University of Mississippi eGrove American Institute of Certified Public Accountants Newsletters (AICPA) Historical Collection

1966 CPA, 1966 American Institute of Certified Public Accountants

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Recommended Citation American Institute of Certified Public Accountants, "CPA, 1966" (1966). Newsletters. 109. https://egrove.olemiss.edu/aicpa_news/109

This Book is brought to you for free and open access by the American Institute of Certified Public Accountants (AICPA) Historical Collection at eGrove. It has been accepted for inclusion in Newsletters by an authorized administrator of eGrove. For more information, please contact [email protected]. THE JANUARY 1966

The Institute Is the Institute’s policy-making-structure-ready for the future? A committee of examines itself three, together with a private consultant, has been charged by the executive com­ mittee to look into the question and report its findings to Council at the spring meeting. The members appointed to the committee are: James VanderLaan, chair­ man, Colorado; Walter J. Oliphant, Illinois; and Kenneth S. Axelson, New York. They will be working with Robert Greenleaf, a former American Telephone & Telegraph Co. executive who has conducted similar studies for the Ford Foundation, the Russell Sage Foundation, and other charitable and business organizations.

First computer Computer research study no. 1 is now being distributed to all members in public program research practice. It contains the results of the AICPA/System Development Cor­ study is in the mail poration survey together with voluntary comments received from participants who returned their questionnaires. This is the first of a series of studies, based on the AICPA/SDC research project results (The CPA, Dec.65, p.1), which explore the impact of computers on public accounting practice. Members not in public practice can receive a free copy of the study by writing to the Institute. Extra copies are available at $1 each.

CPA career ads Like to spread the good word about career opportunities in accounting? A new available edition of Institute ads regarding careers as a certified public accountant is now available without charge from the Institute. The ads are especially suited for high school yearbooks and newspapers.

Also in this issue . . . Broader co-operation between accounting educators and accounting practitioners could result in an awards program for accounting writing and in accreditation of accounting programs (page 8). . . . More than 700 of the best Technical Informa­ tion Service exchanges have been compiled and indexed in a three-volume study, soon to be published by the Institute. It may well lead to the first automated information retrieval system available to the profession (page 4). . . . At a loss for words when it comes to telling others what the profession’s role in society is? The new pattern speech may be what you need (page 4). . . . Thirteen CPA firms have already participated in a unique international exchange program. If you would like to join their ranks, turn to page 5 for further details. . . . The 1966 annual meeting is taking shape. The story on page 7 previews the event.

The CPA, January 1966. Published monthly, except July-August when bimonthly, for membership of the AICPA, Inc. Vol. 46, No. 1. Publication and editorial office: 666 Fifth Ave., New York, N. Y. 10019. Second-class postage, paid at New York, N. Y. FROM THE PRESIDENT ROBERT M. TRUEBLOOD

individual practitioner must be broadened if people are to turn Unlimited Horizons to CPAs for many kinds of addi­ tional services now required by management—EDP consulting, or­ Opportunities for the well-pre­ academicians, lawyers, and bank­ ganization planning, operations pared accountant have never been ers, as well as accountants. Hope­ research. One means to this end greater or more challenging — fully, the Commission’s report will is for CPAs to take a more active whether in business, government give some substantive indications interest in community life. Ac­ or in public accountancy. The of the knowledge which a begin­ countants should participate in shape of things to come is already ning CPA should have. civic and cultural projects. They apparent in the number of men should become interested in social succeeding to higher levels of and economic activity wherever industry and government who The training . . . their training in compiling and sprang directly from our profes­ There are already in practice interpreting objective evidence is sion — Lynn Townsend, Maurice many indications that the ulti­ relevant. Their knowledge and Stans, Percival Brundage, Gerald mate educational background of skills should be brought to bear, Phillippe and Frederic G. Don­ a CPA should include a master’s for example, in shaping socially ner, to mention a few. degree. The Common Body Com­ desirable legislation. CPAs in Our profession will make great­ mission, among other things, will Colorado recently played key er contributions to, and will con­ attempt to specify — without de­ roles in effecting amendments to tinue to participate more fully in, signing a curriculum — the kinds their state laws. The profession the highest levels of industrial of knowledge and understanding needs more of this kind of highly management by building upon of basic disciplines which will be commendable legislative activity. the broader skills, initiative, and necessary for the CPA of the intellectual breadth required by future. modern corporate management. The effort of the Commission . . . and the application New demands upon manage­ may do much in outlining broadly I urge each of you to review ment-imposed largely by tech­ the future trends in accounting nical revolution—highlighted the the needs and concerns of your education. A very interesting pan­ need some years ago for a restudy communities in order to deter­ el session by members of the of the education of tomorrow’s mine possibilities for personal Commission was held in Dallas business leaders. The simple fact participation in civic activities, as last fall. The American Account­ was that a narrowly specialized well as professional affairs. Re­ ing Association is considering a training was adequate only for a view current legislative activities similar program at its fiftieth an­ career of limited scope, and that to see where you might help out niversary meeting in Miami next top managerial posts require a with sound socio-economic pro­ fall. wide range of skills and a broad grams. Discuss social and eco­ The final manuscript of the foundation of knowledge. nomic matters with other profes­ Common Body of Knowledge The Carnegie Corporation is sional men in order to get fresh Study hopefully will be available sponsoring, with the collaboration ideas and new points of view. early in 1966 and should be pub­ of the American Institute, a Com­ John Gardner, the psychologist lished shortly thereafter. The In­ mission to Study the Common who was president of the Car­ stitute is hoping to be able to Body of Knowledge. This work is negie Corporation prior to his organize a series of seminars under the direction of Dean Rob­ present appointment to the cabi­ around the country to provide a ert Roy of Johns Hopkins Univer­ net as Secretary of Health, Edu­ base for open and free discussions sity. The Commission includes cation and Welfare, says in his of the Commission’s findings for book, Self-Renewal: educators and practitioners alike. “Every individual, organization, If these plans materialize, much or society must mature, but much With proper training and appli­ cation, there is no place for CPAs stimulating discussion will follow depends on how this maturing to go but up. In a speech before upon completion of the Commis­ takes place. A society whose ma­ the Colorado Society in November, sion’s work. turing consists simply of acquir­ President Trueblood suggested how Apart from the accountant’s ing more firmly established ways members might apply themselves to technical and professional knowl­ of doing things is headed for the expand their services. edge, the public image of the graveyard—even if it learns to do

THE JANUARY CPA/PAGE 2 these things with greater and greater skill. In the ever-renewing Requests for “Dirty Business” editorial society, what matures is a system or framework within which con­ continue to mount from CPAs, industry tinuous innovation, renewal and rebirth can occur.” Reprints of John L. Carey’s One officer of a large industrial The future is full of change and editorial “The ‘Dirty Business’ At­ company who had asked for re­ challenge. To adapt to it success­ titude” ( The CPA, July-August65, prints elaborated on his thoughts fully, we must conserve all that p.4) have been sent to a local over the phone: is good from the past and, at the practitioner . . . a national CPA “W e are having a serious prob­ same time, we must be curious, firm . . . Xerox Corporation . . . lem filling jobs here. W e have experimental and receptive to and the University of Southern about ten accounting positions to new ideas. California. fill, and we just can t get the right If we are innovative, I am con­ In fact since November 1 well people. fident that the years ahead will over 3,700 copies of the column “And it’s not only us. Other be exciting and rewarding—both have been sent on request to companies have the same prob­ for those of us now in practice, CPAs, educators, financial execu­ lem. and for those students who repre­ tives, and industry leaders. “The way I see it, it’s a selling sent the next generation of our “W e would like to give these to problem — we have to convince profession. our clients,” notes one letter. young people starting on their “These are to be used in con­ careers that accounting is, to para­ nection with the local chapter’s phrase Mr. Carey, a ‘socially use­ How one member benefits education committee activities,” ful occupation.'” from AICPA membership says another. Judging from the number of “I would like to distribute the reprints that have been sent out, E d . N o t e : A member may ask on article to accounting students at forward-looking people around occasion, “What is the Institute the university,” a professor of ac­ the country have embarked on a doing for me?" The letter below, counting writes. campaign to do just that. from a local practitioner to a member of the AICPA staff, pre­ sents one answer. We hope there are more. PD staff training program draws I have read and heard criticism from local firms coast to coast that the Institute is interested only in the national firms. I do not believe this criticism is justified The Institute’s professional de­ degrees, and 10 per cent said they because I, as a small practitioner, velopment staff training program had been exposed to some gradu­ have obtained considerable bene­ has completed another year, and ate work. fit from my membership. Your this is the kind of year it was: While only 27 per cent said prompt reply to my letter of Oc­ There were eleven presenta­ they had more than two years of tober 27 regarding the proper tions at sites from Massachusetts public accounting experience, 46 method of announcing the dis­ on the East Coast to California per cent reported having less than solution of one partnership and on the West Coast. one year’s experience. the formation of a new one is one There were approximately 660 What size firm was repre­ example. It is very comforting to participants, about the same as sented? The largest number of know that members can obtain last year. They attended in groups participants, 42 per cent, came assistance of this nature. varying in size from 8 to 147. from firms with less than ten staff I have attended several profes­ Since the staff training pro­ people; 36 per cent came from sional development courses pre­ gram is geared for men with up firms with more than twenty staff pared by the Institute which have to three years’ experience in the people; and 22 per cent came helped me considerably and I profession, it follows that the par­ from firms with between ten and plan to attend more of them. I ticipants are generally youthful. twenty staff people. believe those who criticize have This year, 50 per cent were under Were the participants satisfied not taken full advantage of the twenty-five years of age, the with the programs, and would opportunities offered by their largest concentration being in the they recommend that their firms membership in the Institute. twenty-two—twenty-five bracket. send others to attend? To both G e o r g e L. K e n n e r Education? Seventy-eight per questions, the answer was an Houston, Texas cent reported having bachelor’s enthusiastic “yes.”

THE JANUARY CPA/PAGE 3 methodology for examining the How to get the message across: rationality of public expenditures, particularly those for research accounting’s influence on society and development. A sociologist from Columbia University sees the possibility of If you have been invited to Here are some of their findings. great expansion in the attest func­ speak to college students, coun­ A behavioral scientist at Stan­ tion by auditing not only in terms selors, professors, or other ac­ ford University notes that the de­ of money, but also in terms of countants, the Institute’s new pat­ velopment and application of in­ approved social objectives such tern speech is yours for the ask­ formation technology has ad­ as “worker happiness” or “con­ ing. Entitled “Accounting — a vanced to the point where the sumer satisfaction.” Social Force,” it describes ac­ person who becomes director of In conclusion, the pattern counting’s profound influence on information in a business would speech points out that “predic­ mankind’s social and economic re­ also become its over-all director. tions about the future of account­ lationships. A political scientist from the ing that have been made in the University of Chicago foresees the ► It can be used to show coun­ past . . . have often come true likelihood of a much more refined selors and other educators with­ faster than expected.” out accounting backgrounds that accounting is a force in society that requires their respectful rec­ ognition. Three-volume TIS guidebook may lead to

► It can provide ammunition automated information retrieval system for college accounting majors as they compete in bull sessions re­ Ten times a day on the average, Edmund F. Ingalls, manager, garding the relative social value 2,200 times a year, the Institute’s Technical Information Service, of different careers. Technical Information Service re­ points out in the preface that “by ceives inquiries from members and large, the answers given in ► Delivered to an audience of asking for help in solving profes­ accountants, it can make one con­ the book are substantially the sional problems. The inquiries tribution toward what John L. same as those originally given on come from firms of all sizes, from Garey recently called a concep­ the firing line.” every state in the Union, and Conceding that probably no tual description of the account­ even from Europe and South ing profession’s mission in society one will read the work at one America. (JofA, Nov.65, p.61). sitting, Mr. Ingalls says that the Approximately 750 of the most book “is primarily a guide to be The speech goes further than interesting of the exchanges be­ consulted as needed by the CPA the Institute’s previous “patterns” tween practicing CPAs and the practitioner.” in finding common ground with Technical Information Service One feature of the work is a men in other disciplines. Most of have been compiled, edited, and synoptic — or digest-type — index the supporting evidence for its indexed in a three-volume work, combined with key words, ap­ points is drawn from fields other Practical Accounting and Audit­ proximating 3,000 to 3,500 entries, than accounting. ing Problems —A Guidebook for which will enable practitioners to The theme of the speech is that the Profession. pinpoint problems similar to their accounting is not merely the re­ The work is case-oriented to own. sult of social and economic forces; down-to-earth technical problems All of the materials and refer­ it is also a force in itself, having encountered by practitioners. ences cited in the book are avail­ a dynamic effect on social and Opinions presented are specific able in the AICPA library. economic history. The effect and the conclusions, whenever “When further elaborated and is illustrated mainly by compar­ possible, are extensively supported supplemented,” Mr. Ingalls says, ing what men do in countries by relevant Institute literature “I have high hopes that the index with and without specific levels and other available authoritative will prove useful in the future, of accounting development. sources. in connection with automated in­ The speech also looks at the The book, among many other formation storage and retrieval.” future by drawing upon some un­ situations, covers audit report When the book is published in published papers of social scien­ cases, disclosures, liability, divi­ early 1966, it will be offered to tists who consulted with the Insti­ dends and distribution, and pool­ members at a special discount tute’s long-range objectives com­ ings and purchases. price of $20, and to nonmembers mittee during its recent study. The author-editor of the work, at the regular price of $25.

THE JANUARY CPA/PAGE 4 investors. . ." In commenting on Accounting developments featured in the implications to the investor of lawsuits that “charge accountants trade magazines, leading newspapers with a fiscal responsibility as well as professional accountability,” he said, “Even under economic fire, many of the nation’s leading Business magazines, trade jour­ reporting in the October 27 issue auditing firms and principals re­ nals, and leading national dailies of Financial World. continue to cover the latest de­ The story, based on interviews tain a strong sense of public ad­ velopments in the profession. and writings of several leading vocacy.” figures in the profession, outlines “Yet, despite the ever-changing problems and the difficulty inher­ Taxation . . . some of the current issues and concludes that substantial prog­ ent in setting up static, rigid The September Chemical En­ ress is being made on complex boundaries of definition in areas gineering Progress warmly ap­ problems that cannot be solved as dynamic as corporate financial plauded the recommendations of overnight. reporting in a business world as the Institutes committee on Fed­ The author, Samuel A. Krasney, changing as the one in which we eral taxation regarding expenses in took particular note of the resolu­ live, the accounting profession is securing employment and in mov­ tion that material departures from moving ahead in a responsible ing in an editorial headed “Bully APB Opinions should be dis­ fashion. . . . recent gains are cer­ for the AICPA.” Commenting that closed, referring to it as “a giant tainly encouraging. Particularly such changes would benefit both step forward in standardizing the since they favor increasingly companies and employees, the disclosure of financial information broader and better evaluated pub­ editorial said that “anything to on a basis easily understood by lic disclosure.” ease the strain would be most helpful.” The tax committee’s statements on CPA responsibility have also Exchange program asks for firms' participation been receiving considerable at­ tention. Reports on Statements on now includes forty member coun­ Responsibilities in Tax Practice Thirteen firms with members in No. 2, “Signature of Reviewer: the Institute are participating in tries. Assumption of Preparers Respon­ a program to provide practical AIESEC would like more CPA sibility,” appeared in two syndi­ international business experience firms to participate. Additional cated columns and a substantial today to the executives of to­ information about the program number of local papers including morrow. can be obtained from AIESEC- the Los Angeles Times. Former The thirteen CPA firms, togeth­ US, 51 East 42 Street, New York, IRS Commissioner Mortimer Cap­ er with more than 500 other New York. lin, in a speech reported by the U. S. businesses, are members of Washington, D.C., Post-Times- AIESEC — Association Interna­ "Accounting Trends" Herald commended the AICPA tionale des Etudiants en Sciences for its “comprehensive statement Economiques et Commerciales. The 19th annual edition of of recommended standards of Through the program, some 400 "Accounting Trends & Tech­ ethical tax practice,” while urging foreign students each year jour­ niques," edited by William H. tax lawyers to develop ethical ney to a country other than their Hird, CPA, was published in No­ guidelines “in solving their prob­ own and spend between ten and vember by the institute. lems of conscience and propriety.” fourteen weeks getting firsthand The 322-page publication in­ And the new edition of Work­ experience of how businesses in cludes a special table of con­ ing With the Revenue Code—1965 other countries conduct their af­ tents listing such topical items was the subject of articles in The fairs. as the effect of the 1964 Rev­ enue Act on accounting for the New York Times and the New In 1965, three of thirteen CPA investment credit and on stock York firms — two in New York and Journal-American. options. one in Chicago — offered a total The new edition of "Account­ of six traineeships. During their . . . and corporate reporting ing Trends & Techniques," priced “internship,” the students served at $18, can be ordered from the There were words of high as regular audit staff members. American Institute of CPAs, 666 praise for the accounting profes­ Starting as a student exchange or­ Fifth Avenue, New York, New sion in a wide-ranging feature on ganization between France and York 10019. CPAs’ efforts to improve corporate Germany in 1948, the program

THE JANUARY CPA/PAGE 5 FROM THE EXECUTIVE DIRECTOR JOHN L. CAREY

while never perfect, have been improved so much over the last twenty-five years that there is What’s Right With the Profession? little comparison. In the period from 1917 to 1952 the profession developed a Uni­ E v e r y profession has its problems — and accounting is no exception. form CPA Examination and cen­ It is, of course, necessary to talk and write about the problems in tralized grading service now order to deal with them effectively. But it is also useful, once in a while, adopted by all the states, terri­ to remind ourselves that some important problems have been solved tories and the District of Co­ in the past, and that there is no reason to believe that those which now lumbia. confront the profession will not also be surmounted successfully. Accounting has achieved a prominent position in the curri­ In other words, it is easy to talk about what’s wrong with the ac­ culums of all schools of business counting profession; now and then it may be useful to consider what’s administration, graduate as well right with it. as undergraduate, and has quietly The CPA profession occupies a vitally important place in American penetrated the curriculums of the society. There can hardly be any argument about this. The profession liberal arts colleges. is more important than most people realize—more important even than Over the last thirty years the many CPAs appreciate. profession has attracted a higher There is a natural time lag in public understanding. In the sense and higher percentage of college of an organized and effective group of significant numbers, the CPA graduates until now the number profession is hardly fifty years old. It had humble beginnings and was of new entrants who do not pos­ not greatly noticed until fairly recently. But the growth in numbers sess college degrees is negligible. The proportion of new entrants of CPAs from 25,000 in 1945 to some 90,000 at present is in itself an with master’s or doctor’s degrees indication of the rapid increase in demand for professional accounting is steadily increasing. services. The widespread distribution of corporate securities and the The literature of the profession increasing numbers and influence of financial analysts have greatly en­ has been enriched more in the last hanced the significance of independently audited financial reports which quarter of a century than in all now disclose vastly more information than in earlier years. The ex­ the preceding decades. Both the panding volume of bank credit — far beyond the scope of the lender’s quantity and the quality of ac­ personal knowledge of the borrower’s ability to repay — has led to counting publications are con­ heavy dependence by banks on independent auditors’ reports. The self- stantly improving. assessing income tax system in the framework of increasingly complex Auditing standards have been developed to an extent which tax laws has led to further reliance by both taxpayers and government compares favorably with the on the CPA profession. The accelerating trend toward management standards of any other profession. by information rather than by intuition has opened up new areas of While the subject of accounting service by CPAs in the effective management of the millions of busi­ principles has been a source of ness enterprises in this country. The increasing intervention of gov­ great controversy, there has been ernment in the economy has developed the need for reliable informa­ a tremendous clarification of ob­ tion on the part of government agencies—and many of them are find­ jectives in recent years and a ing that they can readily acquire the necessary data best with the as­ foundation has been made which sistance of certified public accountants. promises rapid progress in the In the light of these developments, it is not too extravagant to say future. that if the CPA profession did not exist, it would have to be invented. A system of continuing educa­ tion for CPAs and their staffs has What has the profession itself accomplished in response to the in­ been created and is now in suc­ creasing public demand for its services? cessful operation. Efforts to make In approximately thirty years it has developed a strong national it available to more and more organization closely tied in with the independent state societies of members of the profession are certified public accountants. Together they include all but a very now under way. few of the practicing CPAs in the country. Internal communications, The profession has repulsed

THE JANUARY CPA/PAGE 6 many attacks on its standards in the legislative halls and has de­ Boston prepares for 1966 annual meeting- feated efforts to limit the scope of its practice. Its legislative position technical sessions to stress computers is now stronger than ever before. While CPAs have not yet at­ tained universal recognition as The seventy-ninth annual meet­ then to the State House, where members of a learned profession, ing of the American Institute is the oldest written constitution in comparable to law or medicine, scheduled for October 2-5 in Bos­ effect in the United States is on all the evidence suggests that the ton. This is how the program looks view; the Park St. Church, in accounting profession is more at this early date. which “America the Beautiful” widely understood and more Taking its cue from the ap­ was sung for the first time; the widely respected with each pas­ parent success of the technical Old Granary Burying Ground, sing year. Public relations efforts sessions at the Dallas meeting, the which numbers among its resi­ to increase the scope and acceler­ Boston meeting will continue to dents such signers of the Declara­ ate the rate of public understand­ explore the computer-CPA rela­ tion of Independence as John ing are constantly expanded. Par­ tionship. Tentatively scheduled Hancock, Robert Treat Paine, and ticipation by CPAs in public af­ sessions will cover: Samuel Adams; Faneuil Hall, the fairs is on the increase. Their re­ so-called “cradle of liberty”; the lations with universities, with The art of consulting — a dis­ Old South Meeting House in government, with the business cussion on how to discover oppor­ which the Boston Tea Party was and financial community are tunities in management services plotted; and the Paul Revere House, which was built in 1670. growing stronger and are rising The use of computers in aiding The new Boston will be well in to higher levels. small business — a session utiliz­ evidence also. Headquarters for American CPAs are extending ing the case study approach in the annual meeting is the Shera­ their activities and influence into the application of computers to ton-Boston Hotel, a part of the the international economy. small business clients Long-range planning has been recently opened Prudential Cen­ undertaken in a purposeful and Changing concepts of ethics — ter. Among the events scheduled systematic manner. a session covering independence to take place in the new 1,012- This list of accomplishments problems raised by computers room hotel is a concert by the could be expanded, but it suffices renowned Boston Pops Orchestra, to show that a great many ob­ Other technical sessions pres­ under the direction of Arthur stacles have been overcome in the ently planned for the Boston meet­ Fiedler. journey of this still youthful pro­ ing will discuss the Common Body Members choosing to take in fession from its inception to the of Knowledge Study and the pro­ this event will be glad to know present day. Self-criticism is use­ fession’s “human input” needs, that the name “pops” originally ful—and CPAs have an unusual and new approaches in tax policy. referred to the happy sound of capacity for it. But this healthy A session on the over-all view champagne corks. Mr. Koelbel introspection should not be car­ of the profession’s environment notes that members and their fam­ ried so far as to create the impres­ will round out the picture. Efforts ilies, who will be seated at tables sion either among members of the are under way to engage promi­ during the concert, will be able profession or among those outside nent writers on business and to participate in this proud Bos­ of it that there is nothing right economics to participate in the ton “pops” custom. with the accounting profession. session. Critics should be challenged to Preparations for the social side show a comparable record of of the meeting are moving ahead, progress by any other group. too. Arthur Koelbel, chairman of Management Services The challenges which now con­ the annual meeting committee, re­ Technical Study No. 2 front the profession are no ports that he has both the “new” "Cost Analysis for Pricing and “old” Boston well in hand. greater in relation to its present and Distribution Policies," the size and strength than were those Members who favor the “his­ second of a series in technical of earlier days when a CPA had torical” approach will not lack studies in management services, little to work with but his own places to go or things to see in has just been published by the intelligence and determination to their spare time. For example, Institute. It is available to mem­ succeed. There is no reason for there is the “Freedom Trail,” bers at a special discount price lack of confidence in the profes­ which can be covered either by of $2.50 (see November "CPA" sion’s ability to continue its march foot or by vehicle. The “Trail” insert for coupon). forward on the path of progress. leads to the Boston Common and

THE JANUARY CPA/PAGE 7 fering them a measure of financial Accounting practitioners, educators support. The educators urged the Institute to consider modifications discuss broadening of mutual efforts of the specifications for the grants which would encourage a more Improved liaison between ac­ ► Both groups endorsed the idea favorable response. counting practitioners and ac­ that an awards program would counting educators was the gener­ stimulate outstanding contribu­ ► The group also discussed the al aim of a November 29 meeting tions to the literature of account­ proposals for accreditation of ac­ of representatives of the American ing. A joint program for officially counting programs now being considered by the Association of Accounting Association and the recognizing the most meritorious CPA Examiners and the American AICPA. The specific topics dis­ additions to the literature each Association of Collegiate Schools cussed at the Chicago meeting year was proposed. of Business. included: the Common Body of ► Both groups agreed that the Knowledge project, a possible Representing the AAA at the pace of change in society and in awards program for outstanding the accounting profession in par­ meeting were Professor Herbert contributions to accounting litera­ ticular made continuing educa­ Miller, Michigan State University, ture, continuing education, grants- tion of both educators and prac­ president of the Association; Pro­ in-aid, and accreditation of ac­ titioners one of the most crucial fessor Lawrence L. Vance, Uni­ counting programs. problems of the profession. A versity of California, president­ number of approaches to the solu­ elect; Professor Glenn A. Welsch, ► With publication of the CBOK tion of the problem were dis­ The University of Texas, past report imminent, the accounting cussed. president; and Professor Joe R. profession will want to generate Fritzemeyer, University of Iowa, extensive discussion and exposure ► The meeting afforded an op­ secretary-treasurer. Representing of the findings. It was pro­ portunity for some very practical the AICPA were Robert M. posed that seminars be held feedback on the Institute’s grants- Trueblood, president; Thomas D. throughout the country in which in-aid program, now in its second Flynn, immediate past president; practitioners and educators can year. The program encourages ed­ John L. Carey, executive director; share their reactions to the ucators and students to undertake and Guy W. Trump, director of CBOK report. promising research projects by of­ education.

JANUARY 1966

Second class postage paid at New York, N. Y. The CPA is the membership bulletin of the Ameri­ can Institute of Certified Public Accountants, Inc. 666 FIFTH AVENUE, NEW YORK, N. Y. 10019 THE FEBRUARY 1966

Members' views “What members think, what they need, what they want, will determine the urged on computer Institute’s future activities in the computer field, . . ."John L. Carey writes on program . . . page 2. The Institute’s efforts in the past six months, he explains, are only the beginning of its attack on the problem. He urges members to write the Institute their views on the subject.

. . . as Institute A new six-month contract with System Development Corporation has been embarks on second signed and the second phase of the Institute’s computer research and month research study education program is now under way. The new study will focus on the computer’s role in basic management services and auditing. And, as in the case of the first six-month effort, the new study should produce additional literature and courses which will benefit members. To bolster its staff capabilities in the EDP field, the Institute plans to add one or more computer specialists.

How effective A questionnaire examining the effectiveness of the Institute’s governing bodies is the Institute? and its staff has been sent to a representative sample of the membership. The returns—which in no way will identify the responding members—will be analyzed by the ad hoc committee on structure and be used in developing a report to be presented to Council at its spring meeting (The CPA, Jan.66, p.1). The questionnaire asks, for example: What is your general feeling about the management of the Institute’s affairs? How do you regard the contribution of the Institute to your personal or professional prestige? It also asks members to judge the Institute’s programs and services and to indicate why, if the member so feels, such programs and services “are not all that they should be.”

APB Opinion on A proposed APB Opinion, “Accounting for Leases in Financial Statements of accounting by lessors Lessors,” is now out for exposure to state societies, industry committees, out for exposure Government agencies, and other groups. The Opinion sets forth the Board’s views as to the two predominant methods—“financing” and “operating”—of allocating rental revenue and expenses by lessors. The full text of the draft Opinion appears in February 1966 Journal.

Also in this issue .. . CPAs in Pennsylvania form political information committee to promote legis­ lation and to assist candidates (page 7).... Dr. Ezra Solomon accepts appoint­ ment as economic advisor to Institute (page 7).... Are the computer and Code of Professional Ethics compatible? (page 10).

The CPA, February 1966. Published monthly, except July-August when bimonthly, for membership of the AICPA, Inc. Vol. 46, No. 2. Publication and editorial office: 666 Fifth Ave., New York, N. Y. 10019. Second-class postage paid at New York, N. Y. FROM THE EXECUTIVE DIRECTOR JOHN L. CAREY It is not impossible that in the near future small businessmen, who cannot afford their own com­ CPA and Computer puters, will be able to get more, better and more timely informa­ L a s t June the Institute contracted with the System Development tion, at less cost, from computer Corporation for a project in research and education, broadly installations in banks, service cen­ described as the impact of computers on the practice of accounting. ters, trade associations or else­ The tangible results are a series of reports, which will be published where than they can get from CPAs who have not learned to in the coming weeks, and a four-day professional development course utilize the new tool effectively. which is now undergoing refinement and testing. [E d . N o t e : See stories Also, CPAs who do not possess on pages 3, 4.] a basic understanding of how a Both the reports and the course may be disappointing to some computer works will find it diffi­ CPAs—either because they are too elementary, on the one hand, or cult to audit the data in the ma­ too difficult to understand, on the other. But most CPAs will find it chines or to advise and assist their worth the effort to study them. The Institutes membership reflects a clients on systems and controls. wide spectrum of understanding of computers—ranging from zero to a How much the average CPA high degree of sophistication. No one publication or course will satisfy needs to learn about computers in those at the extremes. order to utilize them most effec­ There is no quick and easy way to master the uses of computers tively in the client’s interest is difficult to determine at this time. in accounting practice—no “one easy lesson” which will increase the Presumably, in addition to sys­ billable competence of a CPA immediately. Those who accept the tem concepts, someone in each proposition that they can’t lick the computer, but must join it, will firm should understand the proce­ have to reconcile themselves to the investment of some time and money dures involved in preparation of in educating themselves. “software”—the basic information The Institute’s efforts in the past six months are only the beginning and instructions which will be of its attack on the problem. It has made a new contract with System translated into computer language Development Corporation for a second six-months’ study, focusing on and transmitted to the machine. the computer’s role in basic management services—at the small-client The CPA should also understand level—and in auditing. More literature and more courses will be pro­ computer language and program­ duced. It is planned to add specialists in computer technology to the ing techniques sufficiently to avoid Institute’s permanent staff. being wholly at the mercy of technicians. He should know A major problem in this undertaking is the fact that computer enough about the controls and specialists and CPAs speak different languages. They have been operations of the computer itself trained in completely different disciplines. The absorption by CPAs to audit the data it contains with of the knowledge and skills of ED P technicians is likely, therefore, knowledge of what he must guard to be a slow, and perhaps a painful, process. It is hoped that the against in the way of material professional development courses can speed and ease it. error or misappropriation. Another serious problem is the apparent failure of many CPAs to This is a pretty big order, to be grasp the full implications of the computer in relation to their own sure. And the acquisition of all practices—and therefore to understand why they should make the ef­ this knowledge may not result in fort to master it. immediate increases in the CPA’s The computer is not merely a substitute for manual bookkeeping income. But failure to acquire it work. In it can be housed most, if not all, of the information a business­ may result in losses of income in the future. The conversion of a man needs to run his business effectively. Furthermore, the machine substantially larger proportion of can be programed to analyze the data it contains in almost any man­ clients’ records for computer us­ ner desired, so as to produce rapidly, frequently and cheaply reports age seems inevitable in the next showing, for example, sales by salesmen, product line or territory; five to ten years. Technological labor costs by product or plant; receivables by age; inventory reorder improvements are so rapid that points; budget comparisons; and so on and so forth—not to mention even the experts have difficulty trial balances, balance-sheets, income statements and tax returns. in keeping abreast. Time-sharing

THE FEBRUARY CPA/PAGE 2 is reducing the cost of comput­ er service. Teletype, telephone Survey provides insight on impact and other communication devices make it possible to utilize com­ of EDP on practice of accounting puters at distant points. The use of computers by CPAs should not be equated solely with Services which have been offered traditionally to clients “write-up work." The computer are expanding as computers become “silent assistants” to CPAs. revolution will affect every phase What are the nature and extent of these new services? of accounting practice—auditing, taxes, management services. In fact it may well tend to integrate All members in public practice by offering ED P services. the CPA’s approach to these sup­ and education will soon receive Nearly one-third of the re­ posedly separate areas. As the the first AICPA/SDC computer sponding firms use service bu­ client’s data gradually tend to be­ program research study. reaus. Approximately 10 per cent come a “total” computerized in­ It contains the results of a use bank service centers. Less formation system, the CPA’s ap­ questionnaire designed to deter­ than 2 per cent use other CPAs’ proach to the client’s needs for mine the current impact of EDP equipment. external reports, and internal data on the practice of public account­ The survey gives some insight for planning, control and deci­ ing. The questionnaire, mailed to as to the type and extent of EDP sion-making, will tend to become 13,888 CPA firms across the coun­ services presently offered by a “total” approach. If it doesn’t, try, was returned by 3,492 firms. CPAs. the CPA may find himself out at Here are some of the highlights One hundred and sixty-nine the edges of the business-infor­ of the survey: firms are designing and producing mation field, and might even be Almost 40 per cent of the re­ computer programs; 236 modify pushed off. sponding firms have one or more and correct computer programs; What has been written here is staff members participating in 662 advise on computer selection a personal appraisal of the out­ EDP engagements. Nearly 25 per and purchase; 629 advise clients look, by one who is not an expert cent of the firms have one or on ED P expansion or reduction; but has been listening to experts. more staff members currently in and 754 firms (out of 3,492 re­ It may be old stuff to most read­ EDP training. Almost 7 per cent sponding) are conducting feasi­ ers. It may be considered un­ (out of 2,886 responding) have bility studies. realistic by many. In any event, full-time employees with com­ Many of the responding firms write us your views on the sub­ puter programing assignments. not presently engaged in such ac­ ject. What members think, what Five per cent of the respond­ tivities, however, reported that they need, what they want, will ing firms reported losing clients they are planning to offer these determine the Institute’s future because EDP services were of­ services in the near future. activities in the computer field, fered by someone else. Nearly 25 What about dollar costs? which could involve substantial per cent said that additional cli­ Reported computer purchase investment. ents would have been acquired prices ranged from less than $10,000 to between $50,000 and $100,000. The monthly rental price median is $1,687. The site preparation cost median is $909. AICPA Library Adds More EDP Documents The median annual salary for pro­ gramers is $5,894. And the re­ More than 100 documents and society, information proc­ ported median annual salary for dealing with EDP that may be essing systems, and information equipment operators is $6,052. of interest or use to CPAs have processing in the behavioral sci­ recently been added to the ences. E d . N o t e : The studies deal pri­ AICPA library and may now A master reference list de­ marily with the practice of pub­ be borrowed by members. scribing the documents is avail­ lic accounting and education and The documents cover such able at the library. will automatically be sent, there­ areas as: computer technology, The material was submitted fore, to that portion of the mem­ development of information to the American Institute by bership so engaged. All other processing systems, computer the System Development Cor­ programing, information stor­ poration as part of the joint members can receive a copy of age and retrieval, cybernetics AICPA/SDC computer project. the computer study by writing to the Institute. Additional copies are available to all for $1 each.

THE FEBRUARY CPA/PAGE 3 in addition to the auditor’s cer­ Public at large learns of accountancy tificate.” and accountants as reports reach it... Accountants are not expected to understand actuarial methods so “are in no position to examine insurance companies’ statements from the rostrum ... least as important as reported critically.” earnings. Hence, in our Annual State societies have been active Report on American Industry we “They [actuaries] question the in getting press attention for In­ use cash flow-to-equity capital as propriety of an accountant veri­ stitute speakers. Typical of these one of our three yardsticks of fying the liabilities of a company efforts were feature articles on profitability.” whose pension plan has been es­ President Robert M. Trueblood’s tablished by an actuary from the talk before the Colorado Society, same accounting firm. They are which appeared in the Denver and from Fortune magazine also fearful that the actuarial pro­ Post (November 11) and Rocky A two-part article in Fortune fession might end up simply as (November 11). Mountain News (December-January), “Those Un­ a branch of accounting.” Similar treatment was given to re­ certain Actuaries,” has many items marks by John L. Carey on the The second part dealt almost of interest to CPAs. computer before two local groups exclusively with pension plans in Written by Thomas A. Wise, in the Philadelphia Bulletin (No­ which it reported that two CPA author of “The Auditors Have vember 10) and New Haven, firms were among the 14 largest Arrived” ( Fortune, November-De­ Conn., Journal-Courier (Novem­ pension planning organizations. cember 1960), the first part is pri­ ber 19). Also, accountants “have been marily a discussion of the actu­ nudging their corporate clients to arial groups and their problems. report pension charges. However, Views of actuaries toward ac­ from The Journal... the latest annual survey of the counting, as reported in the ar­ Journal of Accountancy articles American Institute of Certified ticle, include these samples: are reaching wider audiences as Public Accountants [ Accounting a result of efforts to bring selected Corporate annual reports should Trends & Techniques] does not articles to the attention of other contain “a special certificate testi­ suggest that the nudging process magazine editors. Recent reprints fying to the pension plan assets, has been very effective.” or summaries have appeared in Management Review ( Decem­ ber), Fortune (January), Credit PD courses reflect demands of computer challenge and Financial Management (D e­ cember), and the Insurance Ad­ The Institute’s professional de­ CPAs with the knowledge needed vocate (December 18 ). velopment division is mounting a to work effectively with service full-scale effort to assist members centers. The popular management serv­ from the Institute . . . in meeting and adapting to the computer challenge. ices lecture program, “Systems The new edition of Accounting In various stages of develop­ and Procedures Engagements,” is Trends & Techniques has pro­ ment are: now being revised and modified vided material for several stories, • A two-day course on “Audit­ to include the problems encoun­ including the New York Times ing ED P Installations” which will tered when EDP equipment is (December 5) and The Wall follow up the presently available in use. Street Journal (November 30). PD course “An Introduction to Much of what is planned by The Times (December 28) also A D P.” the PD division in the way of commented favorably on the • An intensive four-day course new courses has been sparked newly effective resolution to dis­ tentatively titled “Information by the impact of the computer on close departures from APB pro­ Processing Systems: A Founda­ the accounting profession, and the nouncements. tion Course in ED P” which was interest shown by members in “An The use of “cash flow” figures prepared by System Development Introduction to ADP,” the first still remains a problem as indi­ Corporation as part of the Insti­ of the PD “computer” courses. “In­ cated by a Forbes editor’s note tute’s computer research and edu­ troduction” is still going strong, to a letter written by the Insti­ cation program. too, as evidenced by the fact that tute’s public relations officer ( De­ The PD division is also consid­ the seven presentations scheduled cember 1). It said: “Forbes feels ering the possibility of preparing this past fall were attended by that, increasingly, cash flow is at a course which would provide nearly 700 participants.

TH E FEBRUARY CPA/PAGE 4 Just Published— A Complete and Up-to-Date Study of the CPA's Code of Professional Ethics and a Guide to Ethical Questions Which May Arise in Actual Practice

ETHICAL STANDARDS o f t h e ACCOUNTING PROFESSION BY JOHN L. CAREY AND WILLIAM O. DOHERTY

This important new book merits the careful attention and study of every CPA—not only for its up-to-date analysis of the ethical rules which govern the CPA’s practice of accountancy, but also because it provides a wealth of practical information to help you resolve specific questions which may arise in your day-to-day practice. Far more than a revision of the volume Professional Ethics of Certi­ fied Public Accountants which is now out of date, the book considers the CPA’s current ethical standards in the light of changing conditions of professional practice—particularly as they apply to independence. . . professional attitude. . . tax practice.. . opinions on financial statements . . . and management services. The book is fully indexed and its reference value is further increased by the addition of appendices containing by-laws, rules and opinions.

CLOTH BOUND REGULAR PRICE $5.00 DISCOUNT PRICE TO AICPA MEMBERS $4.00

SPECIAL FEATURES • A comprehensive discussion of • The 17 numbered opinions is­ general ethical principles as they sued by the Institute’s Committee relate to specific circumstances on Professional Ethics. which may confront today’s CPA practitioner. • 170 informal opinions of the Committee — in the form of sum­ • Complete text of the 21 rules marized questions and answers — which now make up the Institute’s on actual problems of ethics raised Code of Professional Ethics. by practitioners. SEE REVERSE SIDE FOR ADDITIONAL INFORMATION

AICPA MEMBERS PLEASE USE THE DISCOUNT ORDER FORM BELOW

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 666 FIFTH AVENUE, NEW YORK, N.Y. 10019 Gentlemen: Please send, postpaid,_____ copies of Ethical Standards of the Accounting Profession at the special member discount price of $4.00 per copy.* Our payment is enclosed.

Na m e ______

FIRM ______

ADDRESS______— ____

CITY______STATE______ZIP CODE _ Please add 5% sales tax in New York City. Elsewhere in New York State, add 2% state tax plus local tax if applicable. *AICPA member discount does not apply in the case of orders subject to educational or quantity discount. ETHICAL STANDARDS o f the ACCOUNTING PROFESSION BY JOHN L. CAREY AND WILLIAM O. DOHERTY

CONTENTS

I. GENERAL PRINCIPLES OF ETHICS Professional Ethics and the Public Interest Professional Competence Independence The Professional Attitude

II. AUDITING, TAX PRACTICE, AND MANAGEMENT SERVICES Opinions on Financial Statements Tax Practice Ethical Responsibilities in Management Services

III. RELATIONS WITH OTHERS Relations With Clients Relations With Fellow Practitioners Forms of Organization and Description

APPENDICES A. Excerpts from the AICPA’s By-Laws B. The American Institute’s Code of Professional Ethics C. Numbered Opinions of the Committee on Professional Ethics D. Summaries of Informal Opinions of the Committee on Professional Ethics

INDEX

HERE ARE SOME EXAMPLES OF THE 170 PRACTICAL QUESTIONS ON W HICH INFORMAL INTERPRETIVE OPINIONS ARE PROVIDED

May a CPA enter into an agreement with a bookkeeping com­ pany to prepare tax returns on the basis of work sheets provided to the company by its customers? May a CPA make use of an outside service bureau for the processing of clients' tax returns? May a CPA, as an expert witness in a damage suit, receive compensation based on the amount awarded the plaintiff? May a CPA send collection letters to his clients’ customers? Three CPA firms wish to form an association to be known as “Smith, Jones & Associates.” Is there any impropriety in this? Is a CPA who has formed a partnership with a non-certified public accountant ethically responsible for all the acts of the partnership? May a CPA make use of an outside mailing service for the confirmation of receivables and payables?

PLEASE USE THE FORM ON THE REVERSE SIDE TO ORDER YOUR COP| Q&A's From the New AICPA Book on Ethical Standards

Tax evasion b y client of collusion, he should write the any objection to this practice? Q. A member learned that a taxpayer that the additional in­ client withheld from him informa­ come should be reported in an A. Such a practice might mis­ tion on a substantial part of his amended return. If the client re­ lead others into believing that income, with the result that a fuses to correct the return, the the number of states in which faulty tax return was prepared member should withdraw from a CPA is certified has some sig­ and filed. What should the mem­ the engagement. nificance with regard to his pro­ ber do? fessional standing. For this rea­ CPA title, multiple certificates son the Institute itself refrains A. He is not obliged to inform from any such references when anyone but the client that a vio­ Q. Frequently CPAs are referred preparing biographies of au­ lation has occurred. In order to to as holding certificates from thors, speakers, and other mem­ protect himself from the charge more than one state. Is there bers.

voluntarily contributed by the CPAs in Pennsylvania form committee more than 4,000 CPAs who live and work in Pennsylvania. to promote bills and assist candidates Supporting the committee should not be viewed as a substitute for Pennsylvania may have a pro­ such as the Pennsylvania Insti­ any support a CPA may care to fessional first—the first political tute avoid such activities so as give as an individual to local can­ information committee of certi­ not to prejudice their nonprofit didates for state office, according fied public accountants (PIC- status. to Mr. O’Hara. The purpose of the CPA). To effect its goals, the political Pennsylvania political information Organized to promote legisla­ information committee needs a committee is to give the profes­ tion beneficial to the accounting minimum annual working fund of sion a more effective role in state­ profession and to oppose adverse $10,000 which it hopes will be wide matters. legislation, the committee, com­ prising ten prominent CPAs from various parts of the state, was formed under the lobbying laws AICPA retains Ezra Solomon as economic adviser of the state of Pennsylvania with Ezra Solomon, professor of the knowledge of the council of agreed to address the seventy- the Pennsylvania Institute of finance at the Graduate School of ninth AICPA meeting in Boston CPAs. Business, Stanford University, this October. John B. O’Hara, treasurer of Stanford, California, has accepted Dr. Solomon served as editor of PIC-CPA, points out that the pro­ appointment as economic consult­ the Journal of Business from 1953 fession must be prepared to as­ ant to the American Institute. to 1957. Among the books that he sist candidates for state office who As economic consultant to the has authored or coauthored are: will be sympathetic to problems, Institute, Dr. Solomon will, from Theory of Financial Management, and that the profession must also time to time, brief the Institute on The Management of Corporate be represented at significant po­ the current economic scene and Capital, and Metropolitan Chi­ litical fund-raising affairs. will advise the Institute of mat­ cago: An Economic Analysis. “In the main,” Mr. O’Hara ters which he believes require at­ From 1961 to 1964, Dr. Solo­ notes, “these efforts have been tention or should be communi­ mon held the position of director conducted in the past by indi­ cated to members. He may also, of the International Center for the vidual certified public account­ in time, help the Institute develop Advancement of Management ants. W e believe that we will closer relations with the econo­ Education, Stanford University. speak as a much more powerful mists as a group. He is a member of the Amer­ force if these efforts are con­ Members of the Institute had ican Economic Association and ducted on a collective basis.” the opportunity to hear Dr. Sol­ the American Finance Associa­ Independent groups like the oman speak on “Accounting in the tion, and has served as a consult­ political information committee Next Decade” at the annual meet­ ant to business, government, and are necessary, Mr. O’Hara says, ing in Miami two years ago. The trade associations both in the because professional organizations renowned economist has also United States and abroad.

