an     (1979)
further the              executive summary that
availability of          is designed to
nontechnical summaries,  communicate key
such as discussion       provisions in everyday
memorandums and          language. FASB is
exposure drafts.         constantly striving to
Additionally, FASB       make its documents more
should continue its      accessible.
efforts to improve the
format and style of its
pronouncements.

75. Communication of     FASB members express     FAF             FASB
FASB members' leanings   their views in a         (1979)
as early as possible is  variety of forums.
desirable by whatever    However, it is
vehicle is most          important to recognize
appropriate at the       that FASB members
time.                    strive to keep an open
                         mind to opposing views
                         throughout FASB's due
                         process.

76. FASAC should         FASAC has, from time to  FAF             FASAC
consider ways to         time, formed committees  (1979)
improve its input to     to assist FASB in its
FASB on major technical  efforts.
matters. This is
probably best
accomplished through
the use of committees.

77. FASB has increased   Task force activity      FAF             FASB
its use of task forces.  varies through the life  (1979)
FASB should continue     of a technical project,
the practice of meeting  and the best time to
with members of task     involve a task force
forces after the public  varies from one project
hearings. FASB can       to the next.
continue to improve its
use of task forces in
all phases of a
project, particularly
during FASB's
deliberative
proceedings, although
care should be taken to
avoid slowing down
decision-making
processes.

78. FASB should          See action taken for     FAF             FASB
consider the potential   recommendation 95.       (1979)
economic consequences
in its standard-
setting process, but in
doing so it should
recognize that one
cannot set accounting
standards based on an
amalgam of opinions as
to impact of a standard
on individual entities.
As in other areas of
its work, FASB needs to
search for additional
ways to show the extent
to which it considers
economic consequences
in making its
pronouncements.

79. The FAF Board of     See action taken for     FAF             FAF
Trustees might be        recommendation 90.       (1979)
expanded by still
another at-large
trustee to increase
constituency
participation at the
Trustee level.

80. Where there appears  This has been FASB's     FAF             FASB
to be continuing deep    practice for several     (1979)
concern, FASB should     years. All requests for
advise its constituents  interpretation or
that it is ready to      amendment are
consider requests to     considered in public
interpret or amend any   FASB meetings.
pronouncement without
waiting for formal
periodic review.

81. FASB should give     A statement of FASB's    FAF
high priority to         mission was developed    (1982)
improving relations      and published in a new
with its                 edition of Facts About
constituencies. This     FASB along with
would include upgrading  information about the
all support services     standard-setting
that involve direct      structure, how
contact with members of  decisions are made to
FASB's constituencies,   place items on FASB's
developing a long-       agenda, and the due
range plan to educate    process required by the
the public, and          Rules of Procedure.
providing the necessary  More than 85,000 copies
staff and budget. The    were distributed.
objective would be to    Speeches delivered by
fulfill FASB's           FASB members exceeded
educational mission, to  200. The newsletter
broaden the public       Status Report was
understanding of FASB's  redesigned to
work and achievements,   incorporate viewpoints
and to enhance the       and highlights
goodwill of FASB's       eliminating confusion.
constituents.            Efforts were made to
                         identify special groups
                         having an interest in
                         particular technical
                         projects and to
                         establish two-way
                         communication with
                         them. FASB's current
                         strategic plan includes
                         an objective to build a
                         broader acceptance for
                         the FASB process among
                         constituents.

82. FASB should          (a) FASB's EITF          FAF             FASB
continue to follow its   provides input on        (1982)
present due process      implementation and
procedures. Refinements  practice problems. The
of those procedures      work of other task
that should be           forces is limited to
considered are (a)       specific projects.
increasing the use of    (b) FASB members and
task forces to work      staff often meet with
with staff in preparing  constituent groups
recommendations for      during the comment
FASB consideration in    period. Those meetings
connection with          are designed to answer
selected implementation  questions and explain
and practice problem     documents.
projects, (b) assisting  (c) Exposure Drafts now
respondents in           include a "Notice to
preparing comments on a  Recipients" that
Discussion Memorandum    identifies key issues.
or Invitation to         Many constituents use
Comment, and (c)         the series of questions
identifying in exposure  raised in the Notice to
drafts key changes to    structure their comment
present accounting       letters.
practice that are
expected to result,
industries most likely
to be impacted, and
issues of particular
sensitivity on which
FASB is seeking
comments.

83. FASB should take     FASB actively solicits   FAF             FASB
steps to try to          comments from those      (1982)
increase the number of   groups and has made a
responses to Discussion  number of attempts to
Memorandums,             encourage their
Invitations to Comment,  participation. However,
and Exposure Drafts      comment letters from
from small businesses,   those groups continue
security analysts,       to represent a small
investment advisors,     fraction of the total
bank credit officers,    comments received.
and nonfinancial
executives.

84. FASB should develop  In response to the       FAF             FASB
a plan, for              recommendations of an    (1982)
consideration by the     earlier task force on
FAF Board of Trustees,   timely financial
to provide timely        reporting guidance,
guidance for             FASB formed the EITF,
implementation           whose members are drawn
questions and emerging   primarily from public
issues.                  accounting firms but
                         also include
                         representatives of
                         large companies and
                         major associations of
                         preparers and CPAs who
                         serve small businesses.
                         The chief accountant of
                         the SEC attends
                         regularly as an
                         observer with the
                         privilege of the floor.
                         A FASB committee to
                         review the EITF
                         concluded in its 1995
                         report that the EITF
                         serves a valuable
                         function and satisfies
                         many needs of a variety
                         of constituents.

85. The process by       The process continues    FAF             FASB
which a subject is       to evolve and            (1982)
considered for addition  frequently involves a
to the FASB agenda       wide cross section of
should be better         FASB's constituencies.
communicated to FASB's
constituencies.

86. Accelerate progress  CON 5, concerning the    FAF             FASB
on the accounting        recognition and          (1982)
recognition and the      measurement in
income, cash flows, and  financial statements of
financial position       business enterprises,
projects. The concepts   was issued in 1984. It
statements that are the  did not resolve all the
objectives of these      issues, and work on
projects are important   these concepts
and should be published  continues at the
as quickly as is         standards level. SFAS
feasible.                95, concerning the
                         statement of cash
                         flows, was issued in
                         1987.

87. Although the         FASB is constantly fine  FAF             FASB
organizational           tuning its               (1982)
structure of FASB and    organization. The basic
staff works well with    structure of FASB and
the principal            staff remains similar
incumbents, FASB should  to the structure that
review its internal      existed in 1982,
organizational           although the number of
structure to ascertain   activities has expanded
whether it will          considerably. For
continue to meet the     example, FASB's EITF
long-term needs of FASB  was formed in 1984,
as incumbents are        and, since 1990, FASB
replaced.                has devoted much more
                         effort to international
                         issues.

88. (a) FASB and its     FASB submitted a report  FAF             FAF and FASB
staff should be asked    to the Special Review    (1985)
to assess in the first   Committee in July 1986.
half of 1986 the         A Special Review
feasibility and          Committee of the FAF
desirability of          Board of Trustees
shortening the due       reviewed this report
process and of           and issued a report in
modifying the            December 1986. In the
"sunshine" rule within   report, the Special
the original spirit of   Review Committee
that rule, (b) a         concluded the
special committee of     following: "The
the FAF Board of         Committee recommends
Trustees should be       that the FAF Board of
appointed to consider    Trustees accept and
these matters, (c) FASB  approve the responses
should submit a report   received and recorded
to the special           herein, and further
committee by mid-1986,   recommends that the FAF
setting forth possible   Board of Trustees
courses of action and    encourage and support
pros and cons for each   the FASB staff in the
of them, and (d) the     follow-up commitments
special committee        included in the
should submit            responses."
recommendations to the
FAF Board of Trustees
by year-end 1986.

89. FASB and its staff   Actions taken to         FAF             FASB
should be asked to       improve participation    (1985)
consider in the first    have included efforts
half of 1986 ways of     to gain participation
broadening               of users and CEOs on
participation by and     task forces, FASAC, and
communication with       the FAF Board of
corporate CEOs and       Trustees; speeches to
users of financial       user groups; meetings
information. FASB        of FASB members or
should report on its     staff with user groups;
progress to the FAF      special mailings;
Board of Trustees in     telephone contacts with
the second half of       constituent groups; and
1986, specifying its     informal meetings.
recommendations for      Further plans for
encouraging constituent  broadening user
involvement.             participation include:
                         (a) expanding the
                         number of speeches
                         given to user groups,
                         (b) considering
                         modifying expense
                         reimbursement policy so
                         that contact may be
                         made with user groups
                         unwilling to pay
                         expenses; and
                         (c) expanding the
                         number of general
                         liaison meetings with
                         user groups. Further
                         plans for broadening
                         CEO participation
                         include: (a) expanding
                         lists of CEOs and audit
                         committees receiving
                         copies of Status
                         Report, (b) expanding
                         use of personalized
                         letters from FASB to
                         CEOs, (c) formalizing
                         and expanding use of
                         regional and industry
                         CEO groups; and (d)
                         encouraging the FAF
                         Board of Trustees to
                         elect CEOs to the FAF
                         Board of Trustees and
                         FASAC. FASB's current
                         strategic plan includes
                         an objective to build a
                         broader acceptance for
                         the FASB process among
                         constituents.

90. The FEI, NAA, and    The FAF Board of         FAF             FAF
BRT have recommended     Trustees accepted the    (1985)
greater representation   AICPA's offer to
on the FAF Board of      relinquish the ex
Trustees from business   officio seat on the FAF
and industry. The        Board of Trustees and
Special Review           amended FAF's bylaws to
Committee recommends     increase the number of
that the FAF Board of    at-large trustees from
Trustees take the        two to three. One of
following steps: (a)     the two at-large seats
accept the AICPA's       has been filled by the
offer to relinquish the  election of a retired
ex officio seat on the   partner of a regional
FAF Board of Trustees    public accounting firm.
heretofore held by the   The other was filled by
Institute's chief        election of a high-
officer, (b) amend the   level corporate
FAF bylaws to increase   executive. Since then,
the number of at-large   in July 1996, FAF
trustees from two to     agreed to amend its
three, and (c) elect to  bylaws to add two new
the unfilled at-large    at-large trustees,
seats on the FAF Board   replacing a trustee
of Trustees individuals  position held by the
with business,           accounting profession
professional,            and a position held by
government, or other     FEI. In addition, FAF
experience who, in the   is in the process of
judgment of the FAF      filling two existing
Board of Trustees, can   at-large vacancies with
contribute to advancing  public representatives.
the purpose of FAF. The
Special Review
Committee believes that
a chief executive
officer from business
or industry would make
a worthwhile
contribution.

91. The Special Review   The Chairmen of FASB     FAF             FAF, FASB, and
Committee recommends     and GASB and the         (1985)          GASB
that steps be taken to   Advisory Councils, as a
increase the FAF Board   part of their
of Trustees' knowledge   educational role vis-
of FASB and GASB         a-vis the FAF Board of
activities. The Special  Trustees, are
Review Committee         encouraged to bring to
recommends that (a) the  the FAF Board of
FAF Board of Trustees    Trustees candid
should recognize that    assessments of
the chairs of FASB and   nontechnical problems,
GASB and their           both present and
respective Advisory      potential, on which the
Councils have an         FAF Board of Trustees
educational role vis-    may be able to assist.
a-vis the FAF Board of   The FAF Board of
Trustees, (b) the FAF    Trustees formalized a
Board of Trustees        program of regular
should formalize what    trustee observation of
has been an informal     meetings of the two
program of trustee       standard-setting
observation of meetings  Boards, their Advisory
of the two standard-     Councils, and FASB's
setting Boards,          EITF. (In the past,
Advisory Councils, and   such observation has
FASB's EITF, and (c) in  occurred only on an
keeping themselves       occasional basis.)
informed about the
progress of specific
technical projects
undertaken by the two
Boards, the FAF Board
of Trustees should
focus on the nature of
controversies that may
arise concerning those
projects.

92. The Special Review   The FAF Board of         FAF             FAF and FASB
Committee recommends     Trustees accepted        (1985)
that the FAF Board of    recommendations at
Trustees defer           their July 1986
consideration of FASAC   meeting, except for the
matters until the        recommendation to
Special Review           eliminate permanent
Committee on the Future  FASAC seats of four
Role of FASAC completes  sponsoring
its work and submits it  organizations.
to FASAC in the first
half of 1986. The FASAC
chair then would be
asked to submit
recommendations for
consideration by the
FAF Board of Trustees
at their meeting in
July 1986.

93. The Special Review   FASB and staff has       FAF             FASB
Committee recommends     responded with a         (1985)
that FASB and its staff  special issue titled
pay particular           FASB Analyzes Small
attention to the small   Business Concerns About
business area in 1986    Accounting Standards.
and urges FASB to meet   The issue summarizes
with interested groups   FASB's beliefs
and then determine what  concerning alternatives
reasonably can and what  to GAAP, simplification
cannot be done to        of standards, and
alleviate the problems   differential
of small businesses and  measurement. FASB
small public accounting  considers small
practitioners regarding  business issues on
GAAP, and finally to     every project, and
publish those            seeks advice on such
conclusions and the      matters from
reasons for them.        organizations concerned
                         with these issues. On
                         all projects, FASB will
                         seek answers to the
                         following with regard
                         to whether small
                         businesses should be
                         treated differently
                         than corporations: (a)
                         whether the different
                         treatment would
                         alleviate "standards
                         overload," (b) whether
                         a proposed solution
                         would enhance or
                         diminish the
                         credibility of
                         financial reporting,
                         (c) whether there is
                         persuasive evidence
                         that user needs are
                         different for different
                         entities or that costs
                         outweigh the benefits,
                         and (d) whether there
                         is a difference in the
                         economic basis of a
                         transaction for
                         different entities.

94. While the EITF       At the July 1986         FAF             FASB
received general         meeting of the FAF       (1985)
approval in both the     Board of Trustees,
Harris survey and the    James J. Leisenring, as
Special Review           director of FASB
Committee's interviews,  research and technical
some constituents are    activities and as EITF
concerned as to whether  chair, reviewed for the
the Task Force is, in    FAF Board of Trustees a
effect, establishing     full report on EITF,
standards. Some also     dated June 27, 1986,
believe that there is    developing the reasons
insufficient             the Task Force was
representation in the    established, the broad-
membership of the Task   range composition of
Force by persons other   membership, the purpose
than practicing CPAs.    of EITF in assisting
The Special Review       FASB in identifying
Committee believes       financial reporting
these matters should be  problems as they
the subject of a report  emerge, the
by the Task Force chair  accomplishments of EITF
to the FAF Board of      in suggesting solutions
Trustees in 1986.        to problems, and the
                         potential for solving
                         problems through
                         discussion and
                         formation of consensus
                         on appropriate
                         accounting. It was the
                         recommendation of the
                         FAF Board of Trustees
                         that the full report on
                         EITF be made available
                         to interested
                         constituents. A FASB
                         committee conducted a
                         10-year review of the
                         EITF and concluded in
                         its 1995 report that
                         the EITF was serving a
                         valuable function.

95. In its               CON 2 para. 143          FAF             FASB
consideration of the     concluded that the       (1985)
costs/benefits of        following two actions
specific standards and   should be taken: (a)
proposed standards,      before a decision is
FASB should be           made to develop a
encouraged to find ways  standard, FASB needs to
to articulate its        satisfy itself that the
positions to a greater   matter to be ruled on
degree and make them     represents a
more visible to the      significant problem and
constituency.            that a standard that is
                         promulgated will not
                         impose costs on the
                         many for the benefit of
                         a few and (b) FASB
                         should explain the
                         benefits of the
                         resulting financial
                         reporting, for example,
                         if a standard is less
                         costly and only
                         slightly less
                         effective. FASB
                         attempts to do that in
                         the basis for
                         conclusions for each of
                         its standards and will
                         continue to do so.

