The Senate Subcommittee on Reports, Accounting and Management of the Committee on Government Operations (Metcalf Committee)
conducted a study of the accounting profession
  • published a study entitled "The Accounting Establishment" in 1976
  • two main criticisms:
    • The "Big Eight" accounting firms controlled the AICPA, the AICPA had approval authority for appointed Financial Accounting Trustees, and the Trustees in turn appointed FASB members.  Therefore, the "Big Eight" firms controlled the standard-setting process
    • The Securities and Exchange Commission had not fulfilled its responsibilities in establishing accounting and auditing standards.  There was too much reliance on the private sector.
  • contained a number of recommendations, among which were:
    • Amend securities laws to restore the right of individuals to sue accounting firms for negligence.
    • The Federal Government should establish accounting and auditing standards
    • The Federal Government should audit the auditors
    • The Federal Government should establish a code of ethics for auditors
    • Accounting firms should only be hired by the Federal Government to perform auditing and accounting services.
The Metcalf committee resulted in a number of actions taken by the AICPA, the FAF, and the SEC.  The FAF appointed a Structure Committee to study the organization and activities of the FAF and the FASB.  Numerous changes took place within the AICPA, and the SEC did an intensive self-assessment of its role in accounting standards-setting.

 

Ernst & Ernst v. Hochfelder
  • Involved SEC Rule 10b-5, Private action for securities fraud.
  • President of First Securities Company embezzled money over a 20-year period.
  • Embezzlement was discovered in 1968 when the president committed suicide, leaving a note explaining the fraud.
  • President had a rule that only he could open mail addressed to him. If he was absent, no one else could open the mail.
  • In the absence of scienter (the intent to deceive, manipulate, or defraud), is there liability on the part of experts for damages to third parties?
  • Supreme Court held that there was no liability with regard to Ernst & Ernst due lack of scienter.
  • Experts like accountants are accorded a "due diligence" defense.  If after reasonable investigation, the expert(s) had "reasonable grounds" to believe that the statements for which he was responsible were true and there was no omission of material fact



  SCI ENTER - Knowingly. Having the requisite knowledge of the wrongness/illegality of an act or conduct; guilty knowledge; knowing the impropriety/illegality associated with doing certain acts. This is often an element of liability or guilt that must be proven before a judgment or conviction can be obtained.

A man may do many acts which are justifiable or not, as he is ignorant or not ignorant of certain facts. He may pass a counterfeit coin, when he is ignorant of its being counterfeit, and is guilty of no offense; but if he knew the coin to be counterfeit, which is called the scienter, he is guilty of passing counterfeit money. 

A man who keeps an animal which injures some person, or his property, is answerable for damages, or in some cases he may be indicted if he had a knowledge of such animal's propensity to do injury. In this respect the civil law agrees with our own.