the financial statements of the proposed registrant if the member resigned as director of the corporation, or failing this, whether one of the duly qualified members of the firm could certify if the designation of the accounting firm as accountants for the corporation was canceled. Held, the accounting firm of which the director was a member and each of the members thereof could not be considered independent for the purpose of certifying the financial statements of the registrant even though the member of the firm resigned his directorship and the accounting firm was not designated accountants for the corporation.

10. From September 1943 until January 31, 1946, a partner in an accounting firm was at all times available for conferences with the registrant on accounting matters. The accountant also exercised some supervisory powers with respect to the coporation's accounting procedures. Held, the accounting firm of which the accountant was a partner could not be considered independent for the purpose of certifying the financial statements of the proposed registrant for the fiscal years ended March 31, 1944, 1945, or 1946, inasmuch as the corporation's accounting procedures were subject to the supervision of the partner acting in the capacity of quasi-controller during part of the 1944 and 1946 years and all of the 1945 year.

11. An accountant was a partner of a registered broker-dealer with a 1 percent interest in the company. Held, the accountant could not be considered independent for the purpose of certifying the financial statements of the brokerdealer.

12. An accountant was an inactive partner in one firm of accountants, A, and an active partner in another firm of accountants, B. The accountant's share of the earnings from firm A consisted of an annual payment representing a percentage on his investment. The active partner in firm A was formerly the resident manager of an office maintained by an accounting firm which was the predecessor of firm B. All the partners of B were partners in the predecessor firm. The active partner in A was a director and owned a small stock interest in the registrant. Inquiry was made as to whether firm B could certify the financial statements to be filed with the Commission by the registrant. Held, accounting firm B could not be considered independent with respect to the registrant for the purpose of certifying statements to be filed with the Commission. Held, further, the resignation of the active partner of firm A as director of the registrant and the sale of his shares in the registrant would not alter the status of firm B with respect to the registrant for the period in which he served as director or for any subsequent period if the active partner in A had participated in the formation of significant accounting policies persiting beyond the year in which he resigned of such a character as to place firm B in the position of auditing his decisions.

13. An accountant who certified to the financial statements of a registrant was the father of the secretary-treasurer of the registrant. The secretary-treasurer was employed by the registrant on a half-time basis. Prior to holding such position, the secretary-treasure was employed by the registrant as its full-time principal accounting officer. Held, the accountant could not be considered independent for the purpose of certifying the financial statements of the registrant to be filed with the Commission.

14. An accountant certified the financial statements of a brokerage firm in which his brother was a partner. Held, the relationships between the certifying accountant and his brother were such that the accountant could not be considered independent for the purpose of certifying the financial statements of the brokerage firm to be filed with the Commission.

15. A partner in an accounting firm loaned $600,000 to a former officer of a company which held a significant interest in the registrant. This loan was secured by substantial blocks of stock of the registrant and of an affiliate of the registrant together with options to purchase the shares pledged. The accounting firm of which this partner was a member withdrew from the audit of the registrant. Subsequently, question arose as to whether the accounting firm could certify to financial statements to be filed with this Commission by a subsidiary of the registrant. Held, the accounting firm which was not independent with respect to a parent corporation could not be considered independent with respect to its subsidiary.

16. An accounting firm certified the financial statements of a registered investment company. The stocks and bonds of the registrant were kept in a safedeposit box in a bank and the members of the accounting firm had exclusive custody of the key to the safe-deposit box. Held, the accounting firm acting as a custodian of the registrant's portfolio securities could not be considered inde

pendent for the purpose of certifying the financial statements of the registrant. 17. An accounting firm certified the financial statements of a bank. A partner in the accounting firm acted as representative of the director's examining committee of the bank. In this capacity, he reviewed the loans made by the bank and made reports to the committee with respect to loans requiring special attention. A registrant, which was indebted to the bank for a substantial amount and whose loan had been reviewed by the accountant, intended to issue preferred stock amounting to about 75 percent of the loan. The preferred stock was to be junior to the bank loan, and the proceeds from the sale of the stock were to be used for working-capital purposes. The accounting firm of which this partner was a member had been asked to certify the financial statements to be included in the registration statement. Held, the accounting firm of which this partner was a member could not be considered independent for the purpose of certifying the financial statements of the proposed registrant.