THE FEBRUARY CPA/PAGE 7 FROM THE PRESIDENT ROBERT M. TRUEBLOOD There is another quality which, in my judgment, our Compleat Man must have in his professional life, but which is perhaps not The Compleat Professional Man often referred to in our literature. That is creativity. There is a ten­ dency in all institutions to be­ A certain completeness tends to make a CPA a better prac­ come preoccupied with things as titioner of his profession, as well as a more contented person in they are, to concentrate on simply the leisure hours of his life. rearranging known factors, and to elaborate more and more finely on known techniques. This pre­ occupation ultimately leads to a h e n I told one of my col­ as compared with people in other sort of intellectual inbreeding at W leagues what I intended to occupations, are motivated more the risk of ultimate sterility. write about, I asked if he had any by a devotion to their calling for One obvious area in which our suggestions. He said, “Perhaps its own sake, than by desire for profession could be more creative you should consider first the at­ material gain. Professionals ac­ is in financial reporting by cor­ tributes of the professional man, knowledge a responsibility to the porations. While there can be no and then the attributes of the public and a duty to use their question that business has made complete man, and somehow try skills in public causes. The pro­ great progress in furnishing in­ to put them together.” And this fessional man accepts a code of vestors with useful information, it is essentially the approach I’ve ethics, and he is disciplined by is equally unquestionable that op­ his peers according to established adopted. portunity for improvement still procedure. And, finally, practic­ It is clear that a person can be exists. It is good we can say that ing professionals are independent; a complete man, in the way I American investors are the best- mean the word here, and not be they heed the standards of their informed stockholders in the a CPA or a professional of any profession, above even the inter­ kind. But it is also possible that a ests of clients or employers. world. But is that enough? Should CPA can be positively brilliant in Accounting has all these dis­ we not ask whether the more than all aspects of professional prac­ tinctive qualities. The individual 20 million stockholders in this tice, and yet be quite an incom­ accountant takes them seriously, country are as fully informed, plete person, in the sense I’m and he takes them to heart. In­ as well informed, and as clearly using the word. tegrity, objectivity, independence, informed as is possible within the I think we all agree that a pro­ and ethics are much more than present state of our art? fession rests on a body of ac­ buzzwords. They are concepts. The Compleat Professional Man cumulated knowledge, and a liter­ A case of stodgy reporting ature. This knowledge is taught thinks about these concepts — not in formal courses of education, as philosophical abstractions, but Recently, a public relations often in special schools. Members rather as gauges to be applied in man told me that a client of his are usually licensed by the state work-a-day assignments: had been unhappy because the to perform their work, or they Intellectual integrity enjoins the financial community did not seem are accredited by some formal or­ true professional from rationali­ to appreciate the great strides his ganization as in the United King­ zation. company was making. After dom. They profess — and this is studying the matter and talking where we get the word “profes­ Objectivity demands a lack of to some bankers and brokers, my sion” — to be more competent bias in the decisions of every day public relations friend concluded to provide services in a particular and every job. that a main reason for lack of field than persons outside the interest in the company was that profession, and generally they Independence puts the profes­ sional above the market place. its financial reporting was stodgy try to bar outsiders from engag­ and sparse. So one day he said ing in their work. Ethics are a matter of attitude to the president, “What do you However, there are even more and mental demeanor, as distin­ suppose would happen if you important marks of a profession. guished from a series of “thou asked your auditors for their sug­ The practitioners of a profession, shalt not’s.” gestions on what material to put

THE FEBRUARY CPA/PAGE 8 in the annual report in order to ent accountants won’t have any acquire the capacity to use the make it more satisfactory to anal­ to offer. On the other side of the English language on paper and ysts and to fund managers?” coin, I suspect that the noncrea­ in speech and with the habits of “Well,” replied the president, tive accounting firm frequently clear thinking which only a truly “after the partner in the auditing may not suggest improvements — liberal education can give.” firm who takes care of us recov­ simply because it isn’t asked. Although Justice Frankfurter ered from the shock which that was speaking of lawyers, his pre­ question would bring on, I don’t scription, in my opinion, applies A not-so-humdrum business imagine he’d come up with any­ just as well to accountants. A thing we hadn’t thought of al­ This story suggests one reason superior CPA is likely to be a ready. After all,” the president why many people regard ac­ broadly cultivated man. His range said, “we know our business — so counting as a humdrum business. of knowledge and interests en­ the auditors don’t tell us how to It is because they think of ac­ riches his own life and opens to prepare our annual reports; we countants as noncreative people. him many sources of enjoyment. tell them.” The public presumes that ac­ The Compleat Professional Man My public relations friend per­ countants only review what others finds time to read more than sisted, however, and finally the have done. It doesn’t see ac­ books and articles in his own president of his client company countants, for example, in the field. He reads the great novels, did put the question to his ac­ light of architects designing fine history, and biography. Nor is he counting firm. I am told that there buildings, or even as construction a stranger to museums, concert came back a list of proposals, men doing the dangerous and ex­ halls, or the theater. documented and explained, that citing job of fastening girders The interests and attitudes of both astounded and delighted the hundreds of feet in the air. In­ the Compleat Professional Man president. A number of the pro­ stead, I fear, the public tends to are such that he is alive to im­ posals have been adopted and — think of auditors as the building portant issues affecting his city, although I take no position as to inspectors who come around to his country, and his world. Many cause and effect — I can tell you make sure that the specifications CPAs already hold public office that business magazines and fi­ of the construction code have or contribute their services in nancial editors seem to be paying been observed. public causes. But there is more more attention to this company. You and I know that a CPA’s that CPAs can do in this way — Its stock is more active, and a work is not simply that of re­ particularly since so many public couple of weeks ago it reached viewing. With accountants get­ problems today are largely eco­ a new high. ting into wider areas of service, nomic in character. Clearly the The moral of this story lies not and many of them becoming man­ skills of accountants could help in in the market performance of the agement scientists, the creative the analysis and solution of these stock, but in the first reaction of aspects of a CPA’s work have en­ problems. the president of the company — larged greatly. But in the area of Let me remind you of some his feeling that the auditors would a client’s financial reporting — as of the attributes which an early “pass out” in astonishment if well as in the management serv­ philosopher assigned to what he asked for presentation suggestions ices — the Compleat Man will try called the “superior man,” and of this sort, and that they prob­ to be creatively helpful in every ask you to think of this “superior ably wouldn’t have any ideas any­ way, and every day. man” as the Compleat Professional way. Man I have tried to describe: I suspect that such a view­ Leisure-time interests “The superior man understands point may be more prevalent in what is right; the inferior man the business community than we Much more could be said about understands what will sell. would care to think. I suspect that the Compleat Man in his profes­ “The superior man loves his a great many corporations don’t sional aspect, but let’s briefly con­ soul; the inferior man loves his ask their auditors for suggestions sider his nonoccupational inter­ property. because they feel their independ- ests. “The superior man is always Here, I think, the late Justice candid and at ease with himself Frankfurter provided excellent or others; the inferior man is A credo on the philosophy of guidance when he said: always worried about some­ professionalism, this month’s “No one can be a truly com­ thing.” column was adapted from a petent lawyer unless he is a cul­ I hope very, very much that speech President Trueblood tivated man. . . . The best way to you and I — each in a creatively gave recently before the San prepare for the law is to come professional environment — may Francisco chapter of the Cali­ to the study of the law as a well- always be at ease with others, and fornia Society. read person. Thus alone can one with ourselves.

THE FEBRUARY CPA/PAGE 9 Are the computer and the Code of Ethics compatible? problems which may require amendment of the Code___ It seems to be generally con­ ceded that computerized account­ The article, “New book discus­ 1. Permit our members to ad­ ing services are likely to have an ses ethical aspects of computer vertise all services which are also enormous effect on the practice of challenge . . .” ( CPA, Dec.65, offered by, non-CPAs; this would public accounting. When writeups p.4), states that computer serv­ include practically all services ex­ can be performed and tax returns ices create a novel problem as to cept the attest function. processed with heretofore unheard professional ethics. It seems that 2. Stay with our present Code of speed and accuracy, then it this problem has been with us of Ethics, without making special would seem that the policy organs ever since the existence of our allowances for computer services. of the Institute would be remiss profession. Our clients have al­ I would appreciate it very much in their obligations to the mem­ ways been solicited by a variety to hear your and other members’ bership if they did not at least of people offering the same serv­ views on my comments on this consider the possibility of amend­ ices we can perform; e.g., book­ subject. ing or reinterpreting the Code in keeper services, tax consultants, R o b e r t N e u s c h u l e r the light of this new social and management consultants, noncer­ Homewood, Ill. economic force. tified accountants. The only excep­ It is, of course, possible that tion is the attest function, which The book in question deals not after the problem is considered it law has reserved exclusively for us. only with this problem, but with may be concluded that you are Thus, computer services is just many aspects of professional ac­ right and that no changes in the one more item where we are in counting ethics. The problems are Code are desirable. But at least a competition with non-CPAs. The fully discussed and analyzed, and long hard look at the question question follows: Why single out in many cases suggestions for should be taken, and that is really this one service as presenting a change are offered. In this con­ all the article in question is rec­ special problem to our ethics? text, the effect of computers on ommending. It seems that we are left with the ethics of the profession will W i l l i a m O. D o h e r t y , Manager the following choices: be seen to be only one of many Ethics and State Legislation

FEBRUARY 1966

Second class postage paid at New York, N. Y. The CPA is the membership bulletin of the Ameri­ can Institute of Certified Public Accountants, Inc. 666 FIFTH AVENUE, NEW YORK, N. Y. 10019 THE MARCH 1966 CPA

Executive committee The executive committee has approved a series of proposals involving an exten­ approves proposed sive revision of the disciplinary provisions of the Institute’s By-Laws. The proposals By-Laws revisions . . . provide for the automatic suspension from Institute membership of a member whose CPA certificate is suspended for disciplinary cause or who has been convicted of a felony, of failure to file his personal income tax return, or of filing a false and fraudulent return for himself or a client. The proposals also call for automatic termination of membership of a member if his CPA certificate is revoked for disciplinary causes or when his conviction becomes final. The pro­ posals include a provision for reinstatement of members terminated for disci­ plinary reasons. The proposed amendments to the By-Laws will be presented to Council when it meets in May and, with Council’s approval, to the annual meeting in Boston this October for discussion. The next step would be a mail ballot to the entire membership.

. . . and re-entry of The executive committee also approved the re-entry of the Institute into the Institute into American American Thrift Assembly, the organization primarily interested in co-ordinating Thrift Assembly the efforts of self-employed groups to improve the Keogh law (HR 10). The committee authorized an appropriation of $5,000, to be paid in installments, with the understanding that the Institute’s participation in the ATA was solely directed to encouraging improvements in the self-employed retirement law.

Management services The management services technical subcommittee now has attached to it three subcommittee new “satellite” committees functioning in the areas of financial management gains satellites and controls, data processing, and manufacturing management. Each committee will prepare technical material, be responsible for clearing MS technical studies and consider the technical data requirements of the general practitioner and the specialist relative to its particular area of practice. Serving as chairmen of the committees are: Philip L. Blumenthal, Jr. (Indianapolis, Ind.), financial management, Arthur B. Toan, Jr. (New York City), data processing, and H. J. Kraig (St. Louis), manufacturing management

A reminder for New members are eligible to apply for the AICPA Group Insurance and CPA new members Plans any time up to sixty days after the date of their admission to the Institute. If they do not apply within that period, they must wait until the Plan entry date established by the AICPAIT committee.

The CPA, March 1966. Published monthly, except July-August when bimonthly, for membership of the AICPA, Inc. Vol. 46, No. 3. Publication and editorial office: 666 Fifth Ave., New York, N. Y. 10019. Second-class postage paid at New York, N. Y. Technical committees Various technical committees of the Institute have been working on special take these actions projects. Here is a capsule report on their most recent actions. • The committee on relations with the ICC has prepared a report on replace­ ment accounting. It is presently before the committee for approval prior to its submission to appropriate senior technical committees. • The committee on relations with the SEC met with representatives of the agency on January 11. SEC Chairman Manuel F. Cohen stated that agency Accounting Series Release 102 (installment sales) "did not represent a change in the SEC policy on accounting matters” and expressed the hope that the accounting profession "would solve some of the pending problems in a reasonable period.” The committee also met with representatives of the New York Stock Exchange. • The committee on bank accounting and auditing has prepared an exposure draft of the proposed bank audit guide and it is being distributed for comment and discussion to industry groups and other interested parties. The guide is being exposed as two documents — one dealing with accounting principles, and the other with auditing standards and procedures. • The committee on insurance accounting and auditing prepared a final revised draft of the proposed fire and casualty audit guide which is presently before the committee for approval. The draft will then be cleared by the chairmen of the appropriate senior technical committees.

Research study will aid What motivates a student to select accounting as a career? or what makes him recruiting effort choose another profession? How much influence do parents exert on career choices? And when are career choices made? These are among the questions that should be answered by a study currently being conducted for the Institute by the Bureau of Applied Social Research of Columbia University. The answers could provide the profession with effective recruiting guidelines.

Also in this issue . . . Twenty-seven state society executives from twenty-five states met in Princeton on January 17-18 to participate in a long-range objectives workshop. The story on page 11 gives a capsule account of what they did. . . . President Johnson’s tax proposals are now being considered by the House Ways and Means Com­ mittee. The Committee is also considering certain modifications of the pro­ posals suggested by the Institute’s Federal tax committee. The Presidents proposals and the AICPA’s recommendations appear on page 6. . . . The first IRS proclamation under its new experimental rulings program has been published. The Institute’s role in proposing and drafting Revenue Procedure 66-6 is explained on page 3. . . . State society codes of professional ethics are about 70 per cent uniform. But there are some rules on which there is neither substantial agreement nor disagreement. Turn to page 8 to see how your state’s code compares with the others. . . . Institute membership will soon be at 55,000. Over the years, the source of membership applications has been shifting. The chart on page 5 shows where the new members come from. . . . The New York Times, Business Week and Duns Review have recently carried stories about CPAs and the profession. Read what they had to say on page 3. . . .

TH E MARCH CPA/PAGE 2 Business press reviews the profession AICPA Insurance Trust and comes up with mixed notices Reports Record Coverage Increased participation by mem­ bers in 1965 in the Group Insur­ In a speech before the Credit taxes, systems and management ance and CPA Plans resulted in Policy Committee of the Amer­ services. more than $80 million worth of ican Bankers Association, the vice And, in the field of recruiting, new life insurance coverage. chairman of the First National youngsters were urged to seek According to the administrators City Bank took the accounting careers in accounting in two re­ and underwriters of the AICPA profession to task for its account­ cent articles prepared with the Insurance Trust, the life insur­ ing and auditing standards, but assistance of the Institute’s public ance figure was matched by an he had several constructive sug­ relations staff. “Exciting Careers equal amount of new accidental gestions to make. The report in in Accounting” is the title of a death and dismemberment in­ The New York Times (Feb. 2 ), feature article in the February is­ surance. The total represents a unfortunately, emphasized the sue of Hi Way, which reaches new high in participation for any critical comments. See the March some 100,000 teenagers. It dis­ given year in the Trust's history. issue of The Journal of Account­ cusses such careers in terms of “a ancy for speech excerpts and an series of progressive, constructive editorial which includes the gist roles that open opportunities for of a letter from John L. Carey full growth of personality” and Cy Barrett (over 100 newspapers) to the editors of The Times (not concludes that “the accounting devoted a column to the CPA and yet published at press time). profession will assume an even his services, in which the CPA “SEC Prods Accountants” was greater role in America’s economic title is described as “the label of the title of a Business Week (Jan. picture.” Syndicated feature writer highest competence.” 15) article in which SEC chair­ man Manuel F. Cohen was re­ ported as having “put the profes­ sion on notice that unless it AICPA participates in new IRS rulings program speeded up its efforts to modern­ ize and unify the way in which businesses report their financial The first published pronounce­ ment (a Revenue Procedure or a facts and figures, the regulatory ment by the Revenue Service un­ Revenue Ruling) which is then authority would take a greater der the new IRS experimental rul­ discussed with the Service. If hand in doing it for them.” The ings program treats a subject pro­ agreement is reached, the pro­ recent ruling on deferred taxes on posed by the Federal tax commit­ nouncement is published. installment sales was cited as a tee of the American Institute ( The In the case of Revenue Proce­ case in point. It noted, however, CPA, Sept.65, p.8). dure 66-6, the Service responded that the APB “is expected to The pronouncement, Revenue “enthusiastically” to the draft — swing into action with some major Procedure 66-6, initially drafted the first the Institute had submit­ new changes.” by the tax committee, was pub­ ted — and only minor changes The Institute’s annual meeting lished in the January 24 issue of were required. Both the IRS and is still attracting attention. In the “Internal Revenue Bulletin.” the Institute are “very pleased” summarizing the papers on com­ It explains the procedure gener­ with the initial success of the pro­ puters given at the meeting Data ally followed by IRS in approv­ gram. Processor (Jan.) reports “The ing a request for a change in an The Service has approved other CPAs are gearing up for a mas­ annual accounting period under AICPA proposed subjects for fu­ sive educational effort to learn certain circumstances even though ture pronouncements. These in­ and take advantage of EDP in the short taxable year resulting clude: withholding tax on flat ex­ their work. They have some from the change has a net operat­ pense allowances, deductibility of knotty problems to solve, but the ing loss. intangible drilling costs and in­ outlook is bright.” This is how the AICPA partici­ demnity undertakings in certain The second annual “guide to pates in the experimental pro­ types of reorganization transac­ Management Services” was pub­ gram: tions. lished as a supplement to Duns The Institute proposes a sub­ The American Bar Association Review (Jan .). It includes a com­ ject for a service pronounce­ and the Tax Executives Institute prehensive description of CPA ment. If it is approved by IRS, are also participating in the ex­ services in terms of auditing, the Institute drafts the pronounce- perimental rulings program.

THE MARCH CPA/PAGE 3 FROM THE PRESIDENT ROBERT M. TRUEBLOOD

ing firm, nor the wife or depen­ dent child of any partner, may hold a single share of stock in a company whose accounts the firm The Responsible CPA audits, or be in any way finan­ cially obligated to an audited company or any of its officers. I’m afraid that too many people involves a particular element of Not only professionally stipu­ feel that when a CPA signs the public responsibility. lated “appearances of indepen­ opinion on a corporation’s finan­ dence” are involved here, but also cial statements, he has simply some fine moral points as well. In A need for communication gone through the same motions of a recent U.S. Supreme Court case prior years and has given his pres­ The fact that accountants’ work involving corporate conflicts, tor ent opinion routinely. Those of us relates not only to clients but to example, it was said, “The statute who are in practice know how far others puts upon us a special need is thus directed not only at dis­ this is from the truth. Professional to communicate. Simply, there honor, but also at conduct that decisions made in our field are in must be standards of measure­ tempts dishonor. This broad pre­ their way as exciting as the ad­ ment, so that what is communi­ scription embodies a recognition ventures of Doctor X, the anon­ cated can be mutually understood of the fact that an impairment of ymous author of a current best­ as between the issuer, the user, impartial judgment can occur in seller called Intern. and the attester. even the most well-meaning men While reading Intern, I was set Occasionally, the “public re­ when their personal economic in­ to thinking about our own profes­ sponsibility” aspect of our socio­ terests are affected. . . . To this sion — how we resemble and economic relationship is miscon­ extent, therefore, the statute is how we differ from the other pro­ strued. Yes, we have a duty — to more concerned with what might fessions, and in what respects we our clients and to the public — to have happened in a given situa­ are similar. be competent, diligent, and to ex­ tion than with what actually hap­ Any professional persons first ercise our very best judgment in pened.” responsibility, of course, is to the rendering opinions. But we can­ precepts of his profession. On the not be expected to be omniscient, Intellectual independence personal side, the doctor’s prin­ nor do we hold ourselves out to cipal responsibility is to his pa­ be insurers. I mention this be­ In addition to the clear impor­ tient. Similarly, in the law, the cause of recent claims against tance of economic independence, principal relationship is between CPAs for losses by persons who intellectual independence is im­ practitioner and client. That is, may or may not have been care­ perative. The CPA advises forth­ the lawyer’s usual role, at least in less or imprudent themselves. The rightly, and does not refrain from matters of litigation, is one of ad­ entire business of accountants’ lia­ counsel because it might be diffi­ vocacy. bility is one which we are even­ cult for the client to take. The CPA, like the doctor and tually going to have to meet head Just as Doctor X, in Intern, lawyer, has a confidential relation­ on, bluntly and openly. But per­ declares that laymen do not know ship with his client which must be haps even before we undertake to what goes into the decisions a honored scrupulously. But ac­ explain the matter to the public, physician makes — the sometimes countants — and I refer here we had best begin to discuss the agonizing mental processes the largely to our attest function — problem freely among ourselves. doctor undergoes in sorting in addition have a pervasive third- It is not enough, however, through complex observations and party responsibility. In almost merely to say that we recognize considerations to reach a judg­ everything we do, there are three that our work involves a large ment — so, I believe, the public parties involved. There is the is­ element of public responsibility. does not realize the hard decisions suer of financial statements, the W e must fulfill that responsibility. accountants make. And as doc­ user, and the attester: the client, And in order to do this, strict in­ tors cannot discuss the details of the credit grantor or the investor, dependence from clients is essen­ their cases with outsiders, ac­ and the CPA. In short, the profes­ tial in the attest function. For ex­ countants are also under a seal of sional obligation of accountants ample, no partner in an account­ confidentiality — even, unlike the

THE MARCH CPA/PAGE 4 doctor, with respect to other mem­ Institute membership grows each year: bers of the accounting profession. But at least the result of the doc­ Where do the applications come from? tor’s decision is apparent to the world — the patient gets well, or he doesn’t. However, when an New members constitute the ship) from the Institute to new auditor imposes a tough decision lifeblood of any organization. The CPAs — historically the single upon his client, no one except the American Institute is no excep­ greatest source of applications — parties involved ever knows what tion. last year accounted for 45 per took place in private. Of special interest to the Insti­ cent of all membership requests. When the financial press car­ tute staff’s membership promotion Referrals by firms, by state so­ ries the announcement of a cor­ and admissions departments are cieties and membership promo­ porate bankruptcy or a firm’s se­ those CPAs who have not yet be­ tion committeemen, personal re­ rious reverses, the accountant’s come members of the AICPA. quests, follow-up letters and spe­ role in the revelation cannot be They fall into two main groups: cial promotions combined to pro­ mentioned or explained. Only the newly certified CPAs and those duce the remaining 55 per cent of CPA involved, and his partners who have been certified for some the 4,087 applications for mem­ and his immediate staff, know of time. bership received during the year the days and months of hard de­ [As of August 31, 1965, there ending August 31, 1965. A projec­ cisions and objective analysis that were approximately 92,150 regis­ tion of the 1,418 applications re­ went into the story behind the tered CPAs in the United States. ceived from September 1 through stark, journalistic announcement. Of that number, about 54,000 December 31, 1965 shows the (And then, to make matters were members of the Institute.] same 45 per cent and 55 per cent worse, a disgruntled creditor or Congratulatory letters (which breakdown for congratulatory let­ investor is apt to pounce on the include an invitation to member­ ters and all other sources. theory that the accountant must have known the facts a year ago SOURCES OF AICPA MEMBERSHIP APPLICATIONS

— and is therefore monetarily 60-61 61-62 62-63 63-64 64-65 liable for the third party’s present loss!) Situations such as this should teach us a lesson. Remembering that unsophisticated as well as sophisticated members of the gen­ eral public are unspecified users of many of our communications, we must continue in our effort to clarify and to explain the prin­ ciples, practices, and procedures involved in the preparation of financial statements. Perhaps most importantly, we must encourage the APB in its current efforts to hasten consideration of outstand­ ing technical issues — major and minor. Finally, to all professions — whether ours, the law, medicine, or others — there applies the state­ ment made by Francis Bacon almost three hundred and fifty years ago. “I hold every man a debtor to his profession; from the which as men of course do seek to receive countenance and profit, so ought they of duty to endeavor them­ selves by way of amends to be a help and ornament thereto.”

THE MARCH CPA/PAGE 5 Tax group urges modifications of President’s tax proposals

Certain modifications in Presi­ Its letter to House Ways and by the Treasury Department in a dent Johnson’s tax proposals were Means Committee chairman rec­ particular fiscal year of the Gov­ suggested recently by the AICPA ommends a revised corporate ernment.” committee on Federal taxation. estimated tax payment schedule, The recommended changes deal separate withholding table for specifically with the proposals heads of households, extension Graduated withholding concerning speedup of corporate of effective date of new with­ The committee’s letter noted income tax payments, graduated holding schedule and limited in­ that the proposed graduated in­ income tax withholding for indi­ corporation of self-employment come tax withholding rate sched­ viduals, and self-employment tax. tax into estimated system. ule “will substantially increase The committee’s recommenda­ over-withholding for taxpayers tions were included in a letter with adjusted gross incomes of sent to Representative Wilbur D. stantially by eliminating the pay­ $10,000 and over,” and recom­ Mills (D., Ark.), chairman of the ment in the fourth month of the mended “an adjustment in the House Ways and Means commit­ year, and simply adding that pay­ withholding rates which decreases tee. Representative Mills’ commit­ ment to the payment due in the this result without materially af­ tee is currently considering the sixth month of the year. Thus, fecting the other advantages President’s proposals. for calendar year corporations, a sought to be derived. . . .” payment of 24 per cent would be The letter suggested also that a Corporate tax payments required on June 15, 1966, and a separate tax table for heads of payment of 50 per cent would be households be prepared since the The letter noted that the tax required on June 15, 1967. The “Treasury Department report [on committee had expressed its con­ September 15 and December 15 the President’s message] indicates cern to the House Ways and payments would be in accordance that the table for single employees Means Committee over the accel­ with the President’s recommenda­ will also apply to heads of house­ eration of corporate tax payments tions [see chart below]. holds” and would consequently in March 1963, in response to the “Under our suggestion, we be­ subject the latter group to over­ late President Kennedy’s tax mes­ lieve corporations would have a withholding. sage. “At that time we pointed chance to judge more accurately The recommendation was quali­ out the problems that would re­ the trend of the current year’s fied, however, by recognizing that sult for corporations because of business before having to make “the number of taxpayers involved the requirement that the first pay­ their first estimated tax payment, may not warrant the additional ment of a calendar year corpora­ and, with respect to calendar year complication.” tion’s estimated tax must be made taxpayers, the same amount of The tax committee suggested on April 15. estimated tax would be received that the effective date of the new “We recommended,” the letter said, “that corporate payments be made in equal thirds, with the first payment in the sixth month AICPA Suggested Corporate Payment Schedule of the taxable year (June 15 for Current Taxable Year Following Year a calendar year corporation) and M ar 15 June 15 the second and third payments in Year April 15 June 15 Sept 15 Dec 15 the ninth and twelfth months. 1966 0 24 25 25 13 13 “The difficulties encountered by 1967 0 50 25 25 0 0 1968 0 50 25 25 0 corporations with respect to esti­ 0 mating taxes for the purpose of President's Proposed Corporate Payment Schedule the first payment still exist and are compounded by the proposed Current Taxable Year Following Year acceleration of the scheduled in­ Year April 15 June 15 Sept 15 Dec 15 M ar 15 June 15 creases in such payment. While 1966 12 12 25 25 13 13 we continue to favor our proposal 1967 25 25 25 25 0 0 of spreading the estimated tax in 1968 25 25 25 25 0 0 thirds from the sixth through the Payments are expessed as a percent of calendar year tax liability and assume that a twelfth months of the year, our corporation estimates 100 per cent of income. concern could be alleviated sub-

THE MARCH CPA/PAGE 6 withholding schedule be extended to July 1, instead of the present Accounting research project explores effective date of May 1, 1966. “It appears to us,” the letter problems unique to extractive industries said, “that the objectives of the proposal would not be materially affected” and that there would be Discovery and extraction of which costs are identified with the “additional advantage of start­ mineral resources create several discovered reserves and carried ing the new system with the be­ unique accounting problems. forward to future mining opera­ ginning of a calendar quarter, These problems are the subject tions. Other unusual problems thus enabling a more systematic of a research study now being of extractive industries include a change-over for many employers.” undertaken by Robert E. Field, variety of contractual arrange­ CPA, of Price Waterhouse & Co., ments for operations and trans­ New York City. fers of properties or property Self-employment tax The study is to cover petroleum rights and fair disclosure of vol­ The committee pointed out that and natural gas, coal, metals, and umes or intrinsic values of un­ the Treasury's report indicated nonmetallic minerals. mined reserves. that “the incorporation of the self- The accounting practices in use Comments and suggestions from employment tax into the estimated will be discussed against the any interested person will be wel­ tax system would add approxi­ background of industry operations comed by Mr. Field and by Reed mately one million declarations. and broad theoretical accounting K. Storey, director of accounting “W e think it undesirable,” the concepts. An important section of research. Comments may be ad­ committee said, “to require these the study is discussion of the ex­ dressed to the director of account­ additional declarations solely be­ tent of disclosure of accounting ing research, American Institute cause of the self-employment tax. practices and relevant financial of Certified Public Accountants, We would recommend, therefore, and operating data in annual re­ 666 Fifth Avenue, New York, N.Y. that the inclusion of such tax in ports to stockholders, based on a the estimate system should apply review of over 300 reports. only to those taxpayers who are The common source of the required to file estimates because problems in this field lies in the Sub-board takes action of their income tax liability. uncertainties of location and At a meeting held in San Fran­ “W e recognize that this may value of natural deposits of a create a slight inequity between wasting resource ordinarily pro­ cisco on November 16, 1965, a the two groups of taxpayers; how­ duced over a relatively long pe­ sub-board of the American Insti­ tute’s Trial Board considered ever, we believe that this inequity riod of time. charges that Clatus C. Meredith, is less undesirable than a require­ Of particular importance in this 2525 Van Ness Avenue, San Fran­ ment calling for an additional one study are the distinctions made cisco, California, had rendered million taxpayers to file a form between productive and unpro­ himself liable to expulsion or sus­ they have not had to file before.” ductive costs and the manner in pension from membership in that the California State Board of Ac­ countancy had suspended his CPA certificate for 120 days and Extractive industries Project Advisory Committee had placed him on probation for three years. Herman W. Bevis, Chairman Price Waterhouse & Co., New York City The Board’s suspension resulted Gordon T. Bethune United States Steel Corporation, from its finding that Mr. Mere­ Pittsburgh, Pa. dith was guilty of gross negligence Robert W . Boyd Weyerhaeuser Company, Tacoma, Wash. in the practice of public account­ Thomas N. Herreid Ernst & Ernst, Pittsburgh, Pa. ing in that he had expressed an R. Hersel Hughes John W . Mecom Interests, Houston, Tex. unqualified opinion on financial Wallace Macgregor Climax Molybdenum Company, statements without making an New York City adequate audit. Cecil E. Munn Cantey, Hanger, Gooch, Cravens & The sub-board found the re­ Scarborough, Fort Worth, Tex. spondent guilty as charged and Charles W . Plum Standard Oil Company (Ohio), Cleveland decided that he should be sus­ Max S. Simpson Socony Mobil Oil Company, Inc., pended for two years. No request New York City for review of the decision was Glenn A. Welsch The University of Texas, Austin made, and the suspension became effective on December 16, 1965.

THE MARCH CPA/PAGE 7 Most state society codes are uniform, but on some rules.

The professions rules of con­ chart below indicates, however, state names) have by-law provi­ duct are becoming more nearly there are many rules on which sions which automatically bring uniform. According to a recent there is neither substantial agree­ their rules into conformity with study by the staff serving the In­ ment nor substantial lack of agree­ the Institute’s. stitute's ethics committee, state ment. The ethical principles on which society codes are presently about Here are some of the findings agreement is nearly unanimous 70 per cent uniform. of the analysis: are: a CPA may not offer em­ As the number of “Ns” on the Seven state societies (see ° by ployment to an employee of

AICPA ­

Rules o f C o d e

P r a c t i c e and and Professional Disclosure and

Ethics Designation by by Employees Application o f By-laws P ream ble Corporate Independence Bidding Membership bility bility Discreditable Acts Relationship Reports—Responsi Advertising Solicitation Competitive Services Perform ed Confidential 1.01 1.02 1.03 2.02 3.01 3.02 3.03 4.01 4.03 4.05 4.06

Alabama V X X V V V VO X X X N N Alaska N O X X X O o V X X X N Arizona X X X X X X X X X X X X Arkansas X o X X X X o X X X X X Calif. X X X X X X X X X X X X

Colorado X X X X X X X X V X X X Conn. X VX BL V X VX X V X X X VX * Delaware X X X X X X X X X X X X D.C. X X X X X X o X X X X X Florida X X X X X X o X X X X X

Georgia X X X X X X X X X X X X *Hawaii X X X X X X X X X X X X Idaho X o X X X X o X X X X X Illinois X VX X X X X X X V X X X Indiana N o BL X X X o V X X X X

*Iowa X X X X X X X X X X X X Kansas X X X X X X X X X X X X Kentucky X X X X X X X X X X X X La. N VO BL X X V X V X X X N Maine X X X X X X X X X X X X

Maryland X X X X X X o X X X X X Mass. X X X X X X X X X X X X Michigan N o BL X VX VX o V X X X X *Minn. X X X X X X X X X X X X Miss. X o X X X X o X X X X X

*Rules amended automatically with Institute’s rules of ethics. X = Institute Rule V = Variant Rule BL = Same rule, but in By-Laws VO = Variation of Old Rule N = No Rule O = Old Institute Rule VX = Variation of Present Rule

THE MARCH CPA/PAGE 8 claimer (2.03), fee sharing and ..the issue is still in doubt commissions (3.04), and referrals (5.02). The ideal, of course, would be another public accountant with­ another (5.01), a CPA may not for the entire profession to be out first informing the accountant vouch for the accuracy of a fore­ governed by identical standards. (5.03), a CPA may not accept cast (2.04). However, due to a lack of simul­ contingent fees (1.04), a CPA The study also showed that taneous amendment machinery may not engage in an occupation there was least agreement on throughout the country, this goal incompatible with public ac­ the rules governing practice in may never be completely achieved. counting (4.04), a CPA may not another’s name (4.02), the re­ But as the study suggests, the encroach on the practice of quirements of an opinion or dis­ trend is in that direction.

AICPA bility and Disclosure and bility ­ Practice

Rules of Employees by

Professional B id d in g Confidential Designation eorts—Responsi Repo By-laws and Code Ethics Solicitation Relationship Application o f Membership Preformed Services Preamb l e Independence Disceditab leActs C o r p o r a t e Advertising Com petitive 1.01 1.02 1.03 2.02 3.01 3.02 3.03 4.01 4.03 4.05 4.06

Missouri X X X X X X X X X X X X Montana N o N X X V o X X X V X Nebraska N o X X V vx o X N X N X Nevada X o BL X X V X N X N X X N.H. N VO BL N V V V V N N N N

N.J. X X X X X X o X X X X X *N.M. X X X X X X X X X X X X New York V X vx V X X X X V X X X N.C. N X BL X V V o V V X X X N.D. X X X X X X X X X X X X

Ohio X X X X X X o X X X X X Oklahoma X V X X X X o V V X X X Oregon V VO X V X X X V X X X X Pa. X X X X X X o X V X X X R.I. V X BL V V X o X N N N N

S.C. X X X X X X o vx X X X X *S.D. X X X X X X X X X X X X Tenn. X X X X X X X X X X X X Texas X X X X X X X V X X V X Utah N o BL V VX V o V N N N X

Vermont N o BL V X V X V V X N vx Virginia N X X X X X VO V X X X N Wash. X X X V X X X X V X X X Wis. X V X X X X X X X X X N *W. Va. X X X X X X X X X X X X

Wyoming X X X X X X X X X X X X P.R. N X X X X X X X X X X X V.I. N VO BL X X V o V X N X X

THE MARCH CPA/PAGE 9 FROM THE EXECUTIVE DIRECTOR JOHN L. CAREY edge, experience and points of view were freely exchanged in an atmosphere of full co-operation. The State Society Executives The results cannot fail to be beneficial to their organizations. Some members assume that so­ The staff executives of the state societies of CPAs have increased ciety staffs should confine their steadily in number and effectiveness in the past fifteen years. Forty- activities to clerical or administra­ three of the state societies now have full-time or part-time staff help, tive functions. Others sometimes as contrasted with only about nineteen in 1950. The larger societies indicate concern lest the staffs have staffs ranging from half a dozen to twenty people in all. dominate policies and programs. In the same period the number of the Institute’s full-time employees Neither attitude is sound. Staff should be encouraged to express has grown from 90 to 200. opinions on all issues and to par­ This increase in the staff resources of the professional societies re­ ticipate in all activities to the ex­ flects an enormous expansion in their activities. They now work at pro­ tent possible. The volunteer offi­ fessional development, accounting research, auditing procedures, tax­ cers and committees can always ation, management services, education, public relations, ethics and exercise their power to make the discipline, publications, the impact of computers, legislation, the uni­ final decisions. They can accept form CPA examination, the management of an accounting practice, or reject staff advice. And the relations with lawyers, bankers, government agencies, financial execu­ checks and supervision to which tives and others, international affairs and numerous direct services to the staff is subject leave little pos­ members. The specific projects and activities in these areas easily run sibility of staff domination. In­ into the hundreds. deed, so effective are the re­ straints exercised by volunteer of­ The initiative in some of these efforts naturally rests with the state ficers, boards of directors and societies, in others with the Institute. In most, if not all, of the programs committees that excessive caution the best results are obtained by the two working together. on the part of staff is usually more Programs of this magnitude cannot be sustained solely by volunteer of a danger than any effort to officers and committee members who must conduct their own profes­ dominate anything. In fact, staff sional practices and whose terms of office are short. All business and has no power but the powers of professional organizations of any size have accepted the necessity of persuasion. having continuing staff for effective management—and the CPA pro­ The whole point of this discus­ fession has clearly accepted it too. sion is that in their staff execu­ This acceptance puts a heavy responsibility on the staff members. tives the state societies have an They have to demonstrate that the organizations accomplish more accumulation of knowledge and experience, a sense of continuity, with paid staff than without it. This means more than efficient ad­ and a skill in facilitating group ministration alone. An organization can run smoothly and yet achieve action of which full advantage little. The staff, in my opinion, has a duty to help members to identify should be taken. The executives professional problem areas and devise methods of solving them—and should be given ever greater re­ then see to it that action is taken to bring about solutions. sponsibilities as they demonstrate If they are to discharge this duty, staff members must be both their capacity to discharge them. competent and well informed. They should be urged to express To improve the information, communication and co-ordination proc­ their opinions for whatever they esses, the Institute initiated in 1950 a series of periodic meetings of are worth, and whether they are state society executives and Institute staff members. accepted or not. They should be The latest of these sessions—a two-day seminar at Princeton on Janu­ reassured at every opportunity of the members’ confidence in them. ary 17 and 18—is described on page 11 in this CPA. It was a most re­ Under these conditions, the warding and encouraging experience. Some twenty-seven intelligent state executives can make im­ and dedicated individuals, who hold key positions in the professional portant contributions to the societies, spent long hours in intensive discussion of vitally important growth and progress of the pro­ topics—education, professional development, recruiting, public rela­ fession—as, indeed, many of them tions, and co-ordination of state society and Institute activities. Knowl­ have already done.

THE MARCH CPA/PAGE 10 to be automatically members of State society executive LRO meeting the AICPA executive committee. The discussion turned from or­ explores the future of the profession ganization to the needs of indi­ vidual members. “Rather than strengthen or cre­ From Alabama, California and twenty-three other states ate one huge organization, I think we want to create, essentially, a pol­ : they came to discuss the profession where it is now icy-making body which then gets and where it is headed. This is what they talked about. back down to the needs of mem­ bers. The only way you can get to the members is on the local level.” When twenty-seven state so­ ganization,” one executive said, Another executive proffered this: ciety executives from twenty-five “is not the perpetuation and the “. . . W e do recognize that the states get together to discuss the advancement of the society as an structure, while it may be satis­ future of the accounting profes­ institution in and of itself—the factory at the present time, will sion, one thing is almost certain: goal of an organization is the very definitely have to undergo there will be twenty-seven differ­ continuation and advancement of certain changes. What those ent views presented on how to the individual members of the changes are, precisely, we haven’t achieve the same goal. organization.” decided.” Take the long-range planning Another executive phrased it And that led to this query: seminar held at Princeton, N.J., this way: “The goal of a profes­ “What needs of the future can­ on January 17-18. When it came sional society is to enhance the not be met with the present or­ to discussing the structure of the competence of its members, to ganization?” Institute and the state societies, improve the services performed “Let’s look at the next ten years and how these organizations by all CPAs, and to foster a and try to determine what the could best handle the problems broader public awareness of the structure of the profession is go­ of today as well as of tomorrow, CPA’s role in the society.” ing to be. Is the trend going to­ the result was twenty-seven vari­ ward larger and larger firms, ations on the same theme. away from the small practitioner? The structure of the profession But that was the way it was Or is the trend going to be to­ meant to be. The state society One way the structure of the ward larger local firms, through executives had come to Princeton accounting profession might be mergers?” to exchange views on the impli­ changed, it was suggested, is to Another thought was this: cations of John L. Carey’s book, organize an interprofessional Should the Institute be restruc­ The CPA Plans for the Future. council “to unite or merge all tured on the basis of specialties The first day was devoted to accounting groups into one body rather than geography to meet accounting education, professional — a federation — and call it, for better the needs of the members? development, recruiting for the example, ‘The Accountants of Answers of “no,” “yes,” and “a profession and public relations. America.’ ” This council would combination of both,” were of­ The entire second day was de­ include, for example, representa­ fered. voted to a discussion of the role tives of the American Accounting of the state societies in the organ­ Association, the Financial Execu­ “. . . forty different specialties” ized structure of the profession. tives Institute, the Institute of In­ What follows is a capsule ac­ ternal Auditors, the Federal Gov­ One state society executive said count of a portion of the second ernment Accountants Association, that that type of reorganization morning’s proceedings. the National Association of Ac­ would have to wait until the countants and the AICPA. specialties were better defined. The goal of the organization “The present structure of the “Management services splits off AICPA could be made stronger,” into about forty different special­ What is the goal of the profes­ another state executive suggested, ties,” he said. sional organization? How can the “by electing first, second and third “I think there will be accredi­ profession meet the problems of vice presidents and advancing tation for specialties and, at that today within its existing organiza­ them in position and responsi­ time, I think there will be a need tional framework? What changes, bility each year; by creating re­ for specialist groups to meet and if any, should be made in the gional organizations among the talk about their own problems. framework to cope with the prob­ states; by establishing regional But I would hope,” he continued, lems of the next twenty years? offices and staffing them; and by “that it would not be at the ex­ “The goal of a professional or­ providing for regional presidents pense of the general professional

THE MARCH CPA/PAGE 11 structure because there is the need for professional persons to PD Courses: April-June 1966 be generalists first, and then spe­ Introduction to ADP Effective Communications cialists. Beyond that, I think that Birmingham, Ala., April 25-26 Washington, D.C., May 9-10 there would be a real danger if Rochester, N.Y., May 19-20 Houston, May 19-20 we break down our structure too Palo Alto, Cal., May 23-24 New York City, June 23-24 finely.” Louisville, Ky., May 26-27 East Lansing, Mich., June 27- His statement led to these Los Angeles, May 26-27 28 questions: New York City, June 9-10 Tax Lecture Series “When are we going to con­ New Orleans, June 23-24 Columbus, Ohio, June 2-3 sider what constitutes a certified Filings With the SEC Washington, D.C., June 30- public accountant? When will we Pittsburgh, Pa., May 5-6 July 1 get a standardized form of ac­ Dallas, May 23-24 ceptance of how these individuals How to Increase Denver, Colo., June 9-10 Staff Efficiency come into the profession? Los Angeles, June 27-28 For two days, the state society Cherry Hill, N.J., May 5-6 How to Manage executives exchanged dialogue in Improving the Administration Corpus Christi, Tex., May 16- this manner. And, to repeat what of Your Practice 17 Atlanta, Ga., May 16-17 John L. Carey has already said in Hot Springs, Ark., May 26-27 his column on page 10, “the re­ Chicago, June 27-28 sults cannot fail to be beneficial.” Developing a Management Management Services In addition to American Insti­ Services Practice Lecture Series tute president Robert M. True­ Jefferson City, Mo., May 19- New York City, May 19-20 blood, the following AICPA staff 20 Phoenix, Artz., June 16-17 In-Charge Training Program members also participated in the San Dimas, Cal., April 25-29 two-day conference: John L. Procedural Problems in Minneapolis, Minn., May 2-6 Carey, executive director; John Tax Practice Athens, Ga., May 23-27 Lawler, managing director; and Philadelphia, May 12-13 Columbus, Ohio, June 6-10 David H. Lanman, division di­ Oklahoma City, Okla., May 16- Philadelphia, June 6-10 17 Denver, Colo., June 13-17 rector, professional relations.

MARCH 1966

Second class postage paid at New York, N. Y. The CPA is the membership bulletin of the Ameri­ can Institute of Certified Public Accountants, Inc. 666 FIFTH AVENUE, NEW YORK, N. Y. 10019 THE APRIL 1966

Major issues By the time this issue of The CPA reaches you, spring Council will be just before Council over one month off — May 2-5 to be exact. When it meets in Boca Raton, Florida, the Institute’s governing body will act on issues which affect you as members of the AICPA and the accounting profession. Your voice can be heard in Boca Raton if you study the issues on page 4 which are up for consid­ eration and then let your Council members know how you want them to vote.

Industry comments One of the reasons for creating the position of administrative director of the on proposed Accounting Principles Board was to develop more extensive co-operation between APB Opinion No. 7 the APB and various groups in industry, government and education whose views are sought before opinions are issued. Proposed Opinion No. 7, “Accounting for Leases in Financial Statements of Lessors,” has been out for exposure to such interested groups. A sampling of comments from industry appears on page 5.

Hearings on The House Ways and Means Committee is conducting hearings on HR 13103, a newly revised foreign revised version of the Foreign Investors Tax Act (HR 11297). In a report of investors tax bill comments and recommendations on HR 11297, the Institute’s tax committee objected to several of the bill’s provisions and requested hearings on the legisla­ tion. The new bill is substantially in accord with the AICPA recommendations.

Computer studies Computer research study No. 3, “Applications of Computer Programs to the on way to members Practice of Accounting,” is now on its way to all members in public practice and education. The final two studies, “Relationship Among CPAs, Banks and Service Bureaus” and “Computing Machinery: Characteristics and Software Trends,” will be mailed in mid-April. ( All other members may receive a free copy by writing to the Institute.) The studies were prepared by the System Development Corporation as part of the Institute’s computer research and education program.

Also in this issue ... “Practicing accountants have an extensive and probably increasing degree of exposure to claims from clients and others arising from their professional services,” AICPA President Trueblood writes on page 2. “The damage from legal liability to an accountant’s purse can be severe. The damage to his repu­ tation can be irreparable. The emotional cost of involvement can be deadly.” The President’s column this month also includes a checklist of ways accountants can minimize the risk of liability to clients and others. . . . What do members think of the Institute’s computer research and education project? Turn to page 7 for some of their comments. . . . The Ninth International Congress of Accountants is scheduled to be held in Paris, France, in the fall of 1967. The story on page 7 provides you with some advance data on the meeting. . . . IRS urged to modify extension policy based on practitioners’ workload (p. 3 ). . . .

