Metcalf Report

The Metcalfe Report was a critical report on the U.S. accounting profession and the influence of the "Big 8" accounting firms, released in 1976 by Senator Lee Metcalf, who had chaired a U.S. Senate committee that examined the accounting industry. The report's main focus was on the need for change in the structure of the accounting system. The actual title of the report was "The Accounting Establishment."

The primary criticisms contained in the Metcalf Report were that national firms dominated the establishment of auditing standards, and there was no mechanism in place for public participation in establishing these standards. The report recommended that the federal government establish auditing standards through the Government Accountability Office (GAO), the Securities and Exchange Commission (SEC), or by federal statute.

The U.S. 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. It contained two main criticisms: First, the "Big Eight" accounting firms controlled the American Institute of Certified Public Accountants  (AICPA), where the AICPA had approval authority for appointed Financial Accounting Trustees, and the Trustees in turn appointed Financial Accounting Standards Board (FASB) members.  Therefore, the "Big Eight" firms controlled the standard-setting process.

The Big 8, refers to the 1970's and 80's when there were 8 large multinational accounting firms that conducted the majority of auditing business for publicly traded companies:

1.     Arthur Andersen.
2.     Coopers and Lybrand.
3.     Deloitte Haskins and Sells.
4.     Ernst and Whinney.
5.     Peat Marwick Mitchell.
6.     Price Waterhouse.
7.     Touche Ross.
8.     Arthur Young.

The second criticism in the report was that 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.

 The Metcalf Report contained several 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 Financial Accounting Foundation (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.