What Is the 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."

Key Takeaways

  • Among the Metcalf Report's findings was that accounting oversight and auditing standards were inadequate in the accounting industry.
  • The Metcalf Report recommended that the federal government establish and monitor auditing standards for accounting firms.
  • The Metcalf Report also recommended that securities laws should restore the right of individuals to sue accounting firms for negligence. 

Understanding the Metcalf Report

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 and published a report entitled "The Accounting Establishment" in 1976.

Among the Metcalf Report's findings was that independent accounting oversight was lacking in the accounting industry. The report found that the "Big Eight" accounting firms controlled the American Institute of Certified Public Accountants (AICPA). The AICPA establishes standards for certified public accountants (CPAs) to ensure that they meet core competency and performance standards.

The AICPA had approval authority for appointed Financial Accounting Trustees, and the Trustees, in turn, appointed the members of the Financial Accounting Standards Board (FASB), which is responsible for establishing the financial accounting standards for U.S. companies. Therefore, the "Big Eight" firms controlled the standard-setting process.

In the 1970s and 1980s, the Big 8, referred to eight large multinational accounting firms that conducted the majority of auditing for publicly-traded companies. The Big 8 firms were as follows:

  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 Metcalf Report Findings

The primary criticisms of the accounting industry contained in the Metcalf Report were that national firms dominated the establishment of auditing standards. An audit is an objective examination of the financial statements of a company. Audits are designed to ensure that the financial recordings are accurate and are a fair representation of the company’s financial performance.

Also, 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), which monitors government spending and the Securities and Exchange Commission (SEC). The SEC regulates the financial markets but also ensures that corporations file the proper financial statements so that investors have access to accurate and transparent information. If not through those agencies, the report suggested that auditing standards be established by federal statute.

The second criticism of the accounting industry that the Metcalf Report highlighted was that the SEC had not fulfilled its responsibilities in establishing accounting and auditing standards. In other words, there was too much reliance on the private sector.

The Metcalf Report Recommendations

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 SEC, and the Financial Accounting Foundation (FAF). The Financial Accounting Foundation (FAF) is an independent organization that is charged with developing and improving financial accounting standards. The FAF, in part, provides oversight and administration of the Financial Accounting Standards Board (FASB).

As a result of the Metcalf Report, the FAF appointed a Structure Committee to study the organization and activities of the FAF and the FASB. Also, numerous changes took place within the AICPA, and the SEC did an intensive self-assessment of its role in accounting standards-setting.