The CPA, April 1966. Published monthly, except July-August when bimonthly, for membership of the AICPA, Inc. Vol. 46, No. 4. Publication and editorial office: 666 Fifth Ave., New York, N. Y. 10019. Second-class postage paid at New York, N. Y. FROM THE PRESIDENT ROBERT M. TRUEBLOOD

been an important shield to audi­ tors from liability to persons other than their clients for ordinary Legal Liability negligence. Nonetheless, it would be fool­ A socio-economic development The profession has specified hardy to conclude from the exist­ is emerging which involves in­ certain standards and procedures ing decisions that there can be creasing costs to business. More to be used in the performance of no such thing as an audit or a and more one reads of staggering and reporting upon audits. These report for the primary benefit of claims and large judgments and professional statements of gen­ someone other than a client. It settlements in cases of product erally accepted auditing stan­ would be especially foolhardy to liability, personal injury, and other dards and procedures will be rely on this conclusion if the re­ kinds of damage suits. Recoup­ given great, and perhaps decisive, port is of a specialized nature — ment of losses of all sorts by re­ weight in a court adjudicating a one which is likely to be of in­ course to the courts is becoming question of liability. terest, or is delivered only, to a a way of life. So far, the courts have generally single person or category of per­ Practicing accountants have an held that accountants deemed sons (such as a lender) — rather extensive and probably increasing negligent are liable only to their than to all the persons interested degree of exposure to claims from clients — not to third parties (ex­ in the financial affairs of a client. clients and others arising from cept under special statutes such Consider these examples: an their professional services. The as the Securities Act of 1933). opinion of an accountant, deliv­ damage from legal liability to an ► The courts have concluded ered directly or indirectly to a accountant’s purse can be severe. on pragmatic grounds that the lender, to the effect that in his The damage to his reputation can hazards of public accounting prac­ annual audit he observed no be irreparable. The emotional cost tice would be too extreme if the breaches in the restrictions of a of involvement can be deadly. commission of ordinary negli­ loan agreement; an accountant’s The professional status of ac­ gence (such as a thoughtless slip comfort letter addressed both to countants imposes on them an or blunder) were to “. . . expose the client and the client’s under­ obligation to exercise the care accountants to a liability in an writers and delivered in fulfill­ and competence reasonably ex­ indeterminate amount for an in­ ment of a condition precedent to pected of persons in their pro­ determinate time to an indeter­ the obligation of the underwriters fession and a duty to adhere to minate class.” to purchase the securities; special accepted professional standards. A ► The courts have said that receivables audits required by failure to do so is negligence. auditors should not be liable for lenders on collateralized debt. The American Institute has negligence to creditors and in­ It still remains to be established formally defined professional vestors if their report “. . . was by the courts whether any of these standards of qualification such as primarily for the benefit of the or other special audits or reports education, experience, proficiency, [client] . . . for use in the de­ are considered to be for the judgment and independence. The velopment of the business, and primary benefit of persons other Institute, through the efforts of only incidentally or collaterally than the client. its committee on accountant’s le­ for the use of those to whom [the gal liability ( under the chairman­ client] and his associates might The fraud of deceit ship of Ralph Kent), is also work­ exhibit it thereafter.” ing to advise members on what These decisions frame what is Even though an auditor may they should know about liability. called the primary benefit rule. not be liable to persons other The committee, for example, is The rule is based on the thought than his client for ordinary negli­ evaluating the various sources and that a company ordinarily needs gence, he may be exposed to lia­ limits of insurance coverage, the audited financial statements for bility to others if the deficiencies nature and sources of claims, and many purposes — for management or lapses in his professional work the amount of liability insurance guidance, taxes, equity investors, are of such magnitude that the CPA firms should carry. Even­ lenders, suppliers, customers — no issuance of his report constitutes tually the committee hopes to de­ single purpose alone being a de­ the fraud of deceit. velop a communication, present­ cisive reason for obtaining audited It is natural enough for an ac­ ing its recommendations, to all statements. countant to be incredulous at the firms represented in the Institute. The primary benefit rule has thought that he could be guilty of

THE APRIL CPA/PAGE 2 fraud in the absence of intentional that he has examined the financial justify the trier-of-fact in so de­ dishonesty on his part. But evi­ statements in accordance with ciding. dence of negligence, and espe­ generally accepted auditing stan­ As American business grows cially of gross negligence, on the dards and by such audit pro­ larger, the potential losses from part of the auditor will be con­ cedures as in his reasonable judg­ business failure become greater sidered in deciding whether or ment were necessary in the cir­ for both creditors and investors. not the facts support an inference cumstances; and (3) that in his Financial distress and failure in that he committed deceit. opinion the financial statements business are increasingly accom­ present fairly the financial posi­ Gross negligence is defined panied by searches for scapegoats. tion and results of operations. legally as an extreme, flagrant, or Auditors may become one of the If the evidence should reveal reckless departure from standards searchers’ targets. significant gaps or omissions in of due care and competence in The surest and the most direct performing or reporting on pro­ the audit program or serious in­ way for accountants to minimize fessional engagements — as con­ competence or carelessness of the risk of liability to clients and trasted with the thoughtless slip, staff work or supervision, such others is to: honest blunder, or error of judg­ facts might support an allegation ► Emphasize vigilance in the ment which amounts to ordinary that the statements of what was performance of all phases of their done were deceptive misrepre­ negligence. Gross negligence does work; not require intentional misstate­ sentations and might justify a ► Assure that the work per­ ment or concealment. trier-of-fact in so deciding. formed by their staffs is of the If the evidence should suggest highest quality at all levels; An auditor who commits de­ that the audit deficiencies or ac­ ► Assure that the supervision ceit can be held liable to persons counting lapses were so exten­ and review of staff work is ade­ whom he should have reason to sive that the auditor may have quate to detect deficiencies, and expect to act or to refrain from lacked reasonable ground for be­ that technical competence is com­ acting in reliance upon his mis­ lieving in the propriety of his plemented with mature business representations — for loss suffered opinion, such circumstances might judgment; by them in any of the types of support an allegation that the ► Discuss openly with their transactions in which he might auditor’s opinion was deceptive peers the risks involved in the expect their conduct to be in­ misrepresentation — and might pursuit of their calling. fluenced by his misrepresenta­ tions. Such a liability could con­ ceivably extend to those among IRS urged to modify extension policy the potentially large number of present and prospective security based on practitioners’ workload holders, suppliers, customers, and The Institute’s tax committee gion, had issued a bulletin re­ others whom the auditor should has asked IRS Commissioner garding extensions for individuals have reason to expect to act or to Cohen to modify the Service’s which appeared to be more lib­ forbear to act in reliance upon his policy regarding requests for ex­ eral than the rules of Announce­ report. It is legally a question of tensions of time to file individual ment 63-113 regarding the prac­ fact as to which of those persons income tax returns. The commit­ titioner’s workload. the auditor would have a duty, tee felt modifications were needed this determination varying ac­ The committee recommended: 1. When a CPA submits a re­ cording to the differing circum­ because of: • lack of uniformity in evalua­ quest for extension of time to file stances of different cases. It is not tion of the practitioner’s workload an individual tax return for his possible to predict confidently as an appropriate reason for client based solely on the prac­ how any specified question of fact granting extensions titioner’s workload, the request would be decided by various • inconsistencies in the consid­ should be granted. triers-of-fact except that the de­ eration of extension requests on 2. Alternatively, Mr. All’s more cisions would undoubtedly not be the part of the Service personnel liberal approach regarding the consistent. It noted that increased time is practitioner’s workload should be An allegation against an ac­ required for preparing personal adopted as the policy of the Na­ countant for negligence or for de­ returns as a result of added com­ tional Office. ceit would usually arise in con­ plexity in the tax laws and the 3. Where extensions are denied, nection with his audit report. The expanded use of ADP by the the present Service practice of standard audit report contains or Service. granting ten days in which to file implies the following representa­ The committee observed that the return, beginning on the date tions: (1 ) that the auditor is a Harold R. All, Regional Commis­ the denial letter is issued, should competent expert in auditing; (2 ) sioner in the North Atlantic Re­ be extended to twenty days.

THE APRIL CPA/PAGE 3 By-Laws revisions and APB resolution top Council agenda

When Council meets in Boca AICPA governing body will con­ The new proposals set up ma­ Raton, Florida, May 2-5, it will sider amendments to facilitate chinery to give effect to this rec­ consider several issues of major disciplinary procedures. It will ommendation. importance to the membership also be asked to act on the rec­ When the original proposals and to the profession. Two of the ommendations in the report of the were sent back by the executive top items on Council’s agenda are special committee on opinions of committee to the ethics committee proposed revisions in the Insti­ the Accounting Principles Board. and the Trial Board, a subcom­ tute's By-Laws and the adoption mittee of the Trial Board was ap­ of a resolution which would ap­ based, has been reversed or other­ pointed to review the matter in prove, with certain modifications, wise set aside. depth. The present proposals, the report of the special commit­ 3. Reinstatement at the discre­ which are largely the work of that tee on opinions of the APB. tion of the Trial Board, after a subcommittee, have also been re­ A summary of the proposed re­ lapse of three years, of a member viewed by Institute counsel. visions and the resolution are re­ who has been expelled or whose A further amendment to the printed below. Study them and resignation has been accepted by disciplinary clauses of the By- let your Council members know the Trial Board or a sub-board or Laws which was not considered how you want them to vote. whose membership has been auto­ by the Trial Board, but which The proposed revisions would matically terminated. The three- has been approved by the execu­ provide for automatic suspension year waiting period does not ap­ tive and ethics committees, would from the Institute of a member ply to cases falling within one require a member to co-operate whose CPA certificate has been and two above. with the ethics committee in its suspended for disciplinary cause, 4. Other amendments largely investigations of all violations of or who has been convicted of a necessitated by the two basic the By-Laws or Code of Profes­ felony, of failing to file his per­ changes, and intended to clarify sional Ethics. Accordingly, such sonal income tax return, or of fil­ certain ambiguous sections in the member would be subject to ex­ ing a false and fraudulent income present By-Laws. pulsion or suspension if he fails tax return for himself or a client While the By-Laws presently to respond within thirty days to ( crimes thought to be particularly provide that a member shall be communications requesting infor­ serious when committed by a expelled if he is found to have mation as to facts pertaining to CPA); and for automatic termi­ been convicted of a felony or whether the member is subject to nation of the membership of a other crime or misdemeanor in­ disciplinary action. This proposal member if his CPA certificate is volving moral turpitude, a trial is intended to apply to the mem­ revoked for disciplinary causes must be held before the expulsion ber who ignores communications or if his conviction of any of can be ordered. Since the penalty from the ethics committee. It the above crimes becomes final in such cases is mandatory, the would not apply to the member through loss of an appeal or ex­ Trial Board and ethics committee who, acting on advice of coun­ piration of the time in which an thought that a more efficient way sel, declines to give requested in­ appeal may be taken. of handling them should be de­ formation because of possible In addition, provision is also vised. Also, a member who has danger of infringing his rights in made for: had his CPA certificate suspended court. 1. Reinstatement of member­ or revoked for disciplinary rea­ The By-Laws committee will ship when the judgment of con­ sons may, under the existing By- propose these amendments to viction or order of a governmental Laws, continue to represent him­ Council. All have already been authority, on which the automatic self as an Institute member until approved by the committee on termination or suspension is the Trial Board hearing is held. professional ethics and executive based, is reversed or otherwise The delay in processing such committee ( The CPA, March66, set aside. cases is regarded as undesirable. p.1). If Council approves the 2. Reinstatement of member­ Similar proposals were reviewed amendments when it meets next ship at the discretion of the Trial by the executive committee a year month, they will be presented to Board when, after expulsion or ago and were referred back to the annual meeting in Boston for suspension by the Trial Board or the ethics committee and Trial discussion. A mail ballot to the sub-board, the judgment of con­ Board with the suggestion that entire membership would then viction, the order or finding of the the automatic features not apply follow. court, or order of the govern­ when it is thought that the suspen­ Council will also review a re­ mental authority on which such sion or revocation of a member’s port of the executive committee expulsion or suspension was CPA certificate was unwarranted. covering several significant de­

THE APRIL CPA/PAGE 4 velopments in the field of ac­ counting principles which have Industry comments on draft of proposed occurred in recent months. Then, Council will be asked to Opinion No. 7 on accounting for lessors adopt the following resolution: “R e s o l v e d — That the Council of the American Institute of Cer­ Proposed APB Opinion No. 7, important exception that it does tified Public Accountants ap­ “Accounting for Leases in Finan­ not deal with the question of proves all of the recommenda­ cial Statements of Lessors,” has proper treatment of the lease re­ tions set forth in the report of the been sent out for exposure to in­ ceivable by those companies em­ special committee on opinions of dustry committees, government ploying the operating method. the Accounting Principles Board agencies, state societies and other That is to say, a company such — a comprehensive account of interested groups. as ours has contracted receivables major professional considerations The proposed Opinion, the full in the form of a number of months —presented to the spring meeting text of which appeared in the promised (contracted) rental pay­ of Council on May 3-6, 1965 February 1966 Journal of Ac­ ments which nowhere appear on [ The CPA, June65, pp.3-4], with countancy (p .44), sets forth the our balance sheet as an asset. In the following modifications: Board’s views as to the two pre­ fact, under existing Opinions the “That the recommendation (No. dominant methods — “financing” display of such an asset appears 8) on exclusive continuing re­ and “operating” — of allocating to be prohibited by generally ac­ liance on the profession itself to rental revenue and expenses by cepted principles. I feel that the finance the accounting research lessors. subject Opinion should deal with program be amended to permit Here is a sampling of some of this problem and should estab­ the acceptance of contributions the comments received on the lish a basis for recording and dis­ from educational foundations or proposed Opinion. playing on the financial statement other sources outside of the pro­ these promised rental payments fession if, in the view of the ex­ From a major utility company: as an amount receivable, the off­ ecutive committee, such support “. . . we do have some reserva­ set being a deferred income ac­ would not in any way jeopardize tions about the proposed Opinion. count to be carried on the credit the integrity of the program; and The Institute’s formal recom­ side of the balance sheet. The re­ “That consideration of the rec­ mendation of the “Financing ceivable, in my view, would con­ ommendation (No. 7), that in Method” — under certain circum­ stitute an asset although the de­ 1968 Council should approve an stances — could be an invitation ferred income account would not amendment to the Code of Pro­ to the Internal Revenue Service represent a liability.” fessional Ethics to cover infrac­ to apply similar principles for tax tions of the Council’s decision re­ depreciation purposes. If this oc­ From a major communications quiring disclosure of departures curred, the affected lessors would company: “The exposure draft from Opinions of the Accounting suffer an acceleration of tax pay­ seems to be a reasonable approach Principles Board, be deferred ments as compared with straight- to the accounting and reporting until the time suggested in the line or one of the accelerated tax by lessors.... report.” depreciation methods. “One point I cannot understand “In addition, the description of is why the guidelines for record­ the ‘Financing Method’ does not ing financing leases by the lessor AICPA Computer Consultant make clear whether the '. . . level would not be applicable to the Professor Gordon Davis, who is rate of return’ referred to . . . is lessee. . . . head of the Computer Center to be before or after income taxes. “I would think that it would at the University of Minnesota, I assume it means ‘after taxes’ if make more sense to businessmen has accepted appointment as the purpose of the bulletin is to if Opinions No. 5 and [proposed consultant to the Institute on be accomplished. If the property Opinion] No. 7 were combined in computer problems. involved in a rental transaction is one Opinion and the same cri­ A CPA and a member of the subject to accelerated tax depreci­ teria applied to both sides of lease Institute, Professor Davis will ation, the objective would be transactions. The APB in estab­ work with the AICPA on a part- frustrated if the bulletin were in­ lishing standards of accounting, time basis until June, while he fin­ terpreted to mean a level rate of if it is to achieve the necessary ishes the current semester at the return before taxes.” University. He will then work full­ respect to have any real influence, time for a year with the Institute must present a clear position with on research and educational From a major computer manu­ logical reasoning and not leave problems involving computers. facturer: “I think that this draft is gaps that are confusing and likely generally satisfactory with the to be misunderstood.”

THE APRIL CPA/PAGE 5 FROM THE EXECUTIVE DIRECTOR JOHN L. CAREY ment information, CPAs must keep informed of the research that is being done and the con­ CPAs and Information Systems cepts that are being developed, in business, in the universities, and other research organizations, " I nform ation systems” is a phrase found more and more often in in the management-science and management literature. “Integrated” and “total” information sys­ information-system areas. These tems are frequently mentioned. To many CPAs these terms are un­ are really extensions of the ac­ familiar, and may seem to have no bearing on accounting practice—at counting function, although they borrow from mathematics and least that of the local firm with small clients. other disciplines to do things Actually, a double-entry bookkeeping system is an information system, which could not readily be done with limitations. before computers were available. Then what is new? Developments in management sciences and the Providing up-to-date reports in advent of the computer open the possibility of including in one infor­ this field is one of the objectives mation system all the data—financial, physical and even behavioral — of the Management Services mag­ that management needs to plan, control and decide. azine which the Institute began For example, further utilization of source documents used to record publishing two years ago. financial data related to payroll reporting could result in additional reports such as average hours to produce a unit of output, absentee AICPA representatives reports and other labor reports. While the costs involved in carrying inventory are not capitalized in attend ABA tax meeting the financial records, such costs should at least be highlighted for The midyear meeting of the inventory control and production planning purposes. section of taxation, American Bar An effective decision-making tool used for instance by heating-fuel Association, was held in Mexico distributors is such nonfinancial data as weather days for forecasting City, Mexico, on February 11-14, inventory needs and sales potential. and was attended by Donald T. Such information can be assembled without a computer, of course, Burns, general chairman of the Institute’s tax committee and but not economically, and usually not fast enough to be of maximum AICPA staff man Gilbert Simon­ usefulness. etti, Jr., assistant director, techni­ Accounting traditionally has dealt with resources, claims, revenues, cal services. They report that: expenses and costs in terms of dollars. But the accounting process- • A section committee will be­ marshalling, arranging and interpreting data in a meaningful manner— gin working on a complete over­ can surely be applied as well to the new techniques used to produce haul of Subchapter S. non-financial information needed for decision-making. Indeed, it is • A detailed report has been being so applied on an increasing scale. developed by a section committee If both financial and nonfinancial data which management needs are regarding the nature and extent housed in a computer which can be programed to make comparisons, of continuing education available develop ratios and perform various analytical functions, who is going for lawyers in the tax field. The to design and monitor the systems? committee is now considering the The accounting profession has an opportunity to get there first with desirability of preparing tax pub­ lications for section members. the most, but there are many other groups which are working hard • A new committee on legisla­ at the problem, and it is not inconceivable that in time some type of tive recommendations was formed information specialists will emerge who will take over the processing recently to review regulations to of financial data along with all the rest. determine whether they are suffi­ A growing problem for management in this new world of informa­ ciently informative, objective or tion made possible by the computer is the proliferation of so much arbitrary, complete or incomplete. data that it becomes almost incomprehensible, and often indigestible. The committee will also review Among all information specialists, CPAs are the most specifically the regulations to determine trained to select what is crucial for decision-making. whether the Revenue Service is in But if they are to find their proper place in this new era of manage­ effect legislating by regulation.

THE APRIL CPA/PAGE 6 “We have attempted to work Members respond to Mr. Carey’s request with outside bureaus in servicing our clients but in most cases find to express views on computer project that we end up giving business to the service bureau we had before.” “Write us your views on the A practitioner in Pasadena, And from a member in Orlan­ subject,” John L. Carey said in California, suggests “the forma­ do, Florida, come these thoughts: his February CPA column, “CPA tion of a nationwide computer • A CPA needs a conceptual and Computer.” And quite a few service bureau to be run by the knowledge of the components of members did. Here is what some AICPA exclusively for its mem­ a computer and how they func­ of them had to say. bers. tion. “In todays world,” a member “Those members,” the CPA • Most important of all, mem­ from Chicago writes, “information writes, “using the computer serv­ bers should have made available is power and our profession’s ice would share in the profits— to them a periodic “reporter” to growth is in large measure due similar to a co-operative—based keep them advised on the latest to the fact that we have been in on the service fees charged to equipment, its cost, capabilities the information stream. . . . By those members. It is assumed that and limitations. With the aid of the same token, I think account­ the American Institute service such a service, members would ants could lose large segments of would charge fees comparable to be able to advise clients on com­ their practice if another group or those of other service bureaus. puter purchases. groups come into possession of the information on which busi­ ness depends. “The difficulties and expense of 1967 International Congress of Accountants getting into the computer busi­ will explore “The New Horizons of Accounting” ness are such,” the Chicagoan continues, “that I advocate the If you are planning to attend The number of official dele­ formation of an association of the Ninth International Congress gates allocated to the United CPA firms across the nation which of Accountants in Paris, France, in States is limited, and the number will jointly support, and in turn the fall of 1967, keep a sharp eye available to the American Insti­ be supported by, a central or­ on your mail. You will soon be tute is still smaller. But no limita­ ganization to which will be dele­ sent an application form which tion has been placed, as yet, on gated those duties and responsi­ must be returned to the Institute. the number of observers and bilities where economies and ad­ The Congress will extend guests who may attend. vantages will result from central­ through a seven-day period, Sep­ Present plans call for the distri­ ization.” tember 6-12. Mornings and after­ bution of the official Congress Another member, from Wil­ noons will be devoted to techni­ registration form in the fall of mington, Delaware, has this to cal sessions exploring various 1966, with the requirement that say: phases of “The New Horizons of it be returned by January 1, 1967. “I . . . find that every practi­ Accounting,” which is the theme The organizers of the Congress tioner here in the city [is] greatly of the Congress. The subjects will will probably request submission interested in the computer and be presented by selected interna­ of the registration fee with the its uses but I still believe that tional reporters at plenary sessions form. Registrations may be made there is a great deal of flounder­ after January 1, 1967, but will be ing with regard to how it can be and by selected national reporters honored only to the extent that used for other than the mundane at small discussion sessions. The there are available places. purposes of accounts receivable, two official languages are French payrolls, accounts payable. That and English. Simultaneous trans­ Official hotel forms will be sent in other words the full system lation equipment will be used. to potential registrants in the fall from these right straight through During the evenings, delegates of 1966. However, the organizers to the general ledger is appar­ and observers will have a variety recommend making advance reg­ ently not attracting the attention of scheduled entertainments from istrations direct to Paris hotels. that I felt would be the case. In which to choose. Four guided The organizing committee pres­ my opinion, the total systems tours are planned for the Septem­ ently estimates total attendance at phases are the coming thing and ber 9-10 weekend: the Loire cha­ 4,000. If you want to be among the thing that the certified public teaux, the French Riviera, the them, be sure to let the Institute accountant would be best equip­ Champagne area, and a trip to know after you receive the ap­ ped to provide and recognize.” Vichy, a celebrated thermal resort. plication form.

THE APRIL CPA/PAGE 7 Computer book due soon PD Courses: July-August 1966 Accounting and the Computer is a book designed to provide an An Introduction to ADP Procedural Problems in introduction and orientation for Milwaukee, Wis., August 11-12 Tax Practice accounting practitioners who rec­ Denver, Colo., August 15-16 Charlotte, N.C., July 28-29 ognize the potential impact of Pittsburgh, Pa., August 29-30 Wallingford, Conn., August 22-23 computers on their clients’ ac­ Developing a Management counting and their own practices. Services Practice Auditing of EDP Installations It will be published soon by the Richmond, Va., August 8-9 New York, July 21-22 American Institute. Minneapolis, Minn., August 11 - Washington, D.C., August 18- The book brings together in one 1 2 volume selected articles which Effective Communication have been published in The Jour­ Filings With the SEC nal of Accountancy and Manage­ Seattle, Wash., July 14-15 Columbus, Ohio, July 18-19 ment Services. It also includes Norman, Okla., July 28-29 Portland, Ore., July 25-26 papers presented at the Institute’s How to Increase Chicago, August 8-9 recent annual meeting in Dallas, Staff Efficiency Tax Lecture Series and a glossary of computer terms Reno, Nev., July 11-12 Denver, Colo., July 18-19 prepared by one of the national Indianapolis, Ind., July 25-26 accounting firms. Las Vegas, Nev., August 29-30 How to Manage The book represents one effort Management Services of the Institute’s research and Philadelphia, July 18-19 Detroit, Mich., August 1-2 Lecture Series education program on present and Dallas, Tex., July 14-15 future effects of computers on ac­ Improving the San Francisco, July 28-29 counting and public accounting Administration of Chicago, August 4-5 practice. The program was ap­ Your Practice proved by the executive commit­ Baltimore, July 7-8 In-Charge Training Program tee and by Council in the spring Memphis, Tenn., July 21-22 Chicago, July 25-29 of 1965.

A P R IL 1966

CPA Second class postage paid at New York, N. Y. The CPA is the membership bulletin of the Ameri­ can Institute of Certified Public Accountants, tnc. 666 FIFTH AVENUE, NEW YORK, N. Y. 10019 THE MAY 1966

Council in session About three hundred elected members of Council, state society presidents or representatives, committee chairmen, APB and Trial Board members are ex­ pected at the Council meeting in Boca Raton, Florida, May 2-5. There will also be at least two hundred wives accompanying their husbands. This year, the major issues before Council are: • amendments to the By-Laws to facilitate disciplinary procedures • approval of recommendations in the report of the special committee on opinions of the APB ( The CPA, April66, pp.4-5) In addition, Council will hear a report on the Common Body of Knowledge, a report of the ad hoc committee on structure analyzing the effectiveness of the Institute, and review a report of the executive committee covering developments in the field of accounting principles. The June issue of The CPA will include fall coverage of the meeting.

Slate o f AICPA officers The nominating committee has proposed the following members as selected for 1966-67 AICPA officers for 1966-67: For President — Hilliard R. Giffen, Giffen, Hills & Carruth, Fresno, California; for Vice Presidents — George D. Anderson, Anderson & Zur Muehlen, Helena, Montana; John P. Goedert, Alexander Grant & Company, Chicago; Ralph E. Kent, Arthur Young & Company, New York City; E. C. Leonard, Jr., W. O. Ligon & Company, Tulsa, Oklahoma; for Treasurer — David F. Linowes, Laventhol, Krekstein, Griffith & Co., New York City. The committee’s slate will be voted on at the annual meeting in Boston (October 2-5).

Registration for This year, the advance registration form for the annual meeting will not be annual meeting included as before in the June CPA. Instead, it will be included in a separate mailing to be made to members late this summer. Annual meeting technical sessions are planned to emphasize “the art of consulting,” “the use of the computer in aiding small businesses,” “the Com­ mon Body of Knowledge for CPAs,” “tax legislation in the Ninetieth Congress,” and “changing concepts in professional ethics.” On the social side, a special post-meeting trip has been planned to Harwich­ port, on Cape Cod, for a clambake at the Wychmere Harbor Club. A four-day trip to Bermuda has been scheduled as an alternative post-meeting activity. Members will be kept informed of these and other activities through The CPA as details become firmed up. Full details will be in the special mailing.

The CPA, May 1966. Published monthly, except July-August when bimonthly, for membership of the AICPA, Inc. Vol. 46, No. 5. Publication and editorial office: 666 Fifth Ave., New York, N. Y. 10019. Second-class postage paid at New York, N. Y. National conference of President Trueblood has endorsed a proposal of the Institute’s committee on bankers, CPAs relations with bankers to form a National Conference of Bankers and CPAs. The proposed conference would consist of two sections: “bank accounting and auditing” and “financial reporting of borrowers.” The Institute and the American Bankers Association are now in the process of appointing their representatives to the conference. The AICPA committee at a recent meeting also authorized the develop­ ment of a comprehensive program of activities to provide bankers with informa­ tion on matters of mutual interest.

Standing committee on Three of the four major accounting organizations which will be represented by accounting education the Standing Committee on Accounting Education have appointed members to the group. The committee will explore the problem of accreditation and other important issues of accounting education. For the Association of CPA Examiners: Lorin Wilson, California, and John Costello, Minnesota. For the American Association of Collegiate Schools of Business: Dean Clark Myers, University of Miami, and Dean Frank Kaulback, University of Virginia. For the American Accounting Association: Richard Czarnecki, Michigan, and Edward Lynn, Arizona. For the American Institute: Leonard M. Savoie, New York, and James P. Ould, Jr., Virginia.

Revised bank The committee on auditing procedure has prepared a proposed revision of the confirmation form standard bank confirmation form that includes a request for information on any security agreements which the auditor’s clients may have with the bank under the new Uniform Commercial Code. A draft of the revised form has been sub­ mitted to NABAC (The Association for Bank Audit, Control and Operation) for review and comment. The Institute committee anticipates that agreement on the revised form will be reached early this summer and that the form will be available from the Institute this fall.

May 1 7 — A m erican Last November at Mar del Plata, Argentina, participants at the Seventh Inter- Accountants' Day American Accounting Conference reached decisions which had as their objectives the improvement of professional accounting standards throughout the area. In a recent letter to the presidents of 29 Latin American accounting organiza­ tions and the Canadian Institute of Chartered Accountants, AICPA President Trueblood wrote, in recognition of the 18th American Accountants’ Day, May 17, “It is my hope that the spirit of professional cooperation and the good work engendered by conferences such as [Mar del Plata] will continue to flourish within and between our countries and professional organizations.”

THE MAY CPA/PAGE 2 No formal change in extension policy this year, he could investigate and take ap­ propriate action. Internal Revenue Service tells American Institute In addition to Commissioner Cohen, the Service was represent­ The Revenue Service has indi­ dure. IRS pointed out that ap­ ed by Robert L. Jack, Assistant cated that it will not make any proximately 500,000 requests for Commissioner, Data Processing, formal changes in its extension extensions were made in 1965 and three other IRS officials. Don­ policy for filing individual returns and that requests for extensions ald Burns, general chairman of based on practitioners’ workload have been increasing steadily, as the Institute’s tax committee and — but that it would send a letter a percentage of all individual re­ Gilbert Simonetti, Jr., assistant to all regions calling attention to turns filed, since the 1963 an­ division director, technical ser­ the AICPA tax committee’s con­ nouncement. vices, AICPA, represented the cern over the matter and request­ The Service emphasized that no Institute. ing that careful consideration be change was possible, especially given to extension requests. this year, since there is consider­ The AICPA committee had re­ able pressure from the White quested in March that the Ser­ House to collect as much tax as Have you read the new vice’s policy regarding extensions early as possible. issue of MS magazine? be modified ( The CPA, April66, IRS conceded, however, that p.3). there may be a lack of uniformity The March-April issue of Man­ At a recent meeting in Wash­ in the consideration of extension agement Services, the Institute’s ington, D.C., Service officials told requests in the various districts. magazine of planning, systems Institute representatives that An­ Revenue Commissioner Sheldon and controls, contains several arti­ nouncement 63-113, regarding the S. Cohen suggested that if, in the cles of special interest to members. practitioner’s workload, was as opinion of the Institute’s tax com­ far as the Service could go, ad­ mittee, a particular area of the “The CPA in Management Ser­ ministratively, since any further country was being too restrictive vices: A Survey and Projection,” change would have the effect of in handling extensions, the com­ by H. G. Trentin, CPA, traces the establishing an automatic proce- mittee should inform him so that reasons for the involvement of CPAs in management services and explains the reasoning behind the view that the variety of services State society presidents urged to wire the CPA will be called on to per­ form will become more and more representatives to support HR 10 extensive in the future.

Presidents of state societies hav­ mittee expected to take up HR 10 “Evaluating Research and De­ ing members on the House Ways very soon. Urge you, as state so­ velopment Activities,” by Mau­ and Means Committee who are ciety president, to now wire rice S. Newman, CPA, suggests not sponsors of HR 10-type legis­ [your representative], key com­ a model by which the profits lation received a telegram in mid- mittee member, asking active sup­ stemming from total R&D invest­ March from AICPA Executive Di­ port of HR 10, to restore pro­ ment can be determined. rector John L. Carey asking them visions passed in prior years by to actively support HR 10, a new House, which were removed by “How Hanes Hosiery Uses Cler­ bill to liberalize the Act covering Senate before passage of PL 87- ical Work Measurement,” by pensions for the self-employed, 792. HR 10 would improve this Thomas G. Eshelman of Hanes which had the same HR number law by eliminating 50 per cent Corporation, illustrates how a when it was enacted in 1962. limitation on deductible contribu­ ninety-person office effectively States which have representa­ tions and removing ceiling of 10 uses work measurement. tives on the House Committee per cent or $2,500 on certain self- “Renaissance of Cleveland, Ohio,” who are not sponsors of HR 10 in­ employed retirement contribu­ by Robert M. Smith, editor of clude: Arkansas, California, Lou­ tions. Current law falls short of Management Services, explains isiana, Missouri, Florida, Oregon, congressional intent. One wire the leading role taken by an ac­ Illinois, Tennessee, Montana, from state society president counting firm in the rebirth of Massachusetts, Texas, Michigan, would suffice. Other groups of the nation’s eighth largest city. Pennsylvania, Georgia, and Ohio. self-employed in your state plan The telegram to the state so­ similar action. A copy of this Single copies of Management ciety presidents read: being sent to [executive secre­ Services are available from the “House Ways and Means Com- taries] .” Institute at $1.25 each.

THE MAY CPA/PAGE 3 FROM TH E PRESIDENT ROBERT M. TRUEBLOOD

tionwide scale, it reaches almost staggering proportions. I would guess that, conservatively, there The Participating Member are over 10,000 CPAs who are serving their professional organ­ P articipation in professional af­ appointed to deal with specific izations in some official capacity. fairs is an obligation of the pro­ nonrecurring matters. One might logically ask if all fessional man. As accountants, we Some committees require fre­ this effort is really necessary to can be very proud of our record quent meetings; many involve conduct the affairs of the profes­ of participation in our state and substantial homework; and a few sion, or whether the arrangement national societies. can perform effectively primarily is efficient. On more than one oc­ On the national level, our vol­ through correspondence. casion I have heard the mournful untary membership groups now Other than the 500-member — but prideful — plaint from consist of some half dozen major committee on membership, which members that they have been associations concerned exclusively is promotional, committee activity spending so much time on Insti­ with various aspects of the ac­ involves the efforts of some 600 tute affairs that their practice is counting function. individual members who gener­ interfering with their professional As CPAs, we have the Ameri­ ally serve for three years. activities. can Institute of 55,000 members, Take the Board of Examiners, supported by fifty-three autono­ for example. A recent check mous societies in the states. The showed that the average Board Away from the “town meeting" states, in turn, have over two member devotes the equivalent of As the growth of the profession hundred chapters. Without any one working month each year to has accelerated from a mere hand­ formal or rigid organizational Institute affairs. The same extent ful in 1900 to over 90,000 today structure, the accounting profes­ of effort, or even more, is in­ [see “Latest Statistics on CPAs,” sion has made remarkable prog­ volved in other activities such as: p. 7], it has been necessary to ress. the Accounting Principles Board, move further away from the “town It is virtually impossible to esti­ the auditing procedures group, meeting” concept toward a sys­ mate the time that Institute mem­ and the professional ethics com­ tem of representation and dele­ bers give to their professional mittee. gation. We have had to ask rela­ organizations — in terms of either In fact, George Taylor, the In­ tively small groups of our col­ real or opportunity costs. It is stitute’s controller, once estimated leagues to deal with particular possible, however, to measure the that if all committee members aspects of matters more intensive­ scope of members’ participation charged regular per diem for their ly than can any individual, and to in professional organizations. services the Institute would be in work for the profession as a Within the AICPA itself there the red in about three months. whole. are some sixty committees, which We have hired staffs to handle deal with almost every facet of many of our day-to-day affairs; professional activity — the im­ State society participation to study and advise on profes­ provement of technical and ethi­ Much of the same situation, sional matters; to assist commit­ cal standards, continuing educa­ but multiplied many times, exists tee members and governing bod­ tion, direct assistance to the mem­ within the state societies. Let me ies; to co-ordinate our activities; bership, and relations with other quote figures from Pennsylvania, and to provide the element of groups which have an interest in since I have the honor to be a continuity so essential to an or­ what we are doing. past president of its Institute and ganizational structure. These committees vary, of also of its Pittsburgh chapter. The The American Institute now course, in their nature, their state Institute has some 33 com­ has 200 full-time employees. They scope, and their function. Some mittees requiring the energies of consist of CPAs who assist on are standing committees which almost 400 members, not count­ technical matters and specialists have certain periodic or continu­ ing the membership committee in a variety of other areas which ing responsibilities; others are with its 43 members and the state affect the profession. About forty- more or less permanent because legislation committee with its 162 five states have paid staff, per­ of the nature of their functions; members. If you project this pic­ sonnel ranging from part-time ad­ and a few are ad hoc committees, ture of local activity onto a na­ ministrative assistants to groups

THE MAY CPA/PAGE 4 of substantial size and specialized representatives. Or, some rear­ and act upon particular matters. skills. These staffs have made in­ rangement of existing responsi­ But, in the final analysis, a true valuable contributions to the pro­ bilities may be needed. professional man can never dele­ fession. We could not operate We are currently studying this gate his concern for, and partici­ without them. situation. A small committee on pation in, all matters affecting the In short, our professional or­ structure was recently appointed profession. He can’t be an expert ganizations have grown up trying to review the present American in everything, but he can keep to maintain the delicate balance Institute organization with an eye well informed. He can evaluate between personal participation to suggesting possible improve­ his colleagues’ views and he can and effective action, between ments. Its provisional recommen­ make his own heard. If each of us democratic principles and efficient dations may be presented to assumes this obligation there are operation. We haven’t always Council this month. very few problems that cannot be been successful, but on the whole An organizational framework resolved by reasonable, enlight­ I think we have done very well. can be built and improved upon, ened men —working together in Whether our present structure is forums can be provided, and com­ a participative environment of the best that can be devised, I mittees can be formed to study goodwill and common goals. don’t know. Certainly it has some faults and lacks. One solution, of course, is to AICPA computer consultant will direct activities rely on the evolutionary process, with its trial and error method. of newly created task force on auditing EDP It certainly works — in the long- run. I question, however, whether The newly created AICPA task viewed by a group of experts in the accounting profession will be force on auditing EDP will be the field; and, until such time as given this opportunity. Unlike the directed by Gordon Davis, CPA, the manual is completed, postpone professions of law and medicine, who was recently named com­ consideration of a research pro­ which developed over hundreds puter consultant to the American gram for problems which may of years, accounting is basically a Institute ( The CPA, April66, p.5). need study beyond the scope of product of this century. In ac­ The task force, which held its the task force. counting, our birth, childhood, ad­ first meeting on March 21 in New The manual, the task force olescence, and maturity have all York City, decided, among other agreed, would: been compressed into a time span things, to: prepare for publica­ 1. Guide CPAs in auditing or­ which is less than the life expect­ tion a manual setting forth the ganizations using computers for ancy of a human in America. structure of auditing in EDP as record keeping The current rate of professional 2. Provide source material for and technological change is so AICPA members rapid that new problems pyramid Auditing EDP Task Force 3. Provide a starting point for atop the older, unresolved ones so lists Problems to Consider building an expert consensus on fast that it makes even the older standards for auditing EDP problems more difficult to solve. Legal requirements for file re­ 4. Suggest the utility and ap­ tention and hard-copy print­ One of our very real challenges is plicability of different methods outs to remain responsive to the will of where there is insufficient present an enlightened membership and The evaluation and use of the experience to justify a clear de­ computer in performing tests to make effective decisions, with­ termination of what should be on data processing in a reasonable time, which will done. prove acceptable to the member­ Use of computers in a manage­ The manual will assume a ba­ ship. This may be largely a mat­ ment approach to auditing sic understanding of computers on the part of the readers and ter of communication. Impact of computers on sampling approach to auditing will concentrate solely on com­ We must improve the process puter systems. It will not cover by which members can make Test decks versus live transac­ tions punched-card systems. known their views. We should The task force is made up of communicate decisions in persua­ Fraud implications of console seven Institute members: Donald operator sive terms that will demonstrate Adams (NYC), Kenneth Cade­ clearly that the solutions are well Computer generated test decks matori (NYC), Thomas Porter founded. Perhaps some changes Use of experts versus use of (NYC), John O’Donnell (De­ are desirable in terms of increased regular audit staff troit), Donald Marvin (NYC), delegation by the membership in Econom ics of audit of ED P George Trentin (NYC), and Ken­ authority granted to their elected neth Stringer (NYC).

THE MAY CPA/PAGE 5 FROM TH E EXECUTIVE DIRECTOR JOHN L. CAREY Do you communicate as well as you should? Have you ever really been able to: • deliver a formal presenta­ tion to a board of directors? • interpret fully a staff man’s Looking Ahead problems? • write an effective report to a client? J u s t what is the professional practice of accounting? Is it a conglomera­ • participate as much as pos­ tion of unrelated services, more or less fortuitously appropriated by sible in a meeting? CPAs? Or is it a basic discipline, distinct from that of other profes­ • grasp quickly the “gist” of sions or callings, which naturally extends to the solution of a widening the reading matter you’re con­ variety of problem areas created by an ever more complex economy? fronted with everyday? It is the latter, in the opinion of the Institute’s planning committee. Simply, are you able to com­ After nearly a year of research, discussion, and revision of successive municate effectively? drafts, the committee has completed a brief description of accounting A new AICPA professional de­ practice which is now being circulated for criticism among a repre­ velopment two-day workshop, “Effective Communication,” which sentative cross-section of the professions leaders. will be given for the first time It is hoped that this statement, modified as necessary by the criti­ this spring and summer, stresses cism received, may ultimately be approved by Council as an official practical work exercises that will policy declaration of what the accounting profession believes its role enable you to sharpen your com­ to be — now and in the foreseeable future. The description could then munication skills by actually us­ be amplified and illustrated in articles and speeches for the information ing them. of students, vocational advisers, clients, bankers and investors, and The exercises will allow each others concerned. participant to analyze his partic­ A clear conception of the CPA’s role in society is a necessary pre­ ular communication problems and requisite to intelligent consideration of what should be done about to make use of the helpful sugges­ public relations, recruiting, education and training, professional stan­ tions explained in the course. In today’s environment of rapid dards, research, and the economics of practice. That is why the technological and social change, planning committee decided that its first job was to describe in con­ practitioners have an obligation ceptual terms what CPAs do, and why. All the other subjects are on to improve their means of han­ its agenda, and a start has been made in formulating recommenda­ dling everyday professional activ­ tions on some of them. ities. If you want to keep pace — As background for its studies, the committee has an impressive volume this course is for you. of comment on the problems outlined in the book “The CPA Plans for the Future.” Some of this comment appears in transcripts of more than a dozen two-day seminars on the book held in the past twelve months The superior man understands in various parts of the country. Additional comment has come from what is right; the inferior man understands what will sell. Institute committees, state society meetings, letters and interviews with individual members. The superior man loves his soul; The end result, it is hoped, will be extensive recommendations by the inferior man loves his prop­ erty. the planning committee as to what should be done, in every area of professional concern, by individual CPAs, firms, state societies and the The superior man is always can­ Institute itself. did and at ease with himself or others; the inferior man is always The entire exercise is an ambitious effort to peer into the future, worried about something. identify the profession’s objectives, and chart a course leading to their from "The Compleat Professional Man" attainment. The program calls for completion of this task by 1969. If The CPA, February 1966 it is even well begun by then the profession will be much richer.

THE MAY CPA/PAGE 6 Income and retained earnings APB currently works on 11 new opinions, (Frank T. Weston, chairman) lists 17 subcommittees and projects Nature and objectives of finan­ cial statements (Oral L. Luper, chairman) Omnibus opinion (Philip L. De­ The Accounting Principles utilities (Clifford V. Heimbucher, fliese, chairman) Board currently has eleven new chairman) Pensions (John W. Queenan, opinions in the drafting stage or Accounting for leases in finan­ chairman) planned. In all, the APB has sev­ cial statements of lessors (Her­ Price-level adjustments (LeRoy enteen subcommittees engaged man W. Bevis, chairman) Layton, chairman) in various projects. This is how Interperiod allocation of cor­ Treasury stock (George R. Cat­ they break down: porate income taxes (Donald J. lett, chairman) • A planning subcommittee Bevis, chairman) • And a subcommittee on loose- (Clifford V. Heimbucher, chair­ Components of a business en­ leaf edition of bulletins and opin­ man) whose main purpose is to terprise and division and product ions (Robert J. Murphey, chair­ develop short- and long-range lines (Philip L. Defliese, chair­ man) to consider the feasibility plans for the Accounting Princi­ man) of publishing, in looseleaf form, ples Board Foreign operations and foreign and keeping up to date, all bulle­ • Four subcommittees to review exchange ( Donald J. Bevis, chair­ tins and opinions dealing with materials prepared by other In­ man) accounting principles. stitute committees: Bank accounting (Herman W. Bevis, chairman) Legal liability, accounting principles are Fire and casualty insurance companies (John Peoples, chair­ subjects of business-press features man) Health and welfare organiza­ A New York Times (March 27) outsider taking an independent tions (Marshall S. Armstrong and feature discussed at length the look at the representations of the Robert Witschey) profession’s concern over possible company. We offer reasonable Railroad accounting (Philip L. legal liability. Statements from In­ protection against unsound ac­ Defliese, chairman) stitute spokesmen and other CPAs counting practices and undue op­ • Eleven subcommittees to de­ were used extensively in pointing timism. We are expected to, and velop proposed opinions on the out the auditor’s role, concluding must, have the skills and com­ subjects assigned to them: with this comment from an anon­ petence of our profession, and we Disclosure of deferred taxes re­ ymous AICPA representative: willingly accept that responsi­ lating to depreciation by public “Our service is that of a skilled bility. But we are not guarantors or insurers. We are not blood­ hounds.” In an editorial headed “The Ac­ Latest Statistics on CPAs counting Dilemma” Dun's Review (March) referred to “generally According to a recent AICPA The most recent tabulation, survey, there are an estimated made in late 1965, listed 61,825 accepted accounting principles” 92,130 CPAs in the United CPAs as being members of state as "a vague generalization” and States, 53,530 of whom are mem­ societies. This compares with 58,­ called for “a more determined will bers of the American Institute. A 570 a year earlier. to put responsibility where it be­ survey made a year earlier indi­ Here are the top five states in longs through mutual consent of cated a total of 87,890 CPAs, of terms of total number of CPAs, accountant and client ‘lest the is­ whom 50,210 were Institute mem­ AICPA membership and state sue lead to the courtroom and to a bers. society membership: more rigid definition by govern­ ment regulation.” Total CPAs AICPA State society This Week magazine (March (Est.) resident members resident members 20), with a circulation of almost New York 17,696 7,268 12,292 15 million, examined the CPA’s California 10,099 5,862 6,978 role as a personal adviser in a Illinois 6,800 3,450 3,946 story headed “The Money Doc­ Texas 5,410 3,567 4,288 tors.” In referring to this role the Pennsylvania 5,287 3,298 3,898 article says: “They [CPAs] run their clients’ businesses, budgets

THE MAY CPA/PAGE 7 and — very often — their lives.” Institute and state society pre­ 1966 Staff Training Course Schedule pared tax articles have been ap­ Live-In pearing in various newspapers throughout the country. Also, much August 1-12 College of William and Mary, Williams­ burg, Va. of the material has been used by the personal finance writer of The August 8-19 Wittenberg College, Springfield, Ohio New York Times and a summary August 8-19 University of Rhode Island, Kingston appeared in Good Housekeeping August 8-19 Trinity University, San Antonio, Texas magazine (March) under “When August 22-September 2 M enlo C ollege, Menlo Park, Calif. an Accountant Can Help on Tax August 22-September 2 University of Colorado, Boulder, Colo. Returns.” August 22-September 2 Bradley University, Peoria, Ill. The first of a two part article Non Live-In “The Public, the Corporation and August 22-September 2 the CPA” by President Trueblood DePaul University, Chicago, Ill. has appeared in The Exchange September 12-23 Drexel Institute of Technology, Phila­ delphia, Pa. magazine and the remainder is scheduled soon. This article traces September 19-30 Robert Morris Jr. College, Pittsburgh, Pa. the history of accounting and the importance of the CPA to the in­ "What kind of program is it?" gram is especially meaningful vestor. Ten full days of lectures, case to staff men of small- and me­ Bank accounting practices were discussions, problem-solving ses­ dium-sized firms and to the the subject of two recent articles: sions, workshops, and guided newer members of all firms. a critical report in The New York study — all designed to give your staff accountants the ba­ "How can you find out more?" Times (Feb. 20) and an extensive sics every practitioner must Contact the Professional De­ review in the American Banker have. velopment Division, American (March 8) of the proposed book­ Institute of Certified Public let on this subject by the Insti­ "Who can attend?” Any mem­ Accountants, 666 Fifth Avenue, tute’s committee on bank account­ ber of your staff. But t he pro­ New York, N.Y. 10019. ing and auditing.

M A Y 1966

Second class postage paid at New York, N. Y. The CPA is the membership bulletin of the Ameri­ can Institute of Certified Public Accountants, Inc. 666 FIFTH AVENUE, NEW YORK, N. Y. 10019 THE JUNE 1966

Council meeting: This issue of The CPA includes a special supplement devoted entirely to the Boca Raton, F lorida, recent meeting of Council in Boca Raton, Florida. Detailed coverage of this May 2-5 important session, in which the AICPA’s governing body took action regarding accounting principles, professional ethics and the structure of the Institute itself, starts on page 3.

House committee An amended version of Representative Keogh’s HR 10 was reported out of the reports out HR 10 House Ways and Means Committee on May 20. The legislation would remove the present 50 per cent deduction limitation on the allowable contributions (10 per cent of “earned income” or $2,500, whichever is the lesser) by a self- employed individual to a plan. The Institute has asked state societies to urge their Representatives to support the bill.

The Common Body In his column this month, President Trueblood discusses The Common Body of of Knowledge Knowledge for CPAs, which is slated for publication this fall. After briefly going into the report’s background, President Trueblood outlines the significance of the report and what its implications are for the profession (page 19).

Practitioners' work­ What was the average practitioner’s experience during the last two years with loads and IRS the IRS policy regarding extension of time for filing individual income tax extension policy returns? That is what the Institute’s tax committee hopes to find out from a questionnaire which has been mailed to more than 2,500 members (page 2).

Tax committee asks The tax committee has also written letters to the chairmen of the Senate Congress to act Finance Committee and the House Ways and Means Committee urging that favorable action be taken on bills (HR 13070, S 3181) providing for liberalized treatment of employer reimbursement for moving expenses of employees. The House group was further urged to act favorably on HR 14585, a bill providing, in the case of an unused investment credit, the same rules for quick refunds of income tax as now exist in the case of a net operating loss. These bills are similar to the legislation urged by the tax committee in its June 1965 legislative recommendations booklet.

