The Metcalf Commission

The late 1970s and early 1980s were a time of panic for the accounting profession. Companies were dropping like flies due to fraudulent financial reporting or high inflation and subsequent high interest rates. Because of this, many investors suffered huge losses. Take, for instance, the 1985 collapse of E.S.M. Government Securities, Inc. E.S.M. was a dealer in municipal bonds that used speculative trades to try to recover a $3 million loss, with the loss covered up using customer securities. The fraud went on for several years before being discovered by the auditor, whom E.S.M. bribed to cover it up. When all was said and done, E.S.M. had defrauded its customers of over $300 million. Eventually the principals were convicted and sent to prison, as was the auditor.

This …show more content…
In 1976, the Metcalf Commission published a report entitled “The Accounting Establishment” that noted “the ‘Big Eight’ and other large accounting firms readily accepted the special stature associated with their designated role as independent auditors, but they have not fully accepted the special responsibilities which accompany the position of independent auditor.” The report cited long relationships between corporations and auditors as a possible reason for the apparent lack of auditor independence. The report suggested that a mandatory change of auditors after a given number of years would resolve this lack of independence.

In 1977, the Foreign Corrupt Practices Act (FCPA) enacted a rule requiring major enterprises to report and document internal controls. However, the rule didn’t ask external auditors to attest to whether the entity was in compliance with these internal control requirements, nor did it clearly define the meaning of internal controls. While this provision was an important step in helping organizations recognize the need for effective internal controls, it was far from