I showed you earlier on the chart. Another example is on August 15, 1978; 25 checks were cashed. Five for $2,000 each at one bank and 20 for $1,090 each at another bank.

Another example, on August 18, which is 3 days later, 15 more checks were cashed, 5 for $1,000 at one bank and 10 for $2,000 at another bank. This same pattern was repeated with regard to deposits. The currency was deposited at three or four different banks on the same day.

Senator CHILES. Did you determine why they were cashing checks in $1,000 amounts at three or four different banks?

Mr. DOYAL. We asked several people that question. The answer that We got was, "We didn't want the banks to know what our business was. We didn't want people to know how much cash we had on hand." That type of answer.

I never got what I considered a satisfactory answer for this method of generating cash, that is going to several banks at a time.

There is another chart, chart F, which will show who cashed the checks.

The first gentleman is Louis Arnold. He cashed 119 checks during the years 1974, 1975, and 1976 for $111,000.

Harold Phipps, 323 checks, $342,000.

Joel Nagel, 24 checks, $22,500. Mr. Cooperstein cashed six checks. Mr. Slater cashed two checks.

We have interviewed three of those five people formally. Two of them still work for Art Metal and one of them has been retired. Neither of the two current employees could remember any specific instructions concerning denominations of bills they would obtain while they were cashing these checks and neither of them told us they had ever requested the story it was for auction expenses.

One of them did tell us that when he went to the bank to cash the checks as Mr. Phipps, who cashed most of the checks in 1978, said that he got the biggest denominations possible so he could carry the money unnoticed.

Senator CHILES. Is the denomination of the bills obtained at the bank of any significance?

Mr. DOYAL. Yes, sir, it is. When Touche Ross & Co. arrived for their annual audit in September of 1978, they called for account of petty cash. When they did so, they wound up counting $258,900 in currency containing 1,399 $100 bills, 940 $50 bills, and 3,600 $20 bills.

These stacks of money or this money would make a stack about 30 inches high. If it was in the auditors briefcases, chart G would show what the auditor had to see.

Senator CHILES. Is chart G-that doesn't reflect how high the stack would actually be of the $20 bills, does it?

Mr. DOYAL. Yes, sir, if someone has a bill that they can lay up there, you will see that it is to scale.

Senator CHILES. So, actually the stack of $20 bills of 3,600, $20 bills that were there on hand, were actually that high. It would have been that high.

Mr. DOYAL. It would have been that high.

Senator CHILES. That represents a 30-inch stack?
Mr. DOYAL. A total of the stack.

Senator PRYOR. I have two or three questions.

Is the Federal Government the biggest customer of Art Metal? Mr. DOYAL. Yes, sir, they are. About 80 percent of what Art Meta sells, goes to GSA. The reason I make that distinction is, in their book and records, they distinguish between GSA and the rest of the Gov ernment. Some of the other sales, about 88 percent may be to th Government.

Senator PRYOR. Did Art Metal sell any other merchandise or prod ucts to local governments or to State governments?

Mr. DOYAL. Yes, sir. They sell library shelving under the name, Etn Stack, to local State governments and universities, that type of thing Senator PRYOR. That's all the questions I have.

Senator CHILES. I think at this time, we'd like to call a representativ of the audit firm of Touche Ross & Co.

Excuse me just a minute. Let me swear them in.

[Whereupon, Jerry Maloney and Ronald Brotherton, having bee duly sworn as witnesses herein, were examined and testified as follows: Senator CHILES. Mr. Maloney, you are a partner of Touche Ross Co.; is that correct?

TESTIMONY OF JERRY MALONEY, PARTNER, TOUCHE ROSS & CO., ACCOMPANIED BY RONALD BROTHERTON

Mr. MALONEY. That's correct.

Senator CHILES. And you are accompanied by Mr. Brotherton, wh is the assistant general counsel.

Mr. MALONEY. That 's correct.

Senator CHILES. Touche Ross conducted the audits under the perio covered by our investigation and I ask you, Mr. Maloney, again, fo the record, if you would state your position with the firm?