Staff training program The dates and site of the Philadelphia staff training course have been change changed to avoid conflict with observation of the Jewish New Year. The course will be held at St. Joseph’s College September 19-30 — not at the Drexel Institute, September 12-23, as originally announced in the May CPA.

The CPA, June 1966. Published monthly, except July-August when bimonthly, for membership of the AICPA, Inc. Vol. 46, No. 6. Publication and editorial office: 666 Fifth Ave., New York, N. Y. 10019. Second-class postage paid at New York, N. Y. more restrictive this year than at Tax committee gathers data on members’ any other time in the past. This latest development makes it im­ experience with IRS extension policy perative that we gather data to determine the nature and extent of the problem.” The Institute’s tax committee tionnaire, members were told, “In Earlier this year, the tax com­ wants to know what the experi­ view of [the tax committee’s] most mittee urged the Service to liber­ ence of members has been over recent attempt to obtain further alize its extension policy, espe­ the past two years with regard to administrative liberalization of the cially with regard to practitioner the IRS policy on extension of Service’s extension policy, we workload ( The CPA, April66, time for filing individual returns. were quite surprised to receive p.3). To find out, it has sent a question­ reports from a number of mem­ Members have been asked to naire to 2,600 practitioners. bers around the country that the return the questionnaires by The purpose of the question­ application of the policy was June 17. naire is to determine the nature and extent of the extension prob­ lem so that “appropriate admin­ March sub-board decisions become effective; istrative or legislative action may be initiated.” two members are expelled and another is suspended The questionnaire asks for in­ formation regarding: At a meeting in Phoenix, Ari­ prise in which Mr. Murray held a The number of returns filed by zona, on March 3, 1966, a sub­ direct financial interest. The sub­ the CPA’s office board of the Institute’s Trial board found that Mr. Murray had The number of man-hours spent Board rendered decisions result­ violated Rule 1.01 and was guilty in tax return preparation ing in the expulsion from the In­ of an act discreditable to the pro­ The number of requests for ex­ stitute of one member and the fession. The respondent was pres­ tension of time for filing indi­ suspension from Institute mem­ ent at the hearing. The sub-board vidual income tax returns filed by bership of another. The cases decided that he should be sus­ the office against the two members were pended from Institute member­ The number of extension re­ presented by the ethics commit­ ship for two years. No review of quests granted tee. the sub-board’s decision was re­ The number of extension re­ In the first case, the ethics com­ quested, and, accordingly, the sus­ quests originally denied but sub­ mittee charged that Will Morrow pension became effective on April sequently granted after further Mitchell, 6854 Winnetka, Canoga 2, 1966. communication with the Service. Park, California, had violated In a letter sent with the ques- Rule 3.01 (advertising) and Rule A sub-board of the Institute’s 3.02 (solicitation). Mr. Mitchell Trial Board met in New York on was not present at the hearing March 23, 1966, and found that Proposed Statement No. 4 on and prior to the meeting had of­ Louis Irwin, 551 Fifth Avenue, Tax Practice Responsibility fered to resign from the Institute. New York, New York, had vio­ The sub-board refused to accept lated Article V, Section 5, of Proposed Statement No. 4 in the AICPA tax practice respon­ his resignation, found that he was the Institute’s By-Laws, which re­ sibilities series is currently out for guilty as charged, and decided quires the expulsion of a member exposure. that he should be expelled from if the sub-board finds that he has The statement, "Recognition of Institute membership. No request been convicted of a felony or Administrative Determination of for review was filed, and Mr. other crime or misdemeanor in­ a Prior Year," would explain when Mitchell’s expulsion became effec­ volving moral turpitude. The re­ a CPA may sign the preparer's tive on April 2, 1966. spondent, who was present at the declaration on a federal tax re­ In the second case, the sub­ sub-board meeting, had been turn in which treatment of an board considered charges that convicted of violating Section item differs from the treatment Leslie Murray, Jr., of 534 East 201(f) of the federal bribery consented to by the taxpayer for Thomas Road, Phoenix, Arizona, statute (18USC201). The sub­ a similar item as a result of an had violated Rule 1.01 (indepen­ board found him guilty as charged administrative proceeding con­ cerning a prior year's return. dence) in that his partner, with and decided that he should be Institute members can receive Mr. Murray’s knowledge and us­ expelled. No request for review a copy of the exposure draft on ing the letterhead of the partner­ of the sub-board’s decision was request. ship, expressed an opinion on filed and the decision became ef­ financial statements of an enter- fective on April 22, 1966.

THE JUNE CPA/PAGE 2 THE JUNE CPA Council acted on several matters of vital importance to the profession, and a great number of Council members came to Boca Raton to vote on the issues — 207 out of a total of 229. Members can study the issues in the call to meeting ( pages 13-18).

Council approved with one exception the report of the committee on structure of the Institute (page 4), approved with two modifications the recommendations of the special committee on Opinions of the Accounting Principles Board (page 10), and voted to repeal Rule 3.03 of the Code of Professional Ethics on competitive bidding (page 7). Council also heard reports from the . . . Planning committee (page 5), which has prepared a tentative description of the practice of public accounting by CPAs ( page 6), and the EDP committee (page 12), which outlined the progress to date in the Institute’s computer program, and other senior committees (pages 9 and 12).

Several distinguished speakers addressed Council . . . Andrew Barr, Chief Accountant of the Securities and Exchange Commission, commented at some length on the APB and its program for the immediate future (his remarks, as authorized by the SEC, will appear in the July Journal of Accountancy); Professor Herbert Miller, president of the American Accounting Association, urged closer co-operation between educators and practicing accountants; Professor Ezra Solomon, recently appointed economic consultant to the Institute predicted that “many statistics of economic activity will continue to rise including, I hope, the volume of your own practices”; and Walter Witthoff, president of the Association of CPA Examiners, noted the efforts being made by that organiza­ tion and the Institute to solve mutual problems.

Council paused to mourn the sudden death of past AICPA president T. Dwight Williams of Oklahoma City, Oklahoma, who died while en route to the Florida meeting. The governing body passed a resolution which noted in part: “As president in 1945-46, Dwight Williams, at great personal sacrifice, contributed immeas­ urably to the renewed forward surge of the Institute at the conclusion of World War II. By traveling throughout the country, despite uncertain transportation facilities and adverse effects on his own professional practice, he reunited the membership in the cause of advancing the profession.”

The CPA Medal for Distinguished Service — the Institute’s highest award — will be pre­ sented this year at the annual meeting in Boston to L.H. Penney of San Francisco, Council learned from J. T. Koelling, chairman of the committee on awards.

The honor roll of states for the November 1965 CPA examination, reported by the Board of Examiners, includes: Colorado, Illinois, Iowa, Massa­ chusetts, Minnesota, Mississippi, Montana, Vermont and Wisconsin. Candidates taking the examination in these states received passing percentages in all four subjects higher than the national average. The Institute has already taken Structure committee recommends the first step in implementing the “deputy director” proposal. Last stronger Institute organization summer, Dr. Guy W. Trump was chosen to fill the position of direc­ tor of education, with responsi­ It finds that the Institute has crossed the line bility for co-ordinating all educa­ tional and recruiting activities, separating a small from a large organization but that its including those of examination preparation and professional de­ structures and procedures have not fully adjusted to the change. velopment ( The CPA, July-Aug. 65, p. 3). A second deputy director posi­ Upon the recommendation of problem areas which need atten­ tion, the committee said, “should the executive committee, Council tion, the Institute has had a re­ be filled by an outstanding CPA approved — with one exception — markable development, that its who would oversee the accounting, the report of the committee on staff and management compare fa­ auditing and other technical activ­ structure, a special committee ap­ vorably with that of the best of ities, and provide necessary staff pointed last fall to evaluate the similar organizations, that it stands assistance to the various technical effectiveness of the Institute’s or­ in a prestige position as a quality boards and committees of the In­ ganization. institution, and that it has the re­ stitute.” Council unanimously approved sources to move with assurance in A third deputy director would the other structure committee rec­ meeting the ever-growing needs of furnish overall guidance to the In­ ommendations which provide for: the profession.” stitute’s internal operations, profes­ However, the committee also sional relations and staff personnel. • Expansion of the executive found that “at some time in its his­ “It is probably inevitable,” the committee to 16 members — the tory, the Institute passed over the committee reported to Council, seven Institute officers plus nine line that separates a ‘small from a “that the dynamic growth of the members or former members of large’ organization — in both sheer profession will produce some ten­ Council size, as well as complexity of pro­ sion between members who are • A co-ordinate group of three gram — and the structures of pro­ active — and want to be more ac­ deputy directors in the executive cedures of the Institute have not tive — and a strong staff which will office of the Institute fully adjusted to this change.” carry the major burden of the • John Lawler, managing direc­ The committee’s recommenda­ work. The problem is to make this tor of the Institute, to be assigned tions are intended to deal with this a constructive tension.” full responsibility for staff adminis­ expansion. tration while John L. Carey con­ For example, the committee feels tinues his service as executive di­ that enlarging the executive com­ A set of goals rector of the Institute until his mittee and extending the term of The best way to resolve the normal retirement date in May some of its members would result problem, the committee said, is “to 1969, at which time Mr. Lawler in “increased participation, wider hold before members and staff a should succeed him as executive representation and continuity in set of goals that will keep all director. office.” (See Proposal No. 2, “No­ stretched — all of the time.” The exception to the commit­ tice of Seventy-ninth Annual Meet­ The committee listed these goals: tee’s recommendations was the pro­ ing,” p. 18.) Working through its estab­ posal that the office of president of lished structure of Council, ex­ the Institute be made a full-time Staff deputy directors ecutive committee, and officers, paid position, “to be filled by an the Institute intends to build the eminent, highly qualified CPA with The staff deputy directors would size and quality of its staff and strong leadership capacity.” The “provide closer supervision and di­ organize its effort for optimal proposal was referred to the execu­ rection to the many and varied effectiveness in both direct staff tive committee for further study. activities of the Institute. . . . work and assistance to commit­ Prior to preparing its report, the “The staff has grown too large, tees. structure committee circularized and its activities too diversified,” The Institute shall move with more than 3,500 members and con­ the committee reported to Coun­ speed and precision in all of its ducted more than 30 detailed in­ cil, “for the present administrative work in order to strengthen con­ terviews. structure, with all of its ten divi­ tinually its service and its leader­ The committee concluded from sion directors reporting directly to ship. its fact-finding efforts that “despite the executive office.” By its performance, the Insti­

THE JUNE CPA/PAGE 4 tute will earn acceptance as the It will extend its effective con­ Planning committee authoritative source of principles cern for the quality of persons and procedures in its field. entering the profession and be a lists agenda issues It will maintain a strong in­ recognized constructive in­ fluence on public opinion, regu­ fluence on education for the pro­ lation, and legislation on matters fession, ultimately upon all busi­ The planning committee at Boca of concern to the profession. ness education. Raton made its first report to In its field, the Institute will It will enlarge and strengthen Council since it was appointed in be the prime source of research its educational role within the the Spring of 1965. in the production of new knowl­ profession by maintaining a high The chairman of the committee, edge, in the analysis and synthe­ quality of publication and pro­ Gordon Ford, told Council that sis of experience and in the de­ gram development. the major questions to be resolved velopment and adaptation of “The general aim,” the commit­ by the committee are: new procedures and techniques. tee said, “is to sustain the Institute • What is the professional prac­ It shall maintain a close sur­ as a symbol of distinction for the tice of public accounting? veillance of practice in the pro­ profession: by an exceptional qual­ • Assuming clear goals, an ac­ fession in the interest of uni­ ity of staff performance, by the cepted concept of professional ac­ versally high standards of pro­ wide participation of its members, counting practice, and satisfactory fessional performance and the and by the intensive creative in­ human input, what should be the maintenance of full public con­ volvement of the best of the pro­ standards of competence for quali­ fidence in the work of the pro­ fession in the affairs of the In­ fication as professional account­ fession. stitute.” ants? • In the light of the profession’s President Trueblood urges emphasis on profession’s goals, and its own conception of the nature and scope of its prac­ common objectives in area of accounting principles tice, what type of human input will be needed to make possible The highlight of the four-day threshold of still greater accom­ achievement of the goals? Council meeting was, to most plishments.” • What, if any, additional ac­ members present, President True­ He told Council: “There have tion should be taken to improve blood’s off-the-record speech on been disagreements within the client and public understanding of accounting principles. Council, in profession about the most appro­ the nature, scope and value of fact, thought the speech so impor­ priate means for making progress present and future services of tant that it unanimously approved on principles. There will always be CPAs? a resolution from the floor that the differences of viewpoint among us • What research programs or speech be reproduced in full and — that is healthy and that’s good. studies should the Institute con­ distributed to the membership. (It But there is no disagreement as to duct or stimulate in addition to re­ is currently being printed and the end we seek, which is the con­ search on generally accepted ac­ should reach members soon after tinued improvement of financial counting principles? this issue of The CPA.) reporting and of our ability to Mr. Ford told Council that the President Trueblood called for serve society. greater part of the committee’s “a series of constructive, positive “I submit that when reasonable meetings since the annual meeting accomplishments” that the profes­ men hold a common objective, in Dallas has been devoted to a sion can take to the press with share membership in the same or­ completion of a brief description pride, and for a moratorium on ganization, and keep channels of of the nature of the professional carping criticism within the pro­ communication open between practice of public accounting by fession. themselves—these reasonable men CPAs (for the committee’s tenta­ And he said that recognition of can reach agreement on the path tive statement, see p. 6). the authority of APB Opinions by to be followed and the decisions to The committee’s first mission, Council members would be the be made. Mr. Ford said, is to gather infor­ strongest possible influence toward “Effective leadership cannot be mation regarding the problems recognition of the authority of exercised by a divided profession. identified in John L. Carey’s long- APB Opinions throughout the pro­ After the investigations I have range objectives book, The CPA fession. made, and after the thinking I’ve Plans for the Future. Then it will “We have made great progress done, however, I am convinced attempt to determine the major in improving the tools we use in that our profession happily pos­ goals of the profession and to de­ serving society. And,” he said, “I sesses a high degree of unity. And velop guidelines by which these am convinced we are on the let’s keep it that way.” goals might be reached.

THE JUNE CPA/PAGE 5 accounting is a discipline sultation on various complex which provides financial and problems. Some of them involve other information essential to internal financial and informa­ the efficient conduct of the ac­ tion management, such as budg­ tivities of any organization. A tentative description eting, cost control, profit plan­ The information which ac­ ning, internal reporting, auto­ counting provides is essential of the matic data processing, and (1) to discharge the accounta­ quantitative analysis for deci­ bility of organizations to inves­ sion-making. Among the major tors, creditors, government professional practice management problems depend­ agencies, taxing authorities, as­ ing on the accounting function is compliance with tax require­ sociation members, contribu­ of public accounting tors to welfare institutions, and ments. An important part of the others; and (2) to permit effec­ CPA’s practice includes tax tive planning, control and deci­ by CPAs planning, tax advice and assist­ sion making by management. ance in preparation of tax re­ Accounting includes the de­ turns. CPAs represent their cli­ velopment and analysis of data, ents in conferences with gov­ the testing of its validity and prepared by ernment agencies, such as the relevance, and the interpreta­ Internal Revenue Service and the Securities and Exchange tion and communication of the the Institute's resulting information to intend­ Commission, and with others, ed users. The data may be ex­ such as bankers, who have a pressed in monetary or other planning committee legitimate interest in informa­ quantitative terms, or in sym­ tion about the clients’ affairs. bolic or verbal forms. CPAs may properly assist in the implementation of programs approved by management, but Assumptions and estimates they do not make management Much of the data with which decisions. accounting is concerned is not in examining financial state­ Like other professional men, exact or precisely measurable, ments submitted to investors, CPAs are often consulted on but necessarily involves assump­ creditors and other interested general business problems on tions and estimates as to the parties, and in expressing inde­ which their judgment, experi­ present effect of future events pendent opinions on the fairness ence, and professional stand­ and other uncertainties. Accord­ of such statements. This distinc­ ards permit them to provide ingly, accounting requires not tive role has inevitably led to a helpful advice and assistance. only technical knowledge and need for the opinions of CPAs on skill, but even more important­ a wide variety of other things, ly, disciplined judgment, per­ such as compliance with rules High degree of specialization ception and objectivity. and regulations of government The complexities of an indus­ Certified public accountants agencies, sales statistics under trial society encourage a high are the identified professional lease and royalty agreements, degree of specialization in all accountants. In their practice of and adherence to restrictive professions and disciplines. The public accounting they bring covenants in indentures. The accounting profession is no ex­ competence of professional examination of financial state­ ception. Its scope is so wide and quality, an independent point of ments requires CPAs to review varied that many individual view, and a strong concern for many aspects of an organiza­ CPAs choose to specialize in the usefulness of the informa­ tion’s activities and procedures. particular types of service. tion and advice they provide. Consequently they can advise However, despite the diver­ The professional quality of clients of needed improvements sity of their activities, all CPAs their services is based upon the in internal control, and make have demonstrated basic com­ requirements for the CPA cer­ constructive suggestions on fi­ petence of professional quality tificate — education, experience nancial and other operations. in the broad field of accounting. and examination—and upon the In addition to the advice It is this which unites them, as ethical and technical standards given in conjunction with their members of the same profes­ established and enforced by independent examinations, sion, and provides a foundation their profession. CPAs are also engaged to pro­ for extension of their services CPAs have a distinctive role vide objective advice and con­ into new areas.

THE JUNE CPA/PAGE 6 Council votes to repeal Rule 3.03 on competitive bidding; members will discuss proposal at annual meeting

• By a better than two-to-one vote, Council approved an amendment to the Code of Professional Ethics to repeal Rule 3.03 on competitive bidding.

• The proposed deletion of the rule had the unanimous backing of the executive committee and the committee on professional ethics.

• Both committees have been studying the matter for more than two years and have been guided by the counsel of two eminent law firms.

The major concern that prompted discussed the risks of violation of way that it applies to agreements the recommendation: The rule has the federal antitrust laws in detail. among those engaged in ordinary exposed the Institute, its members commercial activities. In this con­ and its officers to serious risks of nection, there are two points that violation of the federal antitrust Counsel's discussion deserve discussion. laws. The substance of counsel’s dis­ The application of Section 1 of In urging approval of the repeal cussion of Rule 3.03 follows: the Sherman Act is limited to ac­ amendment, the executive commit­ Whatever difficulties there may tivities that restrain interstate com­ tee made these observations: be in determining whether the rule merce. It appears unlikely that the “In the years since this rule was applies in particular situations, its application of the Sherman Act adopted, the courts have set in­ general meaning is clear. It is, in could be avoided on the ground creasingly rigid standards for com­ effect, an agreement among the that the practice of accounting is pliance with antitrust laws, and in­ members that they will not engage essentially a local activity and that creasingly broad concepts of what in price competition. practitioners in this field are not constitutes interstate commerce. Section 1 of the Sherman Act engaged in interstate commerce. “Remote as the possibility might prohibits all agreements among Moreover, Section 3 of the Sher­ seem to us that a professional so­ competitors relating to prices. This man Act prohibits agreements ciety would be challenged in an prohibition is often described as among competitors relating to effort to maintain a high quality of directed against price fixing, but it prices within the District of Co­ service to the public, two promi­ is not confined to agreements to lumbia and thus is not limited to nent law firms have advised the fix particular prices or to fix a par­ interstate commerce. Institute that under developing ticular price level or to agreements legal concepts it would be wise to on uniform prices. It applies Application to the professions repeal the rule because of the broadly to all agreements among grave risk of violation of the anti­ competitors in any way. The second point is whether the trust laws. Even though the com­ The courts have held that price Sherman Act applies to the profes­ petitive bidding rules of profes­ agreements among competitors are sions. By its terms the statute ap­ sional societies are subject to chal­ illegal per se. This means, among plies to activities that restrain lenge under federal antitrust laws, other things, that such an agree­ “trade or commerce.” It has some­ properly designed state board rules ment cannot be justified on any times been suggested that the prac­ on the same subject, issued under ground. tice of a profession, such as law, statutory authority, may be im­ An agreement like the one in medicine or accounting, is not mune from attack under federal Rule 3.03, if made by persons en­ “trade or commerce” and that, ac­ law. gaged in any ordinary interstate cordingly, the act does not apply “In any case, the Institute obvi­ commercial activity, would be to those engaged in the practice ously should never consciously re­ plainly unlawful per se under Sec­ of a profession. main in a position which could tion 1 of the Sherman Act. The Supreme Court has never raise the slightest doubt as to The prohibition against price passed on the question whether whether it was acting contrary to fixing would apply to Rule 3.03 un­ the practice of law, medicine or public policy.” less for some reason the Sherman accounting is trade or commerce At the 1966 spring Council meet­ Act does not apply to agreements within the meaning of the Sher­ ing, the Institute’s legal counsel among accountants in the same man Act. That court, however, has

THE JUNE CPA/PAGE 7 applied the Sherman Act to a pro­ dered or done anything to enforce, enforce the rule against an indi­ vision in a code of ethics adopted to apply, or to interpret the rule vidual member either by expelling by an association of real estate might also be a defendant. Any him or by suspending his member­ brokers. defendant found guilty in a crim­ ship. If this should happen, the in­ The United States Court of Ap­ inal proceeding may be fined not dividual might complain to the peals for the District of Columbia more than $50,000, or imprisoned Department of Justice and be suc­ has decided that the provisions of for not more than one year, or both. cessful in instigating action by the the Sherman Act do apply to the The United States could also antitrust division. If the individual professions. It held that the prac­ bring a civil suit to enjoin the en­ wished to proceed on his own, he tice of medicine is trade or com­ forcement of the rule. To win a could sue for treble damages. He merce within the meaning of the suit of that kind the United States could also sue for an injunction. Sherman Act. Its opinion, written would merely have to convince the A challenge to the legality of the by a conservative judge, contains court that the rule was unlawful. rule might be instituted by some­ a detailed and thoughtful analysis It would not have to prove any one who is aggrieved because he of the meaning of the phrase. injury or money damages. If the could not obtain competitive bids It is doubtful that the present United States should win that suit, for accounting services. This might Supreme Court will hold that the the court could not only enjoin the happen, for example, in the case professions enjoy any general im­ Institute and its members from en­ of a municipal agency or corpora­ munity from the application of the forcing the rule but it could also tion which was unable to obtain Sherman Act. Moreover, it is un­ affirmatively require the Institute competitive bids because mem­ likely that the Supreme Court to remove the rule from its Code bers of the Institute were comply­ would approve any immunity from of Ethics. ing with the rule. Such an agency the Sherman Act which is broad The United States could also sue or corporation might institute legal enough to permit the members of to recover simple damages in any proceedings on its own or it might a professional association to en­ case in which the enforcement of complain to the Department of Jus­ gage in price fixing agreements or the rule has inflicted money dam­ tice and thus instigate the United combinations. age upon the United States or any States to start proceedings. The What has been said about the of its agencies. In a case of that same thing could happen in the Institute’s rule against competitive kind, the United States would have case of a federal agency of some bidding would apply also to the to prove that it or one of its agen­ kind which had been thwarted in American Bar Association if it cies had actually suffered money its attempt to get competitive bids. should adopt a canon of ethics pro­ damage that was caused by the It could certainly complain to the hibiting competitive bidding. It rule. Department of Justice. should be noted, however, that it Private persons are also entitled might be less vulnerable to anti­ to sue under the antitrust laws. A Status quo no guarantee trust charges on the interstate com­ private person is entitled to sue merce point because of the nature and to recover treble damages, It should not be assumed that of the practice of lawyers as con­ plus a reasonable attorney’s fee, simply because the rule has been trasted to that of accountants. for any injury inflicted upon him in the Code of Ethics for many by a violation of the antitrust laws. years, without anyone’s attacking To succeed in a suit of this kind its legality, that this situation will Possible legal tests the private person would have to continue. Others have found, to If the legality of the Institute’s prove that in fact he had suffered their dismay, that the fact that a rule should be challenged in a pro­ money damages because of the practice or rule has existed for a ceeding brought under the Sher­ existence or enforcement of the long period of time is no assurance man Act, probably it would be rule. A private person could also that it will not be attacked under held to be unlawful. sue the Institute or the members the antitrust laws. There are different kinds of legal of its Trial Board or ethics com­ What has been said about the proceedings in which the question mittee to enjoin their enforcing the legality of the rule also applies to of the legality of the Institute’s rule against him. similar rules that may be contained rule might be raised. As long as the rule remains in in codes of ethics adopted by state The United States can bring the Code of Ethics there is a sub­ societies. In this connection, inso­ criminal proceedings to punish stantial risk that something may far as the rules of state societies violations of the act. The Institute occur that will cause someone to operate only on intrastate activi­ itself could be a defendant in such challenge the legality of the rule ties and have no effect on inter­ a proceeding. Any member of its by one or more of the various state commerce, they are not sub­ Council or any of its officers or forms of legal proceedings de­ ject to the federal antitrust laws. agents or any member of the In­ scribed above. This might happen, But to the extent that those rules stitute who had authorized, or­ for example, if the Institute should affect the conduct of members

THE JUNE CPA/PAGE 8 who are engaged in interstate com­ AICPA deficit this year is lower than expected, merce, as many members of state societies doubtless are, the rules of but future years hold prospect of increased costs law mentioned above would apply. State Boards of Accountancy or other state agencies which have adopted rules of professional con­ The projected deficit for the In­ and the professional development duct that prohibit competitive bid­ stitute’s fiscal year 1965-66 now program “continues to be in the ding in the practice of accounting appears likely to approximate black.” He reassured Council that may stand on a different footing $52,000, Treasurer David Linowes if either of these programs should from the Institute’s rule. Under told Council. However, he added, run the risk of incurring financial general principles announced by this figure represents a consider­ deficits, the budget committee the Supreme Court, state action, able drop from the $100,000 deficit could cut back these expenditures or official action directed by a state, originally anticipated. to a lower level. that results in a restraint of trade, The lower deficit figure reflects Finally, a considerable increase is not prohibited by the Sherman both good income from the In­ has been provided for legal fees Act. stitute’s investment experience and for 1966-67, reflecting the several For this principle to apply two reduced personnel costs due to in­ projects to deal with the growing conditions must be satisfied. In the ability to fill all authorized Insti­ problems of legal liability suits first place, the state regulation tute staff positions. against accountants. must be in conformity with state On the other side of the ledger, law. This means that the state Mr. Linowes reported that the ex­ agency that issues the rule must ecutive committee has authorized have authority under state law to a $5,000 contribution to the Ameri­ promulgate the rule. It also means can Thrift Assembly, the group Auditing procedure... commit­ that the state agency must have seeking improved tax treatment for tee issued “Long-Term Invest­ issued the rule against competitive pension funds for self-employed ments” and “Letters to Under­ bidding in conformity with any persons (The CPA, March66, p. 1). writers”; prepared first draft of procedures that state law requires In marked contrast to the favor­ special report on audits of ware­ the state agency to follow. able financial results of recent houses; scheduled for distribu­ In the second place, the state years, the years ahead hold the tion exposure draft of proposed board or other agency which issues prospect of substantial deficits for statement on “Interpretation of the rule must be an agency which the AICPA. Horace Barden, chair­ ‘Extensions of Auditing Proce­ is established and controlled by man of the budget and finance dure’ Relating to Inventories”; the state so that it is clear that the committee, alerted Council to the did further work on developing action of the agency is state action executive committee’s attempts to statement clarifying independ­ and not simply action taken by a prepare for meeting these in­ ent auditor’s responsibility for private group. creased expenditures. He noted unaudited statements or when that they will result largely from his name is “associated with” fi­ Members to discuss proposal a combination of the increasing nancial figures released by cli­ cost of the accounting research ent without customary audit The recommended amendment program and the exhaustion of report. to repeal Rule 3.03 on competitive the original generous funds given bidding will be discussed at the by many firms to inaugurate the Management services... com­ annual meeting in Boston (see p. research program. mittee reorganized in order to 18 this issue). It will then be sub­ In response to a member’s query provide leadership and guid­ mitted to the entire membership as to what plans have been made ance in philosophical, opera­ for a mail ballot. In order to be­ to meet this deficit, Mr. Barden re­ tional and technical aspects of come effective, one-third of the ported that the executive commit­ MS practice; prepared drafts of membership must vote on the tee at its July meeting would bulletins of “The Nature of amendment, and two-thirds of explore a number of alternative so­ Management Services” and those voting must approve it. lutions and develop a proposal for “Competence in Management Concurrently, the executive com­ the Council’s consideration. Services” and started to work mittee will study the possibility of Mr. Barden reported that two of on drafts of bulletins on the framing a statement exhorting all the Institute’s more recent major CPA’s role in management serv­ members to avoid setting fees so projects were measuring up well to ices and responsibility in man­ low that they may tend to impair their projected financial yardsticks. agement services. the quality and professional char­ “Management Services magazine,” acter of the services. he said, “is making great progress,”

THE JUNE CPA/PAGE 9 Council approves special committee recommendations

The recommendations of the Recommendation 2 was as fol­ special committee on Opinions of lows : the Accounting Principles Board The Board should move toward made at the spring 1965 meeting the reduction of alternative prac­ of Council ( The CPA, June 65, tices in accounting by adopting p. 3) were approved this year by policies under which it will: Council with two modifications. (a) Recognize the objective One modification ( Recommen­ that variations in treatment of ac­ dation 7) would permit the accep­ counting items generally should be tance of contributions from educa­ confined to those justified by sub­ tional foundations or other sources stantial differences in factual cir­ outside the profession to finance cumstances the accounting research program (b) Set forth in its Opinions if, in the view of the executive the criteria for application of such committee, such support would not acceptable variations in any way jeopardize the integrity (c ) In an Opinion dealing with Council approves of the program. a situation which the Board be­ The other modification (Recom­ lieves justifies alternatives even recommendations mendation 8) relates to amending though there is no significant dif­ the Code of Professional Ethics to ference in factual cricumstances, deal with any failure to disclose set forth the treatment to be pre­ of special committee departures from APB Opinions. ferred, and require disclosure of Council approved deferment of the treatment followed. on Opinions of APB consideration of such action until The Board has endorsed these the time suggested in the special proposals, noting that time will be and hears committee’s report — the spring needed for experimentation in a 1968 meeting of Council. variety of situations before conclu­ The status of the other recom­ sions can be reached on specific report of APB Chairman mendations approved by Council problems. is as follows: Recommendation 3 concerns the Clifford V. Heimbucher The Accounting Principles composition and tenure of Board Board has given high priority to membership. Council has ap­ developing a series of basic docu­ proved resolutions effecting ments in response to Recommen­ changes including reduction in size dation I — a six-part section deal­ of the Board (see JofA, June65, ing with the purposes of published p. 9 ). Recommendation 4 called for financial statements, the identifica­ a long-range planning program: tion of basic concepts and account­ The APB has established a plan­ ing principles, and definition of ning subcommittee which has set terminology. The first document priorities for production of Opin­ will be directed generally to the ions and scheduled preliminary functions of financial statements — work on long-term projects. their purposes and limitations; a The Board has taken several draft is expected to be ready for actions on Recommendation 5, consideration at the APB’s meeting which deals with the development next February. The second docu­ and evolution of APB Opinions. ment will be concerned with basic It has agreed that its Opinions concepts underlying financial generally should be applicable to statement preparation. The third financial statements for fiscal pe­ will be addressed to broad ac­ riods starting after the date of the counting principles. The Ameri­ Opinion. At its first meeting each can Institute’s accounting research year, the Board will consider any staff has assembled background suggestions for reconsideration of material for the second and third previously issued Opinions; AICPA booklets. members have been invited to sub­

THE JUNE CPA/PAGE 10 mit such suggestions. The Board ernment. Through the administra­ tial progress in developing an will experiment with issuing an tive director of the Board, CPA Opinion on the topic. Much work annual “omnibus” Opinion; this Richard C. Lytle, liaison has been remains to be done before an ex­ would cover a number of unre­ established with such key organ­ posure draft is ready for release, lated, relatively minor subjects that izations as the Financial Execu­ but the prospects that this Opin­ would not justify a separate Opin­ tives Institute, the Financial An­ ion can parallel the schedule for ion on their own. alysts Federation, the American the Opinion on income and re­ Recommendation 6 proposed a Accounting Association, and a tained earnings appear to be very continuing educational program number of industry groups. As one good. to facilitate understanding and ac­ indication of this increased com­ It is a basic premise of the Om­ ceptance of Board Opinions among munications effort, some 5,500 cop­ nibus Opinion that it will deal only the accounting profession and re­ ies of exposure drafts of Opinions with subjects on which the Board lated groups in industry and gov- are now circulated. can act quickly. Accordingly, this also appears to be an Opinion on which action can be expected dur­ ing 1966. Another possible Opin­ Chairman Heimbucher reported on the latest ion for 1966 is one on components of a business enterprise, which is APB developments. This is what he told Council... also progressing satisfactorily. In order to expedite matters, the Board has started working on the The subcommittee scheme, business enterprise, and at its draft of an Opinion on allocation adopted last year, is working very April meeting, it considered first of corporate income taxes in par­ effectively (The CPA, May 66, p. drafts of the subjects. allel with the exposure phase of 7). Under the scheme, the sub­ At the April meeting, the Board the accounting research study on committees are assigned responsi­ also considered a point outline of the subject. Copies of a draft of bility for initial consideration of the proposed Omnibus Opinion the study were furnished to Board Board projects and, in the case of (The CPA, Dec. 65, p. 8). members, and the draft is being proposed Opinions, for the sub­ Subcommittees are currently used as the basis for preliminary mission of “first drafts” of the drafting point outlines or first consideration of a comprehensive Opinions to the Board. drafts on Opinions on price-level Opinion on the subject, including The use of subcommittees for changes, treasury stock and the the question of balance sheet clas­ preparing first drafts permits more implications of the rate-making sification of tax allocation accounts effective use of Board members’ process in accounting by regulated related to installment receivables. time and efforts. A new procedure, industries which the Board will The Board will allow ample op­ recently adopted by the Board, consider at its June meeting. portinity for comments on the re­ should further increase its effective­ Although it is “dangerous” to search study to be submitted be­ ness. Under this procedure, sub­ predict just when any Board or fore it attempts to complete prepa­ committees prepare point outlines committee will complete a particu­ ration of an exposure draft. It of the views they intend to pro­ lar project, the Board is maintain­ hopes to do this before the end of pose for the Board’s consideration. ing the schedule set some months 1966, but it is doubtful an Opinion The Board informally discusses ago in all major respects and, as will be issued before the spring of the outlines and then reaches ten­ a result, expects to issue several 1967. This Opinion will be fol­ tative decisions for the guidance more Opinions by the end of 1966. lowed in due course by Opinions of the subcommittees preparing Other than Opinion No. 7, “Ac­ on other subjects on the Board’s the first drafts. Experience thus counting for Leases in Financial agenda. far with the new procedure indi­ Statements of Lessors,” which will be published this June, the pro­ cates that it is an effective way of Financial accounting directing attention to matters of posed Opinion on income and re­ substance early in the process of tained earnings seems to be the The Board is making good prog­ developing an Opinion. It appears farthest along. The Board expects ress in the development of three likely that the new procedure will to complete an exposure draft on Opinions on the fundamentals of be a major factor in accelerating the subject at its June meeting and financial accounting to serve as a issuance of Board Opinions. to approve a ballot draft at its next foundation upon which more spe­ At its February meeting, the meeting in the fall. cific pronouncements as to the ap­ Board discussed point outlines on Although accounting for the cost plication of accounting procedures pensions, income and retained of pension plans is one of the most may rest. A subcommittee com­ earnings, allocation of corporate difficult subjects to come to grips pleted a draft of the first of these income taxes and components of a with, the Board has made substan­ Opinions — on the purposes and

THE JUNE CPA/PAGE 11 characteristics of financial state­ EDP: problem or opportunity for CPAs? ments — which was discussed at the February meeting. The sub­ stance of another draft, to be pre­ It’s up to the individual or his firm pared on the basis of this discus­ sion and detailed comments sub­ mitted subsequently by individual “The problems and opportuni­ vey results are prepared as special Board members, was discussed at ties of EDP will be with CPAs for research reports by SDC and are the April meeting. many years and the knowledge and published by the Institute and dis­ In addition, the accounting re­ skill of the individual or his firm tributed to members. search division has prepared back­ may well determine whether prob­ January 1966: Institute signs a ground material on the second and lem or opportunity is what is in­ second contract with SDC. The third Opinions, dealing with basic volved,” Council was advised by new project will yield a report dis­ concepts and broad accounting Arthur B. Toan, Jr., chairman of the cussing the basic considerations an principles, which the subcommit­ ad hoc committee on computers. accounting firm should take into tee is now studying. Because of the “An increasing number of mem­ account in deciding whether it interrelationship between these bers express concern and interest.” should provide computer services three Opinions, the Board does not But many, he added, “seem still to for its clients. The project is ex­ plan to expose any of them until look upon EDP as a development pected to be completed by this fall all three are pretty well worked to whose effects they will be im­ and the results made available to out as to substance. mune.” Institute membership soon there­ “Taking the profession as a after. Industry and government whole,” he said, “one gains the impression that progress is being One of the recommendations in­ The Board recognizes the im­ made.” cluded in the long-range plan pre­ portance of obtaining the opinion As chairman of the computer pared at the conclusion of the first and experience of industry groups, committee, Mr. Toan outlined for project was that the Institute give government agencies and teachers Council the progress being made high priority to the problems of early in the development of pro­ by the Institute in its computer auditing EDP. posed Opinions. Principally program: As a result, Mr. Toan said, Pres­ through its administrative direc­ ident Trueblood, in March of this June 1965: Institute reaches an year, appointed a special working tor, the Board has been actively agreement with System Develop­ task force with substantial experi­ engaged in establishing more ef­ ment Corporation to undertake a ence in this area. fective participation by them in its six-month research and educa­ The task force is headed by Pro­ efforts to continue improvement tional project. in financial reporting. fessor Gordon Davis of the Univer­ At the present time, some four­ June through December 1965: sity of Minnesota who will also teen industry and other groups SDC conducts a survey of firms serve the Institute as a computer have expressed an interest in co­ and individual practitioners repre­ consultant for the next fifteen operating with the Board and have sented in the Institute membership months. either set up special committees to determine the nature of their One of Professor Davis’ assign­ to participate in the Board’s pro­ present contact with computers, its ments as consultant will be to re­ gram or are taking the necessary effect on their firms’ practices and cruit a permanent staff for the steps to participate effectively. their future plans to purchase or Institute which will continue to The increase in the number of re­ lease a computer or to use external advise on computer and educa­ sponses to the draft of Opinion data processing service bureaus. tional programs after he returns to No. 7 is indicative of the response January through April 1966: Sur­ the University in September 1967. of these organizations to our invi­ tation to participate more actively. The full impact of these co-op­ erative efforts may not be felt for Federal government . . . committee has 18 components (consult­ some time, partly because the co­ ing committees and consultants); notes trend involving expanded operating organizations must nec­ federal use of accountants in programs involving “social wel­ essarily experiment for a period to fare” legislation (Medicare, anti-poverty) and feels that AICPA determine the operating methods testimony in public service areas is useful; feels that co-operation best suited to their organizations of independent auditors in assisting federal financial control over for this purpose. However, they social welfare programs is appropriate and is an essential element have made a good start and the of the profession’s desire to be active in public service areas. benefits to be derived can be many.

THE JUNE CPA/PAGE 12 Notice of Seventy-ninth Annual Meeting American Institute of Certified Public Accountants October 3 , 1966

To the Members of the the Sheraton-Boston Hotel, Boston, the By-Laws, there are also sub­ American Institute of Certified Massachusetts, beginning at 9:00 mitted to the membership pro­ Public Accountants: a .m ., on Monday, October, 3 , 1966. posed amendments to the Insti­ In accordance with the provi­ tute’s By-Laws and Code of Pro­ In accordance with the provi­ sions of Article XII, Section 1(a), fessional Ethics which have been sions of Article XIV, Section 3, of of the By-Laws, the following re­ approved by the Council. the By-Laws of the American In­ port of the committee on nomina­ stitute of Certified Public Ac­ tions is submitted to members of J o h n L. C a r e y countants, I hereby give notice the American Institute of Certified Executive Director that the regular annual meeting of Public Accountants. the American Institute of Certified In accordance with the provi­ Public Accountants will be held at sions of Article XV, Section 4, of New York, N. Y., June 1, 1966

Report of the Committee on Nominations The committee on nominations Harold M. Berlfein, Calif. The committee will nominate hereby nominates the following Gerald R. Case, Calif. the following for members of for officers and members of Jack J. Dreiman, Calif. Council on the floor of the annual Council of the American Institute J. W esley Huss, C alif. meeting on Monday, October 3, of Certified Public Accountants: Herman E. Ward, Calif. 1966, to fill vacancies created by G ordon W . Tasker, Conn. the election of officers, the death Claude M. Hamrick, Jr., Ga. of a Council member, and the FOR OFFICERS Robert W . Baltz, Ill. absence from three consecutive Glenn Ingram, Sr., Ill. meetings of a Council member: President H albert A . Schussele, Ill. For Council Members at Large Hilliard R. Giffen, Calif. Quentin H. Covert, Ind. E. F. Volberding, la. (Two-year terms) Don F. Gresser, Kans. G eorge H. Hansen, la. Vice Presidents Harry C. Zug, Pa. George D. Anderson, Mont. Joseph P. Jones, Jr., Ky. John P. Goedert, Ill. W . Kenneth Simpson, Ky. For Members of Council Ralph E. Kent, N .Y . Sidney A . Champagne, La. (One-year terms) E. C. Leonard, Jr., Okla. S. Howard Phipps, Md. Anthony Gerharz, Jr., Mont. Lewis M. Foster, Mass. Richard S. Helstein, N. Y. Morris Goodman, Mass. Treasurer Dudley C. Tetro, N. H. W illiam R. Shaw, Mich. David F. Linowes, N. Y. Joseph E. Tansill, Ill. Leonard E. Richardson, Mo. Ralph T. Bartlett, N. J. Each of the nominees has ex­ For Council Members at Large Edwin T. Boyle, N .J . pressed his willingness to serve if (Three-year terms) A rth u r L. Breakstone, N. J. elected. The list of nominations Horace G. Barden, Ill. Nathan Honig, N. J. has the approval of all members Maurice J. Dahlem, C alif. Kerm it J. Berylson, N. Y. of the committee on nominations. Ralph F. Lewis, N. Y. James J. Needham, N. Y. Respectfully submitted, Herbert E. Miller, Mich. W illiam D. Sprague, N. Y. W alter R. Staub, N. Y. W illiam P. Stowe, N. Y. Thomas D. Flynn, Marvin L. Stone, Colo. William H. Westphal, N. C. Chairman Kenneth B. Wackman, N. Y. William A. Jacoby, Ohio Ernest A. Berg Stanley D. Ferst, Pa. Charles Bennett For Members of Council George T. Helm, R. I. Carl Lipoff (Three-year terms) H. Landrith Thomas, Tenn. Robert J. Murphey James E. Money, Ala. G ordon N. George, Texas Lawrence J. Scully Donald A . Brunell, Ariz. Stanley J. Scott, Texas Kenneth L. Thompson Percey W . Pogson, Jr., Ariz. Donald L. Schoedel, Wash. May 15, 1966

THE JUNE CPA/PAGE 13 Proposed Amendments charges, by the Trial Board or a by a general resolution of the to the By-Laws sub-board appointod t o hear the Council. case. No action shall he taken on (c) No person shall be consid­ Council has approved for dis­ the resignation of a member or ered to have resigned while in cussion by the members present associate with respect to whom good standing if at the time of his at the annual meeting, but not for possible charges are under investi­ resignation he was in debt to the action, the following proposed gation by the committee on pro­ Institute for dues or other obliga­ amendments to the By-Laws. Un­ fessional ethics. Action upon the tions. A member or associate sub­ der the provisions of Article XV, resignation of a member or associ­ mitting his resignation after the Section 5, of the By-Laws, follow­ ate against whom charges are beginning of the fiscal year, but ing the annual meeting the pro­ pending to be heard by the Trial before expiration of the time limit posed amendments will be sub­ Board or a sub-board shall be taken for payment of dues or other obli­ mitted to all members for a vote by the Trial Board or the sub­ gations, may attain good standing by mail: board appointed to hear the case. by paying dues prorated accord­ Action upon the resignation of a ing to the portion of the fiscal year Proposal No. 1 member or associate who is sus­ which has elapsed, provided obli­ pended under Article V, Section gations other than dues shall have To provide for the automatic 6(a) or (c) shall be taken by the been paid in full. suspension from Institute member­ Trial Board or by an ad hoc com­ (d) A member or associate who ship of a member whose CPA cer­ mittee thereof consisting of at has resigned or whose membership tificate has been suspended for dis­ least five members appointed by or affiliation has been terminated ciplinary cause or who has been the chairman of the Trial Board or in any manner may not file a new convicted of a felony or other seri­ vice chairman, when acting as application for admission but may ous crime; and for automatic ter­ chairman. apply for reinstatement under the mination of the membership of a Section 2. A member or associ­ applicable provision of paragraph member when his CPA certificate ate who fails to pay his annual dues (a) or (b) of this section, or Arti­ has been revoked for disciplinary or any subscription, assessment, or cle VI, Section 5(b) or (c). cause or when his conviction has other obligation to the Institute Section 4. A member or associ­ become final; and within five months after such debt ate renders himself liable to ex­ To provide for reinstatement, in has become due shall automati­ pulsion or suspension by the Trial the discretion of the Trial Board, cally cease to be a member or as­ Board or a sub-board thereof if after a lapse of three years, of a sociate of the Institute, unless (a) he refuses or neglects to member whose membership has in the opinion of the executive give effect to any decision of the been terminated for disciplinary committee it is not in the best in­ Institute or of the Council, or reasons; and terests of the profession that his (b) he infringes any of these To require a member to co-op­ membership or affiliation be ter­ By-Laws or any provision of the erate with the ethics committee in minated in this way. Code of Professional Ethics, or its investigation of complaints Section 3. (a) A member or as­ (c) he is declared by a court of (that is, to require a member to sociate who shall resign while in competent jurisdiction to have answer communications from the good standing may, upon request committed any fraud, or committee within thirty days or made in writing to the Institute, (d) he is held by the Trial render himself liable to discipli­ be reinstated by the executive Board or a sub-board thereof to nary action). committee without a reinstate­ have been guilty of an act discred­ To give effect to this recom­ ment fee. itable to the profession, or to have mended change it is proposed that (b) The executive committee, been convicted of a criminal of­ Article V and Article VI of the By- in its discretion, may reinstate a fense which tends to discredit the Laws be amended, as follows: member or an associate whose profession, or Change Article V (proposed ad­ membership or affiliation has been (e) he is declared by any com­ ditions are in italics) to read in its terminated for nonpayment of petent court to be insane or other­ entirety as follows: dues or any other obligation owing wise incompetent, or Section 1. Resignations of mem­ by him to the Institute, provided (f) his certificate as a certified bers or associates may be offered that his reinstatement shall not be­ orwithdrawnbytheaurevoked public­ accountant is suspended, in writing at any time and shall be come effective until he shall have effective on the date of acceptance. paid to the Institute all dues and Action upon the resignation of a other obligations owing by him to member or associate in good stand­ it at the time of such termination, ing shall be taken by the executive and shall also have paid to it a re­ committee. and, in the case of a instatement fee in such amount, if member orassociate under any, as shall have been determined

THE JUNE CPA/PAGE 14

thority o f any state, territory, orterritorial possession ofthe UnitedStates ortheDistrict ofColumbia.

