STATEMENT OF COL. A. H. CARTER, NEW YORK CITY, CERTIFIED PUBLIC ACCOUNTANT, PRESIDENT OF THE NEW YORK STATE SOCIETY OF CERTIFIED PUBLIC ACCOUNTANTS

The CHAIRMAN. Will you state your name, address, and occupation?

Mr. CARTER. My name is Col. A. H. Carter. Address 15 Broad Street, New York. I am the president of the New York State Society of Certified Public Accountants.

If I may, Mr. Chairman and gentlemen of the committee, I would like to read this short statement, and then go back and in detail discuss any of the points.

The CHAIRMAN. That will be all right.

Mr. CARTER. At the outset I wish to state that my sympathies are with the general principles of the proposed bill known as the Federal Securities Act. I also wish to have it understood that I would advocate that, if possible, the proposed bill be changed so as to afford even greater protection to the investor than it now contemplates.

The purpose of this bill is well understood as intended to protect the investor from unscrupulous issuers, but not to penalize the many thoroughly honest houses of issue, corporations, and businesses whose issues have been sold with absolute honesty and on the highest plane of business ethics. I am sure that you do not intend that this legislation shall injure a single honest issuer of securities but rather will throw the dishonest issuer out of business.

When this bill was made public considerable favorable attention was attracted to the statement that it was designed to emphasize the principle of caveat venditor as much as caveat emptor.

As the bill now reads it places upon the Federal Trade Commission the responsibility of determining many questions surrounding the issuance of securities. By its present terms, it imposes highly technical responsibilities upon the Commission as to accounting principles, their proper application and their clear expression in financial state

ments.

Furthermore, it imposes upon the Commission the responsibility of detecting the unscrupulous issuers who may attempt to veil the true picture of their enterprise. Thus the burden of proof would be placed upon the Commission rather than upon the issuer to develop full and reliable information.

To avoid this I suggest that lines 21, 22, and 23 of subsection 4-A under section 5 on page 8 be amended to read as follows-I would substitute this: "issuers income, expenses, fixed charges, and analysis of surplus for the three years"-instead of one-"or if in actual business for less than three years," for the period they had been in

business.

The CHAIRMAN. I did not quite get that. You said page 8?
Mr. CARTER. Page 8, lines 21, 22, and 23, Senator.

The CHAIRMAN. "Statement of the amount of issuers income." Mr. CARTER. I am adding to that requirement that you have there "and analysis of surplus," and instead of requiring the income statement to be for one year, make it for three years. The reason for that is that it is most difficult to judge the average earning capacity of any company by studying an income and surplus statement for just one year. You might have a situation where the income state

ment would show a profit of a half a million dollars this year. It might have shown a loss of a million dollars last year. At present prospectuses accompanying the issuance of securities generally give such statements for 3 years or more. We have had that in this country for a number of years.

Senator GORE. It has not done much good, then, has it?

Senator REYNOLDS. In other words, your suggestion is designed to not be of injury to reliable companies who have been operating honestly and profitably?

Mr. CARTER. That is right.

The cardinal importance of this income account for the period that I mentioned is explained by the fact that the value of a business today or any day is dependent mainly upon its earning capacity, and you cannot judge an earning capacity accurately by one year's earning. Senator GORE. You mean it ought to be the test.

Mr. CARTER. At the end of subsection 4-A of section 5 on page 8 I would suggest that the following be added after the words "actual business":

The accounts pertaining to such balance sheet, statement of income and surplus shall have been examined by an independent accountant and his report shall present his certificate wherein he shall express his opinion as to the correctness of the assets, liabilities, reserves, capital and surplus as of the balance sheet date and also the income statement for the period indicated.

That is, 3 years.

Senator BARKLEY. How much more and additional employment would that give to certified accountants?

Mr. CARTER. Eighty-five percent of the companies that are listed on the exchanges in New York today are examined.

