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to file statements with the Commission and that accounting and auditing procedures cannot remain static and continue to serve well a dynamic economy. The Commission's accounting staff, therefore, studies the changes and new developments for the purpose of establishing and maintaining appropriate accounting and auditing policies, procedures and practices for the protection of investors. The primary responsibility for this program rests with the Chief Accountant of the Commission, who has general supervision with respect to accounting and auditing policies and their application.

Progress in these activities requires continuing contact and consultation between the staff and accountants both individually and through such representative groups as, among others, the American Accounting Association, the American Institute of Certified Public Accountants, the American Petroleum Institute, the Financial Analysts Federation, the Financial Executives Institute, and the National Association of Railroad and Utilities Commissioners, as well as many Government agencies. Recognizing the importance of cooperation in the formulation of accounting principles and practices, adequate disclosure and auditing procedures which will best serve the interests of investors, the American Institute of Certified Public Accountants, the Financial Analysts Federation and the Financial Executives Institute appoint committees which maintain liaison with the Commission's staff. The Commission on its part has authorized its Chief Accountant to continue to serve as a member of an advisory committee to the accounting principles board of the American Institute of Certified Public Accountants.

The many daily decisions to be made require the attention of some of the Chief Accountant's staff. These include questions raised by each of the operating divisions of the Commission, the regional offices, and the Commission. As a result of this day-to-day activity of the Commission and the need to keep abreast of current accounting problems, the Chief Accountant's staff continually reexamines accounting and auditing principles and practices. From time to time members of the staff are called upon to assist in field investigations, to participate in hearings and to review opinions insofar as they pertain to accounting matters.

Prefiling and other conferences, in person or by telephone, with officials of corporations, practicing accountants and others are also an important part of the work of the staff. Resolution of questions and problems in this manner saves registrants and their representatives both time and expense.

Many specific accounting and auditing problems are disclosed in the examination of financial statements required to be filed with the

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Commission. Where examination reveals that the rules and regulations of the Commission have not been complied with or that applicable generally accepted accounting principles have not been adhered to, the examining division usually notifies the registrant by an informal letter of comment. These letters of comment and the correspondence or conferences that follow continue to be a most convenient and satisfactory method of effecting corrections and improvements in financial statements, both to registrants and to the Commission's staff. Where particularly difficult or novel questions arise which cannot be settled by the accounting staff of the divisions and by the Chief Accountant, they are referred to the Commission for consideration and decision.

These procedures are particularly appropriate in resolving the problems which arise in connection with initial filings made by new corporate entities and by corporations whose securities had been closely held or traded over the counter. During the past year many such filings were made by companies whose business is closely associated with rapidly growing technological and scientific developments and with our expanding population, as in real estate and recreational activities.

Certain special problems related to real estate filings and the increase in their number indicated the need for a new form designed to provide adequate disclosure of the problem areas. The Chief Accountant and his staff cooperated with other divisions of the Commission in the preparation of a new Form S-11 for this purpose which was adopted effective December 1, 1961.72

The Commission also adopted, on June 12, 1962, new Rules 13a-15 and 15d-15 under the Securities Exchange Act, and new Form 7-K to require real estate companies to file quarterly reports of gross income. expense and net income; cash available for distribution; and distributions to shareholders.73

Difficulties often arise in connection with initial filings because accountants and other advisers who serve the registrant have not had any prior experience with the Commission. In some cases these persons have not familiarized themselves with the rules and regulations of the Commission--particularly the instructions as to financial statements required by the forms, the rules relating to independence of the certifying accountant, and those relating to the form and content of financial statements as set forth in Regulation S-X.

Some of the current problems in initial filings are created because audits had not been made in years preceding the filing of a registration

72 Securities Act Release No. 4422.

13 Securities Exchange Act Release No. 6820 and Securities Act Release No. 4499 (June 12, 1962).

statement or the audits for prior years did not measure up to generally accepted auditing standards and procedures, particularly with respect to verification of inventories and receivables. These standards require the observation of inventory taking and the confirmation of receivables where practicable and reasonable if either of these assets represents a significant proportion of the current assets. Where these procedures have not been applied, the auditor must satisfy himself as to the reasonableness of inventories for prior years by other appropriate auditing procedures. In some instances this is very difficult because the client may not have taken an inventory at the end of any prior year or because inventory records for such years are incomplete or may have been destroyed. Failure to adequately verify inventories and receivables may preclude expression of an opinion as to the fairness of the financial statements taken as a whole since discrepancies may exist which would materially affect the income, earned surplus, and working capital.

During the year it came to the attention of the Commission that wide variations had developed in the certificates of independent accountants with respect to representations concerning the verification of inventories of prior years in first audits. In some cases such representations have raised a question as to whether the certifying accountant intended to limit his opinion regarding the fairness of presentation of the income statements. Accordingly, an Accounting Series Release 74 was issued to reemphasize that our rules under the Securities Act require that registration statements contain a certificate of an independent accountant based on an audit conducted in accordance with generally accepted auditing standards and procedures.