However, should the secretarythe Institute be of of the

opinion that it may be in the best interest of the Institute toterminate , without the Trial Board, whose certificate as a certified pub­ trial, membership ofamember lic accountant or license or permit or the affiliation of an associatewhose certificate has been so sus­ with respect tocases heard initially by it and casesheard by it on to practice as such or to practice review of a decisionof a sub-board and to the public accounting has been sus­ pended, revoked or withdrawn, pended as a disciplinary measure sub-board by any governmental authority the secretary shall refer the matterto the executive committee. Insuch event, the executive commit­ with respect to cases heard bywhich such sub- heardboard the in case, shall, except as provided in para­ which no request for re­view has been granted. Whereupon the Trial graph (f) of this section, become tee may terminate, without trial, automatically suspended upon the Board or sub-board, as applicable, may by a majorityvote of the expiration of thirty days after mail­ such membership or affiliation, if it d eterm in es th at ing a notice of such suspension, as it is in the best interest of th e In stitu te to d o so members present and entitled to vote, reinstate such member or associate. provided in paragraph (e) of this or license or permit to practice as section. Such notice shall be mailed such or to practice public account­ Section 6. (a) The membership within a reasonable time after a ing is suspended, revoked, with­ or affiliation of a member or asso­ statement of such governmental drawn or cancelled as a discipli­ ciate who is convicted by a court authority, showing that such cer­ nary measure by any governmental of any of the following criminal of­ tificate, license or permit has been authority, or fenses: a crime which is defined as suspended and specifying the (g) he fails to co-operate with the a felony under the laws of the con­ cause and duration of such sus­ committee on professional ethics victing jurisdiction; willfully fail­ pension has been filed with the in its efforts to ascertain the facts ing to file any income tax return secretary of the Institute. Such au­ pertaining to whether such mem­ which he, as an individual taxpay­ tomatic suspension shall cease ber or associate is subject to dis­ er, is required to file under the upon the expiration of the period ciplinary action pursuant to the law; willfully attempting to evade of suspension so specified. By-Laws of the Institute. Accord­ or defeat any income tax, or the (d) The membership or affiliation ingly, a member or associate shall payment thereof, by filing a false of a member or associate whose respond to communications from and fraudulent income tax return certificate as a certified public ac­ the committee requesting informa­ on behalf of himself or a client; or countant or license or permit to tion as to such facts within thirty willfully aiding in the preparation practice as such or to practice pub­ days of the mailing of such com­ or presentation of a false and lic accounting has been revoked, munications by registered mail, fraudulent income tax return of a withdrawn or cancelled as a dis­ postage prepaid, addressed to the client; shall become automatically ciplinary measure by any govern­ member or associate concerned at suspended upon mailing a notice mental authority shall, except as his last known address, according of such suspension, as provided in provided in paragraph (f) of this to the records of the Institute. paragraph (e) of this section. Such section, become automatically ter­ Section 5. A member or associ­ notice shall be mailed within a rea­ minated upon the expiration of ate shall be expelled if the Trial sonable time after a certified copy thirty days after mailing a notice Board or a sub-board thereof finds, of a judgment of conviction of of such termination, as provided by a majority vote of the members such criminal offense has been in paragraph (e) of this section. present and entitled to vote, that filed with the secretary of the Such notice shall be mailed within he has been convicted by a court Institute. a reasonable time after a state­ of a felony or other crim e or m is ­ (b) The membership or affilia­ ment of such governmental author­ demeanor involving moral tu rpi­ tion of a member or associate who ity showing that such certificate, tude any of the criminal offenses has been convicted by a court of license or permit has been revoked, set forth in Article V, Section 6(a), any of the offenses set forth in par­ withdrawn or cancelled and speci­ or any crime involving moral tur­ agraph (a) of this section, and fying the cause of such revocation, pitude; provided, in the case of which conviction has become final, withdrawal or cancellation has such a finding by a sub-board, its shall become automatically termi­ finding in this respect is not re­ nated upon mailing a notice of versed by the Trial Board. If courtthe conviction shall be reversed such termination, as provided in paragraph (e) of this section. Such By-Laws proposal No. 1 by a higher court, such member or notice shall be mailed within a associate may requestment, andsuchrequestshallbere­ reinstate­ reasonable time after a certified would provide for committee's recommendation,to ferred tothecommitteeonprofessionalethicswhich,afterinvestigatingallrelatedcircumstances,shallreportmatter,with ­­ copy of such conviction and evi­ dence that it has become final has automatic suspension been filed with the secretary of the and termination ... Institute. (c) The membership or affilia­ tion of a member or associate

THE JUNE CPA/PAGE 15 been filed with the secretary of the ation is suspended or terminated mental authority based upon such Institute. under paragraph (a), (b), (c) or (d) offense or wrongful conduct. Any (e) Notices of suspension or ter­ of this section, a statement of such such offense or wrongful conduct mination pursuant to paragraph suspension or termination, giving shall be punishable under the per­ (a), (b), (c) or (d) of this section the reasons therefor, shall be pub­ tinent By-Law provisions which shall be signed by the secretary of lished in The CPA. Such statement were in effect immediately prior the Institute and mailed by regis­ shall be in a form approved by the to such effective date. Such By- tered mail, postage prepaid, ad­ chairman of the Trial Board or the Law provisions are continued in dressed to the member or associate vice chairman when acting as such, effect for this purpose. concerned at his last known ad­ and shall disclose the name of the (b) The provisions of Article V, dress according to the records of member or associate concerned Section 5(d) and Article VI, Sec­ the Institute. unless the chairman or vice chair­ tion 5(b) and (c) which became ef­ (f) The operation of paragraph man decides that the name be fective on [date of adoption by (c) or (d) of this section shall be­ omitted. members] shall apply retroactively come postponed if, within thirty (h) The provisions of this sec­ as well as prospectively. days after mailing the notice of tion shall not preclude the sum­ (c) The provisions of Article V, suspension or termination, the sec­ moning of the member or associate Section 1, which became effective retary of the Institute receives a concerned to appear before the [date of adoption by members] request from the member or asso­ Trial Board or a sub-board pursu­ shall apply after such effective ciate concerned that the pertinent ant to Article VI, nor shall it pre­ date to any resignation, regardless provision shall not become opera­ clude the imposition of any pen­ of when submitted. tive. The request shall state briefly alty under Article V, Section 5, or Change Article VI (proposed the facts and reasons relied upon. Article VI, Section 3(b), unless his additions are in italics) to read All such requests shall be referred membership or affiliation has been in its entirety as follows: to the Trial Board for action there­ terminated pursuant to paragraph Section 1. Any complaint pre­ on by the Trial Board or by an ad (b) or (d) of this section. ferred against a member or asso­ hoc committee thereof consisting (i) The period of suspension ciate under Section 4 or 5 of Arti­ of at least five members appointed pursuant to paragraph (a) or (c) of cle V shall be submitted to the by the chairman of the Trial Board this section shall not be counted committee on professional ethics. or vice chairman, when acting as in computing the period of not If, upon consideration of a com­ chairman. more than two years, for which the plaint, it appears to the committee If the request is denied, the sus­ Trial Board or a sub-board may that a prima facie case is estab­ pension or termination, as the case suspend a member or associate lished showing a violation of any may be, shall become effective under Article VI, Section 3(b). By-Law or any provision of the upon such denial, and the member Section 6. 7. The Council may, Code of Professional Ethics or con­ or associate concerned shall be so in its discretion, terminate the af­ duct discreditable to a public ac­ notified in writing by the secretary. filiation of an international asso­ countant, the committee on pro­ No appeal to the Trial Board shall ciate. fessional ethics shall report the be allowable with respect to a de­ Section 8. (a) The provisions of matter to the secretary of the Insti­ nial of such a request by the ad Article V, Sections 4, 5 and 6 and tute, who shall summon the mem­ hoc committee. Article VI, Section 1, which be­ ber or associate involved thereby If the request is granted, the came effective on [date of adop­ to appear in answer at the next suspension or termination, as the tion by members] shall not be ap­ meeting of the Trial Board or any case may be, shall not become ef­ plied retroactively to any offense sub-board appointed to hear the fective. In such event, the secre­ or wrongful conduct occurring case; exceptthatinanycase­ tary shall transmit the matter to prior to such effective date regard­ volving a prima facie showing of the committee on professional less of the date of judgment of paragrah (f),hemay,inhisdis­ violation of Article V, Section 4, ethics to take whatever action it conviction or order of a govern- considers proper in the circum­ stances. A determination that paragraph (c) or (d) of this section shall not become operative shall be made ... reinstatement only when it clearly appears that, because of exceptional or unusual and co-operation circumstances, it would be inequi­ table to permit such automatic sus­ pension or termination. (g) When a membership or affili­

THE JUNE CPA/PAGE 16

cretion, submit the matter to the executive committee. In the event of such submittal, the executive committee shall either terminate t he me m bership o r affiliation o f such member or associate pursu­ ant to Article V, Section 4 , p a r a ­ graph (f) or sum m on

h i m t o a p pear in answ er at the n e x t m e e t­­ in g of th e Trial Board or any s u b - board appointed tohear the case. provided, however, that with re­ of his unavailability, and com­ spect to a case falling within the posed of not less than five mem­ scope of Article V, Section 6, such By-Laws proposal No. 2 bers of the Trial Board who did committee shall have discretion as not participate in the prior pro­ to whether and when to report the would increase ceedings in the case. The ad hoc matter to the secretary for such committee shall have power to de­ summoning. the size of cide whether or not such a request Section 2. If the committee on the executive committee for review by the Trial Board shall professional ethics shall dismiss be allowed, and such committee’s any complaint preferred against a decision that such a request shall member or associate, or shall fail not be allowed shall be final and to act thereon within ninety days subject to no further review. A after such complaint is presented quorum of such an ad hoc com­ to it in writing, the member or as­ member or associate against whom mittee shall consist of a majority sociate preferring the complaint complaint is made, or by a two- of those appointed. If such a re­ may present the complaint in writ­ thirds vote of the members pres­ quest for review is allowed, the ing to the Trial Board; provided, ent and voting, may expel such Trial Board shall review the de­ however, that this provision shall member or associate. The Trial cision of the sub-board in accord­ not apply to a case falling within Board or sub-board hearing the ance with its rules of practice and the scope of Article V. Section 6. case shall decide, by a majority procedure. On review of such a The Trial Board shall make such vote of the members present and decision the Trial Board may af­ investigation of the matter as it voting, whether the statement of firm, modify, or reverse all or any may deem necessary, and shall the case and the decision to be part of such decision or make such either dismiss the complaint or published shall disclose the name other disposition of the case as it refer it to the secretary of the In­ of the member or associate in­ deems appropriate. The Trial stitute, who shall sumon the mem­ volved. A statement of the case Board may by general rule indi­ ber or associate involved thereby and the decision of the Trial Board cate the character of reasons which to appear in answer at the next or sub-board hearing the case shall may be considered to be of suf­ meeting of the Trial Board or any be prepared by a member or mem­ ficient importance to warrant an sub-board appointed to hear the bers of the Trial Board or the sub- ad hoc committee granting a re­ case. board, as the case may be, under a quest for review of a decision of a Section 3. For the purpose of procedure to be established by sub-board. adjudicating charges against mem­ such Trial Board or sub-board, (d) Any decision of the Trial bers or associates of the Institute, and the statement and decision, Board, including any decision re­ as provided in the foregoing sec­ as released by the Trial Board or viewing a decision of a sub-board, tions: sub-board, shall be published in shall become effective when made, (a) The secretary of the Insti­ The CPA. No such publication unless the Trial Board’s decision tute shall mail to the member or shall be made until such decision indicates otherwise, in which lat­ associate concerned, at least thirty has become effective, as herein­ ter event it shall become effective days prior to the proposed meet­ after provided. at the time determined by the ing of the Trial Board, or any sub­ (c) The member or associate Trial Board. Any decision of a sub- board appointed to hear the case, concerned in a case decided by a board shall become effective as written notice of the charges to be sub-board may request a review follows: adjudicated. Such notice, when by the Trial Board of the decision (i) Upon the expiration of mailed by registered mail, postage of the sub-board, provided such a thirty days after it is made, if prepaid, addressed to the member request for review is filed with the no request for review is prop­ or associate concerned at his last secretary of the Trial Board at the erly filed within such thirty-day known address, according to the principal office of the Institute period; records of the Institute, shall be within thirty days after the deci­ (ii) Upon the denial of a re­ deemed properly served. sion of the sub-board, and shall quest for review, if such a re­ (b) After hearing the evidence file with such request such infor­ quest has been properly filed presented by the committee on mation as may be required by the within the thirty-day period and professional ethics or other com­ rules of the Trial Board. Such a has become denied by the ad plainant, and by the defense, the review shall not be a matter of hoc committee; and Trial Board or sub-board hearing right. Each such request for a re­ (iii) Upon the effective date the case, by a majority vote of the view shall be considered by an ad of a decision of the Trial Board members present and voting, may hoc committee to be appointed by affirming the decision of a sub- admonish or suspend, for a period the chairman of the Trial Board, board in cases where a review of not more than two years, the or its vice chairman in the event has been granted by the ad hoc

THE JUNE CPA/PAGE 17 versed or otherwise set aside or (b), of the By-Laws be amended invalidated. Such request shall be to read in its entirety as follows: referred to the committee on pro­ The executive committee shall Ethics proposal No. 1 fessional ethics which, after in­ consist of the president, the four would repeal vestigating all related circum­ vice presidents, the treasurer, the stances, shall report the matter, immediate past president, and the competitive with the committee’s recommen­ nine other members or former dation, to the Trial Board. W here­ members of the Council who shall bidding rule upon the Trial Board may, by a be elected by the Council. Of the majority vote of the members pres­ nine members to be so elected in ent and entitled to vote, terminate 1967, three shall serve for one year, the suspension or reinstate such three for two years, and three for committee, and the Trial Board member or associate, after accord­ three years, or until their succes­ has affirmed the decision of ing him such hearing, if any, as sors have been elected. Thereafter, such sub-board. may be appropriate. beginning in 1968, the Council Section 4. At any time after the (c) Except as provided in para­ shall annually elect three members publication in The CPA of a state­ graphs (a) and (b) of this section, to serve for three years, or until ment of the case and decision, the a member or associate whose mem­ their successors have been elected. Trial Board may, with respect to bership or affiliation has been au­ Vacancies occurring among the a case heard by it, initially or on tomatically terminated under Ar­ elected members shall be filled by review of a decision of a sub- ticle V, Section 6(b) or (d), or who the Council for the unexpired board, and the sub-board may, has been expelled by the Trial terms. No elected member who has with respect to a case heard by it Board or a sub-board, or whose served for a full three-year term in which its decision has become resignation has been accepted by shall be eligible for reelection until effective without a review by the the Trial Board, an ad hoc com­ the annual meeting of the Institute Trial Board, by a two-thirds vote mittee thereof or a sub-board, next following completion of his of the members present and vot­ may, at any time after three years term of service. Seven members ing, recall, rescind, or modify such from the effective date of such shall constitute a quorum of the expulsion or suspension, a state­ termination, expulsion or accept­ committee. ment of such action to be pub­ ance of resignation, request rein­ lished in The CPA. statement of his membership or Proposed Amendment to the Section 5. (a) Should a judg­ affiliation. Such request shall be Code of Professional Ethics ment of conviction or an order of referred to the committee on pro­ a governmental authority on which fessional ethics, which, after in­ Council has approved for dis­ the suspension or termination of vestigation, shall report the mat­ cussion by the members present at membership or affiliation of a ter, with the committee’s recom­ the annual meeting, but not for member or associate was based mendation, to the Trial Board. action, the following proposed under Article V, Section 6(a), (b), Whereupon the Trial Board may amendment to the Code of Profes­ (c) or (d) be reversed or otherwise reinstate such member or associ­ sional Ethics. Under the provisions set aside or invalidated, such sus­ ate on such terms and conditions of Article XV, Section 5, of the By- pension shall terminate or such as it shall determine to be appro­ Laws, following the annual meet­ member or associate shall become priate. If an application for rein­ ing the proposed amendment will reinstated, when a certified copy statement under this paragraph is be submitted to all members for a of the order reversing or otherwise denied, the member or associate vote by mail. setting aside or invalidating such concerned may again apply for re­ conviction or order is filed with instatement at any time after two Proposal No. 1 the secretary of the Institute. years from the date of such denial. (b) A member or associate who To repeal Article 3, Section 3.03, of the Code of Professional Ethics, has been suspended or expelled Proposal No. 2 pursuant to Article V, Section 4(c), which reads as follows: (d), (e) or (f), or expelled pursuant To increase the size of the execu­ 3.03 A member or associate shall to Article V, Section 5, may re­ tive committee from thirteen to not make a competitive bid for a quest that the suspension termi­ sixteen by adding to its member­ professional engagement. Compet­ nate or request reinstatement if ship the immediate past president itive bidding for public accounting the judgment of conviction, the and two additional members or services is not in the public inter­ order in finding of court or the former members of Council. est, is a form of solicitation, and is order of the governmental author­ To give effect to this recom­ unprofessional. ity, on which the suspension or ex­ mended change it is proposed that To renumber Section 3.04 as pulsion was based, has been re­ Article IX, Section 2, paragraph Section 3.03.

THE JUNE CPA/PAGE 18 FROM TH E PRESIDENT ROBERT M. TRUEBLOOD

don and Howell report, spon­ sored by the Carnegie Founda­ tion. These two reports triggered a revolution, especially in gradu­ The Common Body of Knowledge ate schools of business, which is paying handsome dividends to­ day in the quality of young ex­ W h e n I assumed the presidency decades ahead, and that because ecutives. of the Institute last October of the computer’s almost limitless Hopefully, the Common Body, I spoke with you of “The Urgency facility, the information profes­ which had substantial financial of Opportunity.” I said then, “We sions are in for a future of almost and intellectual support from the have much to do to prepare our­ limitless change. The growth of Carnegie Foundation, will ac­ selves for change and for the role operations research since World complish for the accounting pro­ we will play in the future.” War II is but one example of fession what these two reports Before I step down from the how the computer has helped to did for business education. presidency this October, I hope change business science. I recommend that the informa­ to see published “The Common The report, which represents tion in the Common Body be Body of Knowledge for Certified the conclusions of its director, disseminated in the same man­ Public Accountants.” The Com­ Dean Robert H. Roy, and his as­ ner as were the suggestions in the mon Body tells the accounting sistant, Professor James H. Mac­ Pierson and Gordon and Howell profession what we must do to Neill, therefore, does not set forth reports — by a series of high- prepare ourselves for change and an itemized common body of level seminars at universities for the role we will play in the knowledge as of a point of time, around the country. future. It characterizes the kind nor does it specify a suggested I also recommend that the In­ of CPA who will not only sur­ curriculum. Rather, it hopefully stitute and the state societies vive, but thrive in the ever- projects its usefulness into the sponsor regional seminars to im­ increasingly complex world of challenging future. part the philosophy contained in business that is fast coming upon I believe that the directors and the Common Body. I hope that us. the commission developed a com­ the American Accounting Associ­ The prospectus given to the mon body of knowledge for CPAs ation will participate in, or jointly 11-man advisory commission by that is broad in scope—yet defini­ sponsor, such programs. the American Institute at the in­ tive in that it describes and ex­ ception of the study, three years emplifies the kinds of knowl­ Contributions from outside ago, suggested that the report edge that will be required of us. The report is significant for identify the common body of I believe that the commission more than one reason. For the knowledge that would enable the looked creatively and imagina­ first time in the history of the ac­ beginning CPA (1) to serve his tively, yet realistically, into the counting profession, outstanding clients competently and (2) to kinds of financial reporting and men from outside the profession grow with the profession. information that will serve the business world of the future. I have contributed materially of The directors and the commis­ their time and knowledge to help sion had no intention of focusing believe that they delineated formulate a penetrating analysis on a body of knowledge which knowledgeably the characteristics of the CPA who will live com­ of professional accounting. would be needed at a specific Such men who served on the point in time. Rather, regarding fortably in the environment of several years from now. commission under the chairman­ the professional accountant as ship of Elmer G. Beamer in­ viable, as being able to grow and The precedents clude: develop as circumstances dictate, Phillip West, Vice President, the commission concerned itself The Common Body follows by New York Stock Exchange with the knowledge and qualities ten years two other reports which Dean Courtney Brown, Gradu­ needed for growth. had great significance to business ate School of Business, Columbia The commission was well aware education directly, and to the University that all over the United States business world indirectly — the Dean Charles E. Johnson, Col­ millions of dollars are being spent Pierson report, sponsored by the lege of Arts, University of Oregon on research looking toward the Ford Foundation, and the Gor­ Henry P. Hoffstot, Jr., partner,

THE JUNE CPA/PAGE 19 Reed, Smith, Shaw & McClay, upon the possession of knowl­ And we should “augment the and a member of American Law edge by CPAs” and result in present meager efforts in ‘clini­ Institute “topical compliance” at the pos­ cal’ research in accounting, there­ The late Milton Drake, Senior sible cost of intellectual shallow­ by yielding additional inductive Vice President, Detroit Bank & ness. knowledge.” The yields to spon­ Trust Company. Fourth, it should result in an sors could be so sufficiently large What effect will the Common enlargement of research activity as to more than cover research Body have on the profession? not, as the study points out, “by costs. First, the study should serve as diminishing or altering current I believe the profession has an a prod to enrich further the In­ relationships, but by augmenting obligation to make use of the stitute’s and state societies’ pro­ them with sponsored research, study.j fessional development programs. wherein candidates and their Council last month heard a re­ Second, there will be a “re­ faculty may receive appropriate port on the Common Body, and treading” effect. That is, many support for engagement in re­ the profession will have the op­ practitioners will realize the ne­ search projects paid for by the portunity to become more familiar cessity for studying new and dif­ sponsors.” with its contents at the annual ferent concepts while relying, in I personally feel that spon­ meeting in Boston. It is scheduled the process, on the fundamental sored research is one of the im­ for publication this fall. My pur­ disciplines in which they were portant keys to the growth of the pose here has been to tell you trained. profession. I agree with the study what I feel the significance of the Third, there will be an obvious when it says that “sponsored re­ report is and what its implications impact on accounting curricu­ search devoted to ‘action prob­ are for the profession. lums. I believe the study is most lems’ in the ‘real world’ can By making full use of the Com­ wise in not recommending spe­ bring to accounting the essential mon Body, I believe that the pro­ cific batteries of courses because, quality of reality not capable of fession will have come a long way as it points out, “prescriptive syl­ simulation in academic institu­ in meeting the urgency of op­ labi” would “place upper bounds tions.” portunity.

J U N E 1966

Second class postage paid at New York, N. Y. The CPA is the membership bulletin of the Ameri­ can Institute of Certified Public Accountants, Inc. 666 FIFTH AVENUE, NEW YORK, N. Y. 10019 THE JULY-AUGUST 1966

Auditing procedure The committee on auditing procedure, at its June meeting, (1) approved the committee actions revised standard bank confirmation form developed in co-operation with NABAC (The Association for Bank Audit, Control and Operation), (2) reviewed and revised drafts of proposed statements dealing with “Interpretation of ‘Extensions of Auditing Procedure' Relating to Inventories,” “Unaudited Statements,” and "A Special Report on Internal Controls and Auditing Pro­ cedures Concerning Goods Stored in Public Warehouses” and (3) appointed a subcommittee to consider common problems of compliance reporting and to develop appropriate guidelines.

Warehouse study On June 28, the committee on auditing procedure sent out for exposure to out for exposure state society and chapter committees a proposed statement on auditing pro­ cedure dealing with the internal control of the warehouseman and the procedures of the independent auditor with respect to goods in custody of the warehouse. After comments from interested parties have been received and reviewed, the statement will be published — probably in early October.

Bankers and CPAs The first meeting of the National Conference of Bankers and CPAs has been conference date set scheduled for September 9 in New York City. Recently named as conference co-chairmen are John L. Hennessy (AICPA) and Edward F. Gee (American Bankers Association) for the Section on Financial Reporting of Borrowers, and Eugene L. Larkin (AICPA) and Edward T. Shipley (ABA) for the Section on Bank Accounting and Auditing.

New Institute film Inc., the new Institute educational film, is scheduled for completion this month. nearing completion When a pilot version of the film was shown to a panel of viewers in June, it was described as “colorful,” “realistic,” and as creating a “favorable but balanced impression of CPAs and their role in developing and auditing the information system used by managers and stockholders.” The film is intended to be used as a curriculum aid in college preparatory social studies classes.

Annual meeting Roy Ash, president of Litton Industries, and Manuel F. Cohen, chairman of speakers the Securities and Exchange Commission, will be key speakers at the Institute’s annual meeting in Boston (October 2-5). Full details of the meeting, as well as registration and hotel forms, are included in a special mailing now on its way to members.

Taxes and Las Vegas: Why not get the benefit of a full week of tax instruction — and then enjoy Labor Labor Day weekend Day weekend — both at the Sands Hotel in Las Vegas? The Institute’s profes­ sional development division is first offering “Tax Lecture Series,” August 29-30, and then “Estate Planning,” August 31-September 2. Arrangements can be made through the AICPA PD office.

The CPA, July-August 1966. Published monthly, except July-August when bimonthly, for membership of the AICPA, Inc. Vol. 46. No. 7. Publication and editorial office: 666 Fifth Ave., New York, N. Y. 10019. Second-class postage paid at New York, N. Y. FRO M TH E EXECUTIVE DIRECTOR JOHN L. CAREY ciples consistently applied and also in accordance with the cost Accounting for Medicare principles issued by the Social Security Administration. P r o p o s e d cost principles governing reimbursement under the new The extent to which a CPA firm Medicare program, which were to become effective July 1, were pub­ engaged by an intermediary may lished in the Federal Register, June 2, 1966. Earlier drafts were delayed rely on “certification” of costs by a CPA firm acting as independent by objections raised in the Senate. (A summary of the current pro­ auditor for a provider is unclear, posals appears in the July Journal of Accountancy, page 18.) although the phrases “in all ma­ As The CPA goes to press, general audit requirements for “provider” terial respects” and “presents cost reports have just come to hand (Bureau of Health Insurance fairly” suggest that discretion may Intermediary Letter No. 38, June 6, 1966, reprinted on pages 3-4 of be used in this respect. (Rule this CPA). Audit programs, instructions and forms of auditors’ reports 2.01 of the Institute’s Code of or “certificates” have been drafted. Late in June an Institute task force Ethics permits reliance on other had an opportunity to confer with the Social Security staff on certain auditors, in part, under specified of these matters. This was a start, but there are still many unresolved conditions.) problems. A question has been raised as The multi-billion dollar Medicare program, therefore, went into effect to whether an independent audi­ tor of the financial statements of in a somewhat tentative atmosphere, so far as the all-important finan­ a provider may properly audit re­ cial controls are concerned. This is not the fault of the hard-pressed imbursable costs of the same pro­ Social Security staff, who have knocked themselves out over a period vider on behalf of the intermedi­ of many months in an effort to meet the deadlines. The fact is that this ary, in view of a possible conflict vast new program is incredibly complex, and the volume and variety of interest. Yet a CPA firm fa­ of transactions to be accounted for stagger the imagination. miliar with a hospital’s system and Certified public accountants will almost certainly be involved in procedures may be able to audit Medicare on a large scale. the costs for the intermediary In the first place, hospitals, nursing homes and other “providers” ( as more economically than anyone they are called in the regulations) will have to adapt, expand or re­ else. The Institute’s ethics com­ construct their own accounting systems to provide the cost information mittee sees nothing improper in required for reimbursement. Providers will be required to segregate a member’s serving in both ca­ pacities. charges attributable to patients eligible for Medicare, since the dis­ The intermediaries naturally are tribution of costs to such patients will be based upon charges made accountable to the Social Security to them as they relate to charges to all patients. Administration for the funds dis­ Claims for reimbursement will be certified either by a “provider’s” bursed. The Audit Agency, official or by a “public accountant,” according to an early tentative DHEW, will appraise the effec­ draft of a form for this purpose. The public accountant apparently tiveness of intermediaries’ audits, may be either a CPA or a licensed public accountant or neither. The and will require access to work form of “certificate” which appeared on this form required the signer papers for this purpose. The Gen­ to “certify” that the stated costs were “correct.” A CPA might feel that eral Accounting Office will prob­ he could not sign such a statement without checking every transaction, ably have to satisfy itself, on be­ and this would be very costly, as compared with testing and sampling half of Congress, that the ac­ counting and auditing safeguards techniques. are adequate. Reimbursement of costs will be made by “intermediaries” — mostly One CPA has humorously sug­ Blue Cross organizations and some insurance companies. They will be gested that the accounting and required to audit, presumably on site, the claims by “providers,” al­ auditing expense under Medicare though disbursements may be made prior to audit. According to BHI may be greater than the cost of Letter No. 38 the intermediaries’ audits may be made by their own benefits to patients. While this is accounting staffs or by public accountants retained for the purpose. hardly likely, it is possible that the Intermediaries’ auditors must express an opinion whether, in all mountains of paper work and the material respects, the cost report for the period represents fairly the manhours of auditing may cost so costs incurred, in conformity with generally accepted accounting prin­ much as to constitute a major

THE JULY-AUGUST CPA/PAGE 2 burden on the program — and quirements for detailed verifica­ fessional societies. At the same possibly an object of Congres­ tion — whether by staff employees time, they should be aware of the sional inquiry a year or two or independent auditors — could risks involved. If they are acting, hence. weigh down the program. in effect, as accountants or con­ On the other hand, the oppor­ Without some general under­ trollers for hospital clients — doing tunities for waste, error, and even standing of the inherent limita­ the internal work — they should abuse under this program are ob­ tions on all those concerned with make sure they will be regarded vious and formidable. Some of the financial controls of such a as independent if they also certify these will inevitably occur in the massive new venture, there may costs as public accountants for re­ beginning, despite all precautions. be headline scandals, charges and imbursement on behalf of these Yet the responsible agencies will recriminations, Congressional in­ clients. As auditors for providers naturally try to protect themselves quiries, and victimization of many or intermediaries they should sign against Congressional criticism by well-meaning, hard-working peo­ no “certificates” which they are closing every conceivable loop­ ple who may be singled out as not prepared to justify on the wit­ hole. This may result in an effort examples. ness stand. In all relations with to put responsibilities on inde­ The Institute’s task force is try­ the Medicare program CPAs pendent auditors which cannot be ing to help the Social Security staff would do well to exercise that discharged except at heavy cost. in resolving these problems. “anticipatory hindsight” which the The problem here — as in the Certified public accountants, as late Saul Levy so prophetically field of auditing generally — is to members of an independent pro­ recommended. But they should relate the cost of protection to the fession serving the public, must also continually urge the most magnitude of risk of loss. This re­ do all they can to make the Medi­ economical procedures consistent quires a degree of flexibility and care program work — both as in­ with relative risk in the safe­ discretion at all levels. Rigid re- dividuals, and through their pro- guarding of the public funds.

SSA issues Medicare audit requirements and guidelines "Selected audit requirements and 3. Any agreements between an in a position to express an opinion guidelines applicable to annual intermediary and an independent whether, in all material respects, cost report forms of providers for firm engaged for audit purposes the cost report for the period ex­ reasonable costs under Parts A should include these requirements amined presents fairly the costs and B of Title XVIII, Public Law along with other appropriate con­ incurred for the period, in con­ 8 9 -9 7 .” ditions: formity with generally accepted (a) The audit shall be in­ accounting principles applied on Audit program: dependent. It shall be made in ac­ a basis generally consistent with General cordance with generally accepted that in the preceding accounting 1. The Social Security Admin­ auditing standards applicable in period. This opinion must also in­ istration will design and develop the circumstances. Such an audit dicate whether the accounting the required cost report forms for must meet at least the minimum procedures and system of inter­ determining and apportioning requirements of instructions fur­ nal control maintained are ade­ “reasonable costs” for providers. nished by the Social Security Ad­ quate for the purposes required. SSA will also formulate and pro­ ministration concerning the audits The opinion must further specify vide audit instructions and guide­ of provider costs. (The audit will whether the costs included in the lines, approved by the Audit not be deemed independent with annual cost report were deter­ Agency, the Department of respect to any provider in which mined in accordance with the pro­ Health, Education and Welfare, any partner or officer of the audit­ visions of governing contracts and for the annual verification of these ing firm has any interest, either cost principles issued by the So­ cost report forms. direct or indirect. Moreover, the cial Security Administration. 2. The Social Security Ad­ audit is not to be considered inde­ (c) Contracts for audit ser­ ministration will reimburse the in­ pendent if during the period cov­ vices should be entered into with termediary for its appropriate ered by the audit any partner or those certified public accountants share of the cost of audit services. officer of the audit firm is or was or public accountant firms meet­ This will apply to such services as serving as an officer or employee ing state and local requirements furnished by or arranged for by of the provider.) for licensure; where there are no the intermediary to verify costs (b) The audit must be suf­ such requirements, the intermedi­ reported by the provider under ficiently comprehensive. This ary must determine that the firm Parts A and B of the program. means that the auditor must be has an established reputation and

THE JULY-AUGUST CPA/PAGE 3 represents a stable and effective an independent organization other expanding the annual audit of the operation. than a certified public accountant provider’s books. 4. The Audit Agency, DHEW, or public accountant firm (e.g., Where such an arrangement is will appraise the effectiveness and Hospital Cost Analysis Service, entered into, the intermediary acceptability of the intermediary’s Inc., of Maryland). Where there would be expected to reimburse audit of provider costs. To the ex­ is such an independent organiza­ the auditing firm for the services tent the Audit Agency can estab­ tion, the intermediary will be ex­ rendered for the intermediary at lish the reliability of audit work pected to purchase this service for appropriate rates comparable to performed by others, the agency cost verification under Parts A those payable for similar services will accordingly avoid duplicative and B. The rates of payment for in the area. Contract arrange­ audit efforts. To assist the Audit such services should be compar­ ments under this option will be Agency in its audit activities, it is able to the rates being charged recognized and honored on a suggested that agreements be­ by the independent organization going-in basis until January 1, tween intermediaries and audit­ to other third parties for similar 1968. Prior to December 1, 1967, ing firms include a specific pro­ services. each intermediary involved in vision that the work papers of the Such an arrangement with the such a contract arrangement will audit organization are to be made independent organization would report to the Social Security Ad­ available as needed to representa­ not be required if the intermedi­ ministration on the effectiveness tives of the Audit Agency. It is ary demonstrated to the Social of these arrangements and desirable that the Audit Agency Security Administration that the whether they should be continued have ready access to internal con­ services of such an organization on a permanent basis. trol surveys, audit programs, audit were not readily available, were work papers, and audit reports not adequate, or were otherwise Approval of Audit subcontracts by SSA prepared in the course of an inter­ not feasible. mediary’s audit of provider rec­ 2. If the intermediary does not Any arrangements to be entered ords. have or cannot make any arrange­ into by the intermediary under ments described under category 1 B.1.(b), B.1.(c), B.2.(b) and B.3 Audit capability: above, the intermediary will then will of course require prior ap­ Order of preference have the option of either of the proval from the Social Security The following are listed in rated following: Administration; this is required order of preference. (a) The intermediary may under the present contracts be­ recruit, train, and develop a quali­ tween the Social Security Ad­ 1. (a) Some intermediaries have fied professional audit organiza­ ministration and intermediaries established and presently main­ tion of its own to accomplish this with respect to the subcontracting tain as part of their own operation annual cost verification. This is of intermediary functions. an ongoing provider audit capa­ subject to the requirement that bility. In such a case, the inter­ the costs of this service would not mediary will continue to use its be more costly than those which own audit organization for veri­ would be required under option Journal of Accountancy fying provider costs under this (b) below. Has Fifth Editor in 54 Years program. (b) The intermediary may With the July issue, George B. (b) Some intermediaries contract with a certified public Finnegan III becomes editor of The now purchase for their own pro­ accountant or public accountant Journal of Accountancy. Mr. Finne­ gram provider auditing services firm to render necessary provider gan, formerly with Business Week from a certified public accountant auditing services for the inter­ and the Research Institute of Amer­ and/or public accountant firm. In mediary. The rates to be paid for ica, became managing editor in such cases the intermediary will these services must be comparable January 1964. expand these audit contracts with­ to the rates charged in the area Charles E. Noyes, the Institute’s in the framework of the rates cur­ for similar type services. director of publications, who has been editor since 1956, assumes the rently being paid by the inter­ 3. Where the intermediary does title of Journal publisher which has mediary to such a firm, to apply not have or cannot make ar­ been held by John L. Carey, who to the verification of provider rangements as described in cate­ relinquished the editorship in 1955. costs under Parts A and B. gories 1 and 2 above, the follow­ Including Mr. Finnegan, The Jour­ (c ) Some intermediaries ing alternative may then be used. nal has had only five editors since which do not have an audit capa­ The intermediary may contract A. P. Richardson became the first bility as described under (a) and with the provider’s own certified full-time editor in 1912. The other (b) above may have available public accountant or public ac­ was John Lawler, now the Insti­ in the intermediary’s service area countant firm to accomplish the tute’s managing director. a provider audit capability from cost verification by appropriately

THE JULY-AUGUST CPA/PAGE 4 JUST PUBLISHED Accounting Research Study No. 9 INTERPERIOD ALLOCATION OF CORPORATE INCOME TAXES BY HOMER A. BLACK This new study provides a broad and penetrating analysis of the basic concepts which underlie current methods of allocating corporate income taxes among different accounting periods. Systematic in approach and based on a thorough examination of Institute, SEC, and other authoritative literature, the study is intended to serve as a vehicle for discussion and debate within the profession on this critically important subject. Should interperiod income tax allocation, for example, be required for all material tax timing differences? How should tax effects of timing differences be accounted for and presented? Which years should receive the benefit of loss carrybacks and carryforwards, and when should carryforward benefits be re­ corded ? By probing such vital and timely questions as these, the study should help resolve many of the differences and inconsistencies which now prevail in practice. At the same time, by providing a better understanding of concepts and procedures currently in use, it should also help the professional accountant or financial executive discharge his responsibilities with greater insight— and presumably with better results. 123 PAGES LIST PRICE $1.50*

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 666 FIFTH AVENUE, NEW YORK, N.Y. 10019 Gentlemen: Please send, postpaid ...... copies of Accounting Research Study No. 9: interperiod a l l o c a t io n o f c o r p o r a t e i n c o m e t a x e s at $1.50 (0089).

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Also send the following earlier Accounting Research Studies . . . _No. 1 (0081) at $1.50 No. 7 .Cloth (0087-0001) at $4.00 No. 2 (0082) at $1.50 .Paper (0087-0002) at $3.00 .No. 3 (0083) at $1.50 .No. 8 (0088) at $1.50 _No. 4 (0084) at $1.50 Post Binder (0080) at $3.00 No. 5 (0085) at $1.50 (Three binders needed for No. 6 (0086) at $2.00 studies published to date.) (Please add 5 percent sales tax in New York City. Elsewhere in New York State, add 2 percent state tax plus local tax if applicable.)

*MEMBER DISCOUNT AICPA publications are available to members at a 20 percent dis­ count. The minimum order subject to this discount is $2.50. If your order totals $2.50 or more, please deduct 20 percent from the list prices shown.

SEE REVERSE SIDE FOR DESCRIPTIONS OF EARLIER STUDIES EARLIER ACCOUNTING RESEARCH STUDIES Now Available at AICPA Member Discount Price (See Note on Reverse Side)

No. 1 : THE BASIC POSTULATES OF ACCOUNTING by Maurice Moonitz An attempt to define the basic assumptions which underlie accounting principles generally, classified into three sets of postulates relating to the substance, the practice, and environ­ ment of accounting. 61 Pages. $1.50.

No. 2 : “CASH FLOW” ANALYSIS AND THE FUNDS STATEMENT by Perry Mason An examination of the current use of “cash flow” as an analytical tool, its relationship to net earnings, and the need for the inclusion of a well-designed comparative funds statement in published financial reports. 117 Pages. $1.50.

No. 3 : A TENTATIVE SET OF BROAD ACCOUNTING PRINCIPLES FOR BUSINESS ENTERPRISES by Robert T. Sprouse and Maurice Moonitz This study extends the analysis contained in Accounting Re­ search Study No. 1 to the broad area of accounting for business enterprises, and makes specific recommendations on a wide variety of practices related to corporate accounting. 97 Pages. $1.50.

No. 4 : REPORTING OF LEASES IN FINANCIAL STATEMENTS by John H. Myers This study discusses the background and economics of leasing, considers the conditions under which a lease should be recorded as an asset, and suggests what steps should be taken to ensure full and adequate disclosure of leasing arrangements. 155 Pages. $1.50.

No. 5: A CRITICAL STUDY OF ACCOUNTING FOR BUSINESS COMBINATIONS by Arthur R. Wyatt An analysis of the kinds of accounting problems which may arise when a merger or acquisition takes place, with special at­ tention to the interrelationship of business policy, tax law, and accounting principles. 161 Pages. $1.50.

No. 6 : REPORTING THE FINANCIAL EFFECTS OF PRICE-LEVEL CHANGES (staff written) This study explores the meaning of price-level adjustments, problems which may arise in reporting the effects of such ad­ justments in financial statements, and forms of presentation which will help to produce satisfactory disclosure. 290 Pages. $2.00.

No. 7 : INVENTORY OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR BUSINESS ENTERPRISES by Paul Grady A comprehensive and systematic description of accounting principles as they currently exist, with reference to supporting AICPA, SEC, and other authoritative pronouncements. 485 Pages. Cloth bound $4.00. Paper bound $3.00.

No. 8 : ACCOUNTING FOR THE COST OF PENSION PLANS by Ernest L. Hicks This study proposes solutions to problems relating to ac­ counting for the cost of pension plans, with emphasis on the timing of charges to expense and the presentation of informa­ tion in financial statements. 159 Pages. $1.50.

AICPA MEMBERS MAY ORDER COPIES OF THESE IMPORTANT STUDIES BY MEANS OF THE FORM ON THE REVERSE SIDE Institute comments on proposed Treasury practice regulations

On June 20, the Institute's tive levels. We recognize that in reputable conduct enumerated committee on federal taxation some cases a power of attorney above, conviction of any commented at Treasury hearings may be required. criminal offense involving dis­ on the agency's proposed revision We believe that some of the honesty or a breach of trust by of Circular 230. The modified cir­ proposed changes in the disci­ an enrolled agent may be con­ cular would give effect to the plinary provisions limit unneces­ sidered grounds for disbar­ changes required by the passage sarily the Treasury’s scope of re­ ment or suspension from prac­ last November of a bill providing sponsibility to take disciplinary tice before the Internal Rev­ for the automatic admission of action in certain cases. A com­ enue Service.” lawyers and CPAs to practice be­ parison between key provisions of fore the Treasury Department. the present rules and the pro­ The proposed limitations on Here, in part, is what the com­ posed rules demonstrates the lim­ disciplinary authority would cre­ mittee had to say: itation of authority: ate an imbalance between the disciplinary responsibilities of the We believe that the proposed 1. Current rule. Section 10.51(a): state licensing authorities and the revision is generally satisfactory; “Disreputable conduct for Treasury. We believe this im­ however, we have some reserva­ which any enrolled attorney balance is not in the public inter­ tions concerning two principal or agent may be disbarred or est and recommend that the fol­ aspects of the proposed revision: suspended from practice be­ lowing changes be made to re­ first, regarding the procedure for fore the Internal Revenue Ser­ store the balance: filing the declaration of qualifica­ vice includes any conduct vio­ tion and authorization by attor­ lative of the ordinary standards 1. Amend Section 10.51(a)(1) neys and CPAs; and, second, re­ of professional obligation and of the proposed rules to provide, garding the disciplinary provi­ honor.” sions. as the current regulations do, that disreputable conduct includes In establishing the procedures Proposed rule. Omitted. “conviction of any crime involving to be followed in filing the decla­ ration, the following points should 2. Current rule. Section 10.51(b): moral turpitude.” “Among other forms of dis­ be considered: 2. Amend Section 10.51(b) of reputable conduct the follow­ the proposed rules to make it ap­ ing are deemed to constitute 1. A separate form should be such conduct: plicable to CPAs. developed for the declaration to (1) Conviction of any crimi­ distinguish it from a power of nal offense prescribed by the Other Comments. Section 10.51 attorney. We believe a separate Internal Revenue laws or con­ (a )(8 ). This section provides that form would be less confusing than viction of any crime involving “maintaining a partnership for the a combined form for the declara­ moral turpitude. . . .” practice of law, accounting, or tion and power of attorney. We other related professional service would be pleased to assist in the Proposed rule. Section 10.51 with a person who is under dis­ development of the declaration (a): “Disreputable conduct for barment from practice before the form by either submitting to you which an attorney, certified Service shall be presumed to be a a draft form or by commenting on public accountant, or enrolled violation of this provision.” a form which you will develop. agent may be disbarred or sus­ We believe that this provision 2. The declaration should be pended from practice before permits a presumption of guilt on signed only by the person who the Internal Revenue Service the part of an innocent practi­ appears to represent a particular includes, but is not limited to: tioner because of his association party on whose behalf he acts. (1) Conviction of any crimi­ with his partner. This provision 3. Once a declaration is filed, nal offense under the Revenue presumes knowledge on the part it should continue to apply with laws of the United States. . . .” of the innocent practitioner — a respect to the particular client re­ 3. Current rule. New provision presumption which, in the light of gardless of the number of ap­ which would apply to enrolled the large partnerships operating pearances made by the attorney agents only. in the accounting field, is unrealis­ or CPA at any one of the admin­ tic and unduly restrictive. We istrative levels. The same declara­ Proposed rule. Section 10.51(b): suggest that the word “may” be tion also should apply as the case “Enrolled agents. In addition substituted for “shall” in the above may proceed to higher administra­ to the categories of dis­ quotation.