Senator REYNOLDS. Do you think it proper to insert in there that these independent public accountants should be privileged to state their opinion as to the value of securities or the condition of the company?

Mr. CARTER. We are unable to express an opinion as to the value of securities. I think the impression generally prevails that one who reads a balance sheet and an income statement regards the figures in such a statement as a defensible definitely ascertainable fact, whereas, as a matter of fact in reality it can only be an opinion based upon certain accounting assumptions which must be applied to the opinion of some individual as to values.

Senator REYNOLDS. Do you think they should be permitted to express their opinion about them?

Mr. CARTER. Yes.

Senator REYNOLDS. Will not the figures themselves show?

Mr. CARTER. The figures will not necessarily show. It depends upon how the accounts are treated. For instance, you might have an item capitalized that should be charged against income.

Senator BARKLEY. Do you think that the Federal Trade Commission's records or these reports ought to be encumbered by the bookkeeping processes by which accountants would arrive at an opinion as to the value of a stock?

Mr. CARTER. I do not see how the Federal Trade Commission can properly discharge its duty by merely accepting a statement that has not been independently examined and certified to by an

accountant.

Senator BARKLEY. In other words, after the statement has been filed by the officers of the company you want an independent organization to go over it and then report to the Federal Trade Commission whether that is correct or not?

Mr. CARTER. I mean that that statement itself should have been the subject of an examination and audit by an independent accountant.

Senator GORE. Before filing?

Mr. CARTER. Before filing.

Senator GORE. Is that patterned after the English system?

Mr. CARTER. Yes, sir.

Senator REYNOLDS. Together with an opinion.

Mr. CARTER. That is all they can give; that is all they can give. That is all anyone can give as to a balance sheet.

Senator WAGNER. Well, basically, are not these facts that have got to be alleged rather than an opinion?

Mr. CARTER. Under the terms of the bill it has to be given under oath. I do not see that anyone can certify under oath that a balance sheet giving many millions of dollars of assets is as a matter of fact correct. He can state his opinion based upon a thorough investigation. Senator BARKLEY. In other words, before the officers of the company that is issuing stock shall file that statement that is contained in this bill with the Federal Trade Commission the company must call in outside independent accountants and give them the job of going over it and passing on whether they have told the truth or not. Well, I am not for your amendment, I will say that now.

Mr. CARTER. Later on in the act it provides that the Commission may call for such a statement. The only point I am trying to make is this, that I think such an examination should be a part of the application rather than after the application has been filed.

Senator ADAMS. The law does not require any examination, as I read it.

Mr. CARTER. No.

Senator ADAMS. That is, it merely requires the filing of this statement.

Mr. CARTER. That is right.

Senator ADAMS. Then by the fact of filing this statement they in substance get the right to go into interstate commerce and sell securities. There is no such requirement for examination to be included in the application.

Mr. CARTER. Not in the application. But there is in the bill a provision which gives the Commission a right to demand such an investigation and demand such a report as a result of such investigation. My point is to put that in the application in the beginning.

Senator BARKLEY. Do you not think it is more in the interest of the public that is to buy these securities, if there is to be any check up or any guarantee as to the correctness, that it be done by some Government agency rather than by some private association of accountants?

Mr. CARTER. I think it is an impractical thing for the Government agency to do it effectively.

Senator REYNOLDS. Why?

Mr. CARTER. Because it involves such a large force. It involves the question of time.

Senator REYNOLDS. Well, it would not require any more time on the part of government officials to make a check up and audit than it would by private individuals, would it?

Mr. CARTER. I think the public accountant is better equipped to do that than the average government agency would be able to do that.

Senator GORE. How many public accountants do you think would be available for this service?

Mr. CARTER. There are approximately 15,000 certified public accountants in the United States today qualified under the laws of the various States.

Senator BARKLEY. How many in your organization?

Mr. CARTER. Two thousand.