96. FASB should discuss  The FASB staff is        FAF             FASB
with appropriate         complemented by          (1985)
constituents ways of     Fellows, consultants,
making employment on     and task force members.
the FASB technical       To encourage
staff more attractive    participation in the
to persons with          Industry Fellow
professional or          Program, FASB undertook
business careers. Among  an active campaign in
the ideas that might be  1984 and 1985. Current
explored are short-      Industry Fellows were
term assignments for     made available for
persons at or near       speeches, the program
retirement and on leave  was publicized in
or loan from their       accounting periodicals,
firms for specific       Industry Fellowship
assignments. The         meetings were sponsored
president of NAA has     by accounting
offered to form a        organizations, and FASB
coordinating committee   has encouraged one-on-
for this purpose.        one meetings with
                         companies interested in
                         the program. When
                         appropriate, FASB has
                         utilized executives
                         upon retirement from
                         industry or on loan
                         from their companies.

97. Enhance the          AcSEC issued SOP 94-6    Big 7           Accounting
relevance of financial   in December 1994. It     (1986)          profession
statements through       calls for increased
improved disclosures of  disclosures of risks
risks and                and uncertainties.
uncertainties.

98-101. A business                                AICPA Task
enterprise should make                            Force on Risks
disclosures beyond                                and
those now generally                               Uncertainties
made in financial                                 (1987)
reports about the risks
and uncertainties
facing it as of the
date of the financial
reports. The
disclosures should
include

98. ...a description of  SOP 94-6 requires                        FASB
the kinds of products    disclosure of these
or services the          matters.
enterprise sells, its
principal markets, and
the locations of those
markets.

99. ...an explanation    See action taken for                     FASB
that the preparation of  recommendation 98.
historical financial
information requires
the use of management's
estimates.

100. ...a discussion of  See action taken for                     FASB
significant, change-     recommendation 98.
sensitive estimates
used by management to
measure assets and
liabilities at the
reporting date.
Disclosure would be
required for any
significant estimate
used in the
determination of the
carrying amount of an
asset or a liability at
the current reporting
date that based on
facts and circumstances
existing at that date,
is particularly
susceptible to changes
that could result in
material effects on
near-term results of
operations.

101. ...information      See action taken for                     FASB
about current            recommendation 98.
vulnerability to risk
due to concentrations
(for example, in the
enterprise's assets,
customers, or
suppliers) other than
those generally known
to be associated with
the industry or trade
in which the entity
operates would be
required in the
following
circumstances:

(a) concentrations
existing at the report
date make the
enterprise vulnerable
to the risk of severe
impact on near-term
cash flows or results
of operations and

(b) it is at least
reasonably possible
that the events that
could cause the severe
impact will occur.

102. FASB should use a   Adopted, after           FAF             FASB
computerized log to      development in 1995.     (1989)
record technical
inquiries.

103. The FAF Board of    A standing oversight     FAF             FAF and FASB
Trustees should review   committee of trustees    (1989)
the standard-setting     has been formed to
apparatus at some time   evaluate on an ongoing
within the next 5 years  basis whether FASB's
in order to determine    standard-setting
whether actions taken    activities are
as a consequence of      consistent with the
this review have been    FASB mission statement.
effective and what
other improvements
should be made.

104. The FAF Board of    Not under                FAF             FAF and FASB
Trustees should          consideration.           (1989)
consider changing the
name of FAF to
something like the
"National Accounting
Standards Foundation"
to avoid having a name
so similar to that of
FASB.

105. FAF should hold     Current practice         FAF             FAF and FASB
confidential             through the FAF          (1989)
consultations with each  Selection Committee.
member periodically
during his or her term
to discuss the member's
performance.

106. FAF should          All terms now end on     FAF             FAF and FASB
consider changing the    June 30.                 (1989)
end of FASB members'
terms to June 30.

107. FAF should be       Current practice         FAF             FAF and FASB
explicitly obligated to  through the FAF          (1989)
conduct a performance    Selection Committee.
evaluation prior to the
completion of a FASB
member's initial term
in order to determine
the appropriateness of
the member as a
candidate for
reappointment.

108. Losses for problem  SFAS 114 para. 10        GAO             Accounting
loans should be taken    clarified the threshold  (1991)          profession
if more likely than      for impairment. FASB                     and FASB
not, rather than         and AcSEC support the
probable. A problem      ï¿½probableï¿½ threshold.
loan should be
accounted for as an in-
substance foreclosure
unless there is clear
evidence of the
lender's ability to
collect the loan based
on its contractual
terms, as opposed to
existing accounting
rules that require
probable nonpayment and
clear evidence that the
loan will default.

109. The definition and  Recently issued          GAO             Accounting
determination of fair    accounting standards,    (1991)          profession
market value should be   such as SFAS 121, 122,                   and FASB
changed. The value of    123, and 124, define
in-substance foreclosed  "fair value." Also, SOP
loans and other real     92-3 requires that
estate owned should be   foreclosed assets be
determined based on      reported (at
existing market          foreclosure) at the
conditions unless there  lower of their (a) cost
is clear evidence to     or (b) fair value less
support projections of   estimated costs to
improved financial and   sell.
economic conditions--
for example, signed
leases from responsible
tenants. The carrying
value for other real
estate owned should be
reduced by estimated
carrying costs,
including a cost of
capital, to the
expected date of sale.

110. The accounting      Accounting standards     GAO             Accounting
rules and audit          have not been changed.   (1991)          profession
procedures for related-  However, SAS 45 states                   and FASB
party transactions       that the independent
should be enhanced to    accountant should be
clarify that related-    aware that the
party transactions are   substance of a
required to be           particular transaction
accounted for and        could be significantly
reported based on their  different from its
economic substance.      form, and that the
Also, guidance should    financial statements
be provided on how to    should recognize the
determine economic       substance of particular
substance.               transactions rather
                         than merely their legal
                         form. SAS 69 states
                         that the auditor should
                         consider whether the
                         substance of
                         transactions or events
                         differs materially from
                         their form.

111. FASB should add to  FASB does not believe    POB             FASB
its agenda a project to  it is appropriate at     (1993)
study comprehensively    this time to add this
the possibility of       project to its agenda.
requiring the reporting  The Jenkins Committee
of values and changes    reported in 1994 that
in values rather than    users oppose replacing
historical transaction   the current historical
prices, either as a      cost-based accounting
basis to propose         model with a
changes to financial     comprehensive fair
accounting standards or  value accounting model.
to explain publicly why  However, FASB continues
such a change in         to consider value-
accounting standards is  based reporting for
impractical or           certain kinds of assets
otherwise                and liabilities. FASB's
inappropriate. In        June 1996 exposure
carrying out this        draft, Accounting for
effort, FASB should      Derivative and Similar
consider the             Financial Instruments
conclusions of the       and for Hedging
AICPA, the FEI, and the  Activities, would
AIMR studies with        require fair value for
respect to the future    all derivatives
of financial reporting.  (comments are due
                         October 1996). Further
                         extension of fair value
                         is under discussion in
                         FASB's financial
                         instruments project and
                         SFAS 107 requires
                         disclosure of fair
                         values for all
                         financial instruments,
                         subject to a
                         practicability
                         exception.

112. Accounting firms    Representatives of the   POB             Accounting
should take special      SECPS of the AICPA       (1993)          profession
care to ensure that      Division for CPA firms
their participation in   and the POB have met
the standard-setting     with the chairmen of
process is               FASB, the ASB, and
characterized by         AcSEC to discuss this
objectivity and          subject. The chairs of
professionalism.         the ASB and AcSEC have
Standard setters and     reminded their members
leaders of the           of the need to ensure
profession should        that objectivity is
discuss and address the  maintained in the
issues related to        standard-setting
client advocacy in the   process. In August
standard-setting         1995, the Professional
process and establish    Ethics Division issued
ways of identifying and  Interpretation 102-6
correcting aberrant      that addresses these
behavior when it         recommendations to the
occurs.                  satisfaction of the
                         POB.

113. Strive for          In February 1996, FASB   AIMR            FASB
globally acceptable      issued an Invitation to  (1993)
accounting principles,   Comment on the
including disclosure     recommendations of
standards.               AIMR. Comments were due
                         to FASB by July 31,
                         1996.

114. Consider cost/      In February 1996, FASB   AIMR            FASB
benefit analysis from a  issued an Invitation to  (1993)
user viewpoint (i.e.,    Comment on the
the shareholders and     recommendations of
their financial          AIMR. Comments were due
advisors should best be  to FASB by July 31,
able to advise           1996.
standard-setting and
regulating bodies as to
the proper balance of
costs and benefits
associated with
accounting and
disclosure standards).

115. Appoint more        In February 1996, FASB   AIMR            FASB
representatives from     issued an Invitation to  (1993)
the community of         Comment on the
financial statement      recommendations of
users in determining     AIMR. Comments were due
the form and content of  to FASB by July 31,
financial statements.    1996.

116. FASB should         SFAS 119 concerning      GAO             FASB
proceed expeditiously    disclosure of            (1994)
to issue its existing    derivatives and fair
exposure draft on        value of financial
disclosures of           instruments was issued
derivatives and fair     in October 1994.
value of financial
instruments.

117. FASB should         FASB issued its          GAO             FASB
proceed expeditiously    exposure draft,          (1994)
to develop and issue an  Accounting for
exposure draft that      Derivative and Similar
provides comprehensive,  Financial Instruments
consistent accounting    and for Hedging
rules for derivatives    Activities, in June
products, including      1996. Comments are due
expanding disclosure     in October 1996.
requirements that
provide additional
needed information
about derivatives
activities.

118. FASB should         This matter is under     GAO             FASB
consider adopting a      consideration as part    (1994)
market value accounting  of the Board's
model for all financial  financial instruments
instruments, including   project. The exposure
derivatives products.    draft issued in June
                         1996 (see action taken
                         for recommendation 117)
                         proposes to require
                         that all derivatives be
                         accounted for at fair
                         value.

119. The SEC should      The SEC is working       GAO             SEC
ensure that FASB         closely with FASB on     (1994)
proceeds expeditiously   this issue. On
to develop and adopt     December28, 1995, the
comprehensive,           SEC proposed rules to
consistent accounting    require additional
rules and disclosure     disclosures about
requirements for         registrants' accounting
derivative products.     policies for
                         derivatives products
                         and risks inherent in
                         these instruments. The
                         comment period expires
                         May 7, 1996. FASB's
                         June 1996 exposure
                         draft (see action taken
                         for recommendation 117)
                         proposes comprehensive
                         accounting standards
                         for derivatives and
                         revised disclosures in
                         line with this proposed
                         accounting.

120. Because they share  The AICPA and FASB are   Kirk Panel      Accounting
the objective of         committed to working in  (1994)          profession and
providing the public     a cooperative way with                   SEC
with relevant and        the SEC. Although from
reliable financial       time to time
information, the public  relationships have been
accounting profession    strained, the process
and the SEC must have    of resolving conflict
more cooperative, less   is a positive one. In
adversarial              that connection, the
relationships. CPA       POB's Kirk Panel report
firms should be careful  itself is a response to
in how they communicate  criticisms voiced by
their views to FASB,     the former chief
the SEC, their clients,  accountant of the SEC.
and the public at        Also, the new AICPA
large. The SEC should    Financial Reporting
help identify            Coordinating Committee,
accounting practice      formed to follow up on
problems and look to     the recommendations of
the private sector       the Jenkins Committee,
standard setters to      has already met with
solve them--only being   the SEC to exchange
a standard setter of     ideas and views on key
"last resort" and only   issues.
after appropriate due
process.

121. Improve the         FASB has issued an       Jenkins         FASB and SEC
disclosure of business   Invitation to Comment    Committee
segment information.     addressing the Jenkins   (1994)
                         Committee
                         recommendations
                         (comments were due in
                         July 1996). In January
                         1996, FASB issued an
                         exposure draft of a
                         proposed standard that
                         would revise the
                         requirements under
                         which public entities
                         report disaggregated
                         information. The SEC
                         will hold a symposium
                         on these
                         recommendations during
                         1996. Also, the Jenkins
                         Committee found that
                         users believe that
                         current disaggregated
                         disclosures do not
                         provide adequate
                         information to help
                         them predict an
                         entity's future
                         earnings and cash
                         flows. In January 1996,
                         FASB issued an exposure
                         draft of a proposed
                         standard that would
                         revise the requirements
                         under which public
                         entities report
                         disaggregated
                         information.

122. Address the         See action taken for     Jenkins         FASB and SEC
disclosures and          recommendation 121. As   Committee
accounting for           noted in the action      (1994)
innovative financial     taken for
instruments.             recommendation 119, the
                         SEC has issued a rule
                         proposal to require
                         disclosures about
                         derivative products.

123. Improve the         See action taken for     Jenkins         FASB and SEC
disclosures about the    recommendation 122.      Committee
identity,                Many off-balance-sheet   (1994)
opportunities, and       financing arrangements
risks of off-balance-    are dealt with in FASB
sheet financing          statement 125 issued in
arrangements and         June 1996.
reconsider the
accounting for those
arrangements.

124. Report separately   See action taken for     Jenkins         FASB, SEC, or
the effects of core and  recommendation 121.      Committee       public
noncore activities and                            (1994)          companies
events, and measure at
fair value noncore
assets and liabilities.

125. Improve the         See action taken for     Jenkins         FASB, SEC, or
disclosures about the    recommendation 121. SOP  Committee       public
uncertainty of           94-6 requires            (1994)          companies
measurements of certain  explanation that
assets and liabilities.  preparation of
                         historical financial
                         statements include use
                         of estimates.

126. Defer attention to  See action taken for     Jenkins         FASB and AICPA
issues that have low     recommendation 121.      Committee
priority according to                             (1994)
current evidence of
users' needs.

127. Standard setters    An SEC Task Force on     Jenkins         FASB, AICPA,
should search for and    Rule Simplification      Committee       and SEC
eliminate less relevant  issued a proposed rule   (1994)
disclosures.             to simplify and reduce
                         certain disclosures.
                         The SEC is currently
                         reviewing comments
                         received on this
                         proposed rule. In 1995,
                         FASB issued an
                         invitation to comment
                         on disclosure
                         effectiveness and is
                         currently considering
                         comments received.
                         Recommendations of the
                         Jenkins Committee were
                         included in a FASB
                         Invitation to Comment
                         issued in February 1996
                         (comments were due by
                         July 1996).

128. National and        The new AICPA Financial  Jenkins         FASB, AICPA,
international standard   Reporting Coordinating   Committee       SEC, and
setters and regulators   Committee will follow    (1994)          international
should increase their    up on this                               standard
focus on the             recommendation. FASB's                   setters and
information needs of     current strategic plan                   regulators
users, and users should  includes an objective
be encouraged to work    to develop and enhance
with standard setters    the reporting model as
to increase the level    a tool for decision-
of their involvement in  making in a rapidly
the standard-setting     changing economic and
process.                 technological
                         environment. Another
                         one of the plan's
                         objectives is to build
                         a broader acceptance
                         for the FASB process
                         among constituents.