THE JULY-AUGUST CPA/PAGE 7 FROM TH E PRESIDENT ROBERT M. TRUEBLOOD

institutional groups provide the vehicle by which the individual can be a stimulus to his profes­ Creativity and the CPA sion. Why do we CPAs take our pro­ fessional organizations so seri­ In every age, one of s o c ie ty ’s • There will be further explora­ ously? The reasons, I think, are tion in the management sciences. great needs is for creativity — suggested by the choices Marga­ creativity in the leadership of in­ Analysis of the processes of deci­ ret Mead made when she was stitutions, and creativity in our sion making will open broad new asked to name what she consid­ individual lives. horizons. ered to be the “constants” of man. Many might say that creativity • The fact of the computer in­ She said these constants are: an is not a quality generally applied creasingly demands that more urge in man to adapt to his en­ to accountants. But CPAs who among us become deeply familiar vironment; an urge in man to would make that statement do with its potentials and with its relate to something bigger than limitations. And the computer themselves and their profession himself; an urge to work in a an injustice. For, in fact, there is calls for the development of stan­ group to attain something man much creativity in our profession. dards both in the design of infor­ cannot obtain alone; and finally, mation systems and in the audit There has been from its begin­ the desire for companionship. nings. Accounting could not have of such systems. achieved the stature and confi­ • Criteria must be worked out dence it now enjoys — indeed it for determining the circumstances Productive adaptations could not have survived — with­ that warrant the use of alterna­ CPAs seek, within the environ­ out creativity in abundance. tive accounting principles. ment of our economy, to make But in every generation there is • The structure of the Ameri­ productive and useful personal can Institute has remained essen­ a need for renewal. There are pe­ adaptations. We strive to relate riods of particular challenge and tially the same for some 20 years, our efforts to a higher purpose while membership has grown accomplishment in the life of a and to a goal larger than our­ from 10,000 to 55,000. This cir­ profession, as in the life of an selves. As members of a group, we cumstance indicates a need for individual, and I believe that ac­ make contributions to our time of counting is in such a period now. extensive review, and possibly for a breadth and of a nature we revision, of our organization. But we must remember that “tides could not achieve alone. And we • The provocative discussions taken at their flood” can let one find opportunity for fraternity. about professional independence down as readily as the tides may Thus we CPAs, as a group and that have followed upon the raise one to great heights. Shake­ within the framework of the In­ marked growth of management speare specified that the “tide stitute and our state societies, services will undoubtedly contin­ must be taken.” He did not say move toward realization of those ue until a position has been de­ that we will be carried happily “constants” which sustain the mor­ fined which is generally accepta­ along, just because we happen to al and the intellectual life of man. ble to society (not necessarily to be in the way. To what might we apply our cre­ ourselves). ativity beyond those examples and • Our ethical rules — some of The over-all problem problems I’ve already suggested? which may seem almost inconsis­ One important area is that of cor­ The over-all problem for our tent with the desired and desira­ porate financial reporting. Great profession, as for society gener­ ble public posture of our profes­ ally, is that of rapid change and sion — need a continuing and progress has been made in pro­ the facility to accommodate to critical review. viding investors and the public change. Let me mention some of It is accordingly clear, I think, with more meaningful, with more the developing conditions in ac­ that this is an exhilarating time to complete information. It is said counting, as I see them: be a part of accounting. that the American investor is the • In the time ahead there will I feel it is the role of the best informed in the world, and be broader applications of the at­ state societies and of the AICPA we can take satisfaction in that test function, extending to social to guard the profession against fact. But can we stop there? measurements not presently con­ complacency, and to foster the in­ Hardly. Our creative sense should sidered a part of our role. novative urge. Conversely, these lead us to question whether share-

THE JULY-AUGUST CPA/PAGE 8 owners are as fully and as clearly interest. I can confidently say that nation, but rather that consensus informed as is professionally pos­ I believe, in coming months, you is an attempt to agree on so many sible. will see significant actions on the small issues that great public pur­ Of course, it is one thing to ask part of the Accounting Principles poses are lost sight of. these questions — and quite an­ Board with respect to a number In my view, the antidote to other to do something about them. of key issues which have been consensus thinking is creative We were reminded of this when troubling us for some time. thought, creative leadership, cre­ SEC Chairman Manuel F. Cohen Nonetheless, we must avoid ative personal lives. — to use Business Week’s term — within our profession a tendency, We all know professionals — be prodded the profession to greater common to all institutions, to be­ they doctors, lawyers, CPAs — action on the matter of more come preoccupied with the status who possess the quality of inven­ “comparability” in corporate finan­ quo, to concentrate on simply tiveness to a very high degree. cial reporting. This is a technical rearranging known factors, and in We know others who fail to as­ problem, as most of you know, elaborating known techniques sume even the responsibility to that has been debated within the more and more finely. And we study or to absorb the inventive­ profession for some time. must avoid the comfortable, but ness of their peers. Failure to It is not my purpose here to not very comforting, methods of keep abreast of the developments add to that debate. Suffice it to making progress simply by “trial in one’s own time and in one's say that the issue is neither so and error.” own profession usually results simple nor susceptible to quick Though he was speaking in a more from lack of effort than from and easy solution as the mere quite different context, I think lack of capacity. Yet there are statement of intent might imply. that we accountants might give those in the professions who at re­ If the profession has not acted thought to the warning about tirement are practicing only what with greater alacrity, it is because “consensus thinking” which James they remember from the textbooks there are ancillary considerations MacGregor Bums gives in his re­ of their youth. I trust that all of of long-term effect, of degree, and cent book on presidential govern­ us will strive to retain intellectual of circumstance, which bear on ment. Mr. Burns says that con­ curiosity, mental alertness, and whether “comparability in the sensus does not often reflect the receptivity to new ideas — over all strict and literal sense” is either deepest needs and desires of the the years of our lives. possible or in the public interest. I would not like to see so im­ portant an issue become a shibbo­ Statistical Sampling Program. In recognition of the increased leth. Nor would I want our pro­ need for exposing to independent auditors statistical sampling tech­ fession led to opinions under pres­ niques presently available to auditors, the AICPA committee on sta­ sure of uninformed sentiment, tistical sampling has developed a one-day program for presentation such as sometimes comes from to interested state societies. The program includes discussion of sta­ user groups. But never, never tistical terminology, sampling selection methods, statistical sampling would I want our profession to be plans, evaluation of sampling results and a case study. The program accused of delay, of internal dis­ presented by the full statistical sampling committee utilizes handouts pute, or of quibbling over minu­ and film slide material. tiae in the improvement of finan­ To date, presentations have been made at Tulsa, Okla.; Dallas- cial presentations. Fort Worth; Houston; Columbus, Ohio; New Brunswick, N.J.; and Minneapolis, Minn. The committee will complete its busy 1966 fiscal No one quarrels with the ob­ year with a presentation at Madison, Wis., on September 8. Devel­ jective of greater comparability. opment and presentaton expenses of the program have been assumed The principle has, in fact, been by the firms of the individual committee members and the AICPA. endorsed and adopted by the gov­ erning Council of the American Boston PD Seminars. As long as you're planning to be in Boston Institute. But our responsibilities for the annual meeting, why not attend a professional development lie in the manifold effects of the seminar? broad, and sometimes not easy, There will be two: "Improving Profits through Cost Reduction" and applications of the comparability "Special Reports." They will be held simultaneously on Saturday, Oc­ concept. Professionally we must tober 1, just one day prior to the start of the annual meeting, at move in that direction — but we meeting headquarters, the Sheraton Boston Hotel. The seminars will be conducted by their authors: Irving Kellogg, must move surely, and certain­ (Improving Profits), and Charles J. Weiss and James W . Kelley (Spe­ ly. The profession will not be cial Reports). damned for “making haste slow­ The cost of the seminars, which are being co-sponsored by the ly,” if the profession ultimately Massachusetts Society and Institute's PD division, is $35. For other makes progress — and if that prog­ information and registration forms, write to PD division, AICPA. ress is sound, and in the public

THE JULY-AUGUST CPA/PAGE 9 papermen should pay particular Editors, writers, attend Institute attention. Sunday morning, the program financial communications seminar of the Accounting Principles Board was discussed. A successful experiment in ter idea of auditing and the kinds The seminar was closed by Mr. press relations was conducted by of problems that exist.” Trueblood, who summed up by the Institute the weekend of Newspapermen and business emphasizing the importance of June 10-12 when nine members, magazine writers from Boston to judgment in CPAs’ determina­ including President Robert M. Philadelphia and northwest to tions, what may be expected of Trueblood and SEC Chief Ac­ Rochester joined in the session. It the APB in the future, the prob­ countant Andrew Barr, met with was held at Tarrytown House, a lem of accountants’ legal liability, 13 financial editors and writers Tarrytown, N.Y., conference center. CPAs’ great concern with inde­ in a “Seminar on Financial Com­ The meeting, organized by Rod­ pendence, and some future expec­ munications.” eric Parnell of the AICPA staff, tations for the profession, such as Mr. Trueblood had agreement was structured around descrip­ extension of the attest function. from both the writers and the tions of the behind-the-scenes CPAs who gave talks at the accountants when he concluded, judgment and accounting tech­ meeting were Lindsay Boyle, “From the results of this experi­ niques involved in financial re­ Haskins & Sells; Joseph Cum­ ment, I am enthusiastic about its porting. mings, Peat, Marwick, Mitchell & possibilities for the future. I feel A session covering basic con­ Co.; Philip Defliese, Lybrand, we should consider holding such cepts of accounting kicked off the Ross Bros. & Montgomery; Thomas seminars in other parts of the seminar. This was followed by a D. Flynn, Arthur Young & Com­ country.” description of the roles of man­ pany; Leonard Savoie, Price New York Herald-Tribune Fi­ agement, the independent CPA, Waterhouse & Co.; William D. nancial Editor Myron Kandel and the Securities and Exchange Sprague, Arthur Andersen & Co.; summed up for his colleagues: Commission. Saturday afternoon and Kenneth B. Wackman, presi­ “We feel that this was a very good was devoted to examining annual dent of James Talcott, Inc., in ad­ session. I hope personally that you reports and items affecting earn­ dition to President Trueblood and continue it. It has given us a bet­ ings per share to which news­ Mr. Barr.

J U L Y /A U G U S T 1966

Second class postage paid at New York, N. Y. The CPA is the membership bulletin of the Ameri­ can Institute of Certified Public Accountants, Inc. 666 FIFTH AVENUE, NEW YORK, N. Y. 10019 THE SEPTEMBER 1966

Ethics committee issues The committee on professional ethics has issued an opinion on fees and professional opinion on fees standards (see page 5). In a special message mailed recently to all members re­ and standards porting this action of the ethics committee, President Trueblood noted that the proposed repeal of Rule 3.03 on competitive bidding had aroused some apprehen­ sions that the repeal might have the effect of modifying other rules bearing on the quoting of inadequate fees. Mr. Trueblood indicated that the ethics committee’s action was intended to remove any misunderstanding on this point. The opinion states in effect that the quoting of an inadequate fee may in some circum­ stances be regarded as evidence of a violation of the solicitation rule (3.02) or the rule on reporting standards (2.02).

Executive committee The executive committee met in San Francisco on July 28-29 and discussed actions reorganization of the Institute, fees, computers, future financing of Institute programs, and other issues of importance to the membership. Capsule accounts of the committee’s actions appear on page 2.

Treasury issues Effective September 13, CPAs will no longer need a Treasury card to New IRS practice rules practice before IRS. Starting that day, the Treasury’s new practice rules — published in the August 13 Federal Register — will require a written declaration from a CPA “that he is currently qualified as a CPA and is authorized to represent the particular party on whose behalf he acts.” A Treasury card issued before September 13 “shall be invalid and may not be used in lieu of such written declaration.” The Treasury is currently developing the declaration forms.

Annual meeting: The Institute’s 79th annual meeting, to be held this year in Boston on October 2-5 October 2-5, is fast approaching. The deadline for sending in your advance registration forms is September 16. Turn to page 3 for a last minute report on the technical sessions and social activities planned for this year’s meeting.

Answers to questions May a CPA sign the preparer’s declaration on a federal tax return where one or on tax returns more questions on the return have not been answered? .. only if he is satisfied that reasonable effort has been made to provide appropriate answers to the questions on the return which are applicable to the taxpayer,” according to Statements on Responsibilities in Tax Practice No. 3, “Answers to Questions on Returns.” The statement, prepared by the Institute’s tax committee, was sent to all members this month.

The CPA, September 1966. Published monthly, except July-August when bimonthly, for membership of the AICPA, Inc. Vol. 46, No. 8. Publication and editorial office: 666 Fifth Ave., New York, N. Y. 10019. Second-class postage paid at New York, N. Y. AICPA executive committee meets in San Francisco; discusses reorganization of Institute, fees, computers

• On July 28-29, the Institute’s executive committee met in San Francisco to consider issues of major importance to the membership.

• Agenda items included: a permanent paid AICPA president, future financing of Institute programs and financial seminars for the press in key cities.

• Here, in capsule form, is a report on what the committee discussed and the actions it took.

. . . Resolved that the structure The executive committee hopes Western Hemisphere which has committee report on the reorgan­ to make an interim report to sufficient economic resources but ization of the Institute be pub­ Council at its October 1 meeting where information presently avail­ lished and distributed for the in­ in Boston. able indicates that accounting is formation of all members, with a lacking. The study would attempt . . . Recommended that the eth­ request for comments. The execu­ to determine means whereby ics committee convene a special tive committee said the report was such a country could raise its ac­ an “inspiration and challenge” to meeting to consider issuing an counting, auditing and financial opinion on fees and professional the entire profession. The com­ reporting standards. The recom­ standards. [Ed. Note: At the spe­ mittee further resolved that the mendation carries the proviso that cial meeting, held on August 16, report, as approved in part by additional funds of $40,000 could the ethics committee approved Council at its 1966 spring meet­ be obtained from other partici­ Opinion No. 18. See page 5.] ing, be accompanied by an ex­ pants. planatory statement when sub­ . . . Considered further the ex­ mitted to the membership. change of views on computer . . . Approved the action of President Trueblood was au­ practice between subcommittees President Trueblood in appointing thorized to appoint a subcom­ of the ethics committee and the a subcommittee to consider future mittee of the executive committee executive committee. The execu­ financing of Institute programs to give intensive consideration to tive committee explored means and named to the subcommittee: the recommendations in section whereby members could offer Matthew F. Blake, New York, 3(a) of the report, which recom­ computer services to other prac­ chairman; Horace G. Barden, Chi­ mended the appointment of an titioners. cago; and Claude M. Hamrick, eminent CPA as a permanent paid Jr., Atlanta. . . . Approved, with minor modi­ president of the Institute, and . . . Approved the suggestion creation of the office of chair­ fications, the tentative Descrip­ tion of the Professional Practice that the Institute sponsor finan­ man. Council had referred this cial seminars in other large metro­ recommendation back to the exec­ of CPAs which appeared in the politan areas, similar to the one utive committee for further study. June66, CPA (p.6), and resolved to submit it to Council at the Oc­ held last June in New York for tober meeting, with a recommen­ financial writers ( The CPA, July- dation that it be adopted as a August66, p.10), and that provi­ Medicare report forms statement of policy of the Insti­ sion be made in the budget for tute, and that copies be distrib­ these meetings. Invitations to such Recommended forms for use by conferences would be sent over a the auditor for the intermediary uted to all members for informa­ wide area in order that the con­ under various circumstances have tion. been prepared for the Social ferences would have a truly re­ . .. Approved a recommenda­ gional representation. Securities Administration by the tion of the committee on inter­ Institute's Medicare task force. national relations that the Insti­ . . . Resolved that a scroll be The forms have been approved tute provide in its budget for the presented to the American Ac­ by the auditing procedure com­ next fiscal year $10,000 for a re­ counting Association in behalf of mittee. search study to be made in a se­ the Institute on the occasion of lected developing country in the the 50th anniversary of the AAA.

THE SEPTEMBER CPA/PAGE 2 in the ethics of auditing and re­ Boston annual meeting coming up fast: porting.

here’s what’s planned for members .. . Major addresses by Roy L. Ash, President of Litton Indus­ tries and Manuel F. Cohen, Chair­ Before you know it, September Tax legislation in the Ninetieth man of the Securities and Ex­ 16 will be here and the deadline Congress. The several approaches change Commission. for sending in your advance regis­ to tax simplification now being ad­ tration application forms for the vanced in Washington and how . . . A variety of social events in­ annual meeting will have come and when there is a likelihood of cluding a Boston Pops concert or and gone. Remember: Advance achieving such simplification, ma­ a private tour of the Boston Mu­ registration applications received jor tax proposals under way with seum of Science highlighted by after September 16 will be proc­ respect to exempt organizations planetarium show and the tradi­ essed at meeting time in Boston. and private pension plans, and tional banquet, with Metropolitan Highlights of the meeting ( Oc­ other current matters of vital in­ Opera star Marguerite Piazza and tober 2-5) include six technical terest to the accounting profes­ TV entertainer Henry Morgan as sessions... sion. featured entertainers. And for the ladies, a tour of Boston’s North An over-all view of the profes­ Changing concepts in the profes­ Shore, a tour of Historic Boston, sions environment. The national sion's ethics. The applicability of and a luncheon at which Cleve­ economic scene, the impact of the the Code to management services land (“Who Killed Society?”) changing environment and its (concerned in part with the ethi­ Amory will be the guest speaker. structure and functions and the cal implications of the lack of a international economic picture are definition of management serv­ As an added attraction, the all combined in this session, which ices), the ethics of tax practice— Massachusetts Society will spon­ explores business and accounting the responsibilities of the CPA tax sor an old-fashioned clam bake in the closing years of the decade. return-preparer to his client, gov­ at the Wychmere Harbor Club at Harwichport on Cape Cod on The art of consulting. A three-part ernment and public — and an ex­ Thursday, October 6. program dealing with: establish­ ploration of the problems involved ing the framework of consulting, the psychology of consulting and a panel presentation devoted to such topics as discovering oppor­ Follow the Congress with a European tour tunities, holding engagements and The Institute, working with Lincoln Miller, a travel agent of Washing­ reporting results. ton, D.C., has made arrangements to offer members attending the 9th International Congress of Accountants in Paris in 1967 a choice The use of the computer in aiding of two 2 1-day European tour itineraries. small business. A comprehensive look at computers focusing on the Both tours call for departure from New York on September 5, 1967, information needs of a typical arriving in Paris that evening. Following the close of the congress small business client, a status re­ members will depart September 13 on the tour of their choice. port on major new technological The first itinerary follows a northern route including Berlin, Copen­ developments in the field of inte­ hagen, Amsterdam, Brussels and London, with an optional return grated information systems and from Dublin or Glasgow on September 27. presentations of case studies on computerized information systems The second itinerary covers Zurich, Lucerne, Venice, Florence, for small business clients. Rome, Madrid and Lisbon, returning to the United States on Sep­ tember 27. The Common Body of Knowl­ Both tours include air fare, economy class round trip from New edge for CPAs. Interpretations of York, good hotels, sightseeing, most meals and tips. The cost per CBOK as viewed from the par­ person, including hotel and meals while in Paris, is estimated at ticular vantage points of an ac­ present rates to be $925. counting educator, a mathemati­ cian, an accounting practitioner, a Members who are interested in these tours should write the pro­ behavioral scientist and the chair­ fessional relations division of the AICPA. If interest is expressed by man of the study commission, plus a sufficient number, more detailed brochures will be sent to members a general panel discussion and with applications. audience participation.

THE SEPTEMBER CPA/PAGE 3 Sub-boards take action on five cases; found him guilty as charged and decided that he should be sus­ expel three members; suspend two pended from membership in the Institute for six months. The respondent requested a review of the sub-board’s decision Convicted of felonies lated Article V, Section 5 of the and his request was considered By-Laws, which requires the ex­ and denied by an ad hoc commit­ A sub-board of the Institute’s pulsion of a member if it is found tee of the Trial Board on April 30, Trial Board met in New York on that he has been convicted of a 1966. Pursuant to Article VI, Sec­ October 21, 1965, to consider a felony or other crime or mis­ tion 3(d) (ii) of the By-Laws, the charge of the ethics committee demeanor involving moral turpi­ sub-board’s decision became ef­ that J. Morton Finke, 274 Madi­ tude. The respondent did not at­ fective upon the denial of his re­ son Avenue, New York, New tend the hearing and the sub quest for review. York, had violated Article V, Sec­ board found him guilty as charged. tion 5, of the By-Laws, which re­ No request for a review of the quires the expulsion of a mem­ Failed to file tax returns sub-board’s decision was filed and ber if it is found that he has been accordingly, his expulsion became At a meeting in Boca Raton convicted of a felony or other effective 30 days after it was Florida, on April 30, 1966, a sub- crime or misdemeanor involving made, pursuant to Article VI, Sec­ board of the Trial Board decided moral turpitude. It was also tion 3 (d )(i) of the By-Laws. that Carl L. Nicholson, South 612 charged that this conviction Lincoln Street, Spokane, Wash­ brought discredit upon the pro­ ington, had violated Article V, fession. The respondent was not Violated independence rule Section 5 of the By-Laws in that present at the hearing. The sub- A sub-board of the Trial Board he had been convicted of failing board found him guilty on both to file personal federal income tax counts. met in Phoenix, Arizona, on March 3, 1966, to consider the returns for the calendar years The respondent requested a re­ charges of the ethics committee 1959, 1960 and 1961 and that view of the sub-board’s decision his failure to do so was an act by the full Trial Board. An ad hoc that Warren Mittelstaedt of 534 East Thomas Road, Phoenix, discreditable to the profession. committee of the Trial Board, Arizona, had violated Rule 1.01 The respondent was not present which met on March 3, 1966, de­ at the hearing. The sub-board cided that his request should be of the Code of Professional Ethics by expressing an opinion on fi­ found him guilty as charged and denied. Accordingly, his expul­ nancial statements knowing that decided that he should be ex­ sion became effective on March his partner had a direct financial pelled from membership in the 3, 1966, pursuant to Article VI, Institute; no request for review Section 3(d )(ii) of the By-Laws. interest in the enterprise and had violated Article V, Section 4(f) of the sub-board’s decision hav­ The New York sub-board also of the By-Laws in that his cer­ ing been filed, the decision be­ considered the charge of the tificate as a CPA had been sus­ came effective on May 30, 1966. ethics committee that Joseph pended by the state board for 30 In another case heard the same Abrams, 33 Great Neck Road, days. The respondent was pres­ day, the sub-board found that a Great Neck, New York, had vio­ ent at the hearing. The sub-board member, who was present at the hearing, had committed acts dis­ creditable to the profession in AICPA Insurance Trust. As of October 1, 1966, all members are having failed to file federal in­ invited to participate in the Group Insurance Plan, the CPA Plan, or come tax returns for three con­ both, if eligible. If you are interested and have misplaced or have not secutive years. The respondent in­ received the descriptions recently mailed, write immediately for the troduced evidence showing that details from the Plan Administrator, Reid, Collins & Co., Inc., 530 his failure to file was the result of Fifth Avenue, New York, N.Y. 10036. unusual mitigating circumstances. The sub-board decided that the Membership Cards — By Request Only. The Institute will send member should be suspended membership cards only to those members who request them. This is from Institute membership for done as an economy measure since there have been so few requests two years. No request for review in the past. Members desiring cards may obtain them by writing the of the sub-board’s decision was American Institute of Certified Public Accountants, 666 Fifth Avenue, filed, and accordingly, the deci­ New York, N.Y. 10019. sion became effective 30 days after the hearing.

THE SEPTEMBER CPA/PAGE 4 Ethics committee answers question on Ethics Committee solicitation of other practitioners Opinion No. 18 "Fees and Professional Standards" Q. May an Institute member com­ However, in the opinion of the In determining the amount of municate with other practitioners ethics committee, the practice of his fee, a CPA may assess the offering to perform for them or asking other public accountants degree of responsibility being their clients specialized services for professional work should be assumed in the engagement, such as electronic data processing carefully circumscribed. For ex­ the time and manpower re­ work? ample, it would be improper for a quired to perform the service member to write to all the CPAs in conformity with the stan­ A. The rule against solicitation is or public accountants listed in a dards of the profession, the not intended to prohibit such professional society membership skills needed to discharge his communications. It states in effect directory. He should communicate professional obligation to the client and the public, the value that a member shall not endeavor, only with those in public practice. to the client of the services ren­ directly or indirectly, to obtain Attempts to obtain engagements dered, and the customary clients by solicitation. But practi­ from society members who are charges of professional col­ tioners should be free to com­ treasurers, controllers, or other leagues. Other considerations municate with each other in at­ corporate officers would be re­ may also be involved. No sin­ tempts to solve their professional garded as solicitation in violation gle factor can be controlling. problems. Often it is only through of Rule 3.02. It is characteristic of all pro­ such co-ordinated efforts that Moreover, the mailings them­ fessionai persons to be more progress can be made. selves should be in good taste. In concerned with fulfilling their It is not solicitation, as that term the committee’s judgment, elabo­ responsibilities to the public than with immediate financial is generally understood, for a rate brochures and other printed reward. On occasions they may CPA to offer his colleagues spe­ materials should not be employed. appropriately choose to serve cialized services. In such cases, The best procedure would be to a client for a fee less than cost, no representations are made to write in letter form to colleagues or indeed without any compen­ the public and there is no en­ stating simply that the necessary sation whatever. croachment upon the practice of equipment and expertise are avail­ However, to quote a fee in other public accountants in viola­ able for their own or their clients’ advance of an engagement in tion of Institute Rule 5.01. benefit. an amount clearly inadequate to provide fair compensation for performing service in ac­ cordance with accepted pro­ fessional standards may be re­ Second National Conference on State Legislation garded, in some circumstances, as evidence of solicitation in • Are present accountancy laws committee on state legislation, the violation of Rule 3.02 of the adequate to meet the changing conference will bring together Code of Professional Ethics. needs of the profession? state society presidents, execu­ Without attempting to specify • Will the Common Body of tive secretaries of state societies, all circumstances that might be relevant in determining the Knowledge study affect future re­ legislative committee chairmen, propriety of a particular quota­ quirements for the CPA certifi­ legal counselors and members of tion, it would be appropriate to cate? state boards of accountancy and consider whether there were • What are the new trends in provide a forum for the discus­ any facts suggesting that such state accountancy legislation? sion of accountancy laws, admin­ inadequate fee had been fixed The second National Confer­ istration of accountancy laws, ac­ as a part of a plan or design to ence on State Legislation to be countancy legislation of the fu­ solicit business. held at the O’Hare Inn, Chicago, ture, CPAs’ relations with the leg­ In such cases of inadequate on October 23-25, 1966, will ex­ islature, and education and ex­ fees there may be a tempta­ plore these and other problems. perience requirements. tion to minimize losses by re­ ducing the amount of work be­ Hopefully, the conference will Speakers include John L. Carey, low that required by Rule 2.02 enable representatives of state Executive Director, AICPA; An­ of the Code, with serious con­ CPA societies to better under­ drew Barr, Chief Accountant, Se­ sequences for third parties who stand and maintain the legisla­ curities Exchange Commission; rely upon opinions on financial tive standards of the profession. and Guy W. Trump, Director of statements. Sponsored by the Institute’s Education, American Institute.

THE SEPTEMBER CPA/PAGE 5 FROM TH E PRESIDENT ROBERT M. TRUEBLOOD

greater self-scrutiny by many cor­ porations, and a general tighten­ ing of safeguards against conflicts of interest in industry. • The release of statements by Independence, Objectivity, Integrity political candidates of their finan­ cial positions during their cam­ paigns. "There is no terror.. .in your threats; • Cabinet officers disposing of For I am arm’d so strong in honesty investments that might be sus­ That they pass by me as the idle wind.” pected of biasing their judgment. Coming back to our own situ­ —Shakespeare, Julius Caesar, A c t IV, S c e n e 3 ation, I do feel bound to state my personal conviction that the pres­ ent degree of concern about the independence of CPAs is per­ Members are aware of the at­ people with a direct interest in haps somewhat overdone. I’m go­ tention that has been directed the financial affairs of corpora­ ing to return to this point later, lately to the question of CPAs’ tions. but I must add at once that I am independence. Our professional • Changes in our social struc­ acutely conscious that such pub­ publications have carried numer­ ture have increased the impor­ lic concern exists. And since pub­ ous articles on the subject. The tance of economic relationships as lic concern about our indepen­ Savings and Loan Commissioner between entities, and the compli­ dence does exist in fact, we CPAs for the state of California feels cations of their relationship to cannot, with good sense, ignore that the rendering of management the public sector. that concern. services to a savings and loan in­ • The growing complexity of Therefore I want to put before stitution almost automatically im­ society as a whole has multiplied you an assessment — admittedly pairs a firm’s ability to make an the need for reliable assurances a quite personal assessment — of objective audit. I’m told that with respect to many kinds of what we have done so far in this some people in the Social Security assertions and reports, in addition connection, and what we ought Administration wonder whether a to financial statements as such. further to do. firm that audits a hospital can ob­ In effect the public is extending There are two aspects of the jectively certify amounts due to its interest in the attest process. question of independence: the ac­ the hospital under the Medicare I think this increased attention tuality, and the appearance; the program. And, as some of you to CPAs’ independence is part of substance, and the form. Both are know, I have recently spent a a growing preoccupation with the important. They interrelate. good bit of time with financial morals of society — a new inclina­ This duality is recognized by editors and writers in the New tion to examine the ethics of busi­ the profession. With respect to York area. Their conversation nessmen and public officeholders, the actuality of independence, the plainly shows an uncertainty as well as professional people. If Institute’s Code of Ethics states about the stiffness of a CPA’s I may indulge in a bit of philo­ that a member “. . . shall at all spine when dealing with a client. sophical speculation, I think this times maintain independence of There are several reasons for inclination may stem from an in­ thought and action.” While grant­ this heightened interest in the trospective, and sometimes sub­ ing that independence is not sus­ independence of CPAs: conscious, pondering of our af­ • The growing complexity of fluent society — of its elements of ceptible of precise definition, the business has brought calls upon materialism, and of the fact that Code provides at least a sugges­ accountants for kinds of work status is so often rated in terms of tion of a definition by reference beyond that which we have tra­ dollar-numbers. to the judgment of “a reasonable ditionally performed. I refer par­ But whatever the underlying observer,” a third party. And a ticularly, of course, to extensions causes, we have witnessed in re­ partial definition of a reasonable in the area of management serv­ cent years such things as: person may be inferred from ref­ ices. • The dismissal of a prominent erence in the Code of Ethics to • The evolution of the econ­ chief executive for ownership in “one who has knowledge of all omy has increased the number of a supplier-firm — which led to the facts.”

THE SEPTEMBER CPA/PAGE 6 With respect to the appearance third-party responsibility. We’re or the other. But specified rules of independence, Opinion 12 of not unique in this respect. Con­ will probably not be of much the ethics committee states that: sulting engineers, for example, use. ". .". . it is imperative to avoid re­ bear a great responsibility to be These are examples of the kinds lationships which may have the sure that the designs they ap­ of problems we presently have, appearance of a conflict of in­ prove for a bridge will result in my opinion, with respect to terest.” As you very well know, in a structure safe for those who management services. And, may a member of the Institute is spe­ cross it. But by contrast, a doc­ I remind you that these prob­ fically enjoined from performing tor’s responsibility is predomi­ lems will not go away simply by an audit for a company in which nantly to his patient only, and our wishing they were gone. he, or any of his partners, owns as a rule there is only an inci­ stock or serves as a director. I am, dental third-party element in the Not only accountants myself, one who believes that practice of medicine. owning stock of a company would But the responsibility of the But again it is not only account­ in no way keep the vast majority CPA, in his attest function, is ants who have multiple roles. The of CPAs from performing a not solely to the management lawyer does. Almost every profes­ rigorously objective audit. But, whose statements he audits. The sional does. The man of high that is not the point. Like Caesar’s CPA has a very important respon­ moral sense will behave honor­ wife — CPAs must not only be sibility to shareholders whom he ably in all of his roles—going, if pure, but they must take far more does not know, to prospective in­ necessary, to the point of with­ than normal care to give no vestors, credit grantors, tax au­ drawing from a situation where ground for gossip or suspicion. thorities, and others who just he feels he might be unable to While there may be room for might read the financial state­ act as he should. Rules and regu­ further progress with respect to ments. Thus our attest responsi­ lations can limit the occasions for the external forms of indepen­ bility multiplies and extends to wrongdoing by men without high dence, the profession has, in my groups that are diverse in interest, moral sense. But the ethical level estimation, done a creditable job and to groups that are indeter­ of the profession in the larger in this area. minate in kind. As has been sense is not necessarily raised by pointed out many times before, the multiplication of detailed pro­ The substance of independence we do not hold out to these scriptions. groups that we guarantee the ac­ Earlier, I said that I felt the What I should like to suggest curacy of financial statements — present degree of concern about is that in the future we turn our but we do accept the obligation of CPAs’ independence was some­ thinking more to the substance of giving an expert opinion as to what overdone. I would now like independence. It is obviously their fairness. to come back to this point. easier to deal with details of form, Obviously, no CPA can split The ground for my belief is that which are tangible and which can himself into two persons — one an I am convinced the profession be spelled out in legalistic terms. advocate, the other an attestor. exercises a great deal of inde­ But there is danger in becoming But he can, I believe, always keep pendence — but that the exercise overly engrossed with rules and in mind his professional duties in of that independence is not regulations. We should recall both roles, and he can discharge widely recognized because that St. Paul’s admonition about the his responsibilities in both in­ exercise usually takes place in spirit of the law, as compared stances honestly and fairly. But private. By contrast — in the rela­ with the letter. We must not the individual himself must de­ tively few cases in which CPAs emphasize the appearance of in­ cide when and where his dual give a clean opinion on financial dependence — to the disadvan­ roles might conflict, and he must statements that later prove to be tage of the reality. sometimes make his choice of one troublesome — the ensuing in­ The integrity of the profession vestigations and controversies are — of which independence is an highly conspicuous in the public important element — rests finally press. upon the morality of the indi­ There are also cases in which viduals who make up that profes­ President Trueblood’s column this the independence of auditors is sion. And the reality of inde­ month is an adaptation of a speech evidenced by exceptions in opin­ pendence must take precedence he made last June before the 69th ions — but these cases also are over the rules about indepen­ annual meeting of the Pennsyl­ few. Most often, the opinions read dence. vania Institute of Certified Pub­ by those who receive financial A truly distinctive feature of lic Accountants. Mr. Trueblood statements are in the standard our profession as compared to served as president of the Penn­ language that probably seems al­ many others is the degree of our sylvania Institute in 1959-60. most perfunctory to third parties.

THE SEPTEMBER CPA/PAGE 7 But there may have been some His performance is constantly which he belongs. It can lead to strenuous tussles between part­ subject to the scrutiny of stock­ expulsion from the group, to with­ ners of the auditing firm on the holders, bankers, financial journal­ drawal of his right to appear be­ one hand, and officers of the re­ ists, the Securities and Exchange fore the SEC or the Treasury, to porting company on the other — Commission, the Treasury Depart­ loss of his license to practice as a all going on privately, before the ment, and, most importantly, his CPA at all. These sanctions are client accepted the procedures or peers. How long could lack of so severe that few accountants agreed to the disclosures which firmness, or lack of candor, or lack risk incurring them. permitted the auditors to give a of high principles be concealed To recapitulate my theses: clean opinion. from such observation? • Independence and objectiv­ The point is that the struggles The great majority of CPAs re­ ity are the most important ele­ and pressures between the client spond to their professional obliga­ ments of professional integrity and his CPA can never be re­ tions not because that is the best —and CPAs possess professional vealed — because of the confiden­ policy in the sense of producing integrity in high degree. But we tial nature of the CPA’s relation maximum material reward but must not be smug. We cannot with his clients. Thus, behind- rather because responding vigor­ even be content. the-scene debates provide no evi­ ously to professional obligations • Although rules and regula­ dence of independence to the gen­ leads to rewards of inward satis­ tions are restrictive in their ef­ eral public. faction. fect and therefore intrinsically There are, however, other kinds But let’s look at the question negative, they are necessary. And of evidence in abundance. Con­ of professional integrity from a we should continually seek out sider the volume of writing on hard dollars-and-cents viewpoint. ways to improve them. independence and objectivity in A CPA’s reputation is his main • We must not, however, be­ accounting literature. Can anyone asset — maybe his only asset. He come so engrossed in grappling suppose that discussion of this spends years building it. He with technicalities that we neglect order would be produced in a knows it can be destroyed in a the heart of the matter. And profession that was casual about day. Unethical behavior can the heart of the matter and the its ethical responsibilities? bring censure by his peers — re­ heart of our practice is the indi­ Beyond that, consider the many ported to the public, and to all vidual CPA’s moral attitude and forces that converge upon a CPA. the members of the group to his personal integrity.

SEPTEMBER 1966

Second class postage paid at New York, N. Y. The CPA is the membership bulletin of the Ameri­ can Institute of Certified Public Accountants, Inc. 666 FIFTH AVENUE, NEW YORK, N. Y. 10019 OCTOBER 1966

Proposed deletion of competitive bidding rule and other By-Law changes highlight annual business meeting As this issue of The CPA goes to press, more than 2,100 members and guests have already registered for the Institute’s 79th annual meeting to be held in Boston, October 2-5. The business portion of the meeting will be highlighted by members’ discussion of the proposal to delete the competitive bidding rule (3.03) ; the proposal to expand the executive committee; and the proposed amendments to the By-Laws permitting the automatic suspension of members who have been convicted of serious crimes or who have had their CPA certifi­ cates suspended or revoked, and which would permit reinstatement of expelled members after three years.

Tax committee chairman asks modification of b ill to suspend investment credit A memorandum listing six proposed amendments to HR 17607, the bill which would suspend the investment credit, was sent on September 22 to its author, Representative Wilbur D. Mills (D., A rk.), by tax committee chairman Don­ ald T. Burns. The memorandum says that amendments are needed "to elim­ inate what appears to be unintended results and to ameliorate hardships.” Rapid Congressional action taken on the bill prevented the full committee from submitting formal comments. The November Journal of Accountancy will carry a more complete story on the recommendations.

Institute lays groundwork for expanded public relations program An enlarged public relations program is being planned for the Institute. To assist in developing the new program, Stewart Schackne, by arrangement with the Institute’s public relations counsel firm, Osgood Nichols & Associates, will devote virtually full time to the Institute for at least a year.

Tax committee submits drafts for IR S experimental rulings program The tax committee, which is participating in the IRS experimental rulings program, has submitted for consideration by the Service: a draft revenue pro­ cedure regarding the minimum gross receipts standards for social clubs; another draft revenue procedure regarding indemnity undertakings in a ”B”-type organization; and a memorandum outlining several problems in the personal holding company area which may arise as a result of the Service’s issuance of Revenue Ruling 65-259. 2

Regular auditor of provider should be first choice under Medicare President Trueblood has asked the Social Secu­ audited by independent public accountants may rity Administration to revise its statement on Med­ not be immediately feasible, it is also our opinion icare "Audit Capability — Order of Preference." that the public, the provider and the government "First preference,” the Institute president said, will be best served by such an approach and the "should be the engagement of the regular recommendation that the provider’s independent auditor of the provider.” auditor report on costs is a natural adjunct to this SSA Insurance Intermediary Letter No. 38 conclusion.” (The CPA, July-Aug.66, p.4), listed as a last President Trueblood cited as one of the major alternative, "the provider’s own certified public reasons for these conclusions: accountant or public accounting firm.” "Audits of reimbursable costs are a natural In a letter to Arthur E. Hess, Director, Bureau extension of the procedures performed as the of Health Insurance, President Trueblood said basis of reporting on financial position and re­ that it is the opinion of the Institute’s Medicare sults of operations. This is so because many of task force and auditing committee members the provider’s accounts may bear either directly "that use of other alternatives will add substan­ or indirectly on the calculation of reimbursable tially to the auditing costs of your program with costs. Performance of reimbursement examina­ the quality of audit in certain circumstances capa­ tions by auditors other than those examining the ble of being subject to criticism. While I under­ provider’s financial statements would, of neces­ stand that a requirement that all providers be sity, require duplication of audit work.”

Ethics committee answers question on independence Q. The president and 20 per cent stockholder ably lead an observer to question the member’s of a member’s client has offered the member an independence. The committee therefore recom­ opportunity to acquire a one-sixth interest in a mends that the member refrain from participat­ joint venture. The investment required would not ing in financial ventures with officers or stock­ be material in relation to the net worth of the holders of audit clients. member, nor would the enterprise formed by the six joint venturers be in competition with the member’s client. If the member were to partici­ pate in such a joint venture with the client’s New Editors for The Journal president, would he be considered not independ­ and The CPA ent as auditor of the client company? George B. Finnegan has resigned his A. Rule 1.01 requires that before expressing position as editor of The Journal of Ac­ his opinion on financial statements, a member countancy to become editor of “Business must assess his relationships with an enterprise International." William O. Doherty, man­ to determine whether he might expect his opinion ager of the Institute's ethics and state to be considered independent, objective and un­ legislation department since 1960 and biased by one having knowledge of all the facts. coauthor with John L. Carey of “Ethical It is not enough to be independent — the mem­ Standards of the Accounting Profession," ber must also have the appearance of independ­ becomes editor of The Journal with the ence. November issue. Charles E. Noyes con­ An auditor who is a joint venturer with a prin­ tinues as publisher. cipal shareholder and officer of a client company Effective with this issue, Richard C. may be independent in fact. However, the inevit­ Brown succeeds Mr. Finnegan as editor able intermingling of the financial interests of of the CPA. the auditor and the client’s president would prob-

The CPA, October 1966. Published monthly, except July- August when bimonthly, for membership of the AICPA, Inc. Editor: Richard C. Brown Vol. 46, No. 9. Publication and editorial office: 666 Fifth Ave., New York, N. Y. 10019. Second-class postage paid at Production Assistant: Carolyn Evans New York, N. Y. 3

from the President ROBERT M. TRUEBLOOD

Communication and Co-operation One of the more urgent tasks which confront be only part of a corporation’s integrated infor­ us is to develop an expanded machinery for com­ mation system — testing the output of financial munication and co-operation among all the ac­ information separately will become uneconomic. counting organizations throughout the world. Even if it were feasible for the attestor to evalu­ In pooling our resources to pursue common ate only the financial output of an enterprise, he objectives, we would not be weakening in any would have to approach the task in a matrix of sense our abilities to serve our individual needs, many other information networks. nor running any special risk of losing our special The professional accountant of the future identities. We would simply be gaining the must, therefore, be able to comprehend the entire strength to resolve some of the problems which management information system. He will con­ plague us all, and to ensure that the art of con­ tinue to be the synthesist that he already is, put­ sulting will realize its full potential in the serv­ ting together summaries of the results of proc­ ice of mankind. esses. But the accountant of the future must be­ The problems I am particularly interested in come a generalist (in the very broadest sense of are those relating to the attest function, account­ the word) — a generalist competent with respect ing education and accounting research. to a wide range of management problems and management systems. The complex partnership of man and machine The attest function will become an overriding characteristic of our I believe that the attest function of the account­ profession. ing profession will extend to many areas other The professional practitioner of accounting than those to which it is now applied. These new must become comfortable with a view of events areas for attestation will not only include addi­ which is probabilistic, rather than deterministic, tional business operations, but will be extended and perhaps comfortable is too comforting a to a variety of sectors of society other than word. Rather, I suspect that all of us are some­ business. what outraged when hit in the face by the tail of I am concerned here, however, with the expan­ a probability distribution. sion of the attest function only as it relates to It is my view that ultimately the attest function business. may be dissociated from the financial process, Although the auditor’s primary interest has as such. In the future, the attest function may shifted from validation of outputs to valida­ well be applied to the total management process. tion of procedures, his concern is still largely financial. But a strictly financial orientation will not Accounting education carry into the future. We will no longer be able As the attest function moves from dealing only to think about, or to deal with, separate and with quantifications expressed in units of money separable financial information needs. to dealing with much more subjective matters, What does this portend for the attest function? changes in education for both the attestors and Since means for gathering financial data will for the information specialists must take place. I 4 do not doubt that the academic programs under For example, the practitioner believes that a development will ultimately meet the need for recent study by the American Institute’s com­ equipping practitioners to provide attestation in mittee on auditing procedure with respect to the the broad areas that can be foreseen. auditing of public warehouses is indeed a very The composition of such educational programs useful kind of inquiry. Members of the commit­ is, of course, a responsibility which must largely tee talked with partners of more than 60 firms be discharged by our professional educators. and found out what they did in performing such Town and gown have always been synergistic— audits; they found out from warehousemen the one stimulating the other to action—with such details of their businesses; and the committee interactions leading to concepts which in turn arrived at a series of recommendations. These become the basis of new actions. Today’s practice recommendations will not eliminate absolutely is often the basis of tomorrow’s theory. Tomor­ the opportunities for chicanery in warehouse row’s theory frequently becomes the practice of operations, but the studied analysis of the indus­ the day after tomorrow. try will surely make for tighter auditing in that The emerging concept of management infor­ field. mation systems may presently be of more concern In short, the review of the literature on a sub­ to the practitioner than to the academic account­ ject and the analysis of current practice are neces­ ant. Yet, in view of the many advances in the pro­ sary and useful exercises, whether or not the pro­ fession which have been stimulated by the aca­ cedures can properly be described as research. demic community, it is not surprising that we But even more important is research of a differ­ look to our academic colleagues to explore in ent kind — research which involves the orderly depth this new frontier of knowledge. accumulation of evidence, within a predeter­ mined framework, and the systematic analysis of that evidence. Accounting research I think professional societies, such as the As we contemplate the next several years of American Institute and the American Account­ accounting, all of us will surely agree that the ing Association are particularly fitted to conduct profession’s progress will depend heavily on re­ the first kind of research. search. This, of course, is a topic on which there The second kind of research falls perhaps only is wide diversity of opinion and, I think, a lack within the province of universities. But if ac­ of understanding. counting and accountants are to survive, the There are many, particularly in the academic educational fraternity must assume the responsi­ field, who hold that the research conducted by the bility for an even more impressive fundamental American Institute is not research at all. Con­ research accomplishment than it has yet attained. versely, there are practitioners who look at the Investigative projects of an interdisciplinary na­ subjects of some proposed research projects in ture — where accounting relates, for example, academia and find it impossible to relate them to to the law, economics, or to the behavioral sci­ the vital problems of the real world. ences — undoubtedly can best be performed by I believe there is validity in both of these ex­ the academic, but the practitioner has a deep treme viewpoints. responsibility for co-operative and collaborative The educator’s impatience with what practi­ involvement. tioners do in the name of research arises from the fact that the practitioner’s efforts do not usually An interchange of support conform to the pattern followed in the physical Our problems of the future regarding account­ sciences, that is: setting up a strictly defined ing research are interdependent. The educator hypothesis, determining that the hypothesis is must do what he can best do. And we — through testable, accumulating a large amount of evi­ our professional societies — must do what we dence, and subjecting that evidence to rigorous are equipped to do. But above all there should statistical processes. On his side, the practitioner be an interchange of support — and interchange is acutely conscious that "accounting is a man- of financial resources; and interchange of intel­ made art. . . (and that) it does not enjoy the dis­ lectual facilities; and a shared faith in our com­ cipline of natural laws.” mon objectives. JUST PUBLISHED! A New Industry Guide AUDITS OF FIRE AND CASUALTY INSURANCE COMPANIES

This new guide has been specially designed to help the inde­ pendent auditor broaden his knowledge of those aspects of the fire and casualty insurance business which he should be aware of in order to serve clients in that industry most effectively. The booklet describes the nature of the business; the charac­ ter and extent of regulation and its effect on company policy and practices; and the methods of accounting in the industry, including a discussion of major types of transactions and classi­ fication of accounts. Special emphasis is given to the significance of the variances between prescribed insurance accounting practices and generally accepted accounting principles, especially in relation to match­ ing of income and costs, valuation of investments, realized and unrealized capital gains, non-admitted assets, and statutory reserves. In addition, the final chapter contains a discussion of the recommended form of auditor’s report and reconciling supple­ mental data which should be presented to meet the require­ ments of Statements on Auditing Procedure No. 33.

84 PAGES LIST PRICE $2.00*

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AUDITS OF SAVINGS AND LOAN ASSOCIATIONS This study provides a useful guide to the independent audit of savings and loan associations which will meet the needs not only of management but also of the investing public and the supervisory authorities. In addition to describing procedures related to the audit of typical liabilities and assets, the study examines such matters as the purchase or sale of loans, loan participation, borrowing from the Federal Home Loan Bank, and the treatment of vari­ ous “scheduled items." It also provides information on the forms of financial state­ ments prescribed by the Federal Home Loan Bank Board, the chart of accounts generally used in the industry, and where to secure literature describing government regulations and re­ quirements in this area. 78 PAGES $2.00

AUDITS OF CONSTRUCTION CONTRACTORS This guide interprets and summarizes the application of ac­ counting principles to the business of contracting and considers some of the unusual auditing problems which may be en­ countered. It replaces the two previous studies, Auditing in the Construction Industry and Generally Accepted Accounting Principles for Contractors. In addition to consolidating material from these earlier studies, the booklet includes a substantial new section contain­ ing illustrative financial statements which have been prepared on the percentage of completion method and the completed contract method of accounting. This section also provides sam­ ples of the wording of auditor’s reports for basic financial state­ ments and additional financial data for analysis purposes. 120 PAGES $2.00

AUDITS OF BROKERS OR DEALERS IN SECURITIES This guide is designed to acquaint the independent ac­ countant with the unique as well as the more general problems encountered in the audit of a brokerage firm. It describes various kinds of security and commodity trans­ actions, including those which involve trading in odd lots, on margin, or from a short position. It also considers what kinds of records are required when a firm acts as broker for its customers, trades on its own account, or participates in an underwriting. In addition the booklet reviews techniques and procedures for safekeeping the securities of customers, problems involved in the transfer of securities, and auditing procedures necessary for complying with regulations established by the SEC and other jurisdictional bodies. 71 PAGES $2.00

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CPAs and bankers meet to discuss mutual problems President Trueblood has proposed that con­ agreeable solutions to mutual problems.” sideration be given to "the establishment of a The main portion of the conference was de­ voluntary machinery to enable differences be­ voted to discussing the proposed AICPA guide, tween bankers and CPAs to be resolved by media­ "Bank Accounting and Financial Reporting Prac­ tion other than litigation.” tices and Their Relationship to Generally Ac­ He made the proposal at the first National cepted Accounting Principles.” Conference of Bankers and CPAs, which was During the afternoon session, representatives held on September 9 in New York City. of the Institute and the ABA made short pre­ J. Howard Laeri, who represented the Amer­ sentations on such topics as: what the banker ican Bankers Association at the conference, spoke requires in an audit; objective of an independent on "Closing the [audit] Gap.” public accountant in reporting of financial state­ Mr. Laeri, who is Vice Chairman of the First ments ; what the accounting profession should do National City Bank of New York, said, "I be­ to improve uniformity and quality in reporting lieve we have come to the realization that we presentations; and audit report needs for term have a deep and continuing common interest in loan agreements. extending the lines of communication between In addition to the American Institute and the us and broadening our understanding of each ABA, the conference includes representatives of other's roles in the financial community.” Then Robert Morris Associates and NABAC (The the ABA spokesman added, "However conglom­ Association for Bank Audit, Control and Oper­ erate our two professions may be, the fact still ation). The conference is made up of two sec­ remains that, by getting together, we have at least tions : financial reporting of borrowers, and bank taken the first step along the road to mutually occounting and auditing.