The Chief Accountant and his staff cooperated with other divisions of the Commission and the industry in the preparation of proposals to amend Articles 7 and 12 of Regulation S-X governing the form and content of financial statements and schedules filed by insurance companies other than life and title insurance companies. The revision of Articles 7 and 12 which was adopted July 26, 1961,75 reflects changes in requirements of the annual statement filed with state regulatory authorities and developments in insurance reporting since those articles were originally adopted. Details of these changes were discussed in last year's report. Similar cooperative effort during the year resulted also in the development of a proposed amendment to Regulation S-X which would add to that regulation provisions governing the form and content of financial statements and related schedules to be filed by life insurance companies.76


** Accounting Series Release No. 90 (March 1, 1962). T5 Accounting Series Release No. 89. To Securities Act Release No. 4525 (August 20, 1962).

During the year the Chief Accountant and his staff participated in the determination of requirements regarding disclosures and financial statements pertaining to employee stock purchase, savings or similar plans. On July 23, 1962, a new Form 11-K was adopted for use in filing annual reports with respect to such plans, and Regulation S-X was amended by the addition of a new Article 6C which prescribes the form and content of the financial statements to be filed.”

Shortly after the close of the fiscal year, the Commission issued its findings, opinions, and orders in two proceedings under Rule 2(e) of its Rules of Practice. In Arthur Levison,78 the Commission found that Levison, a certified public accountant, was not in fact independent with respect to a registrant and was therefore disqualified under Rule 2-01(b) of Regulation S-X from certifying its financial statements. Levison's lack of independence resulted from the facts that he had been an employee of the registrant and had served as a director of an associated company during the period under report. In addition he certified materially false and misleading financial statements of the registrant and an affiliated company without having audited or ever having seen the books and records of either company. Because Levison's conduct constituted a serious breach of the standards of his profession and of his responsibilities to the Commission and to the public, he was denied the privilege of practicing before the Commission.

In Morton 1. Myers,79 the Commission held that Myers, a certified public accountant, engaged in unethical and improper professional conduct when he prepared a balance sheet for a “proposed corporation” on the basis of information supplied over the telephone by a client and sent the statement to the client with a covering letter addressed to the "Board of Directors," which falsely stated that he had examined the books and records of the "corporation.” The balance sheet was used to obtain a bank loan, the proceeds of which were used to purchase control of a company whose stock was listed on the American Stock Exchange. After consideration of several factor urged by Myers in mitigation of his conduct, the Commission ruled that Myers should be denied the privilege of appearing or practicing before the Commission without its prior approval and that no application for approval would be entertained for a period of 1 year from the date of the order.

17 Accounting Series Release No. 93 (July 23, 1962). 78 Accounting Series Release No. 91 (July 20, 1962). 70 Accounting Series Release No. 92 (July 20, 1962).

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Section 15 of the Bretton Woods Agreements Act, as amended, exempts from registration under both the Securities Act of 1933 and the Securities Exchange Act of 1934 securities issued, or guaranteed as to both principal and interest, by the International Bank for Reconstruction and Development. The Bank is required to file with the Commission such annual and other reports with respect to such securities as the Commission shall determine to be appropriate in view of the special character of the Bank and its operations and necessary in the public interest or for the protection of investors. The Commission has, pursuant to the above authority, adopted rules requiring the Bank to file quarterly reports and also to file copies of each annual report of the Bank to its board of governors. The Bank is also required to file reports with the Commission in advance of any distribution in the United States of its primary obligations. The Commission, acting in consultation with the National Advisory Council on International Monetary and Financial Problems, is authorized to suspend the exemption at any time as to any or all securities issued or guaranteed by the Bank during the period of such suspension.

During the Bank's last fiscal year ending June 30, 1962, the Bank made 29 loans totaling the equivalent of $882.3 million, compared with a total of $610 million last year. The loans were made in Argentina, Australia, Austria, Colombia (2 loans), Costa Rica (2 loans), Ethiopia (2 loans), Finland, Ghana, Iceland, India (5 loans), Israel, Japan, Kenya, Mexico (2 loans), Peru, Philippines (2 loans), South Africa (2 loans), Trinidad and Tobago and Venezuela. This brought the gross total of loan commitments at June 30 to $6,672.8 million. By June 30, as a result of cancellations, repayments, sales of loans and exchange adjustments, the portions of loans signed still retained by the Bank had been reduced to $4,665.4 million,

During the year the Bank sold or agreed to sell $318.8 million principal amount of loans. On June 30, the total sales of loans amounted to $1,332 million, of which all except $69 million was without the Bank's guarantee.

The outstanding funded debt of the Bank amounted to $2,520.8 million on June 30, 1962, reflecting a net increase of $292.3 million in the past year. During the year there was a gross increase in borrowings of $463 million. This increase consisted of three public bond issues, including an Italian lire issue in the amount of Lit. 15 billion (U.S. $24 million), a $100 million U.S. dollar issue, and a Swiss

а franc issue in the amount of Sw F 100 million ($23.3 million); the

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