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?

No

Mr. CARTER. Yes. Yes; a great detriment to it if published. 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.

I suggest that subsection F of section 6, on page 13, be amended to read as follows:

That the enterprise or business of the issue, or person, or the security is not, in the opinion of the Commission, based upon sound principles, and that revocation is in the interest of the public welfare.

Senator GORE. Don't you think that is too tenuous and nebulous. Mr. CARTER. As it reads now, the Commission is charged with the responsibility of saying yes or no to, "Is this sound or not?" I do not see how they can do it except as an expression of opinion.

Mr. PECORA. That relates to the requirement by the Commission after the statement has been filed where the Commission feels that it ought to make a re-examination for the purpose of determining whether or not the registration should be canceled.

Mr. CARTER. I think it imposes a little bit more than that, Mr. Pecora. I think it requires them to make a statement as to whether the business is based on sound principles.

Mr. PECORA. Requires the Commission to do that only with respect to any examination it makes subsequent to the registration of a security by the filing of a statement with a view to enabling the Commission to determine whether or not the registration should be canceled.

is

Mr. CARTER. It is quite a responsibility to say definitely that it

Mr. PECORA. (interposing). The Commission has to assume that responsibility anyway if it determines to cancel a registration. They have to assume it anyway.

Mr. CARTER. Yes; under the bill as it reads now they would have to do that. But I think it should be based on an opinion.

Senator GORE. In the nature of things, is that reducible to any sort of fixed standard or rule?

Mr. CARTER. I do not think so.

Senator GORE. I do not think so either, and I think there we are just embarking into a field that is limitless and authorizing this Commission to pass judgments or states of mind on the concerns. Mr. CARTER. Yes, sir.

Senator GORE. And there are several other points in the same section that fall in the same criticism so far as I am concerned.

Mr. CARTER. Another suggestion in following out my previous one is to substitute the following in line 7 of subsection F, section 6, on page 14:

To be examined by and bear the certificate of an independent accountant. I believe also that line 14 of subsection E of section 8 on page 17 should read as follows:

A statement showing the certificate of an independent accountant as provided in section 4.

This whole subject of security issues was presented in a paper last fall before the Association of Security Commissioners, and if I may, I would like to read what I said to them just a year ago.

Senator GORE. Is that the blue-sky people?

Mr. CARTER. Yes, sir. I attended their convention last fall.
Senator GORE. Yes.

Mr. CARTER. I said:

It would seem exceedingly difficult, if not impossible, for anyone, no matter how skilled, to properly judge the merits of an investment security without having comparative balance sheets of recent dates, income and surplus statements for at least 3 years, and other data disclosing information as to the integrity of management and the economic position of the enterprise. The information required of either a new or an old enterprise applying for authority to sell securities should be comprehensive. The balance sheet giving effect to the sale of securities should indicate the net amount to become available for carrying out the purpose for which the issue was intended when and as the entire issue is sold. There should be disclosed the expenses incident to the sale of the securities and to the organization of the new enterprise. There should also be included a statement of a property or other assets to be acquired and the basis upon which such assets are to be valued and an agreement requiring certification as to the ownership of such properties or assets when and as they are required.

Furthermore, until a certain adequate protion of the moneys required for the purpose have been received, all moneys should be held in escrow to be released to the corporation or returned to the investor if an adequate amount has not been received.

Senator GORE. That is a good point.

Mr. CARTER. Now, that is a thought which is not in this bill which I think is very important, for this reason: If a company endeavors to sell securities for a specific purpose and they are not able to carry out that purpose until the total issue has been sold, my feeling is that they should impound what they receive, and if they do not receive it all they should be in position to turn it back.

Senator REYNOLDS. Colonel, as you know, a great many small corporations who are engaged in the business of selling their stock for the purpose of starting that business necessarily have to pay to their stock salesmen a commission.

Mr. CARTER. Yes.

Senator REYNOLDS. They pay anywhere from 2 percent to 50 percent to the stock salesmen-that is true, is it not?

Mr. CARTER. Yes, sir.

Senator REYNOLDS. What about the commissions?

Don't you think that they should be prohibited from paying any salesman any commission until after the entire issue proposed has been disposed of? Mr. CARTER. I think not. I think a salesman who goes out to sell securities is entitled

Senator REYNOLDS (interposing). To his commission then?

Mr. CARTER. Yes. There must be some way of merchandising it. Senator REYNOLDS. But you suggest that that money be impounded and returned to the shareholders unless the enterprise goes through?

Mr. CARTER. I think they should have to put forth in their sales circular the fact that there is so much of this involved in the marketing of these securities.

Senator REYNOLDS. Don't you think in this bill, if this bill is reported out of here, that is to say, that there ought to be a limit upon the amount of commissions that any company can pay its stock salesmen, like we have in some of our blue sky laws in the various and sundry States?

Mr. CARTER. That might be advisable.

Senator REYNOLDS. I just wanted your suggestion about that. Mr. CARTER. I just have one more thing, Mr. Chairman. Senator GORE. They pay a lot of commission in stocks.

Mr. CARTER Yes, sir; bonuses and stocks.