129. U.S. standard       FASB, the SEC, and the   Jenkins         FASB, AICPA,
setters and regulators   AICPA are all actively   Committee       and SEC
should continue to work  involved in efforts to   (1994)
with their non-U.S.      achieve international
counterparts and         accounting standards
international standard   that meet users' needs
setters to develop       for information. For
international            example, FASB meets
accounting standards,    regularly with
provided the resulting   standards setters from
standards meet users'    the United Kingdom,
needs for information.   Australia, Canada, and
                         the International
                         Accounting Standards
                         Committee and has
                         jointly published
                         studies with them about
                         future events, hedge
                         accounting, leases, and
                         loss provisions.

                         The International
                         Accounting Standards
                         Committee has set a
                         goal of producing, by
                         1998, accounting
                         standards sufficient in
                         quality to be adopted
                         by the International
                         Organization of
                         Securities Commissions,
                         of which the SEC is a
                         member, as suitable for
                         financial statements
                         supporting securities
                         issuance in any
                         country.

130. U.S. standard       See action taken for     Jenkins         FASB and AICPA
setters should adopt a   recommendation 121.      Committee
longer-term focus by                              (1994)
developing a vision of
the future business
environment and users'
needs for information
in that environment.
Standards should be
consistent
directionally with that
long-term vision.
--------------------------------------------------------------------------------


                                    Table II.4
                     
                            Setting Auditing Standards


                                                  Recommendation  Recommendation
Recommendation           Action taken             made by/date    directed to
-----------------------  -----------------------  --------------  --------------
1. The SEC should        The SEC continues to     Moss            SEC
prescribe by rule        look to the ASB to set   Subcommittee
auditing standards to    auditing standards and   (1976)
be followed by           exercises oversight
independent accountants  over the process, as
who certify financial    explained in its
reports filed with the   various annual reports
SEC.                     to the Congress.

2. The federal           See action taken for     Metcalf         Federal
government should        recommendation 1.        Subcommittee    government
establish auditing                                Staff Study
standards used by                                 (1977)
independent auditors to
certify the accuracy of
corporate financial
statements and
supporting records. The
standards could be
established by the SEC,
GAO, or by federal
statute.

3. The federal           See action taken for     Metcalf         Federal
government should        recommendation 1.        Subcommittee    government
define the                                        Staff Study
responsibilities of                               (1977)
independent auditors so
that they clearly meet
the expectations of the
Congress, the public,
and courts of law.

4. The federal           The SEC continues to     Metcalf         Federal
government should        look to private sector   Subcommittee    government
establish financial      standard-setting bodies  Staff Study
accounting standards,    to set such standards    (1977)
cost accounting          and practices and
standards, auditing      exercises oversight
standards, and other     over those bodies
accounting practices in  (which hold meetings
meetings open to the     open to the public) as
public.                  explained in its
                         various annual reports
                         to the Congress.

5. The auditing and      All AICPA senior         Metcalf         Accounting
behavior standards of    technical committees     Subcommittee    profession
the organization of      adhere to open meeting   (1977)
accounting firms (see    policies. Meetings of
recommendation 20,       the SECPS Executive
"Audit Quality"          Committee may be
section) should be       attended by
established in open      representatives of
meetings with broad      member firms and all
representation of        meetings are attended
interests.               by members and staff of
                         the POB.

6. The organization of   The AICPA's vision of a  Metcalf         Accounting
accounting firms (see    more responsive          Subcommittee    profession
recommendation 20,       organizational           (1977)
"Audit Quality"          structure that will
section) should have     enable the AICPA to
sufficient staff to      better achieve its
assure that standards    objectives and fulfill
are well researched and  its mission is
can be handled on a      encompassed in the
timely basis.            AICPA's strategic
                         planning process. For
                         example, in 1995, the
                         AICPA reorganized to
                         better focus and
                         utilize its resources
                         to serve the needs of
                         its members, including
                         accounting firms;
                         members in industry,
                         government, and
                         education; the state
                         CPA Organizations;
                         newly licensed CPAs;
                         recruits; and retired
                         members.

7. The organization of   All enforceable AICPA    Metcalf         Accounting
accounting firms (see    technical and ethical    Subcommittee    profession
recommendation 20,       pronouncements are       (1977)
"Audit Quality"          widely exposed for
section) should develop  comment and are
rules of procedure for   discussed in open
standard setting that    meetings of the
emphasize basic due      relevant board or
process and periodic     committee, pursuant to
review of established    operating policies
standards.               approved by the Board
                         of Directors.

8. Standards developed   The AICPA believes that  Metcalf         Accounting
by the organization of   none of its technical    Subcommittee    profession
accounting firms (see    or ethical               (1977)
recommendation 20,       pronouncements and none
"Audit Quality"          of the SECPS membership
section) should not act  requirements prevent or
to prevent new entry     make burdensome entry
into the field of        into the field of
auditing publicly owned  auditing public
corporations or be       companies.
overly burdensome on
accounting firms with
only a few publicly
owned clients.

9. The organization of   SECPS peer review        Metcalf         Accounting
accounting firms         standards (SECPS         Subcommittee    profession and
envisioned by the        Reference Manual         (1977)          SEC
subcommittee (see        ï¿½2000.137) state that
recommendation 20,       "(t)he review should be
"Audit Quality"          concerned with the
section) and the SEC     accounting and auditing
should focus attention   engagements performed
on both domestic and     by the U.S. offices of
international            the reviewed firm
operations of            selected for review and
independent auditors     with the supervision
when formulating         and control, in
appropriate standards    accordance with U.S.
and a responsive         professional standards,
quality review program.  on work of segments of
                         such engagements
                         performed by foreign
                         offices...." The SECPS
                         made significant
                         efforts to obtain
                         agreement by other
                         countries to an
                         extension of peer
                         review to the work
                         performed in those
                         countries, but was
                         unable to overcome the
                         legal and other
                         barriers to access by a
                         U.S. organization to
                         the foreign
                         accountant's
                         confidential work
                         product.

10. There should be no   In response to this      Cohen           Accounting
differences in the       recommendation, the      Commission      profession
standards that apply to  AICPA mounted a          (1978)
the performance of       research effort that
audits, whether the      resulted in the
audits are of public or  publication of an audit
private entities.        research monograph.
However, present         This was followed by a
guidance on the          major task force effort
application of auditing  that resulted in SAS
standards to audits of   amendments and
different size entities  interpretations as well
is inadequate. Both      as an audit procedures
users and clients would  study on audits of
be better served by      small businesses. Also,
more guidance on         SAS 61 is applicable
accounting and related   only to SEC clients and
services and on the      clients that have audit
application of auditing  committees, and other
standards to audits of   standards, such as
smaller entities.        those on the internal
                         control structure and
                         audit sampling,
                         implicitly or
                         explicitly recognize
                         that the procedures
                         followed to comply with
                         GAAS may differ
                         depending on the size
                         and related
                         characteristics of an
                         entity. In addition,
                         the AICPA has issued a
                         series of Statements on
                         Standards for
                         Accounting and Review
                         Services that address
                         the special needs of
                         private companies for
                         nonaudit financial
                         statement services.

11. Many auditing        After substantial        Cohen           Accounting
pronouncements could     study, no action was     Commission      profession
usefully provide more    taken with respect to    (1978)
specific guidance.       the recommendation.
                         However, SAS 65
                         provides more detailed
                         guidance on using the
                         work of an internal
                         auditor. Also, many
                         recent auditing
                         standards go into
                         significant detail in
                         explaining their
                         applications.

12. The present AudSEC   The 21-member AudSEC     Cohen           Accounting
should be replaced by a  was reconstituted as     Commission      profession
smaller, full-time       the ASB. It consists of  (1978)
group compensated only   15 AICPA members who
by the AICPA.            are expected to devote
                         600-800 hours to ASB
                         activities each year.
                         ASB members who request
                         compensation receive
                         it, up to an annual
                         maximum of $40,000. The
                         ASB has issued more
                         than 55 SASs since the
                         Cohen Commission issued
                         its report, or an
                         average of three per
                         year, and many
                         interpretations. The
                         AICPA believes the
                         present ASB structure
                         is working well.

13. A full-time          As a result of actions   Cohen           Accounting
auditing standard-       taken in response to     Commission      profession
setting body will        this recommendation,     (1978)
require a larger,        the ASB staff is led by
highly qualified staff.  a highly qualified
Other possibilities      AICPA vice president,
should be considered,    and the staff usually
such as a fellowship     includes a professional
program.                 fellow.

14. The standards for    Rule 201 of the Code of  Cohen           Accounting
the audit function       Professional Conduct     Commission      profession
should have broader      establishes general      (1978)
scope than the present   standards of
standards. They should   professional
be applicable whenever   competence, due
a CPA undertakes an      professional care,
audit engagement. The    planning and
restructuring should     supervision, and
include a statement of   sufficient relevant
the independent          data that are
auditor's role.          applicable to all
                         services provided by
                         all AICPA members. The
                         ASB initiated a new
                         series of attest
                         standards to govern
                         services that do not
                         involve financial
                         statements. Also, the
                         ASB has dealt with and
                         will continue to deal
                         with matters that go
                         beyond the boundaries
                         of the financial
                         statements, such as
                         compliance auditing and
                         special reports.

15. Other groups who     The AICPA established    Cohen           Accounting
have a strong interest   an Auditing Standards    Commission      profession
in auditing standards    Advisory Committee and   (1978)
should be encouraged to  some years later
become more involved in  disbanded it at the
the standards-setting    committee's own
process. Industry audit  request. Afterwards,
guides appear to         the ASB placed public
constitute a special     members on its planning
case in which            committee but
particular attention     subsequently concluded
should be paid to        that insufficient
obtaining the            benefits accrued from
participation by         their participation.
management in the        Now, the ASB relies on
affected industry.       frequent and extensive
While the Cohen          communication with
Commission has           outside groups, such as
concluded that there is  the FEI, SEC, American
a need for formal        Bar Associations, etc.,
outside participation    and on its extensive
in the process of        due process procedures
setting auditing         to obtain input from
standards, it has no     preparers and users. In
specific recommendation  addition, committees
on the form this         dealing with specific
participation should     industries include
take. An advisory        significant
committee or direct      representation of
participation by a few   members working in
knowledgeable            those industries; see
individuals on the       the handbook titled
board or its             AICPA Committees for
subcommittees are two    data on the composition
distinct possibilities.  of AICPA boards and
                         committees.

16. The standards-       The CPA Letter           Cohen           Accounting
setting body should      announces all ASB        Commission      profession
increase communication   pronouncements, and the  (1978)
about its work within    ASB frequently
the profession.          publishes notices or
                         alerts on practice
                         matters. See, for
                         example, "The Auditor's
                         Responsibility to
                         Detect Fraud" in the
                         January 1994 CPA
                         Letter. Also, a new
                         information newsletter,
                         In Our Opinion, was
                         inaugurated and is
                         distributed to a number
                         of interested groups
                         and individuals.

17. The ASB should have  A formal, periodic       Cohen           Accounting
a periodic review of     review procedure has     Commission      profession
its operations to        not been established.    (1978)
identify needed changes  However, the Treadway
and improvements.        Commission reviewed the
                         structure and functions
                         of the ASB as part of
                         its work.

18. AudSEC should be     See action taken for     Oliphant        Accounting
reconstituted within     recommendation 12.       Committee       profession
the AICPA as the AICPA                            (May 1978)
ASB, responsible for
the promulgation of
auditing standards and
procedures that define
the nature and extent
of the auditor's
responsibility; provide
guidance to the auditor
in carrying out his
duties; make special
provisions, where
appropriate, to meet
the needs of small
enterprises; and
consider costs and
benefits.

19. The new auditing     The AICPA plans to       Oliphant        Accounting
standards board shall    issue supplemental       Committee       profession
provide auditors with    guidance, such as        (May 1978)
all possible guidance    Technical Practice Aids
in the implementation    and educational
of its pronouncements.   materials, to aid
                         auditors in
                         implementing new
                         auditing standards. In
                         response to a
                         suggestion by the SEC's
                         Chief Accountant, the
                         ASB in 1989 inaugurated
                         a procedure for issuing
                         audit risk alerts
                         annually to provide
                         additions with an
                         overview of current
                         economic, professional,
                         and regulatory
                         developments that may
                         affect audits they
                         perform.

20. The new auditing     See action taken for     Oliphant        Accounting
standards board should   recommendation 12.       Committee       profession
have 15 members, to be                            (May 1978)
appointed for renewable
1-year terms, by the
chairman of the AICPA
with the consent of the
AICPA Board of
Directors. The
chairman's and member's
terms should not exceed
6 years.

21. Any person who has   No action was taken      Oliphant        Accounting
had extensive            with respect to this     Committee       profession
experience in auditing,  recommendation. All ASB  (May 1978)
whether a member of the  members are members of
AICPA or not, should be  the AICPA.
eligible to serve on
the new auditing
standards board.

22. Nine affirmative     No action was taken      Oliphant        Accounting
votes (out of a board    with respect to this     Committee       profession
of 15 members) should    recommendation. Ten      (May 1978)
be required to approve   affirmative votes (out
an auditing standard.    of a board of 15
                         members) are required
                         to approve an auditing
                         standard.

23. Meetings of the new  Meetings of the ASB are  Oliphant        Accounting
auditing standards       open to the public.      Committee       profession
board relating to the                             (May 1978)
establishment of
standards through
statements on auditing
standards, and other
auditing and reporting
matters directly
affecting the public
interest, will be open
to the public.

24. The board chairman   See action taken for     Oliphant        Accounting
or a board member (of    recommendation 12.       Committee       profession
the new auditing                                  (May 1978)
standards board) may
request compensation,
in return for a
commitment of at least
50 percent of his time
to the work of the
board, and should
routinely be reimbursed
for expenses.

25. The new auditing     See action taken for     Oliphant        Accounting
standards board staff    recommendation 13.       Committee       profession
should be considerably                            (May 1978)
expanded and
strengthened to enable
it to undertake more
research, to provide
more support for the
task forces, and to
take over more of the
drafting.

26. The new auditing     See action taken for     Oliphant        Accounting
standards board should   recommendation 13.       Committee       profession
have a highly                                     (May 1978)
qualified, well-paid
executive director, who
will report to and work
closely with the
chairman and members of
the new auditing
standards board.

27. The new auditing     In response to this      Oliphant        Accounting
standards board should   recommendation, the      Committee       profession
have a research          AICPA created a          (May 1978)
director to direct its   research director
research activities.     position. However, this
                         position was recently
                         vacated.

28. The new auditing     See action taken for     Oliphant        Accounting
standards board should   recommendation 15.       Committee       profession
have an advisory                                  (May 1978)
council composed of
between 12 and 18
members to be appointed
by the chairman of the
AICPA for a 1-year term
that is renewable up to
3 years. No member of
the council shall be a
member of the auditing
standards board.
Members of the council
will not be
compensated. The
council should meet at
least once a quarter,
in public.

29. Enhance the ASB's    Changes in ASB           Big 7           Accounting
capacity to develop      composition and          (1986)          profession
auditing standards.      operations have been
                         made as necessary, as
                         evidenced by the
                         issuance of 23 SASs
                         between 1987 and July
                         1995, including the
                         nine "expectation gap"
                         SASs. However, a full-
                         time chairman and board
                         was not deemed
                         necessary.