APB issues draft opinion on determination of income and earnings per share and draft of omnibus opinion—1966 Net income should reflect all items of profit be disclosed in the statement of income, with and loss recognized during the period except for separate disclosure of per share income from prior period adjustments; extraordinary items ordinary operations and extraordinary items. should be shown separately as an element of net The Board also issued for exposure a draft of income of the period. "Omnibus Opinion— 1966.” The opinion car­ That is the major conclusion of the new APB ries out, in part, recommendation 5c of the spe­ draft opinion, "Reporting the Results of Business cial committee on opinions of the APB ( The Operations.” The draft was released for com­ CPA, June65, p.3). ment on September 9 to interested parties. It will "Omnibus Opinion — 1966” is the first of a become effective for fiscal periods beginning series the Board expects to issue periodically on after December 31, 1966, if approved in final various matters that do not require separate form by at least two-thirds of the APB. opinions. "From time to time,” the draft states, "the The subjects covered in the first omnibus opin­ AICPA, through its organized boards and com­ ion include: consolidated financial statements, mittees, reviews . . . the form and content of poolings of interests — restatement of financial financial statements to determine how their use­ statements, deferred income taxes-discounting, fulness may be improved. This opinion is the offsetting securities against taxes payable, con­ result of a review of present practices in the vertible debt and debt issued without stock war­ reporting of the results . . . of business entities.” rants, liquidation preference of preferred stock, The second part of the draft opinion specifies and installment basis of accounting. how earnings per share and dividends per share The full text of both draft opinions will appear should be computed and reported. in Statements in Quotes in the November Journal It recommends that earnings per share figures of Accountancy. 8

from the Executive Director JOHN L. CAREY______Change and Impact When the environment changes as rapidly as ways disorderly behavior and lower standards of it is changing today, few individuals can escape conduct appear to some of us to be gaining the need to adjust. The adjustment is not al­ ground among the population, at the same time ways easy or pleasant. Change, which may help there appears to be a rising level of expectation some people, is likely to hurt others — at least of ethical behavior on the part of the leadership. temporarily. Conflict-of-interest, the use of inside information The changes in the next ten or twenty years by corporate officers and directors, special priv­ are likely to be just as important — quite likely ileges available to public office-holders, are being more so — than those of the past 50 years. There dealt with by public opinion with increasing is no reason to doubt that the demands for CPAs’ severity. The same is true of the professions. services will again be multiplied—if CPAs can In medicine, in law, in the judiciary and, I believe, foresee what services will be needed and equip in the accounting profession, lapses from high themselves to provide them. standards of conduct are treated with less toler­ However, in the process there will be stresses ance than would have been the case twenty years and strains — tensions between large firms and ago. Questions about independence, and about small firms, conflicts between traditionalists and compliance with auditing standards and account­ innovators, disagreements among specialists, ing principles are more numerous and more em­ strong differences of opinion about policies and phatic than in the past. There is, unfortunately, standards in the light of new conditions. a good deal of skepticism among bankers, finan­ To avoid chaos there must be, first of all, good cial analysts, and others as to whether the per­ will and good faith. But there must also be organ­ formance of certified public accountants meas­ ized procedures for research and investigation, ures up to their professed standards. identification and articulation of essential issues, discussion and debate, decision and action, com­ Unjustified skepticism munication and explanation. I, personally, have no doubt that this skepti­ Only the Institute can provide the means to cism is unjustified. But it feeds on every alleged these ends for the profession as a whole. failure on the part of a CPA which receives But the Institute itself is not immune to publicity. In some way we must be able to com­ change. No matter how good its performance up municate information to the public about the to now may have been, it must also adjust and cases — and they vastly outnumber the incidents adapt if it is to meet the needs of the profession which may cast a shadow on the profession’s this year, next year, and in the years ahead. reputation —where CPAs do courageously stand The Institute has not ignored the signs of by their principles, win arguments with their change. It has had a long-range objectives clients, and reject opportunities to enrich them­ committee; it has a planning committee and a selves which might impair their independence. structure committee. It has consultants on eco­ The nation has also set itself social goals which nomics, computers, public relations, and manage­ would not have been dreamed of as attainable ment. It has under study the staff organization, twenty or thirty years ago — the abolition of pov­ committee-staff relationships, and membership erty, the abolition of illiteracy, the abolition of participation. A vast amount of information and disease. These social programs involve money opinion has been gathered. It is in a good position grants, loans and insurance. to adjust to change — but it may have to do some In both its economic and social programs, the leap-frogging to keep up with it! government finds increasing need for vast quan­ What are some of these changes? What should tities of financial and cost information, as well as the Institute do about them? audit controls. Medicare is an interesting and Social trends and value judgments have an recent example. Government may well become, impact on professional accounting which is not in a sense, one of the principal clients of the ac­ always apparent on the surface. While in many counting profession. 9

But it seems to me that the profession as a auditing in any manner. The Institute has a good whole, speaking through the Institute, has a reputation in Washington. Its objectivity is responsibility to the public to discourage unne­ widely accepted. Its advice is respected. cessary paperwork and unnecessary duplication A great deal has already been said and written of audit effort and expense. To this end, the ex­ about the impact of automation on all our lives, perience of individual members and firms en­ but particularly upon the practice of accounting. gaged in activities related to federal programs It is almost a certainty that the computer will should be reported to the Institute. Then, replace all manual accounting and write-up work, through the appropriate committees and staff, including the preparation of financial statements recommendations can be conveyed to the de­ and tax returns. It is also held out as a possibility cision-makers in Washington. that computers may be trained to audit them­ The Institute is now in a good position to do selves, in effect. They are already being used to this. It has direct personal access to the Comp­ produce forecasts, and the probable results of troller General of the United States, the Bureau alternative courses of action, which afford a basis of the Budget, and most of the administrative for management decisions. agencies. It has just appointed a new high-level It seems clear that the profession — and the In­ committee to consult with the Secretary of stitute — are entering a new period of unpar­ Health, Education and Welfare. Its Washington alled opportunity. If they act with vigor, with office and the committee on relations with the wisdom and with self assurance they can do big­ Federal Government, with all its consulting com­ ger and better things, and enjoy greater rewards mittees and individual consultants, have devel­ and satisfaction. oped lines of communication with almost every This should be an exhilarating prospect for all agency which is involved with accounting and those who may have a part in it.

A guide to Fall/Winter professional development courses ADP? EDP? Management services? Taxes? IMPROVING THE ADMINISTRATION OF Whatever your interest, wherever you may be YOUR PRACTICE located, there is probably a professional develop­ Portland, Ore., Oct. 20-21 ment course scheduled during the next few New York, Oct. 27-28 months that fits both your needs and time table. Denver, Colo., Nov. 3-4 Check the list below and then contact your state St. Louis, Nov. 17-18 society’s PD office for more details. AN INTRODUCTION TO ADP MANAGEMENT SERVICES LECTURE SERIES— Newark, N. J., Oct. 13-14 Cost Analysis Techniques East Lansing, Mich., Oct. 17-18 Memphis, Tenn., Oct. 13-14 New York, Dec. 1 -2 Detroit, Oct. 27-28 Dallas, Dec. 8-9 Las Vegas, Nev., Nov. 17-18 Scottsdale, Ariz., Dec. 12-13 Baltimore, Dec. 8-9 AUDITING OF EDP INSTALLATIONS 1966 THIRD ANNUAL TAX LECTURE SERIES Tulsa, Okla., Oct. 20-21 Lake Tahoe, Nev., Oct. 17-18 Cleveland, Oct. 31 -Nov. 1 Chicago, Nov. 17-18 Birmingham, Ala., Nov. 3-4 Newark, N. J., Dec. 8-9 Newark, N. J., Nov. 10-11 Atlanta, Ga., Dec. 12-13 San Francisco, Nov. 28-29 Los Angeles, Dec. 1 -2 PROCEDURAL PROBLEMS IN TAX Houston, Dec. 5-6 PRACTICE Seattle, Wash., Dec. 15-16 Richmond, Va., Oct. 20-21 New York, Nov. 17-18 DEVELOPING A MANAGEMENT SERVICES Milwaukee, Wis., Dec. 8-9 PRACTICE Cleveland, Dec. 12-13 Las Vegas, Nev., Nov. 14-15 10

TRAINING PROGRAM FOR IN-CHARGE ACCOUNTANTS Columbus, Ohio, Oct. 10-14 “The scroll, so nicety worded and beautifully framed, from the American institute to the Cranston, R. I., Oct. 24-28 American Accounting Association at the time of Greensboro, N. C., Nov. 14-18 the letter's 50th anniversary was such a won­ Des Moines, Iowa, Nov. 14-18 derful surprise for the Association's officers and Seattle, Wash., Nov. 14-18 members. Speaking strictly as a member of the Baton Rouge, La., Nov. 28-Dec. 2 Association, the Institute could not have done anything for this occasion that could have given me greater pleasure and satisfaction. EFFECTIVE COMMUNICATION Scottsdale, Ariz., Oct. 13-14 "Our organizations have much in common, Boston, Oct. 27-28 and much to gain from co-operation— from being each other's booster. It has always been Chicago, Nov. 3-4 easy, even natural, for me to identify with the Hollywood, Fla., Nov. 10-11 Institute and its members, and I have bene­ Charlotte, N. C., Dec. 1 -2 fited from my membership in the Institute in an important way— I believe I am a more effective WORKSHOP ON INDIVIDUAL INCOME TAX college teacher as a result. So tangible evi­ RETURNS dence of the Institute's goodwill toward the Chicago, Nov. 1 -2 Association brings forth a good feeling and an even greater interest in and respect for the In­ Washington, D. C., Nov. 10-11 stitute. And I expect, and hope, that I am not Columbus, Ohio, Nov. 14-15 alone, or with the minority, in this reaction to Cleveland, Nov. 17-18 the Institute's recent gesture." Philadelphia, Dec. 8-9 From Professor Herbert E. Miller, Los Angeles, Dec. 12-13 AAA President, 1965-66, San Francisco, Dec. 15-16 to AICPA President Robert M. Trueblood Newark, N. J., Jan. 14 and 21

th e C P A . OCTOBER 1966 Second class postage paid at New York, N. Y. The CPA is the membership bulletin of the Ameri­ can Institute of Certified Public Accountants, Inc. 666 FIFTH AVENUE, NEW YORK, N. Y. 10019 NOVEMBER 1966

Special reports from the annual meeting This issue of The CPA supplements the coverage of the Institute’s 79th annual meeting (Boston, Oct. 2-5) reported in the November Journal of Accountancy. In The Journal you will find comprehensive reports of the business meeting and the technical sessions, the names of the Sells award winners, the CPA Gold Medal winner and profiles of the Institute’s new officers for 1966-67. In accordance with the By-Laws, a report summarizing the pro and con argu­ ments presented at the annual business session on several proposed changes in the By-Laws and Rules of Professional Ethics—including an amendment to repeal Rule 3.03 on competitive bidding— is being prepared to accompany a ballot to be sent to all members.

A report on Medicare: the involvement of the American Institute/page 5 At the October 1 meeting of Council, William Freitag, chairman of the Insti­ tute’s Medicare task force, spoke to Council at length on the new Medicare program: how it is administered, timing problems, involvement of the Institute, and other accounting facets.

The first report to Council of the Institute's new computer consultant/page 12 Gordon Davis, the Institute’s new computer consultant, made a special report to Council at the October 1 session. His report covered such topics as an Insti­ tute in-house computer advisory staff, the progress being made by the AICPA task force on auditing EDP, representation of CPA interests on groups pre­ paring EDP standards, and EDP professional development courses.

Major speeches by Presidents Giffen and Trueblood/pages 3 and 9 Both incoming President Giffen and outgoing President Trueblood stressed the need for co-operation and the urgency of solving some of the major prob­ lems which now confront the profession. Their messages hold importance for every member of the Institute. 2

CPAs Indicted for Fraud By John L Carey Members of the Institute have reacted with have disclosed the ultimate disposition of certain shock and incredulity to published reports that advances shown on Continental’s balance sheets two partners and a member of the staff of Ly­ as made to an affiliate controlled by Continental’s brand, Ross Bros. & Montgomery were indicted chief executive officer (Roth), and second, that on charges of conspiring to defraud. The firm we did not properly evaluate collateral posted to as a whole was named as a coconspirator, but not secure these advances. a defendant. "As to the first allegation, for a number of This is the first case of which the Institute has years we had properly identified and disclosed knowledge in which criminal charges against on Continental’s balance sheets these advances to CPAs have been based on alleged deficiencies in the affiliate and the relationship of Roth to the financial statements audited by them. The impli­ affiliate, and we did so on the 1962 financial cations for the entire profession are most serious. statements. It is clear therefore that we dis­ charged our obligations as independent certified The firm is one of the oldest in the country. public accountants. As to the second allegation, It enjoys an excellent reputation. Two of its we used the then current American Stock Ex­ partners have been presidents of the Institute. change price as a value for the collateral, and It is understood that several outstanding CPAs this was entirely in conformity with generally testified before the grand jury in support of the accepted auditing standards. When the market firm’s position. price fell and it was apparent that the advances Here is the text of a statement issued to the were no longer secured, we withdrew our cer­ press by Mr. W alter R. Staub, Managing Partner tificate. of Lybrand, Ross Bros. & Montgomery, in con­ "As to the charge of conspiracy, our relations nection with the federal indictment handed with Continental were entirely professional. Any­ down in New York on October 17: one who knows our firm and its reputation for independence will recognize that this charge is "The indictment of Mr. Simon, Mr. Kaiser preposterous. and Mr. Fishman is shocking and unwarranted, "With a 69-year history of highly professional as is the naming of Lybrand and Mr. McDevitt service to thousands of our clients, Lybrand is as coconspirators not indicted. It is particularly entitled, we believe, to be dismayed and outraged so since the government has advised us that the at this baseless attack. testimony of representatives of leading account­ ing firms called by the government before the "The Lybrand organization takes great pride grand jury unanimously upheld the position in the quality of services performed over so many taken by Lybrand. This indictment is an ironic years for our clients. W e have complete confi­ sequel to a chain of events which started when dence, therefore, that a full disclosure of our Lybrand withheld this firm’s certification from action in the instant case will not only find us Continental’s 1962 annual SEC report (10-K) innocent of these charges but will serve to build and thus precipitated action by the Securities a greater public respect for and confidence in the and Exchange Commission and the courts. principles of our public accounting system. "Essentially, we are accused of having failed "Lybrand and its counsel are convinced of the to second-guess Continental’s management and innocence of these men and will vigorously sup­ directors in the conduct of its business affairs. port their defense.” This has never been the auditor’s function. There appear to be two major allegations against Ly­ brand in the indictment: First, that we should

The CPA, November 1966. Published monthly, except July- Editor: Richard C. Brown August when bimonthly, for membership of the AICPA, Inc. Vol. 46, No. 10. Publication and editorial office: 666 Fifth Ave., New York, N. Y. 10019. Second-class postage paid at Production Assistant: Carolyn Evans New York, N. Y. 3

from the President HILLIARD R. GIFFEN

A Collective Effort I accept the office of president of the Institute sity in the nature of professional accounting with a deep sense of obligation — and with some practice and, therefore, in the immediate interests anxiety. It would be a bold man who accepted of different groups of members. this office with complete confidence, knowing In a changing environment of this kind, with that he followed a line of such presidents as all the goodwill in the world, there is bound to Robert Trueblood, Thomas Flynn, Clifford be a kind of competition — competition of both Heimbucher and their many distinguished prede­ scope and quality of service. Clients who do not cessors. feel they are getting all they need from the But I am comforted and encouraged by the CPAs they presently retain may change to CPA knowledge that there is a vast reservoir of talent firms which they believe can give them more. in the ranks of the Institute on which I can call The smaller firms, whose clients grow large and for help. decide to go public, often lose old and valued I do not encourage you to think that during the clients to larger firms who are considered more coming year there will be any dramatic achieve­ familiar with the intricacies of the Securities and ments. I shall be satisfied if a year from now I Exchange Commission and the underwriting can say that the entire organization has continued processes. This sort of thing is bound to produce that steady progress on all fronts which has been tensions within the membership; it is bound to characteristic of the Institute for the past fifty create suspicion and questioning of the other years. In that short half century, it has changed fellows’ motives. from a tiny organization of approximately a These tensions can probably never be elimi­ thousand members, virtually unknown in the nated, but I believe that we should do all we can community, to one of the largest, strongest, most to minimize them. The accounting profession is vigorous and most influential organizations of its not even yet so large or so strong that it can face kind in the world. the challenges ahead with complacency. If divi­ As the profession grows larger, however, it sive tendencies within the membership should becomes more difficult to preserve our spirit of grow to a point that impaired the united effort unity, our sense of having a common cause, our to advance the profession as a whole, the odds fraternal feeling of mutual trust and confidence. against our continued progress would multiply. The older professions of medicine and law have had the same difficulties. A few essential principles For one thing, internal communications grow Therefore, I believe it is in the best interests more difficult as Institute membership increases. of each of us, whether we be partners of very The Institute now has more than 56,000 mem­ large, very small, or medium-sized firms, to keep bers. It must rely largely on the printed word to constantly in mind a few essential principles. We communicate with these members, and there is a claim to be professional men. It is characteristic good deal of attrition in this process. of professional men that they are motivated more Then again, as the social and economic en­ by the desire to serve the public than merely to vironment changes, there is an increasing diver­ make money. I do not think it is naive to say that 4

I believe this is really true of most certified public APB already issued in 1966 and the three opin­ accountants. We all want to make enough money ions that are presently being exposed, and that to live comfortably, and so do the doctors and the will probably be issued within the calendar year. lawyers. I think, however, most of us derive the There is a transition going on in accounting greatest satisfaction from the feeling that we are education, and we must take an active part in it. helping our clients, that we are skilled practi­ The study of the Common Body of Knowledge tioners of our art, that we do a good job, and of CPAs, about to be published, gives us a good that we are recognized as useful members of our start. communities. As a matter of fact, I firmly believe We face serious problems in recruiting enough that with this kind of motivation we can scarely young men and women of high quality to meet avoid making enough money to assure a com­ the increasing demands of our clients. We have fortable life. just completed a new film which should help in this effort. Our disciplinary machinery, through which the We are professional people . . . Code of Ethics is given real meaning in the eyes Let’s think, talk and act like the true profes­ of the public, is not fully effective. Our ethics sional people we are. If we don’t, we may find committee and trial board are working overtime, that the public does not accept us as professional but more needs to be done at the local level. people, and this may have rather grave conse­ We cannot yet clearly perceive the full impact quences for all of us. of the computer on all of our practices. Last year Last year the Institute appointed a committee we retained the System Development Corpora­ on structure and retained a management consul­ tion to make six studies on this subject, five of tant, Robert Greenleaf, to review its internal which have been published. We also retained organization and decision-making process. In Professor Gordon Davis who has several other speaking to the Council, Mr. Greenleaf said that projects under way [see story, page 12]. But in the course of his engagement, he had discov­ much more research is needed in this field. ered, rather to his surprise, that the accounting We need to step up our public relations efforts. profession, as identified by the Institute, was a With the help of Mr. Stuart Schackne, who has private organization rendering a public service. agreed to give us practically full-time help for a What he meant, I think, is that the work of year, we hope to make progress in this direction. CPAs individually and collectively has a pro­ found impact on the public — on investors, credit grantors, government agencies, or the collection Problem solving of the revenues, for example. The kinds of problems I have mentioned can­ Mr. Greenleaf went on to say that when a pri­ not be solved by any one firm, however large, nor vate organization renders a public service its by any group of firms. They can be solved only by performance must be not merely good, not merely the entire profession through democratic proc­ excellent, but distinguished. Otherwise it might esses. The Institute, the state societies and the cease to be a private organization, or the public state boards are the only instruments for collec­ service it renders might be turned over to a public tive action available to the practicing CPAs. They organization. all will need greater resources, both in terms of manpower and money, to get the work done that needs to be done. .. . and have much to do But all the resources imaginable will not be If we accept this proposition, we have much enough unless the entire profession remains work to do — a great deal of collective work, united in active support of the effort to reach our through the Institute and our state societies. goals. We have not yet convinced the public that we I think we all realize that our economy will can lead effectively in the narrowing of areas of continue to require individual practitioners, local difference in financial reporting — although I firms, area firms and national firms. The Institute believe we are on the verge of a breakthrough on must represent all of these units of practice in our this front. Witness the two strong opinions of the internal as well as our external affairs. If our 5

representation of these units is broad, fair, and (2) Our performance must be not merely intelligent we will have general membership sup­ good, not merely excellent, but distin­ port for activities of the Institute, even though guished some of these may not appeal to particular firms ( 3 ) None of us can go it alone or individuals, because it will be understood that (4) United we move forward, divided we fall we must represent all segments of the profession. backward This should be true of those of us who practice (5) Our unity will be endangered by a busi­ in smaller communities on a local or area level, ness-oriented approach on the part of our and it should be true of the national firms who members are presently in the flood-light of corporate finan­ cial reporting. (6) In our own self-interest We must support W e’ve been very fortunate. We can be proud our professional organizations — actively of our record to date. But we may well be at a and generously. critical stage in the development of our profes­ Traditionally, I suppose, this has been known sion. We can’t afford to rest on our laurels. as an acceptance speech. On behalf of all the in­ Let us not risk losing what we’ve already coming officers we would like to turn this around gained by losing sight of these fundamentals: and say thank you very much for accepting and (1) Our job is public service honoring us.

AICPA Medicare task force chairman explains program's problems; involvement of American Institute William Freitag, chairman of the Institute’s first year’s costs of Title XV III was something Medicare task force, delivered a special report in excess of $2 billion. This is, more than likely, to Council on October 1. This is what he said. a very conservative figure in view of the fact that since World War II, almost without excep­ tion, hospital costs in the United States have Background risen at a compound rate of approximately 7 per In the summer of 1965, Congress passed Pub­ cent a year. An article in the September 6 New lic Law 89-97, commonly known as Medicare. York Times indicated that costs in the New York This law is administered by the Bureau of Health metropolitan area are expected to increase 10 Insurance of the Social Security Administration to 15 per cent in the next year, and that nation­ of the Department of Health, Education and ally increases are being predicted as high as 30 Welfare. It contains two titles, Title X V III and per cent. Title X IX . Obviously, this is an extremely costly program Title XV III relates to medical care of persons —and it will be subject to public scrutiny. It is 65 years of age and over, and provides for their of further interest to note in regard to cost that hospitalization, extended care, and in some cases in a hearing before the Senate Finance Commit­ professional medical care. The coverage as to tee, on May 25, 1966, it was agreed between a hospitals and professional care became effective Senator and a representative of the Social Se­ July 1, 1966, and as to extended care facilities curity Administration that the annual cost of will become effective January 1, 1967. Title X IX , which had originally been estimated Title X IX applies to the hospitalization and at $238 million a year for the federal govern­ medical care of the medically indigent. In effect, ment’s share, could exceed a billion dollars a it is a means by which the states reinsure with year. the federal government the costs of care of these people. It is extremely difficult to estimate the costs of Method of administration these two programs. However, I have estimated The Bureau of Health Insurance is responsi­ that the federal government’s projection of the ble for establishing regulations and principles 6 of reimbursement under Medicare, and for pay­ government. The ethics committee of the Insti­ ing providers "reasonable cost.” "Reasonable tute, at its June 1966 meeting, indicated that a cost” was the terminology used in the original 1944 Council resolution applied to this situation. Act, and to the present time it has not been That resolution stated that an independent CPA clearly defined. may properly undertake auditing engagements To reimburse the providers, the government on behalf of government agencies or other third has established contracts with fiscal intermedi­ parties involving the accounts of a regular audit aries, generally Blue Cross or commercial insur­ client. ance companies. The intermediaries have the Shortly thereafter, Robert M. Trueblood ap­ responsibility for locally administering the pointed the Medicare task force. This task force, Medicare regulations with regard to providers, together with Karney Brasfield, chairman of the paying the providers, and annually auditing or AICPA committee on relations with the govern­ having audited the reimbursement costs of each ment, and Richard A. Nest, division director, provider under their jurisdiction. technical services, AICPA, met with representa­ tives of the Social Security Administration at their offices in Baltimore. This group reviewed a Timing and accounting problems draft audit program for Medicare which had The Medicare law was passed in the summer been prepared by their staff, and recommended of 1965, and its first provision became effective changes. At that meeting the Institute was asked July 1, 1966. The first official draft of the basis by the Social Security Administration to recom­ upon which "reasonable cost” was to be paid to mend wording of the accountants’ report to be providers was issued on May 2 , 1966, a year after used in Medicare audits. the law was passed. The draft has been subse­ quently revised. AICPA recommendations The principles of reimbursement will un­ To carry out this request the task force met doubtedly require extensive changes in the his­ with a subcommittee of the committee on audit­ torical methods of accounting used by hospitals. ing procedure. This group took two actions. Cost centers will be necessary. Accumulation of First, it recommended to President Trueblood accurate, audited, statistical information is re­ that he write to Arthur E. Hess, Director, Bureau quired. A sophisticated stepdown basis of cost of Health Insurance, Department of Health, Ed­ determination is required. Depreciation based ucation and Welfare, to indicate to him that, upon historical cost will be an allowable ex­ contrary to the recommendations in Fiscal Inter­ pense. In view of the fact that most hospitals mediary Letter # 38, he wished to recommend have not recorded fixed assets at cost and have on behalf of the Institute that the providers’ not provided depreciation, a substantial change own independent accountant be the preferred is necessary in this area. auditor for purposes of Medicare reimbursement The basis of reimbursement has been estab­ audits [The CPA, Oct. 66, p. 2]. The basic rea­ lished to be what is commonly known as RCC sons cited were that this would prevent duplica­ (relationship of charges to cost), which is an tion of auditing and thereby minimize costs. entirely new concept of hospital reimbursement. Although President Trueblood’s letter was ac­ It affects the hospital’s method of charging pa­ knowledged, no official action with regard to tients and the basis and detail of recording such these recommendations has as yet been taken. charges. In this action I feel that the Medicare task force has performed a service to the profession, since this governmental agency has been advised that Involvement of the American Institute the course of action they had intended to take In the spring of 1966 a question was raised would add substantially to the costs of the with the American Institute by representatives program. of the Social Security Administration as to In view of the tremendous costs involved in whether a CPA who is the auditor for a hospital the total program, it seems not only possible but could independently report on reimbursable cost probable that there will be investigations, Con­ to the fiscal intermediary acting on behalf of the gressional or otherwise, at some point in the 7 carrying out of the Medicare program. When performance of intermediary audits and that se­ this occurs, I believe that the auditing costs will lection of the auditors is subject to the approval come under scrutiny. of SSA. This letter also requires that the bidders The second action taken by the task force and submit their rates by staff classification and that, the subcommittee of the committee on auditing in most cases, more than one bid be obtained. procedure was to prepare and transmit to Mr. Harris Berman, Deputy Director, Health Insur­ [E d. N o t e . The SSA was contacted on the ance Reimbursement, suggested forms of ac­ matter on September 12. On September 27 the countants’ reports. Forms were submitted for the Institute was advised that: varying circumstances which will be encoun­ 1. Where competitive bidding was in conflict tered: where the auditor for the intermediary is with requirements of state law, intermediaries the auditor for the provider; where the auditor would not be required to insist on competitive for the intermediary is other than the auditor for bids from audit firms. the provider; where there has been no previous 2. Price is a factor to be considered and when audit of the provider; and where it could be all other considerations are equal, price should foreseen that exceptions or disclaimers might be control. called for, suggested wording for such situations. The SSA agreed, however, that the audit qual­ Subsequently, a revised draft of the audit pro­ ity could be impaired by encouraging the reten­ gram was issued by SSA to the fiscal intermedi­ tion of the lowest bidder without adequate con­ aries which contained the first three forms of sideration of all pertinent factors.] accountants’ reports referred to above, but omit­ ted any reference to exceptions or disclaimers. [The task force met on October 7 to review the In view of the tremendous size and ultimate audit program draft and a meeting with the impact of the Medicare program, an independ­ Medicare representative has been scheduled for ent accountant who holds himself out to perform November 2, after this issue of The CPA goes to work under the Medicare program has the re­ press.] sponsibility to be fully knowledgeable regarding the law upon which the program is based, the published principles of reimbursement, and any and all regulations pertaining to the administra­ Other problems tion of this law which are necessary for him to Within the framework of the regulations as properly carry out an audit of reimbursable costs they presently exist, it is conceivable that Medi­ under the program. He should be especially wary care audits may have already begun. I am sure of making judgments as to interpretation of the problems will arise in such cases because the law, principles, or regulations, since such judg­ final audit guide has not yet been issued. ments might substantially affect the amounts Since the inception of the Medicare program of money paid by the federal government. It a series of letters called Fiscal Intermediary Let­ goes without saying that substandard work ters have been issued by Mr. Hess to the fiscal under these circumstances could be extremely intermediaries. Some of these letters pertain to dangerous. reimbursement problems. Several firms of CPAs There are criminal statutes which protect the have requested copies of these letters from SSA federal government against conspiracy to de­ and have been told that they contain privileged fraud the government, including approval of information which is available only to those who overpayments. "need to know.” SSA has defined those who The problems as to independence, the content need to know as those who are serving the fiscal and availablity of the audit program, the avail­ intermediary, and have indicated that those who ability of Fiscal Intermediary Letters, the final are serving providers have no right to this in­ format of the report forms, and, on a local basis, formation. This position creates problems for the problem of competitive bidding, all remain practitioners serving hospitals. as problems and will require substantial appli­ Recently, Fiscal Intermediary Letter # 1 0 0 cation of time and effort on the part of the Insti­ was issued by Mr. Hess which in effect provides tute and its members to find solutions which are that the intermediary must obtain bids for the proper in the circumstances. 8

Annual meeting receives wide coverage Press coverage of the Boston annual meeting was the most complete ever (see left). In part, it was due to the major addresses by Securities and Exchange Commissioner Manuel F. Cohen and Litton Industries President Roy L. Ash. For the most part, however, it reflects the growing public interest in what the profession is— and what it is doing. The Institute’s public relations staff worked closely with Boston magazine which carried in its October issue a feature on certified public ac­ countants titled "A Profession Reaches the Top.” It concluded with the statement that "the accounting profession is assuming an increas­ ingly important position at the center of the en­ tire business information system and, in a grow­ ing number of instances, at the corporate top.” And radio station KABL, which broadcasts to the San Francisco-Oakland area, announced that it had named Louis H. Penney, this year’s re­ cipient of the CPA Gold Medal for Distin­ guished Service to the profession, "Citizen of the Week.” The New York Times reported SEC Commis­ sioner Cohen as calling for a "healthy skepti­ cism” by accountants when reviewing corporate financial statements. The story went on to quote Mr. Cohen as saying, "Independent accountants lend authority to management’s representations by their opinions as experts, and they operate as a check on managements in assuring that finan­ cial data are fairly presented in accordance with generally accepted accounting principles.” United Press International reported Earl F. Brown, general chairman of the meeting, as say­ ing that increased complexity of business oper­ ations makes it imperative for CPAs to keep abreast of the latest techniques for providing valid, thorough and timely information to in­ vestors, credit grantors, the government and other clients. Both major wire services carried stories on the technical session about the profession’s environ­ ment, featuring Professor Ezra Solomon’s report to the members of his views on the economic outlook. And, for the first time in AICPA annual meet­ ing history, the governor of the state in which the meeting was held declared a "certified public ac­ countants week.” 9

from the past President ROBERT M. TRUEBLOOD

Rededication to Professionalism Perhaps no one who has not been president of ship involvement in the work of the Institute. the American Institute can conceive of the scope Moreover, there are some functions to be per­ and complexity of its operations — nor visualize formed — for example, the establishment of the enormous volume of its production in terms technical standards — which cannot properly be of printed materials, personal communications, discharged by the staff. And no one knows this meetings, and courses. The AICPA has become better than the staff itself. one of the largest organizations of its kind in As these observations suggest, the real task the world — and it is still growing. Our Institute before us is to develop an organizational pattern has a distinguished record of achievement, of which assigns clear-cut responsibility for the for­ which we can be proud. mulation of policies to the appropriate represent­ Yet I must say that I believe the accounting atives of the membership — and which also estab­ profession and thus the Institute are only on the lishes clear-cut responsibility for the execution of threshold of greater opportunities. Candor, how­ those policies by the full-time staff. ever, requires me to make another observation: It is by no means certain that we can cross the threshold of our opportunity unless we can re­ The rote of the executive committee solve, in a timely manner, a growing array of The primary instrument for policy control is problems. and should be the executive committee. If the I might appropriately begin by speaking of the proposed By-Laws amendments discussed at the Institute itself. We are now engaged in an inten­ annual meeting are adopted, the executive com­ sive study in order to develop a structural design mittee will be slightly enlarged and it will be which will enable the Institute to cope with an strengthened by added continuity of service. The increasing volume and diversity of work. W e are executive committee should, in my view, have a hoping also to prepare the Institute to participate fairly broad grant of authority and should act, in in the larger responsibilities of the profession effect, as a board of directors for the Institute — which relate to the socio-economic environment with its decisions always subject to review or veto of our country. by the Council. Membership on the executive Those of us who have been involved in this committee may well be an honor, but it is also an review are convinced that increased reliance must obligation and a trust — involving man-months be put upon the full-time staff. It is simply im­ of effort each year. In spite of these rigorous de- possible — under the circumstances of the pres­ ent — for volunteer officers and committees to keep in touch with every aspect of the day-to-day In preparing for this, his valedictory ad­ operations of the Institute. This does not mean, dress to the membership of the Institute, Presi­ however, that the members should turn their dent Trueblood conferred in length with the organization over to the staff. It may well be that, Institute’s executive director, John L. Carey, in certain programs, more might be accomplished and its managing director, John Lawler. The faster by greater dependence on the staff. But speech— a realistic commentary on the status even in such cases, it is imperative to evaluate of the profession today— represents a con­ the gain in efficiency against the loss of member­ sensus of their views. 10 mands, however, I am confident that there are quences that it is being given careful further many in our number who are qualified to assume study by the executive committee. these responsibilities and who are willing to The organizational revisions under considera­ devote the necessary time. tion may tend toward some reduction in member­ ship participation in the work of the Institute. Yet we know there is, even now, an unsatisfied Decision-making processes desire on the part of many members to participate Some years ago Mr. Carey spoke to Council in the Institute’s work. It may, therefore, be regarding his concern about the Institute’s timely to re-examine the proposal to create "sec­ "creaking” decision-making processes. And in a tions” within the Institute. Or if that idea is still recent membership survey, a major criticism of an unpleasant one, other devices might be con­ the Institute was "slowness in developing policy sidered: the enlargement of certain committees, decisions.” I think this a fair judgment, and a the organization of conferences on special sub­ serious one. Nearly all of our technical pro­ jects, the development of an even closer affilia­ nouncements are worked out by volunteer com­ tion with state societies (perhaps going as far as mittees, assisted by competent technical staff. But a requirement for common membership). In any it sometimes takes years to turn out a technical case, it seems imperative to find some means— guide, or an auditing bulletin. without impairing the effectiveness of the Insti­ Consider, for example, the present work of the tute in performing its daily tasks — to provide Accounting Principles Board. During the past opportunities for wider participation of the indi­ year its members have spent weeks in meetings, vidual member in Institute affairs. weeks in reading, and weeks in creative effort. In addition, certain firms are supplying to the Board many man-months of staff assistance. A need to act Chairman Heimbucher’s participation, contribu­ Now let me turn to a few of the areas in which tion and success are unbelievably great — espe­ things need to be done, and done quickly. cially considered in relation to his many years of The research activities of the Institute in the great effort for the Institute, including a year as field of accounting principles have been greatly president. These burdens cannot continue indefi­ expanded in recent years. As I have said on other nitely, else we will not find members willing to occasions, I think we are on the verge of a break­ serve. And yet we must be able to continue to through in this area, and the momentum which infuse this work with the peculiar knowledge has already developed ought to result in acceler­ and insights of the sophisticated practitioner. ated progress in the years ahead. This optimism, What is required is a judicious admixture of vol­ however, is no justification for any slackening of unteer talent and highly qualified technical assist­ effort. We have accepted the responsibility for ance. If the production of groups such as the leadership in the improvement of corporate re­ Accounting Principles Board is to continue at its porting for investors. And a great deal more present pace (and I believe it should accelerate), needs to be done before that mission has been we are going to have to enlarge further the tech­ completed— if, indeed, it will ever be completed. nical staff supplied by the Institute to the Board Moreover, we need additional research in and similar volunteer groups. auditing, in taxes, and in management services Perhaps the most immediate need is for a better understanding of the developments in manage­ A full-time paid president ment information systems for both large and The structure committee has also recom­ small businesses. Other groups are doing a con­ mended a change in the volunteer officer arrange­ siderable amount of work in this field. We must ment — suggesting employment of a full-time at least match — and hopefully surpass — their paid president, with annual election of a volun­ efforts. teer chairman of the board who would preside The demand for some type of recognition for over meetings of the executive committee, Coun­ superior competence in special fields of account­ cil and members. This proposal has been re­ ing continues to mount. Nothing has been done garded as so far-reaching in its possible conse­ about this so far — except to talk about it. But 11

it seems to me that some arrangement ought to benefits the profession as a whole, benefits each be devised to enable people who have compe­ of us. tence in specialized areas of our expanding pro­ We must be prepared — while remaining fession to obtain some symbolic evidence of that faithful to the traditions of our profession — to accomplishment. Something, surely, is lacking if be bold in experimentation, receptive to new the CPA certificate remains the highest accolade ideas, impatient with dogma which impedes our that an energetic young accountant can achieve. ability to adjust to the realities of our time. Most everyone seems to be deeply worried We must be prepared, at the cost of personal about the independence of CPAs — except per­ sacrifice, to contribute generously of our skills haps CPAs themselves. There has been a rash of to the achievement of the goals of our democratic articles and speeches discussing the extent to society, for only through involvement in the vital which management services and tax practice may concerns of our fellow man, can we hope to real­ impair an auditor’s independence, or at least the ize the full potential of the art of accounting. appearance of his independence. Much of this We must also be prepared to invest additional discussion, in my view, has been superficial. funds in the Institute. Top-flight talent, as we all Some of it has seemed to be more a game with know in our own firms, is at a premium. If we words, than an exercise in logic. Yet the skeptics accept the premise that a superior staff is essential need be answered; arid the answers must be per­ to the accomplishment of our goal of distinction, suasive to the public — not merely to ourselves. then the financial resources available to the Insti­ tute must be considerably increased. And if we commit ourselves to additional research (as we A rededication to professionalism must), the financial burden will be further in­ This recital of concerns could be continued, creased. but perhaps what I have said is enough to indi­ This brief review of the problems which we cate that all of us have a lot to do if the promise face is, I suppose, likely to produce one of two of this profession is to be fulfilled. reactions. Some may be dismayed by the multi­ Each of the problems calls for a specific solu­ tude and complexity of our concerns. Others may tion. Yet all of the problems, in a sense, require a regard this inventory of concerns as cheering evi­ rededication to the basic ideals of profession­ dence of the vitality and growing significance of alism. our profession. If enough of us recognize our We must be prepared to assert ourselves to­ concerns as a challenge — and if enough of us gether as a social force in our economy. set out jointly to resolve them—then we can all We must be prepared to pool our knowledge look forward to the future with confidence and and experience through the Institute, for what with faith.

Statements on Responsibilities in Tax Practice No. 4 The Institute’s tax committee has approved is bound as to treatment in the later year, the for publication Statements on Responsibilities in disposition of an item as part of concluding an Tax Practice No. 4. The statement considers administrative proceeding by the execution of a whether a CPA may sign the preparer’s declara­ waiver for a prior year does not govern the tax­ tion on a federal tax return in which the treat­ payer in selecting the treatment of a similar item ment of an item differs from that consented to by in a later year’s return. the taxpayer for a similar item as a result of an Therefore, the statement concludes, if justified administrative proceeding concerning a prior by the facts and rules then applicable, a CPA year’s return. may sign the preparer’s declaration on a return The selection of the treatment of an item, the containing a departure, and such departure need statement points out, should be based on the not be disclosed. facts and the rules as they are evaluated at the The statement will be mailed to members early time the return is prepared. Unless the taxpayer in November. 12

Institute's computer consultant makes first report to Council The Institute’s computer consultant, Professor A second activity is in representing the inter­ Gordon Davis, made his first report to Council est of CPAs in groups preparing EDP standards. at the annual meeting. Professor Davis is on a The two major centers of standards effort are the year’s leave of absence from the University of X3 Committee on Computers and Information Minnesota, where he heads the Computer Center. Processing of the United States of America Stand­ This is part of his report: ards Institute (formerly the American Standards Association), and the Bureau of Standards Cen­ The computer’s impact on the world of the ter for Computer Science and Technology. The CPA will be on a par with other major events Bureau of Standards group will be preparing gov­ such as the establishment of the Securities and ernment standards for data processing. Exchange Commission or the passage of the in­ The AICPA is now represented on the USA come tax laws. It is therefore imperative that the Standards Institute X3 Committee and is in con­ Institute have an in-house computer advisory tact with the work of the Bureau of Standards staff. Center. One of our most important activities during the coming year will be the definition of staff responsibilities and hiring of a permanent com­ puter advisory staff, which will probably consist Computer education for CPAs initially of two professional staff members. Another major project is computer education During the coming year we hope to make a for CPAs. The professional development division significant impact with several projects which are of the AICPA has been handicapped by the lack already under way. of computer advisory services in the AICPA staff. As part of the computer consulting work during the coming year new courses for professional EDP for record keeping development in computers are being developed. These will use new teaching methods and will The first of these is the study of the problems emphasize the "hands-on” approach to learning of auditing of companies which use electronic about computers. The intention is to make basic data processing for record keeping. A task force computer instruction easily available to every was appointed in March 1966 for this purpose. CPA in the nation. It consists of eight members who are knowledge­ Various proposals have been made regarding able, in both electronic data processing and audit­ the computer activities to be pursued by the ing EDP. The task force is preparing a compre­ AICPA. One of my current activities as computer hensive report, the purposes of which are: consultant is to investigate these proposals for feasibility and cost benefit and to make recom­ 1. To guide CPAs in auditing organizations mendations to the appropriate officers and com­ which use computers for record keeping mittees of the Institute. Some proposals currently 2. To provide source materials for AICPA being investigated are (1) a proposal for AICPA- members who do not audit EDP but who sponsored tax preparation software, (2) a com­ wish to be informed puterized information service for CPAs similar to computerized law research service, and (3) a 3. To provide a starting point for building a looseleaf computer report service for CPAs. consensus of expert opinion on standards for auditing EDP Joint Studies by SDC and AICPA 4. To suggest the utility and applicability of different methods for auditing where there 1. Computer Survey Results—Voluntary Comments is insufficient present experience to justify 2. Current Basic Sources of ADP Information an expression of preferred practice. 3. Computer Applications to Accounting Opera- 4. Relations Among CPAs, Banks and Service A final draft of the report is expected by the Bureaus end of this year, and publication will follow in 5. Software Trends - Hardware Characteristics the spring of 1967. 13

Practice before the Treasury IRS has issued interim instructions and pro­ able from district offices, need only to be filled cedures regarding recognition of CPAs. out by the CPA on his first appearance before the Under the Right to Practice law (PL 89-332), Service, and will be presumed to remain valid at and pending issuance by the Internal Revenue every administrative level of the Service. Service of amended regulations on Conference The Service also announced that powers of and Practice requirements and a standard nation­ attorney will continue to be required in accord­ wide declaration form, CPAs will be able to ance with present power of attorney regulations. declare that they are qualified to practice before Neither PL 89-332 nor Circular 230 is intended IRS by filling out "locally developed” declara­ to exempt CPAs from the requirements for filing tion forms. The declaration, which will be avail­ powers of attorney.

Tax committee comments on Treasury's newly proposed consolidated tax return regs The Institute’s tax committee on October 21 able and equitable rules are promulgated under submitted to the Treasury Department a thirteen- Section 1552, relating to the allocation of con­ point technical memorandum on the agency’s solidated tax liability for earnings and profits. proposed consolidated tax return regulations. "The proposed regulations adopt the theory The committee’s comments primarily dealt with that the tax benefit from losses of affiliates is section 1.1502-19 (excess losses) and section necessarily appropriated by the parent or other 1.1502-32 (adjustments to the basis of invest­ affiliate owning the shares of the loss affiliate. ments in subsidiaries) of the proposed regula­ As a business matter this is frequently not true, tions. especially where there may be minority interests. On excess losses, the memorandum said: "Reasonable rules should be provided under "The entire thrust of the rules being proposed section 1552 which accommodate appropriate is that there will be a basis adjustment, possibly financial adjustments among affiliates on account resulting in 'negative basis’ if any benefit is de­ of consolidated tax liability, and any basis ad­ rived by a group because of the operations of one justment rules should take into account the finan­ or more of its affiliates. While this rule may be cial tax liability adjustments which actually take sound in some cases it can be unreal in others. place. For example, if the tax benefit of an operating "As an example, if the profit members of a loss contributed to a consolidated return by one group actually pay over to a loss member the affiliate can be awarded to that affiliate through tax benefit of consolidated utilization of its reasonable earnings and profits allocation rules losses, no basis adjustment should be required. which permit proper tax sharing among mem­ The proper treatment of this transaction should bers, we see no reason for imposing either the be a reduction in the earnings and profits of the basis reduction or excess losses rule. paying members and an increase in the earnings "Accordingly, even though we offer some spe­ and profits of the receiving member. cific suggestions concerning the proposed rules in this area, we find it necessary to protest their promulgation before regulations are proposed Majority of originally proposed regs adopted under section 1552. We believe reasonable rules The major portion of the originally proposed under section 1552 would make it unnecessary regulations were adopted by the Treasury on to have such a major departure from longstand­ September 8. Several of the originally proposed ing income determination and basis concepts.” regulations were withdrawn and reproposed on And on basis adjustments, the memorandum that date. The newly proposed regulations cover said: stocks, bonds, and other obligations of members; "The promulgation of rules for basis adjust­ limitations on certain deductions; consolidated ments (and their interplay with the rules on section 922 deduction; basis of property; and excess losses) should be withheld until reason­ earnings and profits.

■ 14

How do accounting research studies sell? As of August 31, 1966 . . .

1961-62 962-63 1963-64 1964-65 1965-66 Total

Basic Postulates of Accounting (issued Oct. 61) 23,315 6,937 7,200 5,524 4,925 47,901

“Cash Flow” and the Funds Statement (issued Dec. 61) 22,369 7,707 9,026 7,575 5,301 51,978

A Tentative Set of Broad Accounting Principles for Business Enterprises (issued May 62) 13,410 8,299 8,366 6,454 5,398 41,927

Reporting of Leases in Financial Statements (issued May 62) 12,805 6,310 6,176 4,686 3,324 33,301

A Critical Study of Accounting for Business Combinations (issued July 63) 4,808 9,664 6,012 4,750 25,234

Reporting the Financial Effects of Price-Level Changes (issued Nov. 63) 11,367 6,860 5,024 23,251

Inventory of GAAP for Business Enterprises (issued March 65) 22,686 22,978 45,664

Accounting for the Cost of Pension Plans (issued May 65) 10,902 6,169 17,071

Interperiod Allocation of Corporate Income Taxes (issued July 66) 6,025 6,025 15

von Minden, B runeau & An t o n s e n CERTIFIED PUBLIC ACCOUNTANTS

150 BROADWAY NEW YORK 10038

To the Members of the American Institute of Certified Public Accountants:

We have examined the statements of assets, liabilities and fund balances at August 31, 1966, of the American Institute of Certified Public Accountants, the American Institute of Certified Public Accountants Foundation, and the American Institute Benevo­ lent Fund, Inc., and the related statements of income and expense and fund transactions for the year then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the accompanying statements of assets, liabilities and fund balances and of income and expense and fund transactions present fairly the financial position of each of the aforementioned organizations at August 31, 1966, and the results of their operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis con­ sistent with that of the preceding year.