18. A partner in an accounting firm which audited registrant's accounts was appointed agent in control of certain buildings by the children of the controlling stockholder of the registrant. In such capacity, the accountant negotiated a lease with the registrant which occupied office space in one of the buildings. The partner in the accounting firm also acted as trustee of a trust of which the wife and children of the controlling stockholder of the registrant were the beneficiaries. Held, the accounting firm of which this accountant was a partner could not be considered independent with respect to the registrant for the purpose of certifying its financial statements to be filed with the Commission.

19. A partner in an accounting firm which certified the financial statements of a registered broker-dealer maintained a cash account with the broker. The accountant effected transactions through the broker and left the securities in his possession. Held, the maintenance of an open account with a broker, represented by cash or securities, or both, by a partner of a certifying accounting firm, casts doubt upon the independence of the accountant and the firm of which he is a partner with respect to the broker.

20. Two of the partners in an accounting firm certifying the financial statements of a registrant were also partners of a law firm engaged by the registrant to pass upon the legality of the securities which were being registered. Held, the existing relationship was such as to jeopardize the status of the accounting firm in which these individuals were partners with respect to the registrant. 21. A partner in an accounting firm owned an undivided one-third interest in a block of a corporation's stock amounting to approximately 70 percent of the stock outstanding. The accountant was also an officer-director of the corporation. The accountant's firm did not audit the accounts of the corporation. The block of stock was sold to a registrant, a client of the accountant's firm. The accountant resigned as officer-director of the corporation and the corporation was merged with the registrant. Held, the accountant could not be considered independent for the purpose of certifying the financial statements of the registrant to be filed with the Commission.

22. The bookkeeper-cashier of a registrant entered the Armed Forces and a junior accountant on the staff of the accounting firm which audited the accounts of the registrant was loaned to the registrant 1 day a month to perform certain bookkeeping tasks. The following represented the maximum work done in any one month by the junior accountant. He footed the books of original entry, posted to the general ledger, took off trial balances, reconciled bank statements, occasionally made entries in the blotters from company records of purchases and sales, made journal entries for regular monthly accruals, prepared journal entries correcting errors and omissions made by company employees, and prepared and entered closing journal entries at the end of the year at the direction of the registrant. He also prepared balance sheets and profit-and-loss statements from book figures. Held, the accounting firm of which this junior accountant was a member could not be considered independent with respect to the registrant for the purpose of certifying its financial statements.

23. An accountant certified the financial statements of a registrant which were filed with the Commission. Prior to certification, the accountant posted to the general ledger entries covering a month's transactions and made all the closing entries. Held, the accountant could not be considered independent for the purpose of certifying financial statements filed by the registrant.

24. Members of a firm of certifying accountants set up a registrant's books and maintained them for about 6 months until the registrant engaged a bookkeeper. Held, the accounting firm could not be considered independent with respect to registrant for the purpose of certifying its financial statements for the year in which the accountants kept the books.

25. An accountant certified financial statements of securities dealers filed on Form X-17A-5 with the Commission. The accountant was considering an offer to serve as salesman for one of the securities dealers and inquired as to whether this would affect his independence with respect to dealers other than his prospective employer as to whom he acknowledged his lack of independence. Held, accepting employment as a security salesman would place the accountant in the position of engaging in a line of endeavor incompatible with that of an independent public accountant and would affect his status with respect to certifying financial statements filed with this Commission. In this connection, rule 4 of the Rules of Professional Conduct of the American Institute of Accountants was cited to the accountant.

26. An accountant who was elected director of a company in which his client held a 30-percent common-stock interest submitted his resignation immediately after he was notified of his election. Inquiry was made as to whether the accountant could withdraw his resignation and, if not, whether his election disqualified him for any period of time. Held, if the client and the company to which the accountant was elected a director were affiliated within the meaning of that term as defined in the General Rules and Regulations under the Securities Act of 1933, then serving as a director of either company would disqualify the accountant from certifying financial statements to be filed with the Commission. With respect to the interval of time during which the accountant served as a director, no question was raised, since it was indicated that the accountant resigned as soon as he was notified of his election and did not participate in a directors' meeting or act in that capacity.