30. The AICPA should     See action taken for     Treadway        Accounting
reorganize the ASB to    recommendation 15.       Commission      profession
afford a full                                     (1987)
participatory role in
the standard-setting
process to
knowledgeable persons
who are affected by and
interested in auditing
standards but who
either are not CPAs or
are CPAs no longer in
public practice.
--------------------------------------------------------------------------------


                                    Table II.5
                     
                     Expanded Reporting and Auditor Services


                                                  Recommendation  Recommendation
Recommendation           Action taken             made by/date    directed to
-----------------------  -----------------------  --------------  --------------
1. A basic objective of  See CON 1 para. 34. The  Trueblood       FASB
financial statements     requirements for         Committee
should be to provide     information included in  (1973)
information useful for   financial statements
making economic          are continually being
decisions.               improved.

2. An objective of       See CON 1 para. 28 and   Trueblood       FASB
financial statements     30.                      Committee
should be to serve                                (1973)
primarily those users
who have limited
authority, ability, or
resources to obtain
information and who
rely on financial
statements as their
principal source of
information about an
enterprise's economic
activities.

3. An objective of       See CON 1 para. 37.      Trueblood       FASB
financial statements                              Committee
should be to provide                              (1973)
information useful to
investors and creditors
for predicting,
comparing, and
evaluating potential
cash flows to them in
terms of amount,
timing, and related
uncertainty.

4. An objective of       See CON 1 para. 42-48.   Trueblood       FASB
financial statements                              Committee
should be to provide                              (1973)
users with information
for predicting,
comparing, and
evaluating enterprise
earning power.

5. An objective of       See CON 1 para. 50-53.   Trueblood       FASB
financial statements                              Committee
should be to supply                               (1973)
information useful in
judging management's
ability to utilize
enterprise resources
effectively in
achieving the primary
enterprise goal.

6. An objective of       See CON 1 para. 54.      Trueblood       FASB
financial statements                              Committee
should be to provide                              (1973)
factual and
interpretative
information about
transactions and other
events that is useful
for predicting,
comparing, and
evaluating enterprise
earning power. Basic
underlying assumptions
with respect to matters
subject to
interpretation,
evaluation, prediction,
or estimation should be
disclosed.

7. An objective should   The FASB concepts        Trueblood       FASB
be to provide a          statements deal with     Committee
statement of financial   the objectives of        (1973) nd
position useful for      financial reporting,
predicting, comparing,   the qualitative
and evaluating           characteristics of
enterprise earning       accounting information,
power. This statement    and the elements of
should provide           financial reporting.
information concerning   These statements deal
enterprise transactions  with matters that are
and other events that    the subject of this
are part of incomplete   recommendation.
earnings cycles.         However, financial
Current values should    reporting is evolving
also be reported when    and the Jenkins
they differ              Committee has made
significantly from       recommendations on the
historical cost.         nature and extent of
                         information that should
Assets and liabilities   be made available to
should be grouped or     others by management.
segregated by the        The committee has
relative uncertainty of  learned that users
the amount and timing    oppose replacing the
of prospective           current historical
realization or           cost-based accounting
liquidation.             model with a fair value
                         accounting model.
                         However, they view fair
                         value information as
                         useful for particular
                         types of assets and
                         liabilities and in
                         certain types of
                         industries. In that
                         connection, FASB has
                         required disclosure of
                         the current value of
                         financial instruments
                         (SFAS 107) and has
                         required that certain
                         debt a equity
                         securities be reported
                         at fair value (SFAS
                         115). SFAS 33, issued
                         in 1979, required
                         disclosure of
                         supplementary
                         information about the
                         effects of inflation
                         and changes in specific
                         prices, but that
                         requirement was changed
                         to encouragement by
                         SFAS 89.

8. An objective should   See action taken for     Trueblood       FASB
be to provide a          recommendation 7.        Committee
statement of periodic                             (1973)
earnings useful for      The Jenkins Committee
predicting, comparing,   has learned that users
and evaluating           want information about
enterprise earning       the portion of a
power. The net result    company's reported
of completed earnings    earnings that is stable
cycles and enterprise    or recurring and that
activities resulting in  provides a basis for
recognizable progress    estimating sustainable
toward completion of     earnings. Also, users
incomplete cycles        believe that current
should be reported.      disaggregated
Changes in the values    disclosures do not
reflected in successive  provide adequate
statements of financial  information to help
position should also be  them predict an
reported, but            entity's future
separately, since they   earnings and cash
differ in terms of       flows.
their certainty of
realization.

9. An objective should   See action taken for     Trueblood       FASB
be to provide a          recommendation 7.        Committee
statement of financial                            (1973)
activities useful for    The Jenkins Committee
predicting, comparing,   has learned that users
and evaluating           want information about
enterprise earning       the portion of a
power. This statement    company's reported
should report mainly on  earnings that is stable
factual aspects of       or recurring and that
enterprise transactions  provides a basis for
having or expected to    estimating sustainable
have significant cash    earnings.
consequences. This
statement should report
data that require
minimal judgment and
interpretation by the
preparer.

10. An objective of      The Jenkins Committee    Trueblood       FASB
financial statements     has learned that         Committee
should be to provide     investors and creditors  (1973)
information useful for   need forward-looking
the predictive process.  information on which to
Financial forecasts      base their own
should be provided when  projections, but they
they will enhance the    do not expect
reliability of users'    management to provide
predictions.             projections or
                         forecasts. Users also
                         want more information
                         about operating
                         opportunities and risks
                         that are relatively
                         near-term and
                         relatively certain and
                         quantifiable.

11. An objective of      Measuring and reporting  Trueblood       FASB
financial statements     on social interactions   Committee
should be to report on   in financial statements  (1973)
those activities of the  is in its infancy. The
enterprise affecting     present focus is on
society that can be      efforts to deal with
determined and           environmental costs.
described or measured    AcSEC issued in 1995 an
and that are important   exposure draft of a
to the role of the       proposed SOP on
enterprise in its        environmental
social environment.      remediation
                         liabilities.

12-16. The SEC should                             Moss
act promptly to                                   Subcommittee
promulgate rules                                  (1976)
necessary to assure
that

12. ... publicly owned   COSO received 1,014                      SEC
corporations adopt and   responses to a 1988
enforce codes of         survey of over 8,500
business conduct that    public companies that
conform to the laws of   indicated that a
all countries in which   significant number of
a corporation operates   companies have written
and that are disclosed   codes of conduct:
publicly to              --87 percent of
shareholders through     companies with over
filings with the SEC.    10,000 employees,
                         --60 percent with 1,000
                         to 10,000 employees,
                         --32 percent with 100
                         to 1,000 employees,
                         and
                         --15 percent with under
                         100 employees.

13. ...procedures which  The SEC encouraged                       SEC
allow corporations to    adoption of the Foreign
develop off-the-book     Corrupt Practices Act
accounts are             of 1977 and adopted
eliminated.              rules under those laws
                         to address this
                         concern. The SEC
                         further stated that
                         public companies
                         "should review their
                         accounting procedures,
                         systems of internal
                         accounting controls and
                         business practices" in
                         order to take any
                         actions necessary to
                         comply with this act.

14. ...uniform           See action taken for                     SEC
financial controls are   recommendation 13.
applied throughout
every department and
operating division of
the consolidated
corporation and
complementary accounts
among subsidiaries and
between subsidiaries
and the parents are
reconciled regularly.

15. ...communication is  See action taken for                     SEC
strengthened among in-   recommendation 13. Also
house accountants and    see discussions of
auditors and the         communications
appropriate levels of    requirements in SAS 53,
management.              on errors and
                         irregularities; SAS 54,
                         on illegal acts by
                         clients; and SAS 61, on
                         communication with
                         audit committees. Note
                         that "Information and
                         Communication" is one
                         of the five components
                         of internal control
                         under the COSO report.
                         The Private Securities
                         Litigation Reform Act
                         of 1995 (ï¿½301) requires
                         certain communications
                         from the auditor to the
                         company's management
                         and board of directors,
                         and, under certain
                         circumstances, to the
                         SEC.

16. ...independent       On two separate                          SEC
auditors attest to the   occasions (1979 and
quality of internal      1988) the SEC proposed
controls and the         for public comment
quality of enforcement   management and/or
of those controls in     auditor reports on the
the annual report.       adequacy of
                         registrants' internal
                         controls. Comments on
                         these proposals
                         suggested that the
                         costs of such reports
                         may exceed any benefit
                         to investors and noted
                         other concerns. The
                         proposals were not
                         adopted.

17. In instances where   In the absence of an     Moss            SEC
uniformity in            authoritative            Subcommittee
accounting principles    pronouncement, there is  (1976)
is not practicable, the  no basis for
SEC should require the   determining which
independent auditor to   principle or method
attest that the          produces the "most
accounting principles    fair" result. In any
selected by management   event, FASB statements,
represent financial      interpretations, and
data most fairly. The    technical bulletins;
SEC should also          EITF consensuses; and
prescribe supplemental   AcSEC statements of
data to permit a         position and practice
translation from one     alerts have
set of assumptions to    significantly narrowed
another, thereby         the number of
permitting               alternatives available
comparability among      to management. The SEC
companies in a           requires that auditors
particular industry.     of companies making a
                         discretionary change in
                         accounting file a
                         letter indicating that
                         such change is to a
                         preferable method of
                         accounting. Moreover,
                         users have informed the
                         Jenkins Committee that
                         information about a
                         company that is
                         consistent over time is
                         valued more highly than
                         information that is
                         comparable between two
                         or more companies--
                         they believe
                         differences in
                         accounting principles
                         and methods of
                         application should be
                         permitted as long as
                         there is disclosure.

18. Corporate            The September 1992 COSO  Metcalf         Accounting
accountability should    report, Internal         Subcommittee    profession
be improved through      Control--Integrated      (1977)
strengthening internal   Framework, and the
controls and enhancing   publicity and
the professionalism of   educational efforts
management's             that accompanied its
accountants and          issuance have drawn the
internal auditors        attention of corporate
employed by corporate    management and boards
managements.             of directors, once
                         again, to the
                         significance of this
                         recommendation. Other
                         initiatives include the
                         establishment of a
                         Management Accounting
                         Committee and a Members
                         in Industry Committee
                         by the AICPA, the
                         extension of the entire
                         AICPA Code of
                         Professional Conduct to
                         members not in public
                         practice, and the
                         establishment by the
                         Institute of Management
                         Accountants of the
                         certified management
                         accountant program.

19. Until uniformity in  FASB statements,         Metcalf         FASB
the development and      interpretations, and     Subcommittee
application of           technical bulletins;     (1977)
accounting principles    EITF consensuses; and
is achieved, the public  AcSEC statements of
should be informed of    position and practice
the effect on financial  alerts, along with the
statements from using a  GAAP hierarchy and
particular accounting    related requirements
standard to report a     established in SAS 69,
transaction, rather      have significantly
than using any of the    narrowed the number of
acceptable               alternatives available
alternatives.            to management. AICPA
                         industry audit and
                         accounting guides are
                         being used as a vehicle
                         to achieve more uniform
                         application of
                         accounting principles.
                         For example, the
                         banking and the savings
                         institutions guides,
                         which differ in some
                         respects, are being
                         combined into one
                         guide. Interestingly,
                         users have informed the
                         Jenkins Committee that
                         information about a
                         company that is
                         consistent over time is
                         valued more highly than
                         information that is
                         comparable between two
                         or more companies--
                         they believe
                         differences in
                         accounting principles
                         and methods of
                         application should be
                         permitted as long as
                         there is disclosure.

20. An independent       In the absence of an     Metcalf         Accounting
auditor should give an   authoritative            Subcommittee    profession
opinion that the         pronouncement, there is  (1977)
standards used are the   no basis for
most appropriate under   determining which
the circumstances.       principle or method
                         produces the "most
                         appropriate" result.
                         The SEC requirement for
                         a preferability letter
                         is described under
                         recommendation 17.
                         However, the revised
                         auditor's standard
                         report does indicate
                         that the auditor
                         assessed the accounting
                         principles used by
                         management (AU
                         ï¿½508.08). See also
                         action taken for
                         recommendation 19.

21. The independent      The AICPA Board of       Metcalf         Accounting
auditor's report to the  Directors and the POB    Subcommittee    profession
public should comment    in their June 1993 and   (1977)
on the adequacy of       March 1993 reports,
internal auditing        respectively, continue
controls and employee    to endorse mandatory
conduct standards, as    reports by managements
well as compliance with  of public companies and
them.                    by their auditors on
                         the system of internal
                         control for financial
                         reporting.

22. Independent audits   From a practical point   Metcalf         Accounting
should be continual      of view, most audits     Subcommittee    profession
throughout the year.     are conducted over a     (1977)
                         period of time. Also,
                         SAS 71 provides
                         performance standards
                         and reporting guidance
                         on interim financial
                         information.

23. A standard of skill  The objectives of this   Cohen           Accounting
and care is needed to    recommendation have      Commission      profession
call upon the auditor    been achieved to a       (1978)
to extend the study and  large degree by the
evaluation of internal   clear statement of the
controls to all          auditor's
controls that have a     responsibility in SAS
significant bearing on   53, which also
the prevention and       discusses (para. 11-
detection of fraud.      12) internal control
                         problems in the context
                         of the assessment of
                         audit risk. In
                         addition, SAS 78 (which
                         supersedes SAS 55)
                         requires that the
                         auditor obtain an
                         understanding of the
                         internal control
                         structure, including
                         the accounting system
                         and control procedures,
                         and para. 11
                         specifically identifies
                         certain types of
                         procedures designed to
                         prevent fraud. Finally,
                         implementation of the
                         recommendation in the
                         June 1993 policy
                         statement of the AICPA
                         Board of Directors for
                         management and auditor
                         reports on the system
                         of internal control
                         would result in full
                         implementation of this
                         recommendation.

24. Corporations should  COSO received 1,014      Cohen           SEC and public
be required to adopt     responses to a 1988      Commission      companies
codes of conduct         survey of over 8,500     (1978)
indicating in detail     public companies that
conduct that will not    indicated that a
be tolerated. The code   significant number of
should be made readily   companies have written
available to             codes of conduct:
shareholders and         --87 percent of
others. Corporations     companies with over
must also adopt          10,000 employees,
policies and procedures  --60 percent with 1,000
to provide for           to 10,000 employees,
effective monitoring of  --32 percent with 100
compliance and should    to 1,000 employees,
distribute the code to   and
employees at the         --15 percent with under
appropriate levels.      100 employees.


25. The standards for    Rule 201 of the Code of  Cohen           Accounting
the audit function       Professional Conduct     Commission      profession
should have broader      establishes general      (1978)
scope than the present   standards of
standards. They should   professional
be applicable whenever   competence, due
a CPA undertakes an      professional care,
audit engagement. The    planning and
restructuring should     supervision, and
include a statement of   sufficient relevant
the independent          data that are
auditor's role.          applicable to all
                         services provided by
                         all AICPA members. The
                         ASB initiated a new
                         series of attest
                         standards to govern
                         services that do not
                         involve financial
                         statements. Also, the
                         ASB has dealt with and
                         will continue to deal
                         with matters that go
                         beyond the boundaries
                         of the financial
                         statements, such as
                         compliance auditing and
                         special reports.

