More Federal Regulation of Accounting Industry Opposed

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Times Staff Writer

Financial reporting and the accounting industry have come under increasing scrutiny in recent months and the credibility challenges are sure to continue in 1985, according to Ray Groves, chairman of the Big Eight accounting firm of Ernst & Whinney.

As Groves said in a speech last week in Los Angeles, “there is a spotlight that has come on financial reporting” because of corporate bankruptcies and a record number of banking failures in 1983 and 1984 brought about by the recession and changes in the financial services industry.

During the last two years, the Securities and Exchange Commission has focused more on financial reporting cases rather than the previously emphasized insider trading cases, said Groves, who also is 1984-85 chairman of the American Institute of Certified Public Accountants, a New York-based trade group. Groves said SEC Commissioner James Treadway told him that a record number of financial reporting cases will be brought before the SEC this year.


One of the best-publicized financial reporting cases handled by the SEC last year involved Los Angeles-based Financial Corp. of America. The SEC required FCA to restate its second-quarter earnings, changing to a $79.9 million loss for the half-year a previously reported $75.3 million profit, because it disagreed with certain accounting procedures FCA had used.

In October, the SEC filed a suit against Silicon Valley-based Tandem Computers Inc., accusing the minicomputer maker of fraudulently inflating its financial results in fiscal 1982. The suit was settled by the signing of a consent order in which Tandem, two top officials and one former official neither admitted nor denied the charges but agreed to have its outside auditor review its accounting control for the next three years.

Upcoming congressional hearings on the SEC and its function will also deal with financial reporting issues, including whether accounting industry rules should be developed by the private Financial Accounting Standards Board or by a public body, Groves said. No date has been set for the opening of the hearings by the House oversight and investigations subcommittee of the Committee of Energy and Commerce, but they probably will begin in February, he said.

“I think the result of this will probably be some suggestion or maybe something stronger than suggestions . . . that more federal regulation is needed,” Groves said. But such federal regulation isn’t necessary and would only create another layer of bureaucracy for companies to deal with, he said.

“I think we have plenty of regulations” as well as a system to develop future regulations, Groves said. “Our challenge is to implement what we have and to adhere to what we have.”

The 225,000-member American Institute of Certified Public Accountants has established several committees to consider accounting standards issues, Groves said. Among them is a committee looking at the entire structure of industry rule-making and a panel studying the problem of early fraud detection.


In the last five or six years, the industry has tried to improve performance by conducting peer reviews in which an accounting firm hires another firm to review its audit practices, rotating audit partners on publicly held clients and requiring some amount of continuing education, Groves said.

“We always need to look for improvements” in the financial reporting area, Groves said in an interview. The industry needs to pay more attention to dealing with practical daily problems that arise and less time grappling with broad questions, he said.

For example, new accounting problems are constantly arising in in the fast-changing financial services industry and rules must be developed to cover them, Groves said.