27. After the close of the fiscal year October 31, 1946, A corporation distributed 250,000 of the 300,000 shares of its wholly owned subsidiary to its shareholders and retained 50,000 shares to use in lieu of cash to discharge some of its obligations. On November 29, 1946, 5,642 shares were given the accounting firm which audited A corporation's statements as part payment for fees due it. On December 8, 1947, these shares were sold through a brokerage house for cash. Inquiry was made as to whether the accountant could certifl financial statements of A corporation for the fiscal year ending October 31, 1947. Held, that since the accountants no longer had any financial or personal interest in either A corporation or its former subsidiaries, no question would be raised with respect to the certification. However, in the event of some adverse development in connection with the financial statement filed, the fact that at one time the accountants possessed a financial interest in the corporation would be given further consideration.

28. An accounting firm is paid a retainer for consultation services and to make studies and investigations for a hotel company. Held, the accounting firm may be considered independent for the purpose of certifying the financial statements. 29. From 1940 to September 1946 a partner in an accounting firm was a director of a business corporation, and during part of that time served as a member of its executive committee. Inquiry was made as to whether the accounting firm was qualified to certify the financial statements of the firm for the year 1947. Held, that since the audit did not cover any of the time during which the accountant served as a director, no question would be raised with respect to the certification. However, since the independence of the accountant was a matter of fact, this opinion might be altered if it should develop that the 1947 audit was improperly influenced by the accountant's background of directorship of if any significant accounting policies formulated prior to 1946 persisted beyond that year.

30. A company which was liquidating and held only two blocks of securities had leased for a period not to exceed 18 months one room in a suite of offices held by an accounting firm. The company paid the same rental per square foot as the accounting firm for the remainder of the office space. Inquiry was made concerning the propriety of this arrangement, since the accounting firm certified to the financial statements of the company. Held, arrangements of this type cast doubt upon the independence of the accountant, but in view of the special circumstances of this case the accounting firm would be permitted to certify the company's financial statements.

31. An inspection of a broker-dealer revealed that a member of the accounting firm which certified the financial statements of the broker-dealer also did the bookkeeping work and prepared the financial statements. Held, the accounting firm cannot express an unbiased and objective opinion of work performed by its own staff.

32. An accountant certified financial statements used in a registration statement for the period ending December 31, 1947, under certificate date March 17,

1948. Because of the resignation of the general manager of the company on May 7, 1948, and the general knowledge possessed by the accountant of the company's activities, he was engaged by the directors to reorganize the office and reallocate the duties of the executive personnel. Inquiry was made as to whether the accountant was qualified to certify the financial statements used in the registration statement for the purpose of a post-effective amendment dated June 30, 1948. Held, that the accountants could be considered independent with respect to the financial statements for the period ending December 31, 1947.

33. A partner in an accounting firm responsible for the audit of the financial statements of an oil company and the son of the president of the company jointly acquired a 25 percent stock interest in an oil equipment company. In connection therewith they obtained a bank loan of $200,000, signing a joint note and pledging the stock of the oil equipment business as collateral. The president of the oil company indorsed the $200,000 note and pledged as additional collateral 2,500 shares of the oil company's stock. Inquiry was made as to whether the partner in the accounting firm, who has now resigned from the firm, is qualified to practice before the Commission. Held, that these actions on the part of the accountant prevent his recognition by the Commission as an independent accountant with respect to any financial statements which the oil company has filed or may file covering the period of time when he was a member of the accounting firm which certified those statements.

34. A hotel requested an accounting firm to assign to the hotel one of their senior accountants, experienced in hotel auditing, to make a continuous audit of transactions from day to day. The individual assigned to this work was not to administer the accounting office nor to sign checks of the company, and he would not be required to make any entries in the books of account. The hotel had on its staff another person with the title of chief accountant whose duty it would be to administer the accounting office and to maintain the books of account. Inquiry was made as to whether the accounting firm would be qualified to cert fy the financial statements filed by the hotel company with the Comm'ssion. Held, that under all the circumstances the accounting firm could be considered independent.

