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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. I 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 ŘEYNOLDS. 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. jor 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?

Mr. CARTER. They have been published in their annual reports and distributed to all of their stockholders, to the newspapers and anyone who calls for them.

Senator GORE. And have not done any good?
Mr. CARTER. Yes, sir; I think they have.
Senator GORE. We have had all this debacle here in spite of that.

Mr. CARTER. You still have some very sound companies and industries in this country.

The CHAIRMAN. Most of these people applying to be registered already have an independent audit. It is not necessary to put them in the law. That is their practice now; that is, they are supposed to have already.

Mr. CARTER. I think the trend has been decidedly in that direction in the past five years, and especially in the last three years, and I certainly think it is a safeguard that should not be discouraged.

Senator GORE. Could you make an estimate as to the number that have that done already?

Mr. CARTER. Eighty-five percent of all the companies listed on the New York Stock Exchange have independent audits.

Senator GORE. So it would not be any added expense?
Mr. CARTER. Not to them.

The CHAIRMAN. This bill covers all of them, those listed and those not listed.

Mr. CARTER. Those are the ones that should be independently audited.

Senator REYNOLDS. Which ones?
Mr. CARTER. Those that are not listed.

Senator REYNOLDS. All right; the ones that are not listed are the little fellows, are they not?

Mr. CARTER. Yes, sir.

Senator REYNOLDS. Could they pay you $75 a day to go into their books?

Mr. CARTER. They do not have to.
Senator REYNOLDS. Who pays you?
Mr. CARTER. It does not cost them $75 a day.
Senator REYNOLDs. How much do you charge a day, then?

Mr. CARTER. It would cost them an average of, I should say, $25 a day.

Senator KEAN. What big companies charge $25?
Mr. CARTER. That is about an average.
Senator KEAN. Marwick, Mitchell & Co. cost more than that.
Mr. CARTER. I am giving you an average.

Senator KEAN. Waterhouse & Co. cost more than that. What companies do you know of that charge only $25 a day?

Mr. CARTER. I said that was an average for all. The rates range from $100 a day for a partner down to $15 and $20 a day for a junior. The average scale of rates that are charged are $35, $30, $25, $20, and $15, depending upon the class of men.

Senator KEAN. How many men would it take?
Mr. CARTER. Put one partner in.
Senator KEAN. Only put one partner in?
Mr. CARTER. Yes, sir.
Senator KEAN. That is $100 a day.

Mr. CARTER. That is right, at that rate for the proportion of his time devoted, and he is usually worth it.

Senator REYNOLDS. How many days does it take on the average to audit a small company?

Mr. CARTER. It would depend upon the business.

Senator REYNOLDS. Of course, I understand, but generally, Colonel; just give me some idea.

Mr. CARTER. Well, take a company selling automobiles doing a relatively small business, you could probably audit it in two days and a half.

Senator REYNOLDS. That would be $250?

Mr. CARTER. Yes; assuming the highest rate for partner; the detail work of auditing is usually done by a subordinate.

Senator GORE. Don't you think we have got to establish some sort of standard of bookkeeping for different lines of industry before we can make any comparison?

Mr. CARTER. I think it is very hard to establish a standard of bookkeeping. You can rely upon principles of accounting.

Senator GORE. The Interstate Commerce Commission does that with reference to railroads.

Mr. CARTER. They have a standard classification of accounts in the Interstate Commerce Commission, but they do not audit the accounts of railroads.

Senator GORE. You do not think it could be applied to automobile concerns? You have mentioned those.

Mr. CARTER. Oh, yes; it would be applied to automobile concerns.

Senator GORE. I mean the bookkeeping would be standard there so that you could compare one with another,

and if they are not standardized give this Commission the power to require them to conform to it?

Mr. CARTER. Take the automobile industry. You could have the reports of the various companies and you could find a great similarity in their bookkeeping.

Senator GORE. I know, but unless there is a substantial similarity I do not see how any comparison could be made. You take the textile companies: I presume they may have standards now that they all conform to, but if they do not, don't you think it would be necessary?

Mr. CARTER. I think you would have to take each industry itself and

Senator GORE (interposing). I mean each industry, a cotton concern or an automobile concern.

Mr. CARTER. And provide a system in which they would set up their accounts peculiar to that particular industry.

Senator GORE. That is what I mean, some sort of standard or set of principles so that each industry and individual instances in each industry could be compared with each other.

Mr. CARTER. That is right.

Senator GORE. Is this mandatory in England, the requirement that an independent accountant shall check up?

Mr. CARTER, All companies in England are required to be audited by an independent accountant, who is present at the stockholders' meeting and is available to answer any questions the stockholders wish to put to him.

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Senator GORE. And they list the accountants that will be acceptable?

Mr. CARTER. That is right. Senator REYNOLDS. Now, Colonel, suppose you audit the books of two companies fixed comparatively the same financially, and in rendering your report as suggested by you a member of your organization who had made the audit would state that Company A was in excellent condition, that Company B was merely fair. Don't you think an opinion of that sort rendered and made public by your organization would be of great detriment to Company B?

Mr. CARTER. Yes. Yes; a great detriment to it if published. No accountant should do that. His report would be privileged and confidential, to be made public only by the commission. It would guide the commission in making its decision.

Senator REYNOLDS. But in rendering his opinion he would state what his opinion was.

Mr. CARTER. His duty should be to state that the financial statements that he has audited are a fair presentation of the financial condition of the company as of the date of the balance sheet, and that the statement of income and surplus represents the operations, correct view of the operations for the period.

Senator REYNOLDS. Of course the statement rendered by your member would be public?

Mr. CARTER. That is right. If authority for sale of securities is granted by the commission.

Senator REYNOLDS. That is the real contention of this bill. If those statements were made public it might be a great injustice to that company that was fair. It might be coming along better, and it would ruin that company overnight, would it not?

Mr. CARTER. If the report were adverse the commission would deny the petition. But in any event I think if both companies had stockholders they would be entitled to have the information, good or bad.

Senator REYNOLDS. And they would sell out all the stock they had in Company B?

Mr. CARTER. Yes.

Senator REYNOLDS. And Company A would get the benefit of it, probably

The CHAIRMAN. Let us proceed, Colonel Carter. We would like to get through with this.

Mr. CARTER. In line 22 of subsection 9-A under section 5, page 10, I suggest that the following be substituted:

Shall be verified under oath by the issuer that to the best of his knowledge and belief the statements, exhibits, and documents are correct.

The reason for that is that I do not think anybody could state under oath that a thing is actually so—the balance sheet, statement, is actually so—because it is a matter of opinion. Investors are too prone to regard balance sheets and income accounts as positive and indisputable statements of fact, whereas, owing to complexities of modern business, they can in reality be no more than estimates based on assumptions, some of which rest on accounting conventions and others on the judgment of individuals.

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