26. The auditor should   SAS 78, which revised    Cohen           Accounting
review the               SAS 55 to conform to     Commission      profession
corporation's code of    the COSO report,         (1978)
conduct and the          Internal Control--
procedures adopted to    Integrated Framework,
monitor compliance with  requires the auditor to
it. The auditor should   obtain an understanding
determine whether there  of all of the elements
are material weaknesses  of the internal control
in the monitoring        structure. The COSO
procedures, and          report, issued in 1992
indicate his             and amended in 1994,
conclusions on these     has drawn the attention
matters in his report.   of preparers, auditors,
                         and regulators to the
                         significance of
                         internal controls. COSO
                         points out that codes
                         of conduct are widely
                         used and may be part of
                         the control
                         environment, but
                         properly warns that
                         "existence of a written
                         code of conduct, and
                         even documentation that
                         employees received and
                         understand it, does not
                         ensure that it has been
                         followed. Compliance
                         with ethical
                         standards...is best
                         ensured by top
                         management's actions
                         and examples...." Full
                         implementation of this
                         recommendation is
                         therefore contingent on
                         a requirement for
                         written codes of
                         conduct, which, for
                         that reason, may not be
                         necessary for all
                         companies, and on
                         implementation of the
                         recommendations in the
                         June 1993 policy
                         statement of the AICPA
                         Board of Directors for
                         management and auditor
                         reports on the system
                         of internal control
                         over financial
                         reporting.

27. If there is a        Although the subject of  Cohen           SEC and
corporate code of        two separate SEC rule    Commission      accounting
conduct, the report by   proposals, there is no   (1978)          profession
management in the        present requirement for
annual report should     a report by management
include a statement      or for an auditor's
that such a code exists  report thereon. See
and that procedures      action taken for
have been implemented    recommendation 26 for
to monitor compliance.   additional commentary.
The auditor's report
should state that he
has reviewed the code
of conduct. It should
also describe his
review of the company's
monitoring procedures
and his conclusions on
those aspects that can
be audited. It should
disclose any violation
of the code found
during the course of
the audit if management
and the board of
directors failed to
make an adequate
response when it was
brought to their
attention.

28. The audit function   This is an ongoing       Cohen           Accounting
should expand to         activity of the ASB.     Commission      profession
include information of   Over the years,          (1978)
an accounting and        guidance has been
financial nature that    provided on matters
management has a         such as interim
responsibility to        information, segment
report if the auditor's  information, forecasts,
competence is relevant   internal control,
to verifying the         "special reports,"
information and that     compliance with laws
information is produced  and regulations, and
by the accounting        attest services in
system.                  general. Guidance will
                         continue to be provided
                         as necessary. Also, the
                         Elliott Committee is to
                         consider the scope and
                         evolution of the
                         assurance function over
                         the foreseeable future.

29. The audit should be  From a practical point   Cohen           Accounting
considered a "function"  of view, most audits     Commission      profession
to be performed during   are conducted over a     (1978)
a period of time,        period of time. Also,
rather than an audit of  SAS 71 provides
a particular set of      guidance on reporting
financial statements.    on interim financial
The annual financial     information. However,
statements should be     no formal action has
only one, although the   been taken to implement
most important, of the   this specific
elements audited.        recommendation. The
Eventually, the audit    work of the Elliott
function should expand   Committee may, however,
to include all           address this
important elements of    recommendation again.
the financial reporting
process.

30. The auditor should   SAS 78 (which            Cohen           Accounting
review and test the      supersedes SAS 55)       Commission      profession
entire accounting        requires the auditor to  (1978)
control system. The      obtain a sufficient
objective of this study  understanding of the
and evaluation would be  elements of the
to enable the auditor    entity's control
to reach a conclusion    structure to plan the
on whether controls      audit by performing
over each significant    procedures to
part of the accounting   understand the design
system provide           of the policies and
reasonable, though not   procedures relevant to
absolute, assurance      audit planning and
that the system is free  whether they have been
of material weaknesses.  placed in operation.
                         The auditor is not
                         required to test the
                         entire system because
                         of a belief that the
                         policies and procedures
                         are not relevant to a
                         financial statement
                         assertion, are unlikely
                         to be effective, or
                         because evaluating
                         their effectiveness
                         would be inefficient.
                         The AICPA believes this
                         is an appropriate
                         position until such
                         time as managements and
                         auditors are required,
                         as the AICPA and the
                         POB recommend, to
                         report on internal
                         control over financial
                         reporting.

31. The condition of     SAS 60 requires the      Cohen           SEC and
the controls over the    auditor to communicate,  Commission      accounting
accounting system and    generally to the audit   (1978)          profession
management's response    committee, "reportable
to the suggestions of    conditions" noted in
the auditor for          the audit of the
correction of            financial statements.
weaknesses should be     However, although rules
disclosed in the report  were proposed on two
by management. The       separate occasions,
auditor should report    there is no SEC
on whether he agrees     requirement for a
with management's        public report by
description of the       management or by the
company's internal       auditor on internal
controls and should      controls and weaknesses
describe material        therein. (See
uncorrected weaknesses   recommendations 85-90
not disclosed in that    relating to depository
report.                  institutions.) Comments
                         received on the
                         proposals contended
                         that the costs
                         associated with such
                         reports might outweigh
                         their benefit to
                         investors and expressed
                         other concerns. The
                         June 1993 policy
                         statement of the AICPA
                         Board of Directors
                         endorses such a
                         requirement.

32. Information on       See action taken for     Cohen           Accounting
internal accounting      recommendation 31.       Commission      profession
control should be                                 (1978)
provided whenever
audited financial
statements are issued
for use outside the
company.

33. The auditor should   SAS 71 provides          Cohen           Accounting
be required to review    guidance to auditors     Commission      profession
and report on the        who are requested to     (1978)
company's interim        review and report on
information on a timely  interim financial
basis.                   information, but the
                         SEC has not made this a
                         requirement.

34. To provide           SAS 71 para. 10          Cohen           Accounting
assurance when interim   mandates a "sufficient   Commission      profession
information is           knowledge of a client's  (1978)
released, the auditor    internal control
must have an audit       structure," which is
base; that is, he        normally obtained in
should have a            prior audits. However,
continuing relationship  the SAS allows, as it
with the company.        must, for the
Normally, he should      possibility of a new
have audited the         auditor and requires
financial statements of  that auditor to obtain
at least the preceding   the same level of
period, and his audit    knowledge through other
should have included a   procedures. (A recent
comprehensive study and  SEC enforcement case--
evaluation of the        ZZZZ Best--drew
accounting system and    attention to the
the controls over it.    problems that can occur
                         when the auditor does
                         not have an audit
                         base.)

35. The auditor should   SAS 8 was not modified   Cohen           Accounting
read all of the other    for this                 Commission      profession
information              recommendation. The SAS  (1978)
accompanying audited     requires the auditor to
financial statements     read the other
and compare it to the    information and if it
information in the       is materially
financial statements     inconsistent with the
and his audit            financial statements
workpapers to assure     and not corrected, to
himself that it is not   include an explanatory
inconsistent with        paragraph in the audit
anything he knows as a   report, withhold the
result of his audit.     use of the report, or
His report should        withdraw from the
include a description    engagement. The auditor
of the work performed    is advised to consult
and his conclusions.     with legal counsel with
                         respect to material
                         misstatements that are
                         not inconsistent with
                         the financial
                         statements. Also, SAS
                         61 requires the auditor
                         to explain his or her
                         responsibility for the
                         other information to
                         the audit committee.

36. If the process of    Attestation standards    Cohen           Accounting
preparing forecasts is   have been issued for     Commission      profession
standardized to the      financial forecasts and  (1978)
same extent as that for  projections, but no
other accounting         requirement for their
information, then        inclusion with audited
reviews could be made    historical financial
of the process. The      statements has been
degree of                adopted. In that
standardization that     connection, the Jenkins
would be required has    Committee has found
so far not been          that users do not
approached.              expect management to
                         provide forecasts or
                         projections.

37. To the extent        Such information is not  Cohen           Accounting
information bearing on   required to be reported  Commission      profession
the efficiency,          by public companies.     (1978)
economy, or
effectiveness of
corporate programs,
including social
programs, is produced
by the accounting
system and is required
to be disclosed in
public releases of
financial information,
the audit function
should evolve to
include it.

38-42. The acceptance                             Cohen
and discharge of added                            Commission
responsibilities should                           (1978)
be communicated by the
auditor to users of his
work. The additional
messages, for example,
should cover

38. ...other             See action taken for                     Accounting
information in           recommendation 35 for                    profession
documents accompanying   the auditor's
the audited financial    responsibilities. The
statements.              auditor's report was
                         not modified to report
                         on the execution of
                         those responsibilities.
                         To do so in today's
                         environment would
                         unduly expose the
                         auditor to additional
                         liability. However, SAS
                         61 requires the auditor
                         to explain his or her
                         responsibility for
                         other information
                         accompanying the
                         financial statements to
                         the audit committee.

39. ...association with  Interim information                      Accounting
interim information.     accompanying audited                     profession
                         financial statements of
                         public companies is
                         marked as "unaudited"
                         but is required to be
                         reviewed under SAS 71.
                         However, the auditor's
                         report is not modified
                         unless the information
                         is omitted or the
                         auditor has not made
                         such a review. These
                         requirements are
                         believed to be
                         acceptable to the SEC.

40. ...internal          Neither management nor                   Accounting
accounting controls.     the auditor of an                        profession
                         entity, with the
                         exception of certain
                         federally insured
                         depository
                         institutions, is
                         required to issue a
                         public report on an
                         entity's internal
                         controls. (SAS 60 does
                         mandate a report,
                         generally to the audit
                         committee, on
                         "reportable conditions"
                         noted during an audit
                         of financial
                         statements.) The AICPA
                         has recommended that
                         such a requirement be
                         enacted by the SEC.

41. ...corporate codes   There is no requirement                  Accounting
of conduct.              for the auditor to                       profession
                         review the company's
                         code of conduct. See
                         action taken for
                         recommendation 26 for
                         additional commentary.

42. ...meetings with     The auditor is required                  Accounting
the audit committee.     under SAS 61 to                          profession
                         communicate certain
                         matters to the audit
                         committee, but those
                         communications are not
                         mentioned in the
                         auditor's report.

43-47. Boards of                                  Cohen
directors (or official                            Commission
bodies, if necessary)                             (1978)
should require the
company's chief
financial officer or
other representative of
management to present a
report by management
that

43. ...acknowledges the  Although many companies                  Public
responsibility of        voluntarily issue                        companies
management for the       reports by management
representations in the   that address some, if
financial information.   not all, of the items
                         suggested for
                         disclosure, there is no
                         SEC requirement for
                         such a report.

44. ...provides          See action taken for                     Public
managements assurances   recommendation 43.                       companies
that the information is
presented in conformity
with GAAP appropriate
in the circumstances
and that all material
uncertainties have been
appropriately accounted
for or disclosed.

45. ...indicates that    See action taken for                     Public
the company's legal      recommendation 43.                       companies
counsel has been
consulted regarding the
accounting for or
disclosure of legal
matters and that those
matters have been
appropriately
disclosed.

46. ...presents          See action taken for                     Public
management's assessment  recommendation 43.                       companies
of the company's
accounting system and
controls over it.

47. ...describes the     See action taken for                     Public
work of the company's    recommendation 43.                       companies
audit committee and its
internal auditors.

48. The auditor should   The recognition of       Cohen           Accounting
be required by the ASB   compilation and review   Commission      profession
to report on all         services in Statements   (1978)
unaudited financial      on Standards for
information with which   Accounting and Review
he is associated. Users  Services addresses this
should be informed       recommendation with
about the work done and  respect to private
the assurances intended  companies. The audited
rather than merely       information in
about the audit that is  financial statements of
not done.                public companies is
                         typically interim
                         financial information,
                         covered by SAS 71.

49. Professional         SAS 71 addresses this    Cohen           Accounting
standards should         matter in the context    Commission      profession
require that if          of interim financial     (1978)
information acquired in  information and during
performing other         the performance of
services indicates a     other specified
material deficiency in   procedures.
unaudited financial
information issued by
an audit client, the
independent auditor
should persuade the
client to correct the
information or, failing
that, assure that the
necessary disclosure is
made.

50. There should be a    The SEC has been         Cohen           Accounting
limited extension of     willing to provide a     Commission      profession
the "safe harbor"        "safe harbor" with       (1978)
concept when auditors    respect to forecasts
are asked to assume new  and projections. The
responsibilities or      Private Securities
significantly extend     Litigation Reform Act
old ones.                of 1995 (ï¿½301) provides
                         an extension of the
                         "safe harbor" concept
                         when the auditor
                         notifies regulatory
                         authorities about
                         suspected fraud.

51. Existing accounting  This recommendation has  Price           Accounting
standards should be      not been adopted in      Waterhouse      profession
expanded to include a    this form. However, SAS  (1985)
requirement that the     78 (which supersedes
auditor review the       SAS 55) and SAS 59
company's system of      focus the auditor's
management controls,     attention on the
including conducting an  control environment and
audit process to more    require the auditor to
adequately address the   consider whether there
company's financial      is substantial doubt
condition as well as     about the entity's
its financial position.  ability to continue as
                         a going concern. See
                         also SAS 64 and 77,
                         which supersede SAS 59.

52. Enhance the          SOP 94-6, issued in      Big 7           Accounting
relevance of financial   December 1994, calls     (1986)          profession
statements through       for increased
improved disclosures of  disclosures of risks
risks and                and uncertainties.
uncertainties.

53. Audit the enhanced   Audits of financial      Big 7           Accounting
financial statement      statements that will     (1986)          profession
disclosures of risks     encompass such
and uncertainties.       disclosures include the
                         additional disclosures
                         relative to risks and
                         uncertainties.

54. The accounting       SAS 59 required the      GAO             Accounting
profession should be     auditor who concludes    (1986)          profession
providing better         that there is
disclosure and early     substantial doubt about
warnings regarding the   the entity's ability to
condition of companies   continue as a going
that are in precarious   concern for a
positions.               reasonable period of
                         time to reflect that
                         conclusion in his or
                         her report, and
                         provides guidance on
                         relevant disclosures.
                         However, SAS 77, issued
                         in 1995 to amend SAS
                         59, precludes the
                         auditor from using
                         conditional language in
                         the auditor's
                         conclusion about the
                         entity's ability to
                         continue as a going
                         concern in a going-
                         concern paragraph.

55. The accounting       SAS 54 discusses the     GAO             Accounting
profession should be     consideration an         (1986)          profession
improving its efforts    auditor should give to
in determining whether   the possibility of
companies are complying  illegal acts. Although
with laws and            the SAS states that an
regulations.             audit normally does not
                         include procedures
                         specifically designed
                         to detect illegal acts,
                         para. 9 provides
                         examples of specific
                         information that may
                         raise a question
                         concerning possible
                         illegal acts. The SAS
                         includes guidance on
                         audit procedures in
                         response to possible
                         illegal act, as well as
                         the auditor's response
                         to detected acts. FDI
                         Act ï¿½36(e) requires
                         auditors to report on
                         large banks' and
                         thrifts' compliance
                         with laws and
                         regulations. Also, SAS
                         68 deals with
                         compliance auditing
                         applicable to
                         governmental entities
                         and other recipients of
                         governmental financial
                         assistance.

56. The accounting       The proposed revision    GAO             Accounting
profession should be     of SAS 53, which was     (1986)          profession
making sure internal     exposed for comment in
controls and accounting  May 1996, provides more
systems are in place     specific guidance for
that will help prevent   the auditor's use in
fraud and mismanagement  assessing the risk of
in the companies being   fraud.
audited.

57-60. A business                                 AICPA Task
enterprise should make                            Force on Risks
disclosures beyond                                and
those now generally                               Uncertainties
made in financial                                 (1987)
reports about the risks
and uncertainties
facing it as of the
date of the financial
reports. The
disclosures should
include

57. ...a description of  SOP 94-6 requires                        FASB
the kinds of products    disclosure of these
or services the          matters.
enterprise sells, its
principal markets, and
the locations of those
markets.

