SEPARATE VIEWS OF THE HONORABLE ROMANO L.

MAZZOLI, E.F. HUTTON REPORT, OCTOBER 14, 1986

I have the greatest respect and esteem for Chairman Hughes. I rate him as an excellent and professionally competent Chairman, and I count him, more than that, as a personal friend.

It is, therefore, not pleasant or enjoyable to file separate remarks on a work product as comprehensive and complete as this report. Yet, I must.

With fullest respect to the Chairman, my colleagues and the staff, I cannot subscribe to all the conclusions drawn in this report about the role of the Justice Department in the Hutton prosecution and the degree of cooperation the Department gave the Subcommittee in investigating and compiling this report.

ROMANO F. Mazzoli.

ADDITIONAL VIEWS OF THE HONORABLE E. CLAY

SHAW, JR.

The report, in discussing the relevance of accounting audit examinations in the Hutton case, makes some comments that I believe should be clarified. The Subcommittee reviewed the activities of Hutton's outside accountants at my request. I am satisfied with their activities as established by the record.

We see from documents presented to the Subcommittee that the outside accounting firm of Arthur Andersen & Co. recognized as early as 1978 that Hutton had begun a cash concentration system. The money in this system was properly accounted for, but to the Arthur Andersen accountants, the amount and volume of the transactions warranted further attention. Hutton's use of target balancing techniques progressively increased, and in 1980 the accounting firm requested a legal opinion regarding the cash concentration system at that time. The legal opinion was given orally by Hutton's in house counsel. Based on the opinion of in house counsel, holding that the activities were legal, Arthur Andersen accountants proceeded to recommend that the balance sheet caption in the public filing forms reflect the balances at year end resulting from the use of a cash concentration system. Hutton changed the affected caption, although it did not use the exact caption proposed by the accountants. The traditional and acceptable practice of outside accountants is to rely on a public company's counsel for guidance on these types of issues.

The Subcommittee and, to some extent, witnesses before our Subcommittee mixed the 1980 Arthur Andersen request for review of target balancing with the later mutations of arbitrary drawdowns and chaining. These activities evolved from target balancing and reached their zenith in late 1981 through early 1982. The record indicates that these criminal mutuations entered the scene much later than the time when Arthur Andersen sought a legal opinion regarding target balancing. Blurring these facts brings unnecessary criticism to this firm and the accounting profession.

One of the factors leading to the criticism stems from a misunderstanding of what the public can and should expect from the accounting profession. Accountants are expected to be ethical number crunchers. They are not lawyers and could not be expected to analyze the many legal issues surrounding the mutations in the Hutton cash concentration system in this case. Accountants must be able to rely on the opinions of corporate counsel. If society expects accountants to also provide legal assistance, it must understand that most small businesses and individuals and many larger businesses would be unable to afford the additional cost of the service. The result might be no audits in many of these cases, and this would be a terrible disservice to the public.

The Subcommittee is aware of the division between legal and accounting advice and who can be expected to provide them. Per the Subcommittee's request, the General Accounting Office stated:

In the conduct of the audit and the issuance of the report, the auditor exercises a considerable amount of professional judgement. Professional judgement is based on and limited by the auditor's professional expertise and experience. In no event is the auditor permitted to act in the capacity of an appraiser, lawyer, actuary or other expert.1 We recognize that this view differs from the confused analysis of one witness before our Subcommittee. Professor Briloff criticizes the accountants in an analysis that assumes the 1980 legal review included the arbitrary drawdown and chaining activities, which developed later. The professor, who is a known critic of the accounting profession in general, has not audited a publicly held corporation since 1976, according to "Who Audits America." Although I do not wish to downplay the importance of academic opinion, much has changed over the last decade in the financial activities of publicly held corporations that affect the practical world of accounting. Perhaps the Subcommittee relied too heavily on this one opinion. The record indicates that the Arthur Andersen accountants went beyond the normal course of their review to bring newspaper articles about a previous check kiting case to the attention of Hutton's counsel. They should not be punished or criticized for this extra effort in identifying legal issues that they, as non-lawyers, relied on counsel to resolve. We want to promote this care and not encourage accountants to look the other way.

The accounting profession continues to search for ways that its members, in the normal course of their duties, can uncover corporate fraud. The report fails to make any recommendations on how this can be accomplished. To the extent that the report implies that the auditors in this case failed in their duties or are somehow responsible for failures of Hutton's internal controls, I believe the report is misdirected. It is clear that the outside auditors acted in good faith and in compliance with generally accepted auditing standards during these audits and complied fully and promptly with every Subcommittee request.

I have believed for some time that generally accepted accounting principles and auditing standards must be improved by the profession. A comparison of current standards with the Arthur Andersen audits of its client, E.F. Hutton, however, indicates Arthur Andersen & Co. acted properly and in compliance with current standards.

E. CLAY SHAW, Jr.

1 Attachment to a Letter from Mr. Frederick D. Wolf, Director, U.S. General Accounting Office to Mr. Hayden W. Gregory, Counsel, Subcomm. on Crime (October 2, 1985) (discussing an auditor's responsibility in auditing a public company) (the attachement is testimony submitted by the General Accounting Office to the Energy and Commerce Comm. Subcomm. on Oversight and Investigations on February 20, 1985) page 3 (emphasis added).

DISSENTING VIEWS OF THE HONORABLE BILL MCCOLLUM, DANIEL E. LUNGREN, E. CLAY SHAW, JR., AND GEORGE W. GEKAS

EXECUTIVE SUMMARY

We dissent from the tenor and conclusions of this oversight report because we believe the record overwhelmingly establishes that the Department of Justice prosecution of the E.F. Hutton bank fraud case was proper. Having participated in the oversight hearings, we find little resemblance between the actual case and the Subcommittee findings.

The cash concentration system at E.F. Hutton contained unethical, fraudulent and illegal activities, which endangered the American banking system. The Subcommittee record demonstrates that the Department of Justice resolution of this case protected the American public from the broad range of dangerous frauds on our financial community perpetrated by E.F. Hutton.

THE SUBCOMMITTEE FAILED TO MEET THE SERIOUS RESPONSIBILITIES INHERENT IN CONGRESSIONAL OVERSIGHT

The Subcommittee intended to oversee the Department of Justice policy on white collar crime prosecution. This was never accomplished. Instead, the complex Hutton bank fraud prosecution was singled out for study. The myopic study of this one unusual case cannot provide an adequate basis on which to critique the Department's policy.

Although the Department of Justice was invited to testify at a June, 1985 hearing, its testimony regarding the case was not permitted until December, 1985. Even then, the prosecutors were not afforded time to explain the complicated facts of the case or the relevant law. The investigation took much longer than necessary as a result of the delay in receiving this information.

Most importantly, the Subcommittee's interrogation of the politically appointed line prosecutors themselves, rather than their superiors, creates a danger of political influence upon all line prosecutors. Since the prosecutors make decisions daily regarding the application of criminal law to citizens, this danger is serious. These decisions should never be tinged with political influence, either from Department of Justice superiors or the Congress. The Subcommittee failed to uncover improper influence upon the prosecutors or to demonstrate that the prosecutors acted outside the bounds of proper prosecutorial discretion. Therefore the Subcommittee lacks any appropriate basis on which to question their decisions or analyses, however much any Member might have done something differently. The Subcommittee nonetheless has criticized the prosecution of this case in a manner too closely resembling Monday morning quarterbacking.