Mr. HELLER. Would the accounting office of the Commission have occasion to check books and records of registered brokers or dealers and exchange members who are required to comply with the bookkeeping rules of the Commission under section 17 (a) of the Exchange Act?

Mr. KING. Registered brokers and dealers are subject to almost continuous checking, so far as we have the staff, and investigation by a corps of investigators.

Mr. HELLER. Do you check their record and reports?

Mr. KING. The reports are checked very thoroughly.

I want to add this, though: These investigations, because of the lack of staff, and the large number of registered brokers primarily are checked for compliance with regulations other than accounting. They check one or two things that have to do with accounting, but they are not able to do the job on accounting that they should be able to do. We do get annual financial statements from each one of the brokers, which in most instances are required to be certified, whether they are or are not certified they are very carefully checked by the Division of Trading and Exchanges.

Mr. HELLER. Are they up to date?

Mr. KING. That, I cannot really answer. I can find out.

Mr. HELLER. When you do, will you put that in the record?

Answer supplied: The Division of Trading and Exchanges is up to date in its examination of the reports.

Mr. KING. Yes, sir.

I might add from a supervisory angle, accountingwise, that these broker-dealers' statements are one of our real problems.

Mr. HELLER. Why is it a problem?

Mr. KING. Well, so many of them are so very small. These brokers have a small amount of investment in the company and as a result they do not go out and hire accountants who are familiar with brokerage accounting and the result is that we have a lot of trouble getting them lined up. There of course would be a tremendous advantage if we could examine all of them for unfortunately they are scattered all over the United States-some 3,000 of them-and a good many of them we do not get to see.

Mr. HELLER. Are the reports on ownership by insiders, and reports under the Public Utility Holding Company Act, and certain forms under the Investment Company Act checked by your department? Mr. KING. Not by us; no.

Mr. HELLER. Who is charged with checking then?

Mr. KING. Well, that, I take it, would come under the Public Utility Division, Mr. Yohalem's division and the investment companies would come under the Division of Corporation Finance, Mr. Bane's division.

Mr. HELLER. Has your office had occasion to find, in checking a financial report filed by a registrant after the effective date of the registration statement, that there was so substantial a change in conditions as to require the filing of a post-effective amendment?

Mr. KING. Generally speaking for my office, no; but I am sure that Mr. Barr's Division has had some of them.

Mr. BARR. Yes.

Mr. HELLER. Could you supply a list of these cases and describe what types of changes generally required a post-effective amendment? Mr. BARR. I think that is being given in the list that you requested of Mr. Bane. I think that could be combined with his answer.

Mr. HELLER. All right.

Mr. BARR. If it cannot be, a separate list will be prepared.

Mr. HELLER. Will you do that, just to keep the record in shape? Mr. BARR. Yes.

(The information requested follows:)

LIST OF POSTEFFECTIVE AMENDMENTS

The Drug Products Co., Inc.-File No. 2-6172

A registration statement covering the sale of 175,000 shares of common stock became effective on March 20, 1946. The tabulation in the prospectus setting forth the proposed use of the proceeds of $630,000 indicated the funds were to be used for a national sales development program, new product research and development, payment of loans and to increase working capital.

A posteffective amendment, which became effective November 6, 1946, originated from an inquiry by the registrant June 6, 1946, as to the method of disclosing the proposed use of about $175,000 of the proceeds from the March financing toward the acquisition of a subsidiary, the possibilities of which had become known to the registrant only 3 weeks prior to the inquiry. The amendment described the acquisition and included a revised application of proceeds statement and financial statements of the acquired company.

Globe Aircraft Corp.-File No. 2-6204

The original registration became effective March 18, 1946.

The posteffective amendment, which became effective July 11, 1946, was filed July 1, 1946, after discussion of the necessity thereof with the staff regarding the change in the proposed use of proceeds. The sales and earnings by months for the first 5 months of 1946 were given at the suggestion of the staff. These figures showed that in each month the company operated at a loss, some of