Senator BARKLEY. Is there any relationship between your organization with 2,000 members and the organization of controllers represented here yesterday with 2,000 members?

Mr. CARTER. None at all. We audit the controllers.

Senator BARKLEY. You audit the controllers?

Mr. CARTER. Yes; the public accountant audits the controller's

account.

Senator BARKLEY. Who audits you?

Mr. CARTER. Our conscience.

Senator BARKLEY. I am wondering whether after all a controller is not for all practical purposes the same as an auditor, and must he not know something about auditing?

Mr. CARTER. He is in the employ of the company. He is subject to the orders of his superiors.

Senator BARKLEY. Î understand. But he has got to know something about auditing?

Mr. CARTER. Yes.

Senator BARKLEY. He has got to know something about bookkeeping?

Mr. CARTER. But he is not independent.

Senator REYNOLDS. Let me ask you this question, Colonel. These companies are going to arrive at these figures through their special auditors. All right. Now you want the members of your organization to check up on their figures?

Mr. CARTER. As we do in many cases of industrial companies every year.

Senator REYNOLDS. All right. Then it goes to the Commission, does it not?

Mr. CARTER. Yes.

Senator REYNOLDS. Have they got to check their accounts and your accounts?

Mr. CARTER. I do not think so. I do not think they would have to go to that.

Senator REYNOLDS. Why should your members ask that they be permitted and empowered to check these accounts?

Mr. CARTER. Because it is generally regarded that an independent audit of any business is a good thing.

Senator REYNOLDS. All right. Then, after it goes to the Commission they have to check up to see who is right; they have to go through and audit again. There has to be a Government audit, as suggested by Senator Barkley. Would it not be creating more

difficulty and more expense and more time for the Government if auditing organizations interest themselves in these various and sundry corporations?

Mr. CARTER. I do not think so. I think if a corporation wished to issue some securities and had been employing independent public accountants for 20 years those accountants should be able to make this examination more economically and quickly than the Government.

Senator REYNOLDS. Could they do it more economically than the Government?

Mr. CARTER. I think so:

Senator GORE. There would not be any doubt about that.
Senator REYNOLDS. Why?

Mr. CARTER. We know the conditions of the accounts; we know the ramifications of the business; we know the pitfalls of the accounting structure that the company maintains. You have got every kind of business to deal with.

Senator REYNOLDS. Suppose that we decide in the final passage of this bill here to employ five or six hundred auditors from your organization, that would be all right, then, would it not?

Mr. CARTER. I do not think the Government could employ five or six hundred independent accountants.

Senator REYNOLDS. Why could they not?

Mr. CARTER. I do not think the type of men that are in the public practice of accountancy would leave their present practice to go in the Government employ.

Senator REYNOLDS. Well, if it were sufficiently remunerative they would?

Mr. CARTER. Yes; if the Government made their time worth while. Senator REYNOLDS. The bill here provides for taking care of the expenses incident thereto by way of registration.

Mr. CARTER. Well, you will have to build some more buildings in Washington to house them if you are going to do that.

Senator REYNOLDS. Then we had better not pass this bill at all. Senator ADAMS. How much of a burden is this going to put on the comparatively small company? You were speaking a while back of the companies whose stocks are listed being independently audited. Now coming under the control of this bill are going to be thousands of small companies putting out an issue for their original financing. How much of a burden and cost is that going to put on them?

Mr. CARTER. Very little measured in value to the investor and to them.

Senator GORE. What would be the range?

Mr. CARTER. My experience would be that the average company pays around $500 or $600 or $700 for its auditing, that is, taking the large and small together.

Senator GORE. How often do they resort to that?

Mr. CARTER. Every year. And the largest organizations of our country do it and have been doing it for the last 15 years. Senator GORE. Have had these independent audits made? Mr. CARTER. Have had these independent audits made, yes. Senator GORE. But they have not been available for any public authority to examine and afford no safeguards?