SEPTEMBER 26, 1966 16

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS STATEMENTS OF ASSETS, LIABILITIES AND FUND BALANCES AUGUST 31, 1966 AND 1965

GENERAL FUND ASSETS 1966 1965 $ 40,411 $ 783,555 Cash— other ...... 164,579 164,455 Marketable securities, at cost (quoted market 1966— $2,584,022; 1965— $1,796,127) ...... 2,717,788 1,705,669 Receivables (less allowance for doubtful accounts— $4,000— 1966 and 1965)... 259,601 175,100 Inventories, at c o s t...... -...... 84,853 125,461 Due from American Institute of Certified Public Accountants Foundation...... — 51,613 Prepaid expenses ...... -...... 30,702 26,450 Furniture and equipment, at nominal value...... 1 1 Total assets...... $3,297,935 $3,032,304

LIABILITIES AND FUND BALANCES Liabilities: Note payable in $5,000 semi-annual installments...... $ 65,000 $ 75,000 Other payables...... 363,193 208,907 Dues collected in advance------1,015,922 897,842 Unearned subscriptions and advertising ...... 441,451 424,043 Advance annual meeting registration fees...... 58,036 52,259 Due to Elijah Watt Sells Scholarship Fund ...... 338 ______244 Total liabilities ------$1,943,940 $1,658,295

General Fund balance: Appropriated for contingencies ...... $1,000,000 $1,000,000 Income retained for working capital...... 353,995 374,009 Fund balance...... $1,353,995 $1,374,009 $3,297,935 $3,032,304

ENDOWMENT FUND

Assets: Cash— savings accounts ...... $ — $ 78,351 Cash— other ...... 265 4,370 Marketable securities, at cost (quoted market 1966— $574,453; 1965— $572,241) ...... 497,573 345,813 Library books, furniture and equipment, at nominal value...... 1 ______1 Fund balance ...... $ 497,839 $ 428,535

ELIJAH WATT SELLS SCHOLARSHIP FUND

Assets: Marketable securities, at cost (quoted market 1966— $4,502; 1965— $5,802) $ 4,655 $ 4,655 Due from General Fund...... 338 ______244 Fund balance ...... — ...... $ 4,993 $ 4,899 17

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS STATEMENTS OF INCOME AND EXPENSE

YEARS ENDED AUGUST 31, 1966 AND 1965

INCOME

1966 1965

Membership dues ...... $ 1 ,8 2 9 ,9 6 5 $ 1 ,7 2 2 ,6 6 2 Investment and sundry in c o m e ...... 16 4,82 0 1 3 2,86 9 G e n e ra l in co m e ...... $ 1 ,9 9 4 ,7 8 5 $1,855,531

Self-supporting activities:

CPA examinations, Journal of Accountancy (non-members), Management Serv­ ices magazine, Professional Development program, sale of miscellaneous publications: Gross income ...... $2,729,561 $ 2 ,5 5 3 ,5 2 4 Cost of self-supporting activities...... 2,476,371 2,3 0 8 ,0 6 8 Net Income from self-supporting activities...... $ 2 5 3,19 0 $ 2 4 5 ,4 5 6 Total ...... $ 2 ,2 4 7 ,9 7 5 $ 2 ,1 0 0 ,9 8 7

EXPENSE OF ACTIVITIES AND PROJECTS

Direct Service to Members: Journal of Accountancy, CPA, membership directory, technical publications, library, communications with members, annual meeting ...... $ 7 9 2 ,2 2 0 $ 6 0 8 ,2 2 2 Maintenance of professional standards: Accounting research (see special credit), auditing procedure, ethics, personnel recruiting, research in Common Body of Knowledge (see special credit)...... 5 1 9 ,8 7 0 5 1 0 ,2 2 9 Relations with state s o c ie tie s ...... 9 4 ,6 1 6 89,5 63 External relations: Federal government, Federal taxation, aids to education, universities, and other outside groups ...... 344,851 270,151 Internal affairs: Council and committees (including Executive Committee), maintenance of membership ...... 2 7 1 ,1 9 9 1 9 6 ,3 0 7 Service activities not allocated: Accounting and finance, service functions, general management, legal fees.... 4 6 0 ,4 2 2 405,441 Total regular expense ...... $ 2 ,4 8 3 ,1 7 8 $ 2 ,0 7 9 ,9 1 3 Excess of expenses over income, before special credit...... $ 23 5,20 3 $ [21,074] Special credits: Contribution from American Institute of Certified Public Accountants Founda­ tion for accounting research program ...... $ 2 1 5 ,1 8 9 $ 1 3 5,79 2 Contribution from Carnegie Corporation toward costs of research in Common Body o f K n o w le d g e ...... 18,758 $ 21 5 ,1 8 9 $ 1 5 4,55 0 Transferred to income retained for working capital— [deficit]. $ [20,014] $ 17 5 ,6 2 4 18

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS STATEMENT OF CHANGES IN FUND BALANCES YEAR ENDED AUGUST 31, 1966

Elijah Watt Sells General Endowment Scholarship Balance, September 1, 1965...... $1,374,009 $428,535 $ 4,899 Excess of expenses over income...... 20,014 — — Excess of income over expenses...... ------— — 94 Gain on sale of securities...... — 69,304 — Balance, August 31,1966 ...... _____ $1,353,995 $497,839 $ 4,993

AMERICAN INSTITUTE BENEVOLENT FUND, INC. STATEMENTS OF ASSETS AND FUND BALANCE AUGUST 31, 1966 AND 1965

Assets: 1966 1965 Cash— savings accounts ...... $ — $ 10,902 5,960 13,908 Marketable securities, at cost (quoted market 1966— $488,475; 1965— $563,074) ...... 501,278 499,900 Accrued interest receivable______...... 441 422 Fund balance — ...... -...... $ 507,679 $ 525,132

STATEMENTS OF CHANGES IN FUND BALANCE YEARS ENDED AUGUST 31, 1966 AND 1965

Receipts: Bequest of Harold Burton H a rt...... $ — $ 193,100 Other contributions...... 558 5,415 Income from investments ...... 20,674 22,247 Gain [loss] on sale of securities...... 881 [603] Total ...... ______$ 22,143 $ 220,159

Disbursements: Assistance to members...... $ 38,707 $ 16,415 Stationery, printing and other expenses...... 889 686 Legal fe e s ...... — 1,451 ...... $ 39,596 $ 18,552 Net increase [decrease] in Fund...... $ [17,453] $ 201,607 Fund balance, beginning of year ...... 525,132 323,525 Fund balance, end of y e a r...... $ 507,679 $ 525,132

NOTE— The Harold Burton Hart Fund represents 36.6% of the Fund balance at August 31, 1966 and 1965. 19

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS FOUNDATION STATEMENTS OF ASSETS AND FUND BALANCE AUGUST 31, 1966 AND 1965

Assets: 1966 1965 Cash— savings accounts ...... $ — $ 512,917 Cash— other ...... 3,652 17,237 Marketable securities, at cost (quoted market 1966— $623,402; 1965— $251,783) ...... 639,310 239,146 Accrued interest on securities purchased ...... 77 — $ 643,039 $ 769,300 Liabilities: Due to American Institute of Certified Public Accountants General Fund...... $ — $ 51,613 Fund balance: Accounting research program ...... $ 542,414 $ 617,062 Library (including permanent capital of $2,747) ...... 100,625 100,625 Fund balance ...... $ 643,039 $ 717,687 $ 643,039 $ 769,300

STATEMENTS OF CHANGES IN FUND BALANCE YEARS ENDED AUGUST 31, 1966 AND 1965

Income: Income from securities, less custodian fe e s...... $ 26,616 $ 28,127 Gain [loss] on sale of securities...... [947] 22,727 Contributions received: For support of accounting research program ...... 119,233 67,763 Miscellaneous ...... — 5 T o ta l------$ 144,902 $ 118,622

Disbursements: Contributions to American Institute of Certified Public Accountants: For library expense ...... $ 4,000 $ 4,000 For costs of accounting research program ...... 215,189 135,792 Stationery, postage and other expenses ...... 361 377 T o ta l------...... $ 219,550 $ 140,169 Net increase [decrease] in Fund...... $ [74,648] $ [21,547] Fund balance, beginning of year...... 717,687 739,234 Fund balance, end of y e a r ...... $ 643,039 $ 717,687 20

At the annual meeting Council also . . . Charles B. Couchman

... approved a statement entitled "A De­ Charles B. Couchman, president of the American scription of the Professional Practice of Institute from 1930 to 1932, died in St. Petersburg, Certified Public Accountants" (The CPA, Florida, October 4 at the age of 87. June 66,p.6). It will be an official policy His pioneering efforts in a variety of the Institute’s statement of the Institute and will be dis­ activities laid the groundwork for many of its present tributed to all members in leaflet form. The statement will also be included in fu­ programs. It was, for example, during his two terms as ture issues of the pamphlet containing the president that close relations were established with the By-Laws and Code of Professional Ethics. New York Stock Exchange, culminating in the policy The text of the statement will be re­ that the financial statements of corporations listing printed in the December Journal of Ac­ new or additional securities be accompanied by the countancy. certificate of an independent auditor. . . . heard W. Kenneth Simpson report, A memorial resolution passed by the Institute’s ex­ for the Board of Examiners, that honor ecutive committee reads in part: roll states for the May 1966 CPA examina­ "He will also be remembered as a man whose tion— those states with passing percent­ friendly, outgoing personality won him countless ages in each of the four subjects higher friends both within and outside the profession. than the national averages in each of the "Practitioner, teacher and adviser, his professional four subjects— were: Arizona, Colorado, and personal standards inspired the loyalty of his staff, Florida, Illinois, Minnesota, Missouri, Ver­ mont, Wisconsin and Wyoming. the admiration of his colleagues and the confidence of his clients.”

th e C P A NOVEMBER 1966 The CPA is the membership bulletin of the Ameri­ Second class postage paid at New York, N. Y. can Institute of Certified Public Accountants, Inc. 666 FIFTH AVENUE, NEW YORK, N. Y. 10019 DECEMBER 1966

Members will vote next month on proposed changes in By-Laws and Code/page 11 A referendum ballot presenting two proposed amendments to the Institute’s By-Laws and a change in the Code of Ethics will be mailed to all members next month. The By-Law changes would increase the size of the executive committee, and permit automatic suspension of members who have been con­ victed of serious crimes or who have lost their certificates for disciplinary rea­ sons, and permit reinstatement of expelled members after three years. The other proposal is to delete the competitive bidding rule.

APB holds press conference to announce release of Pension Plans opinion On November 28 the Accounting Principles Board for the first time held a press conference to announce the release of an opinion. The opinion, "Account­ ing for the Cost of Pension Plans,” becomes effective with 1967 corporate earn­ ings statements, and is aimed at narrowing the accounting practices applicable to pension costs. According to APB chairman Clifford V. Heimbucher, the opinion "marks a great step forward for the accounting profession.” (See page 4 for an article by the Institute’s public relations counsel on the implica­ tions of "Accountancy in the Public Eye.” )

International accounting aid project gains momentum Plans to assist a developing country in the Western Hemisphere to study its accounting, auditing and reporting standards are making headway (The CPA, Sept. 66, p. 2). Joining the AICPA in pledging $10,000 each to implement the exploratory phase of the project are the Inter-American Development Bank, the Agency for International Development and the International Finance Corporation. A total of $50,000 is needed to carry out the first phase.

An individual study approach to statistical sampling A new type of professional development program—specially designed for individual study—has been inaugurated by the American Institute. First in the series is an introductory course, "An Auditor’s Approach to Statistical Sam­ pling.” Later courses will cover "attribute” and "stratified” sampling. The series features programed learning texts which virtually necessitate that the practitioner absorb each point thoroughly before going on to the next one. Additional details will appear in the January CPA. 2

from the President HILLIARD R. GIFFEN

Enforcing a uniform code of ethics Having served for many years as a member of Another CPA was cited who gave a clean opin­ the California State Board of Accountancy, I am ion on a bank audit which he conducted all alone familiar with the heavy burdens on state board without any staff assistance whatever. This members and the serious responsibilities which Council member suggests that there are thou­ they assume. I think that these burdens and re­ sands of cases like these which go unobserved. sponsibilities are bound to become greater. One of the most urgent problems is the en­ Ethics anti compliance forcement of a uniform code of ethics on the In recent years the Institute has greatly ex­ whole profession. I believe that the state boards panded its efforts in the field of ethics and com­ of accountancy must take the major part of the pliance. The committee on professional ethics burden of enforcement. Unless they do, I think has been enlarged and divided into subcommit­ there is a real danger that the profession will be tees. The Trial Board has been broken up as a widely discredited. panel. The staff devoting full time to these mat­ As you all know, the profession has been re­ ters has been enlarged. The total annual expen­ ceiving a great deal of publicity in the past few diture in the area of ethics and compliance is years. It is increasingly in the public eye. State­ approximately $75,000. In the fiscal year 1964- ments have been made by financial analysts, 65, the latest for which complete figures are prominent bankers and journalists which raise available, the Institute handled 70 formal com­ questions about the professional standards of plaints and conducted 16 trials which resulted CPAs. It is even sometimes difficult to explain to in the expulsion, suspension or reprimand of 15 some of our personal friends why disciplinary ac­ members. tion has not been taken against a practitioner in The Institute now has more than 56,000 mem­ our own community. bers, and by 1970 will probably have 70,000. It A few months ago a member of the Council seems clear on the face of it that the Institute wrote the president of the Institute [Mr. True­ alone cannot police the ethical conduct of such a blood] expressing concern about the failure of large group. many CPAs to observe the accepted standards of The state societies also have codes of ethics practice. He cited one accountant’s certification and ethics committees. However, except for per- which began "I hereby certify that I have written up the cash receipts and disbursements. . ." President Giffen’s column this month is an Another CPA was quoted as saying that since he adaptation of the speech he delivered before could not observe all the inventories for calen­ the meeting of the Association of CPA Exam­ dar-year audits, he simply qualified his opinion. iners at the annual meeting last October.

The CPA, December 1966. Published monthly, except July- Editor: Richard C. Brown August when bimonthly, for membership of the AICPA, Inc. Vol. 46, No. 11. Publication and editorial office: 666 Fifth Ave., New York, N. Y. 10019. Second-class postage paid at Production Assistant: Carolyn Evans New York, N Y. 3

haps a dozen of the largest societies, these com­ ington accounted for 26 more. Florida and Ken­ mittees have little staff assistance and no investi­ tucky accounted for 12. In other words, 6 states gatory machinery. They can usually act only accounted for 78 of the 118 hearings. when a formal complaint is submitted to them. Of the entire 118 cases reported in the 28 Since they are legally independent of the Insti­ states, 36 resulted in revocations of certificates or tute, they often take action on the same cases licenses; 38 in suspensions, and 33 in repri­ with which the Institute is dealing, and thus mands. In 11 cases the complaints were dismissed. there is a duplication of effort. Occasionally, and I am fully aware of the difficulties involved in unfortunately, a state society’s and the Institute’s increasing disciplinary activity by state boards. ethics committees will reach different conclu­ Most state board members serve without com­ sions. Meanwhile, the member concerned has pensation. The only legal facilities available to had to defend himself in two forums. them are in the state attorney’s office. With few exceptions, the boards have no paid investiga­ A need for decentralization tors. The time and labor involved in dealing But the greatest weakness of the present situa­ with a single case are tremendous. tion is that even when a member is expelled from In order to do an effective job a state board the Institute or a state society, he can continue should have paid investigators and legal counsel. to practice as a CPA unless the state board re­ Complaints should be invited from the general vokes his certificate. CPAs who are not members public and from credit grantors, government of either a state society or the Institute are free agencies and others who rely on CPAs’ opinions. of all restraint except those imposed by the state Paid staff should be available to process the boards. complaints. All this will require money. If the It seems to me the time has come to plan for state boards cannot obtain the necessary funds a widespread decentralization of the disciplinary from the state governments, then perhaps the function, and for the state boards to play a far state societies or the Institute should subsidize more active role than in the past. their activities in this field. If what I have been saying is valid, the expen­ • In 52 jurisdictions the state boards of ac­ diture of these funds in a very real sense would countancy, for the most part, or other administra­ have a strong public relations aspect. tive agencies of the state, possess statutory au­ The experience of one local bar association is thority to revoke a CPA certificate. interesting. It maintains a professional ethics • In 45 jurisdictions a CPA certificate may be committee of about 20 lawyers. The members act suspended. in panels which meet each week to hear com­ • In 30 jurisdictions a state board has the plaints. Several lawyers are employed as full­ right to censure or reprimand a CPA. time staff and they present the complaints to the • In 37 jurisdictions the board may cancel panel. When there appears to be a serious infrac­ registration or refuse to renew a permit to tion, the panel submits findings and recom­ practice. mendations to the executive committee of the • In 43 jurisdictions rules of professional association. If the executive committee agrees, ethics have been promulgated by state boards. the case is presented to the courts, which may However, these powers are not exercised very censure, suspend or disbar the lawyer under widely except in a few states. In June of 1966, charges. the Institute staff sent a questionnaire to state boards asking for information about recent dis­ One possible solution ciplinary actions on the part of the boards. So far Perhaps some similar procedure should be de­ it has received 47 replies. The replies show that vised in the accounting profession. The state in a period of four and a half years 118 discipli­ societies might invite the complaint. Their com­ nary actions have been taken by state boards in mittees and staff might do the investigating and 28 states. Nineteen of the 47 state boards held screening job. When serious infractions appear, no hearings in this period. Of the 28 states which the state societies might present the complaint did, New York and California accounted for 40 to the state boards for final action. of the 118 cases. Arizona and the state of Wash­ In one way or another, the CPA profession 4

must rid itself of the relatively few dishonest should assume an aggressive role in the enforce­ and incompetent members, or I fear it may suffer ment of the ethical codes. a serious impairment of public confidence. In all these areas, the Institute, as you well So, in my opinion, the Association of CPA Ex­ know, stands ready to co-operate fully. W e are aminers has some formidable tasks before it: fortunate in the excellent working relationships • The Uniform CPA Examination should be which have been established between the Associ­ continually modified in the light of the realities ation and the Institute. You members of state of practice. boards, who are on the firing line, are the only • Steady progress should be made toward uni­ ones who can act effectively in the real-life situa­ form education and experience requirements for tions. We in the Institute, however, will support the CPA certificate. you to the fullest extent possible through our • Perhaps most important, more state boards committees, our staff and our financial resources.

Accountancy in the public eye By Stewart Schackne, AICPA public relations consultant In recent weeks the profession has been the Nevertheless, when things go wrong, even in subject of much discussion in the general and isolated instances, CPAs become potential targets business press. Some of the articles, especially in for criticism. And derogatory remarks have a a few of the more well-known publications, have much better chance of landing on the front page not pleased accountants, to put it mildly. than praise for good works. A number of members have telephoned or Accountancy is not the only profession in this written the Institute to express dismay or ire, and position. to ask in effect: "W hat’s to be done?” For every­ Two or three weeks ago The New York Times one who has done this, there are no doubt count­ Sunday Magazine carried an article entitled "The less more who have the same feelings and the Doctor’s Image Is Sickly” — and headlined a same question. So the editor of The CPA sug­ photo-spread, "What Ever Became of Good Old gested that I attempt some comment in these Doc?” On November 20 the Sunday Book Re­ columns. view of the same newspaper contained an adver­ The main causes of the press attention which tisement for a book described as "The story of the profession has been receiving have been America’s most powerful lobby— organized mentioned in speeches and writings by officers medicine—and its forty-five year, multi-million and members of the Institute and its staff. But it dollar fight against public health legislation.” may be useful to recapitulate them here. CPAs are more in the public eye than they The price of prominence used to be. The spread of stock ownership, the Just a few days ago a CPA passed along to the increased role of accountants in business life, and Institute a jocular note he had received from his the greater public awareness of accountants’ im­ brother, a lawyer. The note, attached to a clip­ portance have focused attention on them, And ping of a critical newspaper item, read: "CPAs when any group is in the spotlight, the chances must have attained the professional status of are that it will get some bouquets— and some attorneys to be attacked like this. I expect to see brickbats. soon a best-seller entitled, "How to Avoid The publicity, however, has not by any means Audit.” been all unfavorable. And the Institute is taking This does not mean that CPAs should seek the numerous steps to portray the positive accom­ kind of comfort suggested in the saying that mis­ plishments of the profession. Background infor­ ery loves company, or that the profession’s prob­ mation has been furnished to financial writers. lems are lessened by the fact that others have Institute presidents and the chairman of the them too. But it does provide some perspective Accounting Principles Board have appeared be­ on the price of prominence. fore such organizations as the Financial Execu­ Another factor underlying the press attention tives Institute and the Hayden Stone Forum. is that although accountancy has made great 5 progress, and financial reporting by corporations seminar for financial writers was held for repre­ is better than ever before, there has been a con­ sentatives of newspapers in the northeastern current change in what the public expects of states last June. A second is scheduled for early corporate managements and of professions which December in Chicago. Others are planned for serve vital public interests. It’s like raising the next year. bar for the high jump several notches. Second, attention is being called to positive A third factor is that some business practices, performance. For example, a press conference which were virtually impossible to detect when has just been held on the APB Opinion on ac­ the economy (and the stock market) were in a counting for pension costs. Another will prob­ long and strong rise, have led to newsworthy ably be held on the opinion on accounting for trouble under present conditions. And, what results of operations. with the increased prominence of accountancy, Third, and very important, effort is underway CPAs have been brought into the ensuing legal to develop articles apart from the matters that actions and news stories. are now so conspicuously discussed in the press; Finally, there is a sort of chain reaction in news articles that will tell about the profession and in­ reporting. That is, today’s stories draw some of dividual CPAs interestingly and in an attractive their material and tone from preceding stories, light. and in turn become material for future ones. Results will not be apparent tomorrow or next Which brings us to the question: What’s to week, however. When a strong current of pub­ be done? licity is running, it takes time to turn it around. The first thing is to avoid thinking that critics, without exception, are total ignoramuses. In­ And on the brighter side . . . stead the criticism must be analyzed to see Meanwhile, it is worth repeating that not all whether it may have at least a grain of justifica­ recent publicity has been on the negative side. tion. When it can be seen that something has A news release on Auditing Statement No. 37 been done, or has not been done, to bring on (on public warehouses) struck a constructive criticism, the faults ought to be acknowledged, note and was widely printed. An article by at least to oneself, and steps taken to correct John L. Carey was published in Banking and them. reprinted elsewhere. The Christian Science It is a normal instinct to hit back when at­ Monitor told its readers across the country tacked. But (although there are exceptions to that the accounting profession "is planning the rule) this is generally ill-advised where pub­ some important reforms that will bring more lic relations is concerned. For the object of pub­ uniformity, and consequently more clarity, into lic relations is not to muzzle critics, which is im­ published financial statements.” possible, but to win them over— and a combative An article in Forbes ended: "The old image posture usually doesn’t help to do that. of the accountant as a silent, grim-faced man in Letters to an editor or reporter temperately a green eye shade sitting apart from the main­ presenting arguments counter to those he has stream of business is completely out of date. He’s printed, or pointing out demonstrable inaccura­ now a top management consultant, and that role cies, can be useful. But letters merely expressing is going to grow.” indignation, pain, or surprise "that a publication The magazine Boston, in an extensive article of your standing, etc. . . .” count for virtually titled "A Profession Reaches the Top,” con­ nothing. An editor who doesn’t get a few letters cluded that the profession "is assuming an in­ every month, canceling subscriptions because of creasingly important position at the center of the something he has printed, fears his publication entire business information system and, in a is becoming dull. growing number of instances, at the corporate top.” What the Institute is doing about it That more stories displeasing CPAs will ap­ The Institute is taking actions with respect to pear in coming months is a virtual certainty. the publicity the profession has been receiving. What we can do, and are doing, however, is to First, effort is being made to establish more take steps to increase the ratio of the favorable channels of communication with the press. A to the unfavorable. 6

IRS agrees to modify its extension policy; AICPA will watch 1967filings "very closely" The Internal Revenue Service has taken steps The Commissioner felt that an automatic pol­ to modify its extension policy, although it has icy would almost certainly increase the number rejected a proposal by the American Institute’s of extensions requested and that the necessary tax committee calling for an automatic extension follow-up on the increased number of requests of time for filing individual income tax returns could not be handled by existing administrative where workload of the CPA is involved. Sheldon machinery. S. Cohen, Commissioner of Internal Revenue, The Commissioner also felt that an automatic said that the Service "has gone as far as it can policy would invite substantial abuse which possibly go, administratively.” would contribute to the administrative problem. Basically, this is what IRS will do : He said that such a policy would be unfair to the It will revise Form 2688, Application for Ex­ many millions of taxpayers who do not have their tension of Time to File U.S. Individual Income returns prepared by others and who are required Tax Returns. The new form will provide that, to file timely returns. All these reasons, he added, where authorized by the taxpayer, the applica­ militate against the adoption of an automatic ex­ tion may be signed by an attorney, CPA or en­ tensions policy. rolled agent. The committee’s most recent proposals, which It will clarify its internal guidelines, which were made on October 6, were that: have been issued for the handling of cases in All requests for extensions based upon prac­ which an extension is being sought because of the titioner workload should be granted. The exten­ practitioner’s workload. This will be done to as­ sion requests should be filed no later than April sure a better understanding on the part of the 10, and the extension period should not be for district IRS offices of the Service’s policy and a less than 30 days. greater recognition of the Service’s obligation to This policy should apply only to CPAs, give uniformity of treatment to all taxpayers. lawyers and enrolled agents in view of the con­ The AICPA tax committee’s current attempt trols which may be exercised by the Service over to convince the Service of the need for improve­ these preparers. ment in its extension policy began last March As a procedural matter, CPAs, lawyers and when it requested IRS to allow a CPA prepared enrolled agents should be permitted to file the extension request based solely on the practi­ extension requests on behalf of the taxpayer, tioner’s workload to be granted automatically. (continued on page 7)

Tax Committee Chairman on Extensions

Donald T, Burns, General Chairman of the “I urge all CPAs to prepare their extension Institute’s tax committee, had this to say about the requests with complete and specific reasons for extensions matter. “A restrictive Internal Revenue the request. Diligent effort should be made to Service extensions policy can be supported only comply with the requirements of IRS Announce­ in the face of demonstrated practitioner abuse. ments 60-90 and 63-113. Therefore, it is essential that CPAs judiciously “The chances of a request being granted avoid abusing the privilege. under these circumstances are far greater. Also, time will be saved by avoiding the need to pro­ “ By and large I feel that CPAs have cooper­ vide the IRS with additional information or to ated with the IRS by not requesting extensions make a personal visit to the District Director’s except when they are actually needed. Unfortu­ office in attempting to obtain an extension on a nately, however, a small number who would request rejected the first time around. abuse the privilege creates difficulties for the “ Requests submitted with little or no explana­ majority of practitioners who diligently attempt tion are looked upon by the IRS with suspicion. to prepare timely returns, even in the face of Equally suspicious are requests made in bulk at unbearable workload pressures. one time with the same reason for each request. “ In some cases members have run into prob­ A request should be submitted to the IRS as early lems in obtaining extensions because they have as the determination of the need for one becomes not adequately complied with the requirements. evident.” 7 avoiding the time-consuming necessity of having feels, clearly illustrate the increasing burden the taxpayer sign the extension request. faced by the CPA-tax practitioners to prepare In preparing its recommendations, the tax more returns of increasing complexity in less committee last spring requested information time. A tax committee spokesman said that the from 2,618 accounting-member firms and indi­ committee will be watching 1967 filings "very vidual practitioners. Responses were received closely” and, if there is no substantial improve­ from 711. ment, the Institute will push for legislative The results of the survey, the tax committee action.

Medicare committee submits recommendations to HEW: questions Blue Cross Association proposal The Institute’s Medicare committee has sub­ ards of the accounting profession and is within mitted six recommendations to the Department the auditor’s competence to perform. of Health, Education, and Welfare. At the same All information pertinent to the cost reim­ time, it has raised objections to a proposed Blue bursement audit should be freely available to all Cross Association agreement. performing audits for providers or on behalf of The committee prepared the recommendations intermediaries. The AICPA offers its services to at a November 17 meeting at which representa­ disseminate information which would be helpful tives of the Social Security Administration, the to those conducting initial audits of providers Department of Health, Education, and Welfare, and cost reimbursement examinations. Blue Cross Association and Associated Hospital The committee submitted the recommenda­ Service of New York were present as observers. tions to HEW and indicated it would welcome The recommendations are that: the opportunity to discuss the recommendations SSA should require that every provider hospi­ with appropriate HEW representatives. tal have an examination of its financial state­ Representatives of the committee also held ments and an appropriate opinion be expressed informal discussions with Blue Cross Associa­ on the cost reimbursement report considered in tion representatives concerning a proposed relation to the financial statements taken as a agreement for Blue Cross Plans and public ac­ whole. counting firms performing Medicare audits. The The SSA audit program should be followed agreement, together with Provider Relations as a minimum audit program by the initial Bulletin No. 34, was distributed on November auditor. 14, 1966 to Blue Cross Plans to serve as a basis The provider should authorize the work for contract discussions between independent papers of the provider’s auditor to be available public accountants and Blue Cross Plans. The to the auditors for the intermediary. committee representatives indicated that it con­ The intermediary (usually, an insurance com­ sidered certain sections of the proposed agree­ pany) and his auditor should determine the ment to be objectionable because of proposed re­ extent to which reliance may be placed on the quirements dealing with such matters as restric­ work performed by the auditor of the provider. tion of services, costing adjustments for services The AICPA Medicare committee will prepare rendered, and the content of the auditor’s report. recommended model language to satisfy the re­ The committee was advised that its comments porting requirements appropriate under the cir­ will receive consideration by the Blue Cross As­ cumstances. sociation in the development of the final version Before a final draft of the proposed subcon­ of the proposed agreement. tract for auditing services, presently under con­ The committee urges members to consider sideration for release to intermediaries, is com­ carefully all requirements of the proposed agree­ pleted and issued, the Medicare committee ment with extreme care in their discussions with indicated it would appreciate the opportunity to the various Blue Cross Plans and to be alert to the review the contract to determine whether the inherent dangers which may be at conflict with contract is in conformity with published stand­ the best interests of the profession. 8

New Institute film previewed in Radio City theatre More than ninety teachers and administrators wrong people often go into business and account­ from the New York City Board of Education pre­ ing so that both accounting firms and their clients viewed the Institute’s new film, Inc., on October have personnel problems. Meanwhile, the right 26 at the Johnny Victor Theater in Radio City, people for business or accounting often go else­ New York. where, even to careers where they are misfits.” Introducing the film, AICPA managing di­ Inc. is designed to show students what a cor­ rector John Lawler noted that CPAs are "the poration is and to suggest how it functions as the practicing micro-economists of the business and central institution in the American economy. It financial communities. . . . Because of their role may be obtained on free loan from its distributor, in society, CPAs have a vested interest in effec­ Association Films, 600 Grand Avenue, Ridge­ tive education in economics. CPAs suffer when field, N. J. 07657; 561 Hillgrove Avenue, economic education is inadequate. First, they run LaGrange, Ill. 60525; 1621 Dragon Street, Dal­ into unreasonable clients and other parties who las, Texas 75207; 324 Delaware Avenue, Oak­ behave irrationally because they can’t read finan­ mont, Pa. 15139; 25358 Cypress Avenue, Hay­ cial statements or estimate sensibly the effects of wood, Calif. 94544. Prints of the film may be interrelated economic activities. Second, the purchased for $150.

Sub-board expels one member, suspends two others A sub-board of the Institute’s Trial Board met 14515 River Forest, Houston, Texas, had had his in Cincinnati on September 1 3 , 1966, to consider CPA certificate suspended by the Ohio State the charges of the ethics committee against three Board of Accountancy for one year, thereby also Institute members. The sub-board decided that violating Article V, Section 4 (f) of the Institute’s one member should be expelled and two should By-Laws. It was shown that Mr. Singleton’s cer­ be suspended. The three respondents, whose tificate had been reinstated by the state board cases were held jointly, were represented by prior to the sub-board’s meeting, after a suspen­ counsel. sion of approximately four months. It was de­ The sub-board decided that Chester Hathaway cided that Mr. Singleton’s membership in the of 1007 Transit Building, Cincinnati, Ohio, Institute should be suspended for one year. should be expelled from membership in the Insti­ No appeal was taken from the decision of the tute. It found that he had violated Article V, Sec­ sub-board in any of the three above cases and tion 4 (f) of the By-Laws in that his certificate as accordingly, the decisions became effective on a CPA had been revoked by the Ohio State Board October 13, 1966. of Accountancy under a section of that state’s accountancy law which provides for the suspen­ Actions of Trial Board sion or revocation of a certificate on the grounds On October 2, 1966, the Institute’s Trial Board of negligence in the practice of public account­ met in Boston, Massachusetts, to consider the ing. Prior to the meeting Mr. Hathaway had of­ charges of the ethics committee that Jacob Gold­ fered to resign from the Institute. The sub-board berg, 1290 Avenue of the Americas, New York, decided not to accept his resignation. N. Y., had violated Article V, Section 5 of the The sub-board also found that the CPA cer­ By-Laws which requires the expulsion of a mem­ tificate of Donald Hathaway of 1007 Transit ber who has been convicted of a crime involving Building, Cincinnati, Ohio, had been suspended moral turpitude, in that he had been convicted for two years by the Ohio State Board of Ac­ of bribing an official of the Internal Revenue countancy under the same section of the state’s Service, and that he had committed acts dis­ accountancy law. The sub-board, therefore, creditable to the profession in violation of Arti­ found that he had violated Article V, Section cle V, Section 4(d) of the By-Laws. 4 (f) of the Institute’s By-Laws. The sub-board The Trial Board found him guilty as charged decided that he should be suspended for two and decided that he should be expelled from the years. Institute. The Board’s decision became effective The sub-board found that Jack Singleton of on October 2, 1966. New Publication Announcement

Management of an Accounting Practice Bulletin No. 22 Purchase, Sale and Merger of Small Accounting Firms This new bulletin, drawn from the actual experiences of numerous CPAs throughout the country, discusses and illustrates by means of practical case examples the many critical questions which should be considered in connection with the purchase, sale or merger of accounting firms. It will prove valuable not only to CPA-practitioners who wish to expand their present practices, but also to those who hope to realize full value for their practices upon retirement or for estate purposes. The study describes fifteen major steps which should be followed, particu­ larly in the case of mergers. These include exchanging financial information . . . comparing fee and billing procedures . . . reviewing audit standards and proce­ dures and staff competence . . . defining the partners’ duties and share of the profits . .. determining capital investment. . . establishing a retirement plan . . . and notifying clients. The study also examines eight factors which most frequently determine the market value of a firm; e.g., size and type of practice . . . gross fees . . . net profit . . . seller’s ability to assist in the transfer . . . buyer’s competence in practice management. . . depth of buyer’s interest. . . and pay-out period. $2.00 PER COPY*

AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS 666 FIFTH AVENUE, NEW YORK, N. Y. 10019

Gentlemen: Please send, postpaid______copies of purchase, sale and m er­ ger of sm all accounting firms (0442) at$2.00. m e m b e r ' s n a m e ______

FIRM______(if part of mailing address) ADDRESS______

CITY______STATE______ZIP CODE. Also send the following earlier MAP Bulletins ... No. 14: Basic Financial Report­ No. 20: How to Improve Staff ing for Accounting Firms (0434) Motivation (0440) at $2.00 at $2.00 No. 21: The Process of Com­ No. 14C: 3rd Annual Income & munication in Public Accounting Expense Survey (0430) at $2.00 (0441) at $2.00 No. 19: Retention of Records in Binder for MAP Bulletins (0433) Offices of CPAs (0439) at $2.00 at $3.00 (Please add 5 percent sales tax in New York City. Elsewhere in New York State, add 2 percent state tax plus local tax if applicable. * AICPA Member Discount AICPA publications are available to members at a 20 percent discount. The minimum order subject to this discount is $2.50. If your order totals $2.50 or more, please deduct 20 percent from the list prices shown. 11 from the Executive Director JOHN L. CAREY

Who Suggested Repeal of the Competitive Bidding Rule? Members have raised questions about the ori­ don, who were expert in anti-trust law, to appear gin of the proposal to repeal Rule 3.03 of the at a meeting of the Executive Committee No­ Code of Professional Ethics on competitive bid­ vember 18-19, 1965. Both the lawyers stated ding. Here are the facts. without equivocation that in view of the current Prior to 1962 the rule on this subject provided trend of court decisions in the anti-trust area, in substance that Institute members must follow they must advise the Institute strongly to repeal the rules on competitive bidding adopted by state Rule 3.03. Members of the Executive Committee societies and boards in the states where they challenged and questioned both lawyers, but the practiced. In 1959, Covington & Burling, legal committee was finally convinced that the Insti­ counsel for the Institute, advised that this rule tute was exposed to serious risk in maintaining might invite anti-trust suits because some of the the rule on the books. Subsequently, the commit­ state rules were particularly vulnerable to attack. tee on professional ethics heard the lawyers’ Counsel’s advice was to have no rule on the views at a meeting of the full committee, and subject. after probing and questioning, was also con­ A year or so of discussion ensued. As a result, vinced. in view of Counsel’s advice, the Executive Com­ At the May 1966 meeting of Council of the mittee recommended that the bidding rule be Institute the two committees joined in recom­ eliminated from the code without substitution. mending unanimously that the rule be repealed. However, the reaction to this suggestion on the The Council includes representatives of all the part of members of Council and state societies states. A partner of Covington & Burling ad­ was negative. In 1961, the ethics committee rec­ dressed the Council on the subject, and responded ommended substitution of the present Rule 3.03 to numerous questions. At the conclusion of the for the then existing rule. Legal counsel reluc­ discussion, the Council resolved, by a vote of 135 tantly acquiesced, but not without a word of to 53, to recommend to the membership that the warning. In presenting the rule at the annual rule be repealed. meeting, the chairman of the committee on pro­ The matter was again presented for discussion fessional ethics indicated that it was the inten­ at the annual meeting of the Institute in Boston, tion of the ethics committee to issue a formal October 3 , 1966, and representatives of both Cov­ opinion interpreting the new rule. In March ington & Burling and Cahill, Gordon, addressed 1962, the new rule was approved by the member­ the meting and responded to questions. ship by mail ballot. From 1962 to 1965, the ethics committee attempted to draft an interpretive Members will receive statement of arguments opinion which legal counsel would approve as A statement of the arguments for and against not being in violation of the Federal anti-trust repeal of Rule 3.03, based on the discussion law. None of these attempts was successful. The at the annual meeting and documents made ethics committee then asked the Executive Com­ a part of the record, will be sent to all mem­ mittee whether an opinion should be issued in­ bers of the Institute, together with the mail terpreting the bidding rule, despite the objections ballot on which the vote will be taken. The of legal counsel. The Executive Committee de­ stenographic transcript of the annual meeting cided that the views of another law firm should discussion was not received until early Novem­ be obtained. As a result, the firm of Cahill, Gor­ ber. The task of summarizing the volume of don, Reindel & Ohl was asked for an opinion. material which must be considered in presenting Not only did they support the views of Coving­ the pro and con arguments— and in clearing the ton & Burling with respect to the proposed inter­ draft with members who have expressed them­ pretive opinion, but strongly urged repeal of selves on both sides of the question—will un­ Rule 3.03 itself. doubtedly consume several weeks. Since experi­ The Executive Committee then invited part­ ence has indicated that it is unwise to make bulk ners of Covington & Burling, and Cahill, Gor­ mailings during the Christmas holiday season, 12

it is probable that the ballot will be mailed early members along with the mail ballot. in January. A period of 60 days from the date of On a number of occasions, legal counsel have mailing is allowed for voting. The results, there­ indicated that state boards of accountancy which fore, will not be finally known until March. have adequate statutory authority to do so may It is clear from the record that the proposal promulgate and enforce rules against competi­ to repeal the rule was not initiated by any mem­ tive bidding without the risk of violating Federal ber of the Institute or of its staff, but solely by anti-trust law, since agencies of state government legal counsel in the discharge of their responsi­ are not subject to such law. State societies, how­ bility to protect a client against what they be­ ever, as private organizations, are presumably lieved to be serious risk. Written opinions of subject to the same risks as those to which the counsel will accompany the material sent to the Institute is believed to be exposed.

Minutes of the annual meeting: Boston, Massachusetts, October 3,1966 The seventy-ninth annual meeting of the Amer­ American Institute of CPAs. ican Institute of Certified Public Accountants con­ T. Coleman Andrews, George D. Bailey, Samuel vened at 9 :05 A.M., October 3, 1966, at the Shera­ J. Broad, Percival F. Brundage, Thomas D. Flynn, ton-Boston Hotel, Boston, Massachusetts. President Arthur B. Foye, Clifford V. Heimbucher, L. H. Robert M. Trueblood presided. Penney, Louis H. Pilié, Maurice H. Stans, J. Harold Stewart, Arthur C. Upleger, Robert E. Address of welcome Witschey and John H. Zebley, Jr. Roger Wellington, president of the Massachu­ setts Society of Certified Public Accountants, wel­ Report of the president comed the members of the AICPA to Boston and President Trueblood presented his report to the to the Commonwealth of Massachusetts. members.

Approval of minutes Report of Council Minutes of the annual meeting of September Malcolm M. Devore, vice president and chair­ 20, 1965, were approved as printed and circulated man of the committee appointed to prepare the to the membership. report to the membership on behalf of the Council, presented a report of the activities of the Council Report of the auditors for the fiscal year 1965-66. Upon motion duly Thomas M. Antonsen, of the firm of von Min­ seconded, the report and all acts of the Council den, Bruneau & Antonsen, presented the report of during the year were approved. the auditors (The CPA, Nov. 66, pp. 15-19). On motion duly seconded, the report of the auditors Election of officers and members of Council was received. The chairman announced that the next order of business was the election of officers and members Introduction of guests from other countries of Council for the ensuing year. The chairman introduced the following guests Thomas D. Flynn chairman, presented the report from other countries who extended greetings from of the committee on nominations. the accounting organizations in their respective Mr. Flynn placed in nomination Hilliard R. countries: Giffen, of California, for election as president. It J. R. M. Wilson, president of the Canadian Insti­ was moved and seconded that the nominations be tute of Chartered Accountants; Sir Henry Benson, closed and that the secretary cast one ballot for the president of the Institute of Chartered Accountants election of Mr. Giffen. The motion was carried, in England and Wales; Ricardo Mora, president of the ballot was cast, and Mr. Giffen was declared the Instituto Mexicano de Contadores Publicos; duly elected. and Washington SyCip, past president of the Phil­ The new president was escorted to the dais by ippine Institute of Certified Public Accountants. past presidents Clifford V. Heimbucher and Louis H. Penney. Introduction of past presidents The following members, proposed for the offices The chairman announced that it was his pleasure of vice presidents and treasurer, were nominated to introduce the following past presidents of the by Mr. Flynn: 13

Vice Presidents Edwin T. Boyle, New Jersey George D. Anderson, Montana Arthur L. Breakstone, New Jersey John P. Goedert, Illinois Nathan Honig, New Jersey Ralph E. Kent, New York Kermit J. Berylson, New York E. C. Leonard, Jr., Oklahoma James J. Needham, New York William D. Sprague, New York Treasurer William P. Stowe, New York David F. Linowes, New York William H. Westphal, North Carolina It was moved and seconded that the nominations William A. Jacoby, Ohio be closed and that the secretary cast one ballot for Stanley D. Ferst, Pennsylvania the election of candidates named. The motion car­ George T. Helm, Rhode Island ried, the ballot was cast and the members named H. Landrith Thomas, Tennessee were declared elected. Gordon N. George, Texas Mr. Flynn moved that the following be elected Stanley J. Scott, Texas members of Council for the terms indicated: Donald L. Schoedel, Washington For Council members at large One-year term Three-year term Dale J. Gage, South Dakota Horace G. Barden, Illinois Anthony Gerharz, Jr., Montana Maurice J. Dahlem, California Richard S. Helstein, New York Ralph F. Lewis, New York Joseph E. Tansill, Illinois Herbert E. Miller, Michigan Dudley C. Tetro, New Hampshire Walter R. Staub, New York Robert S. Warner, California Marvin L. Stone, Colorado The motion for election of the candidates named Kenneth B. Wackman, New York was put to a vote and carried, and the members were declared elected for the terms indicated. Two-year term George H. Hansen, Iowa Election of committee on nominations Harry C. Zug, Pennsylvania The chairman announced that the next order For members of Council of business was the election of five members of the Three-year term committee on nominations for the current year, stating that in accordance with the provision of James E. Money, Alabama the By-Laws, the Council had elected Robert M. Donald A. Brunell, Arizona Trueblood, of Illinois, and Leslie A. Heath, of Percy W. Pogson, Jr., Arizona North Carolina, to serve on the nominating com­ Harold M. Berlfein, California mittee, the first named to serve as temporary chair­ Gerald R. Case, California man until the committee elected a permanent chair­ Jack J. Dreiman, California man. The following were nominated: J. Wesley Huss, California Robert I. Cory, Kansas Herman E. Ward, California David O. Gillette, Hawaii Gordon W. Tasker, Connecticut Richard H. Grosse, Pennsylvania Claude M. Hamrick, Jr., Georgia Benjamin Grund, New York Robert W. Baltz, Illinois Walter K. Rush, Oregon Glenn Illinois Ingram, Sr., It was moved and seconded that the nominations Halbert A. Schussele, Illinois be closed and that the secretary cast one ballot for Quentin H. Covert, Indiana the election of the candidates named. The motion E. F. Volberding, Iowa carried, the ballot was cast and the members named Don F. Gresser, Kansas were declared elected. Joseph P. Jones, Jr., Kentucky W. Kenneth Simpson, Kentucky Sidney A. Champagne, Louisiana Recess S. Howard Phipps, Jr., Maryland The meeting recessed at 10:57 A.M. and recon­ Lewis M. Foster, Massachusetts vened at 2:38 P.M. Morris Goodman, Massachusetts William R. Shaw, Michigan Elijah Watt Sells Awards Leonard E. Richardson, Missouri Kenneth B. Simpson, chairman of the Board of Ralph T. Bartlett, New Jersey Examiners, presented the Elijah Watt Sells Awards 14

to candidates who had received the highest grades ing for discussion by the members present but not at the November 1965 and May 1966 CPA exam­ for action, and to Article XV, Section 5, which inations. provides that, following the annual meeting, the proposed amendments will be submitted to all Report of the committee on awards members for a vote by mail, accompanied by a J. T. Koelling, chairman of the committee on statement prepared by the secretary summarizing awards, presented The CPA Award for Distin­ the arguments presented for and against each guished Service of the American Institute of Certi­ amendment. fied Public Accountants, to Louis H. Penney, of San Francisco, California. Amendment to the Code of Professional Ethics The chairman presented for discussion by the Amendments to the By-Laws members present, the proposal for repeal of Article Upon the chairman’s request, Hilliard R. Giffen, 3, Section 3.03 of the Code of Professional Ethics, chairman of the committee on By-Laws, presented which prohibits competitive bidding (The CPA, for discussion by the members present, proposals June 66, p. 18). for amendments to the By-Laws dealing with disci­ The chairman again reminded the members plinary procedures and with enlargement of the Ex­ present that the proposed amendment, together ecutive Committee (The CPA, June 66, pp. with a summary of the arguments presented for and 14-18). against the amendment, would be sent to all mem­ The chairman directed the attention of the mem­ bers for a vote by mail ballot following the annual bers present to Article XV, Section 4, of the By- meeting. Laws, which provides that any amendment to the By-Laws or Code of Professional Ethics approved by Adjournment the Council shall be presented to the annual meet­ The meeting adjourned sine die at 5:00 P.M.

t h e C P A DECEMBER 1966

The CPA is the membership bulletin of the Ameri­ Second class postage paid at New York, N. Y. can Institute of Certified Public Accountants, Inc. 666 FIFTH AVENUE, NEW YORK, N. Y. 10019