Mr. MALONEY. I'm a partner in the firm and I work out of the head office.

Senator CHILES. Were you assigned to the Art Metal account?
Mr. MALONEY. Yes; I was assigned to it in September of 1978.
Senator CHILES. All right, sir.

Mr. Maloney, in September of 1978, auditors under your direc supervision were at Art Metal in connection with your annual audit of the firm.

One of them was assigned to count petty cash and when all of this was done, Art Metal had shown your auditor some $258,900 in currency.

Describe for us, if you will, the counting procedure?

Mr. MALONEY. Basically, when the auditor arrived, Mr. Markowitz at our request, brought in the petty cash to be counted. Senator CHILES. How was that brought in?

Mr. MALONEY. First, he brought in attaché cases and opened then up on the desk and they were brought full of money.

The auditor proceeded to count the cash that was contained in the attaché cases and when he was done with those two, Mr. Markowit said he had another one.

So, the auditor accompanied him back to the safe to get the third case and brought that into the room and he proceeded to count the third case.

Senator CHILES. Was anything said as to why the company had this amount of cash on hand in attaché cases?

Mr. MALONEY. Yes, the same reasons that were given to us that were given to Mr. Doyal and that is, that the cash was to be on hand because a big auction was coming up and they wanted to go buy machinery and equipment at auctions with the cash.

Senator CHILES. Was this cash banded with bank wrappers? Was it like you would get it from the bank in neatly packaged bank wrappings?

Mr. MALONEY. Most of the bills contained rubber bands around them. There were some old and some new bills, but they were basically put in packages with rubber bands. Very little, if any, bank wrappers were noted.

Senator CHILES. How many of your clients would have this amount of cash on hand? Is this a normal procedure that you would find when you audit a firm, to bring in a couple of suitcases of cash?

Mr. MALONEY. For a company of this size, no, this is not a normal amount of petty cash on hand.

They are usually lower amounts of imprest funds where they would get reimbursed as often as required but would normally not E have this amount of cash on hand.

Senator CHILES. Is it a normal practice for firms who are manufacturers, like this, to be borrowing on their accounts receivable?

Mr. MALONEY. It's becoming more prevalent the companies of this size with tight cash positions to be factoring receivables or to have some kind of inventory or receivable financing.

Companies like Armstrong and Commercial Credit are starting to get a lot more customers.

Senator CHILES. I'm looking at the chart that we used as chart B, and I notice that they started January of 1978 with $126,000, that built up. In May, they got $158,000. By July, they have got $227,000 and by September, they have got $258,900. That does not sound like you just went to the bank to get the money, because you have got an auction coming up.

Mr. MALONEY. We reviewed and had determined the same buildup that had been going on month by month, and we asked to see the checks, being told that there were a lot of checks for $1,000 and some, $2,000 and some $3,000 checks.

So, we reviewed the checks for endorsement as Mr. Doyal did and then, again, asked the question, "Why was all this cash on hand?" and the President, Mr. Kurens, said he instructed Mr. Markowitz to have the cash on hand so that when he wanted to go to auction and an auction was available because they were always in a tight cash position, he may have missed out on an auction or two, he wanted to go to because he didn't have the cash available.

So, Mr. Markowitz was instructed to have the cash available whenever Mr. Kurens wanted to go to an auction and buy machinery and equipment.

Senator CHILES. Would you think, just based now on your experience as a partner in the firm, that it would be a sound business practice for a company that is borrowing money at approximately 18 percent interest on factored accounts, to have in January, $126,000 on hand, draw

ing no interest, just sitting in the vault? In July, building up $227,000 and then at the end of the year even further. Would that the normal practice that you would see with a client running a soph ticated operation or a big volume operation?

Mr. MALONEY. It's unusual for it to be handled this way.

Senator CHILES. In the other sort of business practices of the fir were there any other unusual practices like that or did they normal appear to be taking most of the cautions and conducting their busine in a way that would generate a profit and reduce expenses?

Mr. MALONEY. This was the only unusual item that we found. Senator CHILES. What assurance did you have that the cash that y counted was the same cash that was credited by the checks that we titled, and auction expense?