58. ...an explanation    See action taken for                     FASB
that the preparation of  recommendation 57.
historical financial
information requires
the use of management's
estimates.

59. ...a discussion of   See action taken for                     FASB
significant, change-     recommendation 57.
sensitive estimates
used by management to
measure assets and
liabilities at the
reporting date.
Disclosure would be
required for any
significant estimate
used in the
determination of the
carrying amount of an
asset or a liability at
the current reporting
date that based on
facts and circumstances
existing at that date,
is particularly
susceptible to changes
that could result in
material effects on
near-term results of
operations.

60. ...information       See action taken for                     FASB
about current            recommendation 57.
vulnerability to risk
due to concentrations
(for example, in the
enterprise's assets,
customers, or
suppliers), other than
those generally known
to be associated with
the industry or trade
in which the entity
operates, would be
required in the
following
circumstances:
(a) concentrations
existing at the report
date make the
enterprise vulnerable
to the risk of severe
impact on near-term
cash flows or results
of operations and (b)
it is at least
reasonably possible
that the events that
could cause the severe
impact will occur.

61. For the top          This responsibility is   Treadway        Public
management of a public   emphasized in the COSO   Commission      companies
company to discharge     report, Internal         (1987)
its obligation to        Control--Integrated
oversee the financial    Framework, in the
reporting process, it    sections on the control
must identify,           environment and on risk
understand, and assess   assessment.
the factors that may
cause the company's
financial statements to
be fraudulently
misstated.

62. Public companies     This is required by the  Treadway        Public
should maintain          Foreign Corrupt          Commission      companies
internal controls that   Practices Act of 1977    (1987)
provide reasonable       and emphasized by the
assurance that           issuance of the COSO
fraudulent financial     report and the
reporting will be        surrounding publicity
prevented or subject to  and educational
early detection.         efforts.

63. Public companies     COSO received 1,014      Treadway        Public
should develop and       responses to a 1988      Commission      companies
enforce written codes    survey of over 8,500     (1987)
of corporate conduct.    public companies that
Codes of conduct should  indicated that a
foster a strong ethical  significant number of
climate and open         companies have written
channels of              codes of conduct:
communication to help    --87 percent of
protect against          companies with over
fraudulent financial     10,000 employees,
reporting. As a part of  --60 percent with 1,000
its ongoing oversight    to 10,000 employees,
of the effectiveness of  --32 percent with 100
internal controls, a     to 1,000 employees,
company's audit          and
committee should review  --15 percent with under
annually the program     100 employees.
that management
establishes to monitor
compliance with the
code.

64. Public companies     This is required by the  Treadway        Public
should maintain          Foreign Corrupt          Commission      companies
accounting functions     Practices Act of 1977    (1987)
that are designed to     and emphasized in the
meet their financial     COSO report in the
reporting obligations.   section on control
                         activities.

65. Public companies     This is emphasized in    Treadway        Public
should maintain an       the COSO report in the   Commission      companies
effective internal       section on monitoring    (1987)
audit function staffed   and further discussed
with an adequate number  in Chapter 8 on roles
of qualified personnel   and responsibilities.
appropriate to the size  In the survey referred
and the nature of the    to under action take
company.                 for recommendation 63,
                         54 percent of the
                         respondents indicated
                         that their companies
                         have a separate
                         internal audit
                         function.
                         Significantly, this was
                         true in 98 percent of
                         the companies with over
                         10,000 employees and in
                         80 percent of the
                         companies with 1,000 to
                         10,000 employees.

66. Public companies     This is emphasized in    Treadway        Public
should ensure that       the COSO report in the   Commission      companies
their internal audit     section on monitoring.   (1987)
functions are            While in the survey
objective.               referred to under
                         action taken for
                         recommendation 63 only
                         26 percent of the
                         respondents indicated
                         that the person
                         responsible for the
                         internal audit function
                         reports to the chief
                         executive officer, as
                         recommended by the
                         Treadway Commission, an
                         impressive 86 percent
                         of the respondents said
                         that the person had
                         private access to the
                         audit committee.

67. Internal auditors    This appears clear from  Treadway        Public
should consider the      the Standards for the    Commission      companies
implications of their    Professional Practice    (1987)
nonfinancial audit       of Internal Auditing
findings for the         issued by the Institute
company's financial      of Internal Auditors,
statements.              as they relate to due
                         professional care.
                         Moreover, the COSO
                         report as a whole
                         emphasizes the notion
                         of bringing all
                         available knowledge to
                         bear on a control issue
                         and on an evaluation of
                         the reliability of the
                         financial statements.

68. Management and the   SAS 65 para. 23          Treadway        Public
audit committee should   discusses coordination   Commission      companies
ensure that the          of the audit work with   (1987)
internal auditors'       the work of the
involvement in the       internal auditors, and
audit of the entire      the practice is
financial reporting      suggested in the Good
process is appropriate   Practice Guidelines for
and properly             the Audit Committee
coordinated with the     published by the
independent public       Treadway Commission.
accountant.

69. COSO should          The COSO report,         Treadway        Accounting
cooperate in developing  Internal Control--       Commission      profession
additional integrated    Integrated Framework,    (1987)
guidance on internal     was issued in September
control.                 1992 and an addendum,
                         which resulted in GAO
                         endorsement of the COSO
                         report, was issued in
                         May 1994.

70. All public           SAS 60 requires the      Treadway        SEC
companies should be      auditor to communicate,  Commission
required by SEC rule to  generally to the audit   (1987)
include in their annual  committee, "reportable
reports to stockholders  conditions" noted in
management reports       the audit of the
signed by the chief      financial statements.
executive officer and    In 1979 and 1988, the
the chief accounting     SEC proposed
officer and/or the       requirements for a
chief financial          public report by
officer. The management  management or by the
report should            auditor on internal
acknowledge              controls and weaknesses
management's             therein. (See action
responsibilities for     taken for
the financial            recommendations 78-85
statements and internal  relating to depository
control, discuss how     institutions.) Comments
these responsibilities   received contended that
were fulfilled, and      the costs associated
provide management's     with such reports might
assessment of the        outweigh their benefit
effectiveness of the     to investors, and
company's internal       others expressed other
controls.                concerns. The proposals
                         were not adopted. The
                         AICPA believes such a
                         requirement should be
                         instituted.

71. All public           The SEC's proxy rules    Treadway        SEC
companies should be      require disclosure of    Commission
required by SEC rule to  whether the company has  (1987)
include in their annual  an audit committee and,
reports to stockholders  if so, the identity of
a letter signed by the   its members and the
chairman of the audit    function it performs.
committee describing     Additional disclosure
the committee's          of audit committee
responsibilities and     activities is required
activities during the    when there is a change
year.                    in the company's
                         auditors. Therefore, no
                         formal action has been
                         taken on this
                         recommendation.

72. The SEC should       The SEC issued a         Treadway        SEC
require independent      release on the subject   Commission
public accountants to    of timely auditor        (1987)
review quarterly         involvement with
financial data of all    quarterly reports.
public companies before  Comments expressed
release to the public.   concerns regarding the
                         costs of the reviews
                         and the possible delay
                         in the release of data
                         pending the
                         accountants' review; a
                         regulation was not
                         issued.

73. The ASB should       The AICPA has been       Treadway        ASB
revise the auditor's     reluctant to assume      Commission
standard report to       these additional         (1987)
describe the extent to   responsibilities and
which the independent    the related risk of
public accountant has    additional liability
reviewed and evaluated   without a legislative
the system of internal   or regulatory mandate.
accounting control. The  Nevertheless, the ASB
ASB also should provide  has a current project
explicit guidance to     to consider adding
address the situation    language to the
where, as a result of    auditor's report that
his knowledge of the     would describe the
company's internal       auditor's
accounting controls,     responsibility for
the independent public   internal control in an
accountant disagrees     audit of the financial
with management's        statements. An auditing
assessment as stated in  interpretation (AU
the proposed             ï¿½9550.03) provides
management's report.     guidance to the auditor
                         who disagrees with
                         management's published
                         assessment of the
                         company's internal
                         controls.

74. Management of banks  The FDI Act (amended by  GAO             SEC and
and bank holding         FDICIA) requires         (1988)          accounting
companies with           internal control and                     profession
securities affiliates    compliance reporting
should report on the     for large banks and
adequacy of the          thrifts.
entities' internal
controls and on
compliance with laws
and regulations.
Moreover, as part of
the annual financial
audit, independent
auditors should be
required to review and
report on management's
assertions regarding
internal controls and
compliance.

75. Boards of directors  The COSO report          GAO             Public
of public companies      identifies compliance    (1989)          companies
should encourage         with applicable laws
management--which        and regulations as one
should seek the advice   of the three categories
of its in-house lawyers  of internal controls
and outside counsel--    and provides tools to
to develop and maintain  evaluate the
a compliance program.    effectiveness of
The program should       related controls.
include the
establishment of
internal controls to
prevent and detect
noncompliance with laws
and regulations that,
if violated, could
materially affect a
company's operations
and financial
statements.

76. The SEC should       The SEC has complied     GAO             SEC
expedite its review of   with this                (1989)
MD&A disclosures and     recommendation. See
issue guidance, such as  Financial Reporting
the planned              Release 36 concerning
interpretive release,    MD&A disclosures.
to improve information
on risks and
disclosures in annual
reports.

77. The SEC should       Although proposed as a   GAO             SEC
adopt its proposal to    rule amendment, the SEC  (1989)
require management of    has not imposed this
public companies to      requirement, which the
publicly report on its   AICPA believes should
responsibility for the   be implemented. See
financial statements     action taken for
and internal controls.   recommendation 70.
The SEC should require
the auditor to review
and publicly report on
the management report.

78. The Congress should  The FDI Act (amended by  GAO             Congress
enact legislation        FDICIA) contains         (1989)
requiring each insured   provisions for internal
bank to:                 control and compliance
(a) prepare an annual    reporting for large
management report that   banks and thrifts.
(1) describes
management's
responsibility for
preparing financial
statements and for
establishing and
maintaining an
effective internal
control structure and
(2) contains
management's assessment
of the internal control
structure,
(b) prepare an annual
management report that
(1) describes
management's
responsibilities for
complying with laws and
regulations related to
the safety and
soundness of thrift
operations and for
establishing methods to
monitor compliance and
(2) contains
management's assessment
of the bank's
compliance with laws
and regulations related
to operations, and
(c) have the bank's
independent auditor
report on the
management assertions
described above and
submit such reports
with the independent
auditor's audit report
to the bank's
regulator. The report
also recommends that
the insurer identify
applicable laws and
regulations that have
material consequences
on the safety and
soundness of bank
operations to be
reviewed and reported
on in management
reports.

79. The Congress should  The FDI Act (amended by  GAO             Congress
enact legislation        FDICIA) contains         (1989)
requiring each insured   provisions for internal
thrift to                control and compliance
(a) prepare an annual    reporting for large
management report that   banks and thrifts.
(1) describes
management's
responsibility for
preparing financial
statements and for
establishing and
maintaining an
effective internal
control structure and
(2) contains
management's assessment
of the internal control
structure,
(b) prepare an annual
management report that
(1) describes
management's
responsibilities for
complying with laws and
regulations related to
the safety and
soundness of thrift
operations and for
establishing methods to
monitor compliance and
(2) contains
management's assessment
of the thrift's
compliance with laws
and regulations related
to operations, and
(c) have the thrift's
independent auditor
report on the
management assertions
described above and
submit such reports
with the independent
auditor's audit report
to the thrift's
regulator. The report
also recommends that
the insurer identify
applicable laws and
regulations that have
material consequences
on the safety and
soundness of thrift
operations to be
reviewed and reported
on in management
reports.

80. The Congress should  These matters were       GAO             Congress
amend banking laws as    addressed in FDI Act     (1990)
well as securities laws  ï¿½36(e) and (c) for
to strengthen both       large banks and
management's and the     thrifts. The Private
auditor's                Securities Litigation
responsibilities for     Reform Act of 1995 ï¿½301
evaluating and           requires auditors to
reporting on internal    perform procedures to
controls (including      identify related-party
those directly and not   transactions and detect
directly related to the  illegal acts (but does
financial statements)    not require auditors to
and compliance with      evaluate or report on
laws and regulations.    internal controls).

81-83. The Congress                               GAO
should enact                                      (1991)
legislation requiring
that as a condition for
federal depository
insurance, depository
institutions

81. ...prepare annual    See FDI Act ï¿½36(b)(1)                    Congress
financial statements in  and 36(a)(2)(A)(ii),
accordance with GAAP     respectively, and
and have them audited    implementing
by an independent        regulations.
public accountant.

82. ...maintain a        See FDI Act ï¿½36.                         Congress
system of internal
accounting controls,
which meets
requirements like those
contained in
ï¿½13(b)(2)(B) of the
Securities Exchange Act
of 1934, as added by
the Foreign Corrupt
Practices Act.

83. ...maintain          See FDI Act ï¿½36.                         Congress
controls to ensure
compliance with laws
and regulations and
with special regulatory
directives, such as
memorandums of
understanding or cease
and desist orders.

84. The Congress should  No action taken.         GAO             Congress
enact legislation that                            (1991)
authorizes the
appropriate regulator
to require that the
independent public
accountant for large
institutions review
specific operations of
the institution, as
deemed necessary, to
ensure regulatory
objectives are met.

85-87. The Congress                               GAO
should enact                                      (1991)
legislation requiring
independent auditors of
federally insured
financial institutions
to

85. ...report on         FDI Act ï¿½36(c) and                       Congress
management's             36(a)(2)(A)(ii),
assertions described in  respectively, address
its report on internal   such requirements
controls by studying     relative to the
and evaluating the       internal control
institution's internal   structure over
controls in accordance   financial reporting.
with GAAS or other
procedures prescribed
by the regulators and
include the auditor's
report in management's
annual report.

86. ...report to the     See FDI Act ï¿½36(h)(2)                    Congress
institution and the      and implementing
regulators the internal  regulations.
control weaknesses that
are important but are
not defined as material
to the financial
statements or already
included in
management's annual
report.

87. ...report to the     See FDI Act ï¿½36(e).      C               ongress
institution and the      Legislation has been
regulators on the        introduced to repeal
institution's            this requirement.
compliance with (a)
laws and regulations
that are identified by
the regulators as
relating to safety and
soundness where
compliance can be
objectively determined
and (b) special
regulatory directives,
as defined by the
regulators, to maintain
prudent operations or
to restore the
financial health of the
institution.

88-90. The Congress                               GAO
should enact                                      (1991)
legislation that
requires large
institutions to have
the independent public
accountant that audits
their financial
statements

88. ...review and        See FDI Act ï¿½36(g)(2).                   Congress
report on the
institution's quarterly
financial reports
employing specific
procedures agreed upon
with regulators.

89. ...examine a 1-      No action taken.                         Congress
year financial forecast
prepared for the
independent public
accountant.

90. ...meet at least     No action taken with                     Congress
annually with the        respect to annual
institution's            financial forecasts.
regulators and audit     FDI Act ï¿½36(g) does
committee to review the  require the audit
institution's annual     committee to review the
financial forecast and   basis for the
assessment of internal   independent auditor's
controls.                reports, which includes
                         an assessment of
                         internal controls.

91. Management should    FDI Act ï¿½36(b)(2)        GAO             Congress
have to prepare an       established such         (1991)
annual report to be      requirements for the
published along with     internal control
the audited financial    structure over
statements, which        financial reporting for
(a) describes actions    large banks and
taken to establish and   thrifts.
maintain an effective
system of internal
controls that meets a
minimum set of specific
measurable legislative
objectives for internal
control structures,
(b) contains
management's assessment
of the effectiveness of
its internal control
structure and
identifies material
weakness that have not
been corrected, and
(c) is signed by the
chief executive officer
and the chief
accounting or financial
officer of the
organization.