Mr. MALONEY. Well, basically, since we are not there during tỉ year to count cash and look at several items, one was the accountabili of the cash and as Mr. Doyal pointed out, the cash was accountable,: effect, if one went in, to say, "Let's count the petty cash at the end June." Then, the company would have to account for $192,900 of cas Not having been there during the year to count the cash, we aske management if the cash was on hand as indicated in the books an they said, "Yes."

And, we asked them to represent that to us in our audit letter. It an unusual representation but this was an unusual amount of cash. Senator CHILES. So, that would be an unusual thing for you to asl but you did in this instance, and they represented that to you in you audit letter.

Tell me, how does that take place?

Mr. MALONEY. Basically, what they do is, at the end of an engage ment under our practices and accounting policies, any significan representations made to us by management that cannot be corroborate by outside evidence should be contained in a letter of representation

So, they would say to us, based upon the best of their knowledge and I believe the following representations are true and correct, and one of the representations that were made to us is that the cash as indicated in the petty cash book, was on hand.

In addition to that, knowing that this investigation was going on we called the staff members and asked them if they knew of anything that we should be aware of that might affect the audit, and we got the response we expected that is, that they could not tell us anything at the present time.

That was the only outside cooperation that we could get at the time. Senator CHILES. When you asked for this representation from Art Metal, was there any comment about them making this representation? Mr. MALONEY. None whatsoever.

They merely made the representation.

Senator CHILES. Would you class your 1978 audit as routine, and if not, why not?

Mr. MALONEY. No; it was not routine. As Mr. Doyal said:

Under accounting rules, if you have the presumption of concern as to affairs of the company, you must extend your audit procedures to try to do the best you can to look over the transactions or potential, illegal or improper payments.

The committee, in effect, created the presumption of concern and we then had to extend almost all of our audit procedures to determine if there was anything that we could come up with that would indicate that there was any unusual or illegal practices.

Senator CHILES. According to the chart shown us by Mr. Doyal earlier, Art Metal had some $43,000 in cash on hand in their fiscal year 1977.

Could you give us the details of that count?

Mr. MALONEY. Yes. That count was basically the money which was brought in by Mr. Markowitz in something we called a "red robe," which is an expandable file with a rubber band around it. And, he put that on the desk and the count had no bills larger than $20 in it.

All the bills were $20 or lower. And Mr. Markowitz presented that batch for us to count and we counted it.

Senator CHILES. Your working paper shows that the client had made an entry prior to your arrival that closed out the petty cash account and increased the balance of the loans and exchanges account. Wouldn't the effect of that entry be reducing the petty cash to zero? If you just look at that, you wouldn't know that there had been any petty cash?

Mr. MALONEY. That's correct. I believe the amount was about $42,000, which would be a $1,000 working imprest account which is the usual imprest account.

Senator CHILES. Did anyone ask why that entry had been made? Mr. MALONEY. I believe someone asked but it was over 2 years ago, but they couldn't remember what the answer was that was given to us. Senator CHILES. Do you know of any legitimate reason why such an entry like this would be made when, in effect, the petty cash was there? Mr. MALONEY. Basically, I don't know what the reason for the entry was. However, whatever reason the company would give, we would have to follow up to verify whatever reason they felt that entry should have been made.

I don't know the basis for the entries, so I really can't tell what the company was thinking.

Senator CHILES. The books would have balanced by the virtue of the making of that entry?

Mr. MALONEY. Yes, sir. The books would have balanced, but it would have been a different asset in a different account and we would have asked for an account of what that asset was. And, at that time, the asset was cash and we would have had to proceed to count the cash at that time.

Mr. Markowitz did bring it to us so we didn't have to go through that routine.

Senator DANFORTH. Can you tell, when making an audit, how a company, particularly this company has paid for equipment it has purchased?

Mr. MALONEY. Basically, you can go through the books and you can tell when it was paid by cash or by check.

You would ask how is it paid for and whatever method they told you, if they said it was in certified checks, you would say, "Fine, may see your copy of the certified check and who it was made out to and who it was endorsed by?"

I