92. Auditors should be   FDI Act ï¿½36(c) and       GAO             Congress
required to evaluate     36(a)(2)(A)(ii),         (1991)
and report on the        respectively, address
assertions described in  such requirements
management's report on   relative to the
internal controls. The   internal control
auditor's assessment     structure over
should be included in    financial reporting for
management's annual      large banks and
report.                  thrifts.

93. The ASB should       SSAE 2 on reporting on   POB             ASB
establish standards      an entity's internal     (1993)
that require clear       control structure over
communication of the     financial reporting was
limits of the            issued in May 1993.
assurances being
provided to third
parties when auditors
report on the adequacy
of client internal
control systems.

94. The AICPA's AcSEC    This was done in         POB             Accounting
should promptly adopt a  December 1994 with the   (1993)          profession
Statement of Position    issuance of SOP 94-6.
providing guidance on,
and requiring
disclosure of
information about, the
nature of risks and
uncertainties
associated with the
reporting entity's
operations and
financial condition.

95. The SEC should       This recommendation was  POB             SEC
require registrants to   discussed in a meeting   (1993)
include in a document    between AICPA
containing the annual    representatives and the
financial statements     Chairman of the SEC on
(a) a report by          December 15, 1993.
management on the        However, no action was
effectiveness of the     taken. (For discussion
entity's internal        of SEC rule proposals,
control system relating  see action taken for
to financial reporting   recommendation 70.)
and (b) a report by the
registrant's
independent accountant
on the entity's
internal control system
relating to financial
reporting.

96. FASB should add to   FASB does not believe    POB             FASB
its agenda a project to  it is appropriate at     (1993)
study comprehensively    this time to add this
the possibility of       project to its agenda.
requiring the reporting  Given the fact that the
of values and changes    Jenkins Committee has
in values rather than    learned that users
historical transaction   oppose replacing the
prices, either as a      current historical
basis to propose         cost-based accounting
changes to financial     model with a fair value
accounting standards or  accounting model, the
to explain publicly why  AICPA concurs with this
such a change in         decision.
accounting standards is
impractical or
otherwise
inappropriate. In
carrying out this
effort, FASB should
consider the
conclusions of the
AICPA, the FEI, and the
AIMR studies with
respect to the future
of financial reporting.

97. FASB should add to   SOP 94-6 partially       POB             FASB
its agenda a project to  addresses this           (1993)
design a brief           recommendation by
statement explaining     requiring disclosure
the limitations of       about the use of
financial statements.    estimates in financial
The explanation should   statements. It is not
be made a part of every  likely that the
set of financial         benefits of an
statements described as  additional FASB
being "in accordance     requirement would
with generally accepted  outweigh the costs
accounting principles."  involved in issuing
                         such a document.

98. The AICPA joins the  The SEC proposed but     AICPA Board of  SEC
POB in calling for a     never implemented such   Directors
statement by             a requirement. See       (1993)
management, to be        action taken for
included in the annual   recommendation 70.
report, on the
effectiveness of the
company's internal
controls over financial
reporting, accompanied
by an auditor's report
on management's
assertions.

99. Set financial        In February 1996, FASB   AIMR            FASB
information in its       issued an Invitation to  (1993)
business context.        Comment on the
Management should        recommendations of
explicitly describe its  AIMR. Comments were due
strategies, plans, and   to FASB July 31, 1996.
expectations and report
its results in a manner
that is consistent with
the organization and
management of the firm.

100. Continue to         See action taken for     AIMR            FASB
deliberate on the role   recommendation 99.       (1993)
of current values in
financial reports.

101. Recognize all       See action taken for     AIMR            FASB
executory contracts.     recommendation 99.       (1993)

102. Develop standards   See action taken for     AIMR            FASB
for reporting            recommendation 99.       (1993)
comprehensive income to
facilitate analysis of
income statement items
that have a bearing on
forecasting and
valuation of the firm.

103. Provide frequent    See action taken for     AIMR            FASB
and detailed reports     recommendation 99.       (1993)
(continue quarterly
reporting and provide
more disaggregated
financial data in
interim reports).

104. The appropriate     Financial regulators do  GAO             Regulators
regulatory authorities   not think it is          (1994)
should establish         appropriate to mandate
specific requirements    specific management
for independent,         policies to dealers in
knowledgeable audit      derivatives. Financial
committees and internal  regulators believe that
control reporting for    current assessments of
all major OTC            internal controls are
derivatives dealers.     adequate and cover
Internal control         derivatives activities.
reporting by boards of   FDI Act ï¿½36 includes
directors, managers,     requirements for
and external auditors    internal control
should include           reporting for large
assessments of           banks and thrifts.
derivatives risk-
management systems.

105. FASB should         This complex matter is   GAO             FASB
consider adopting a      on FASB's active         (1994)
market value accounting  agenda.
model for all financial
instruments, including
derivatives products.

106. The SEC should      The SEC believes that    GAO             SEC
ensure that SEC          at this time it is more  (1994)
registrants that are     beneficial to investors
major end users of       to focus on improving
complex derivative       the accounting for and
products establish and   disclosure of
implement corporate      derivatives than to
requirements for public  adopt mandatory
reporting on internal    reporting on internal
controls. Internal       controls.
controls reporting by
boards of directors,
managers, and external
auditors should include
assessments of
derivatives risk-
management systems.

107. It is urgent that   The Private Securities   Kirk Panel      SEC
the SEC take the lead    Litigation Reform Act    (1994)
in helping the           of 1995 is expected to
profession to reduce     reduce the profession's
exposure to unwarranted  exposure to unwarranted
litigation. There are    litigation.
dangers, not just to
the profession but to
the investing public,
if the current
liability situation
continues to drift
without SEC leadership.

108. Report separately   FASB has issued an       Jenkins         FASB and SEC
the effects of core and  Invitation to Comment    Committee
noncore activities and   addressing the Jenkins   (1994)
events, and measure at   Committee and AIMR
fair value noncore       recommendations.
assets and liabilities.  Comments were due in
                         July 1996. The SEC will
                         hold a symposium on
                         these recommendations
                         during 1996.

109. Standard setters    FASB has issued an       Jenkins         FASB, AICPA,
should develop a         Invitation to Comment    Committee       and SEC
comprehensive model of   addressing the Jenkins   (1994)
business reporting       Committee and AIMR
indicating the types     recommendations.
and timing of            Comments were due in
information that users   July 1996. The SEC will
need to value and        hold a symposium on
assess the risk of       these recommendations
their investments.       during 1996.

110. Improve the         See action taken for     Jenkins         FASB and AICPA
understanding of costs   recommendation 109.      Committee
and benefits of                                   (1994)
business reporting,
recognizing that
definitive
quantification of costs
and benefits is not
possible.

111. Improve disclosure  FASB, in cooperation     Jenkins         FASB and SEC
of business segment      with Canadian standard-  Committee
information.             setting authorities,     (1994)
                         has exposed for public
                         comment revised
                         standards for
                         disclosing business
                         segment information.
                         See action taken for
                         recommendation 109.

112. Address the         The SEC recently         Jenkins         FASB and SEC
disclosures and          published for public     Committee
accounting for           comment amendments to    (1994)
innovative financial     its rules to require
instruments.             enhanced disclosures of
                         the accounting policies
                         and market risks
                         associated with certain
                         instruments. See action
                         taken for
                         recommendation 109.

113. Improve             See action taken for     Jenkins         FASB and SEC
disclosures about the    recommendations 109 and  Committee
identity,                112.                     (1994)
opportunities, and
risks of off-balance
sheet financing
arrangements and
reconsider the
accounting for those
arrangements.

114. Improve the         See action taken for     Jenkins         FASB, SEC, or
disclosures about the    recommendations 109 and  Committee       public
uncertainty of           112. Also, the           (1994)          companies
measurements of certain  accounting profession
assets and liabilities.  issued SOP 94-6 on
                         risks and uncertainties
                         in December 1994.

115. Improve quarterly   See action taken for     Jenkins         SEC or public
reporting by reporting   recommendation 109.      Committee       companies
on the fourth quarter                             (1994)
separately and
including business
segment data.

116. Allow for flexible  See action taken for     Jenkins         Accounting
auditor association      recommendation 109.      Committee       profession
with business                                     (1994)
reporting, whereby the
elements of information
on which auditors
report and the level of
auditor involvement
with those elements are
decided by agreement
between a company and
the users of its
business reporting.

117. The auditing        Anticipating the effect  Jenkins         Accounting
profession should        of future changes in     Committee       profession
prepare to be involved   the reporting model is   (1994)
with all the             one of the major
information in the       responsibilities of the
comprehensive model so   AICPA's Special
that companies and       Committee on Assurance
users can call on them   Services as well as an
to provide assurance on  ongoing responsibility
any of the model's       of the ASB.
elements.

118. The newly formed    The AICPA's Special      Jenkins         Accounting
AICPA Special Committee  Committee on Assurance   Committee       profession
on Assurance Services    Services is still in     (1994)
should research and      the early stages of its
formulate conclusions    work.
on analytical
commentary in auditors'
reports within the
context of the
Committee's model,
focusing on users'
needs for information.

119. The profession      As indicated in the      Jenkins         Accounting
should continue its      details of the Jenkins   Committee       profession
projects on other        Committee report, the    (1994)
matters related to       ASB has active projects
auditor association      on reporting on
with business            internal control and on
reporting.               the auditor's
                         responsibility for the
                         detection of fraud.
                         Also, the SECPS has
                         issued a response to
                         the report of the POB
                         panel on auditor
                         independence.

120. National and        The new AICPA Financial  Jenkins         FASB, AICPA,
international standard   Reporting Coordinating   Committee       SEC, and
setters and regulators   Committee will follow    (1994)          international
should increase their    up on this                               standard
focus on the             recommendation of the                    setters and
information needs of     Jenkins Committee.                       regulators
users, and users should
be encouraged to work
with standard setters
to increase the level
of their involvement in
the standard-setting
process.

121. U.S. standard       FASB, the SEC, and the   Jenkins         FASB, AICPA,
setters and regulators   AICPA are all actively   Committee       and SEC
should continue to work  involved in efforts to   (1994)
with their non-U.S.      achieve international
counterparts and         accounting standards
international standard   that meet users' needs
setters to develop       for information. For
international            example, FASB meets
accounting standards,    regularly with standard
providing that the       setters from the United
resulting standards      Kingdom, Australia,
meet users' needs for    Canada, and the
information.             International
                         Accounting Standards
                         Committee and has
                         jointly published
                         studies with them about
                         future events, hedge
                         accounting, leases, and
                         loss provisions.

                         The International
                         Accounting Standards
                         Committee has set a
                         goal of producing, by
                         1998, accounting
                         standards sufficient in
                         quality to be adopted
                         by the International
                         Organization of
                         Securities Commissions,
                         of which the SEC is a
                         member, as suitable for
                         financial statements
                         supporting securities
                         issuance in any
                         country.

122. Lawmakers,          The Congress recently    Jenkins         Congress, SEC,
regulators, and          passed the Private       Committee       FASB, and
standard setters should  Securities Litigation    (1994)          AICPA
develop more effective   Reform Act of 1995,
deterrents to            which provides a safe
unwarranted litigation   harbor for certain
that discourage          forward-looking
companies from           statements (in ï¿½102 of
disclosing forward-      this act).
looking information.

123. Companies should    See action taken for     Jenkins         SEC
be encouraged to         recommendation 109.      Committee
experiment voluntarily                            (1994)
with ways to improve
the usefulness of
reporting consistent
with the Committee's
model. Standard setters
and regulators should
consider allowing
companies that
experiment to
substitute information
specified by the model
for information
currently required.

124. Standard setters    See action taken for     Jenkins         FASB and AICPA
should adopt a longer-   recommendation 109.      Committee
term focus by                                     (1994)
developing a vision of
the future business
environment and users'
needs for information
in that environment.
Standards should be
consistent
directionally with that
long-term vision.

125. Regulators should   No action taken.         Jenkins         SEC
consider whether there   However, the SEC has     Committee
should be any changes    issued a proposal that   (1994)
to the current           would allow for
requirement that public  abbreviated financial
companies make all       statements, thus
disclosures publicly     acknowledging that
available.               users' needs may
                         differ.
--------------------------------------------------------------------------------

STATEMENTS, OPINIONS, AND RELEASES
REFERENCED IN APPENDIX II
========================================================= Appendix III



                        Table III.1
          
           Selected FASB Statements of Financial
                    Accounting Standards

    FASB Statement Number and Title         Date issued
--  --------------------------------------  --------------
5   Accounting for Contingencies            March 1975

8   Superseded by FAS 52                    October 1975

33  Superseded by FAS 89                    September 1979

52  Foreign Currency Translation            December 1981

89  Financial Reporting and Changing        December 1986
    Prices

95  Statement of Cash Flows                 November 1987

96  Superseded by FAS 109                   December 1987

10  Disclosures About Fair Value of         December 1991
7   Financial Instruments

10  Accounting for Income Taxes             February 1992
9

11  Accounting by Creditors for Impairment  May 1993
4   of a Loan: An Amendment of FASB
    Statements No. 5 and 15

11  Accounting for Certain Investments in   May 1993
5   Debt and Equity Securities

11  Disclosure About Derivative Financial   October 1994
9   Instruments and Fair Value of
    Financial Instruments

12  Accounting for the Impairment of Long-  March 1995
1   Lived Assets and for Long-Lived Assets
    to be Disposed Of

12  Accounting for Mortgage Servicing       May 1995
2   Rights: An Amendment of FASB Statement
    No. 65

12  Accounting for Stock-Based              October 1995
3   Compensation

12  Accounting for Certain Investments      November 1995
4   Held by Not-for-Profit Organizations

12  Accounting for Transfers and Servicing  June 1996
5   of Financial Assets and
    Extinguishments of Liabilities
----------------------------------------------------------


                        Table III.2
          
              Selected FASB Concept Statements

    FASB Concept Statement Number and
    Title                                   Date issued
--  --------------------------------------  --------------
1   Objectives of Financial Reporting by    November 1978
    Business Enterprises

2   Qualitative Characteristics of          May 1980
    Accounting Information

5   Recognition and Measurement in          December 1984
    Financial Statements of Business
    Enterprises
----------------------------------------------------------


                        Table III.3
          
                Selected FASB Status Reports

    FASB Status Report Number and Title     Date issued
--  --------------------------------------  --------------
22  FASB Issues Research Report on Hedge    October 1991
4   Accounting
----------------------------------------------------------


                        Table III.4
          
           Selected AICPA Statements on Auditing
                         Standards

    AICPA SAS Number and Title              Date issued
--  --------------------------------------  --------------
1   Codification of Auditing Standards and  November 1972
    Procedures

5   Superseded by SAS 69                    July 1975

7   Communications Between Predecessor and  October 1975
    Successor Auditors

8   Other Information in Documents          December 1975
    Containing Audited Financial
    Statements

11  Superseded by SAS 73                    December 1975

12  Inquiry of a Client's Lawyer            January 1976
    Concerning Litigation, Claims, and
    Assessments

16  Superseded by SAS 53                    January 1977

19  Client Representations                  June 1977

22  Planning and Supervision                March 1978

45  Omnibus Statement on Auditing           August 1983
    Standards -1983

50  Reports on the Application of           July 1986
    Accounting Principles

53  The Auditor's Responsibility to Detect  April 1988
    and Report Errors and Irregularities

54  Illegal Acts by Clients                 April 1988

55  Consideration of the Internal Control   April 1988
    Structure in a Financial Statement
    Audit

56  Analytical Procedures                   April 1988

58  Reports on Audited Financial            April 1988
    Statements

59  The Auditor's Consideration of an       April 1988
    Entity's Ability to Continue as a
    Going Concern

60  Communication of Internal Control       April 1988
    Structure Related Matters Noted in an
    Audit

61  Communications With Audit Committees    April 1988

64  Omnibus Statement on Auditing           December 1990
    Standards -1990

65  The Auditor's Consideration of the      April 1991
    Internal Audit Function in an Audit of
    Financial Statements

67  The Confirmation Process                November 1991

68  Superseded by SAS 74                    December 1991

69  The Meaning of "Present Fairly in
    Conformity With Generally Accepted      January 1992
    Accounting Principles" in the
    Independent Auditor's Report

70  Reports on the Processing of            April 1992
    Transactions by Service Organizations

71  Interim Financial Information           May 1992

73  Using the Work of a Specialist          July 1994

77  Amendments to Statements on Auditing    November 1995
    Standards No. 22, "Planning and
    Supervision," No. 59, "The Auditor's
    Consideration of an Entity's Ability
    to Continue as a Going Concern," and
    No. 62, "Special Reports"

78  Consideration of Internal Control in a  December 1995
    Financial Statement Audit: An
    Amendment to SAS No. 55

79  Amendment to Statements on Auditing     December 1995
    Standards No. 58, Reports on Audited
    Financial Statements
----------------------------------------------------------


                        Table III.5
          
                Selected AICPA APB Opinions

    APB Opinion Number and Title            Date issued
--  --------------------------------------  --------------
19  Reporting Changes in Financial          March 1971
    Position (superseded by FAS 95)

20  Accounting Changes (amended)            July 1971

31  Disclosure of Lease Commitments by      June 1973
    Lessees (superseded by FAS 13)
----------------------------------------------------------


                        Table III.6
          
           Selected AICPA Statements of Position

    AICPA SOP Number and Title              Date issued
--  --------------------------------------  --------------
92  Accounting for Foreclosed Assets        April 1992
-
3

94  Disclosure of Certain Significant       December 1994
-   Risks and Uncertainties
6
----------------------------------------------------------


                        Table III.7
          
           Selected AICPA Statements on Standards
                for Attestation Engagements

    AICPA SSAE Number and Title             Date issued
--  --------------------------------------  --------------
2   Reporting on an Entity's Internal       May 1993
    Control Structure Over Financial
    Reporting
----------------------------------------------------------


                        Table III.8
          
               SEC Accounting Series Releases

    SEC Accounting Series Release Number
    and Title                               Date issued
--  --------------------------------------  --------------
19  Reporting Disagreements With Former     April 29,
4   Accountants--Adoption of Amendments of  1976
    Requirements                            (omitted)

25  Disclosure of Relationships With        June 29, 1978
0   Independent Public Accountants          (omitted)

26  Scope of Services by Independent        June 14, 1979
4   Accountants                             (rescinded)

29  Relationships Between Registrants and   August 20,
6   Independent Accountants                 1981
                                            (codified into
                                            FRR No. 1
                                            Sections 601
                                            and 604)

29  Rescission of Certain Accounting        August 20,
7   Series Releases and Adoption of         1981
    Amendments to Certain Rules of
    Regulation of S-X Relating to
    Disclosure of Maturities of Long-Term
    Obligations
----------------------------------------------------------


                        Table III.9
          
              SEC Financial Reporting Releases

    SEC Financial Reporting Release Number
    and Title                               Date issued
--  --------------------------------------  --------------
36  Management's Discussion and Analysis    May 18, 1989
.   of Financial Condition and Results of
    Operations; Certain Investment Company
    Disclosures
----------------------------------------------------------

EXPERTS CONSULTED IN OUR REVIEW OF
THE ACCOUNTING PROFESSION
========================================================== Appendix IV

SECURITIES AND EXCHANGE COMMISSION

Office of the Chief Accountant: 

Michael Sutton, Chief Accountant
Walter Schuetze, Former Chief Accountant
John Riley, Deputy Chief Accountant
John Albert, Associate Chief Accountant
Michael Kigin, Associate Chief Accountant
Robert Burns, Chief Counsel

FINANCIAL ACCOUNTING FOUNDATION

Dennis Dammerman, President
Joseph S.  LaGambina, Executive Vice President

FINANCIAL ACCOUNTING STANDARDS
BOARD

Members: 

Dennis R.  Beresford, Chair
James J.  Leisenring
Robert Swieringa
Joseph V.  Anania
Robert Northcutt
Anthony T.  Cope
John Foster

Former Members: 

Donald J.  Kirk
Frank Block
Raymond C.  Lauver

Research and Technical Activities Staff: 

Timothy S.  Lucas, Director
J.T.  Ball, Assistant Director
Wayne Upton, Project Manager
Jane Adams, Project Manager
Halsey Bullen, Project Manager
Kevin Mead, Practice Fellow

FINANCIAL ACCOUNTING STANDARDS
ADVISORY COUNCIL

Virgil E.  Conway, Chair

AMERICAN INSTITUTE OF CERTIFIED
PUBLIC ACCOUNTANTS

Board of Directors: 

Ronald S.  Cohen, Chair, Crowe Chizek & Co.
Robert L.  Isrealoff, Former Chair, Isrealoff, Trattner & Co., CPAs,
 P.C.
Barry C.  Melancon, AICPA, President
Eric L.  Schindler, Chair, AICPA Finance Committee, Columbia Paint &
 Coatings

Accounting Standards Executive Committee: 

Michael Crooch, Chair, Arthur Andersen, LLP
John Dirks, Price Waterhouse, LLP
George P.  Fritz, Coopers and Lybrand, LLP
Louis W.  Matusiak, Jr., Geo.  S.  Olive & Co. 

Auditing Standards Board Members: 

Edmund R.  Noonan, Chair, KPMG Peat Marwick, LLP
Luther E.  Birdzell, Arthur Andersen, LLP
James E.  Brown, Baird, Kurtz & Dobson
Robert E.  Fleming, Urbach, Kahn & Werlin, P.C.
James S.  Gerson, Coopers and Lybrand, LLP
Deborah D.  Lambert, Johnson, Lambert & Capron
Charles J.  McElroy, Larson, Allen, Weishair & Co., LLP
Kurt Pany, Arizona State University
W.  Ronald Walton, Price Waterhouse, LLP

Industry Committee Members: 

John T.  Shanahan, Banking Committee, Chair, KPMG Peat Marwick, LLP

Financial Reporting Coordinating Committee: 

Jerry Weygandt, Chair, Professor, University of Wisconsin


Accounting Standards Executive Committee: 

Arleen Rodda Thomas, Vice President, Self-Regulation and SECPS
James F.  Green, Technical Manager

Auditing Standards Division Staff: 

Daniel Guy, Vice President, Professional Standards and Services
Jane Mancino, Technical Manager
Judith Sherinsky, Technical Manager
Jeannie Summo, Technical Manager

Accounting and Auditing Guides: 

Gerry Yarnall, Director

Former Staff: 

Thomas Kelley, Vice President-Professional
Joseph Moraglio, Vice President-Federal Government Division

PUBLIC OVERSIGHT BOARD

Jerry D.  Sullivan, Executive Director

ROBERT MORRIS ASSOCIATES

Charlie Huntington, Director Credit Risk Management Division
James A Gertie, Chair - Accounting Policy Committee
David Eyles, Member, Board of Directors

ASSOCIATION FOR INVESTMENT
MANAGEMENT AND RESEARCH

Peter H.  Knutson, Financial Accounting Policy Committee
Alton "Chip" Jones, Advocacy Administrator

AMERICAN ASSOCIATION OF INDIVIDUAL
INVESTORS

John Markese, President
John Bajkowski, Financial Analyst

STANDARD & POOR'S

Equity Investor Services Group: 

David M.  Blitzer, Vice President and Chief Economist
Robert Natale, Research Director
Stephen Biggar, Equity Analyst
Jane Colis, Equity Analyst
Joshua Harari, Equity Analyst
Steve Klein, Equity Analyst

Debt Rating Group: 

Mark E.  Bachmann, Managing Director
Solomon B.  Samson, Managing Director - Corporate Finance Department
Scott Serif, Associate Director
Scott Sprinzen, Managing Director, Corporate Ratings

BUSINESS ROUNDTABLE

Robert Butler, Chair - Accounting Policy Committee
Fredrick Batline, Vice President, Citibank
Gerand Ketz, Vice President, Citibank
Diane Staab, International Paper, Washington Council

FINANCIAL EXECUTIVES INSTITUTE

Susan Koski-Grafer, Vice President
Ken Johnson, Chair - Committee on Corporate Reporting
Mitchell Danaher, Member
David Sidwell, Member

SECURITIES INDUSTRY ASSOCIATION

Marc Lackritz, President
Stuart J.  Kaswell, Senior Vice President

MOODY'S INVESTORS SERVICE

John J.  Kriz, Managing Director

INSTITUTE OF MANAGEMENT
ACCOUNTANTS

Bill Ihlanfeldt, President

AMERICAN ACCOUNTING ASSOCIATION

Stephen Zeff, Former President

AMERICAN BAR ASSOCIATION

Abraham Stanger, Coordinator for Law and Accounting Committee

GAO ADVISORY PANEL

John C.  Burton, Former Chief Accountant of the SEC
Alan B.  Levenson, Partner, Fulbright and Jaworski
T.  Timothy Ryan, Managing Director of JP Morgan
Wallace Olson, Former President of the AICPA
Katherine Ortega, Former Treasurer of the United States

GAO CONSULTANT

Douglas Carmichael, Professor, Baruch College, CUNY




(See figure in printed edition.)Appendix V
COMMENTS FROM THE AMERICAN
INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS
========================================================== Appendix IV



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the AICPA's letter dated August
26, 1996. 

GAO COMMENTS

1.  See the "Comments and Our Evaluation" section in chapter 2. 

2.  See the "Comments and Our Evaluation" section in chapter 3. 

3.  See the "Comments and Our Evaluation" section in chapter 4. 

4.  See the "Comments and Our Evaluation" section in chapter 5. 

5.  See the "Comments and Our Evaluation" section in chapter 6. 




(See figure in printed edition.)Appendix VI
COMMENTS FROM THE PUBLIC OVERSIGHT
BOARD
========================================================== Appendix IV



(See figure in printed edition.)


The following are GAO's comments on the POB's letter dated August 26,
1996. 

GAO COMMENTS

1.  The POB's reports referred to are discussed in chapters 2 and 3,
and in appendixes I and II. 

2.  See the "Comments and Our Evaluation" section in chapter 3. 

3.  See the "Comments and Our Evaluation" section in chapter 2. 

4.  See the "Comments and Our Evaluation" section in chapter 4. 




(See figure in printed edition.)Appendix VII
COMMENTS FROM THE FINANCIAL
ACCOUNTING STANDARDS BOARD
========================================================== Appendix IV



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


The following are GAO's comments on the FASB's letter dated August
27, 1996. 

GAO COMMENTS

1.  Reviewing the status of international standard-setting activities
was beyond the scope of our review of the accounting profession's
responsiveness to the many recommendations made by major study groups
from 1972 through 1995, and to identify any unresolved issues related
to those recommendations.  However, we share FASB's view of the
importance of international accounting standards and, accordingly,
the priority attention to this task as a component of FASB's mission
to improve the quality of financial reporting. 

2.  See the "Comments and Our Evaluation" section in chapter 5. 

3.  FASB's letter to the POB and the letter from AIMR have been
considered in our final report. 

4.  We agree that these recommendations may involve different changes
in financial reporting.  For example, the more comprehensive
reporting model recommended by the Jenkins Committee addresses the
current mixed attribute accounting model and makes a distinction
between core and noncore assets and liabilities and recommends fair
value measurement for the noncore assets and liabilities.  Also, the
Jenkins Committee recommended model includes high-level operating
data and performance measures that may more appropriately be reported
outside the financial statements such as in a management discussion
and analysis report section.  However, a common theme among the
recommendations is that the current mixed attribute report model is
not meeting the broad range of information users' needs. 

5.  FASB's comment references appendix II that lists the
recommendations of the major studies considered in our report and the
actions taken in response to those recommendations.  The appendix is
organized by major issue, such as independence, and then, within that
issue, chronologically by study group.  We selected that presentation
to provide a time line of actions taken in addressing the major
issue.  The reader needs to consider all actions taken, as we have in
our analysis, to determine the status of the major issue.  As FASB
has noted, actions taken in response to recommendations of a study
group may also relate to recommendations made by a previous study
group and the actions taken at that time. 

6.  The final report has been annotated to show that we use the term
FASB Board members in the report to refer to the information provided
to us in interviewing the individual board members and that such
positions do not reflect the official positions of FASB. 

7.  These additional comments have been considered in the final
report. 




(See figure in printed edition.)Appendix VIII
COMMENTS FROM THE SECURITIES AND
EXCHANGE COMMISSION
========================================================== Appendix IV



(See figure in printed edition.)



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The following are GAO's comments on the SEC Chief Accountant's letter
dated September 5, 1996. 

GAO COMMENTS

1.  See the "Comments and Our Evaluation" section in chapter 5. 

2.  See the "Comments and Our Evaluation" section in chapter 2. 

3.  It should be noted that the examples of reports cited by the
SEC's Chief Accountant as having a purpose similar to those required
by FDICIA do not provide an opinion on the effectiveness of financial
reporting controls as required by FDICIA.  The auditors' reports
state that no assurance is provided on the internal control structure
and that the auditors' reports are based on the consideration of
internal controls in determining auditing procedures for the purpose
of expressing an opinion on the entities' financial statements.  As
discussed in chapter 3, this auditing procedure is in accordance with
GAAS, but does not result in the auditor reporting on the
effectiveness of internal controls.  However, the auditor will
communicate to the entity internal control weaknesses discovered
during the audit. 

4.  See the "Comments and Our Evaluation" section in chapter 3. 

5.  Reviewing the status of international standard-setting activities
was beyond the scope of our review of the accounting profession's
responsiveness to the many recommendations made by major study groups
from 1972 through 1995, and to identify any unresolved issues related
to those recommendations.  We share the SEC Chief Accountant's view
of the importance of international accounting standards.  However, we
do not believe that the status of international accounting standards
should become a barrier to improving U.S.  accounting standards and
related financial reporting.  Rather, such improvements should serve
to help achieve similar improved international accounting standards
and related financial reporting. 

6.  See the "Comments and Our Evaluation" section in chapter 6. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IX

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Cheryl E.  Clark, Project Manager
Thomas R.  Broderick, Assistant Director
John H.  Stahl, Assistant Director
Regina Y.  Young, Issue Area Assistant

DALLAS REGIONAL OFFICE

Kenneth R.  Rupar, Assistant Director
Gloria Cano, Evaluator
Matthew F.  Valenta, Evaluator

KANSAS CITY REGIONAL OFFICE

Edwin O.  Boothe, Jr., Senior Evaluator
Maria Rodriguez, Evaluator

SAN FRANCISCO REGIONAL OFFICE

Perry G.  Datwyler, Senior Evaluator
John M.  Lord, Senior Evaluator

OFFICE OF GENERAL COUNSEL

Jeffrey A.  Jacobson, Assistant General Counsel
Jacquelyn N.  Desverreaux, Attorney


*** End of document. ***