The Commission's status should be supervisory without the imposition of additional regulations and interference with the industry's operations. Other than the revision of the agreements and of its own oversight mechanism, the Commission should leave self-policing to the owners. The provisions should be incorporated not in an atmosphere of an adversary proceeding, but rather with an attitude of mutual self-help. The second half of my study, dealing with improvement of the present self-policing methods, will be conducted with the same attitude.

C. DETERRENT EFFECT AND OTHER BENEFITS

As stated previously, self-policing in the shipping industry rests on the premise that the owners have decided to refrain from committing malpractices. Most malpractices can, in time, be detected by an effective neutral body. Equally important is the fact that an effective neutral body can create a clean trade by deterring the commission of malpractices.

While the effectiveness of a self-policing system can be measured to some degree by the fines it collects, the situation eventually could arise where the amounts of the fines would be minimal. The most striking example is seen in a recent case where a neutral body came in during a rate war and put out the fire with heavy fines. Now this conference has only a small number of malpractices and minimal fines.

What cannot be measured when a policed trade becomes clean, and what is of utmost importance, is the deterrent effect an effective self-policing system has. The tendency in conferences in times of peace has been to abolish or water down the authority of the neutral bodies, discounting the deterrent factor. This action by the conferences is imprudent when one looks at the cyclical history of malpractices and the lines' tendency towards recidivism. Clearly, there is a need for a continuing surveillance of conference practices by neutral bodies irrespective of the present condition of the trades.

Another important reason for maintaining the neutral body in place is that it serves as an assurance to the ethical shipowners that their competitors are not taking unfair advantage of them. The vast majority of owners have

committed themselves to observe their agreements. It is important that they know an effective neutral body is present to dissuade those members who are inclined or tempted to commit that first malpractice.

There must be an atmosphere of effective self-policing of the conference agreements so that those conditions do not come about which lead to retaliation in rebating and other malpractices. The owners should not lose sight of the important deterrent effect a neutral body can have. What is clear is that, whether there are closed or open conferences, dual rates or deferred rebates, when the conditions beyond the control of the lines come about, that is, overtonnaging and economic recession, then a rate war is imminent. Apart from the enactment of legislation which would address itself to the problem of overtonnaging, the best solution for preventing rate wars is a strong, effective neutral body.

IV. REVIEW OF SELF-POLICING SYSTEMS

A. ACCOUNTING FIRMS AS INVESTIGATORS OR NEUTRAL BODIES

Historically, accounting firms have been employed by conferences to investigate alleged malpractices on an ad hoc basis or as the permanent neutral body. Apparently, the lines involved were of the opinion that a review of the suspected wrongdoer's books and records would prove a suspected malpractice.

The accounting firms which were hired as permanent neutral bodies have not proved to be effective. The reasons for this can be traced to the lack of sufficient authority in their contracts to police the conferences, as well as the mistaken premise that accounting expertise alone makes one competent to investigate shipping malpractices. With respect to the latter, witnesses state that an audit of a line's records will not uncover malpractices unless it is conducted with some knowledge of shipping practices and the areas where malpractices occur. As to sufficient authority, knowledgeable steamship officials claim that to be effective as a neutral body, there must be, as a minimum, the authority to self-initiate investigations and conduct spot audits of a line's records. The combination of these authorities usually was not given to the auditors looking for malpractices.

The majority of officials also were of the opinion that a competent neutral body investigator should have a combination of experience in the shipping industry, auditing knowledge, and investigative expertise. Few persons would have all three of these talents when first hired to investigate malpractices but, within an acceptable period of time, an intelligent employee should be capable of acquiring all of them. These employees, while developing their talents, would be devoting themselves full-time to being attuned to the shipping trade's current practices, innovations, problems and rumors.

Employees of accounting firms on retainer never acquire the requisite shipping and investigative expertise because of the limited number of investigations they conduct. Accounting firms which are hired as the permanent neutral bodies presumably assign their career accountants to acquire knowledge about malpractices in the shipping industry. These employees must learn how to look for malpractices, how to analyze the evidence, how to develop investigative leads and, finally, how to document a violation. The accountant must put

aside his methodical step-by-step accounting approach and acquire the inquisitiveness and independence of thought to develop evidence beyond that contained in a firm's posted records. The accounting firm must orient itself to respond quickly to suspected malpractices. The inability to resolve complaints promptly was a major objection against accounting firms engaged to audit shipping companies' records.

Accordingly, to be successful as a self-policing neutral body, the accounting firm must be able to convince its career accountants to learn the neutral body trade and stay in this area rather than continuing on in the accounting profession. Understandably, there is little motivation to do so because the salaries of proficient neutral body investigators are far below those of experienced certified public accountants. The talents of a competent neutral body investigator are not those which would further an accountant's career.

Finally, for that body of malpractices which occurs on the piers and in areas other than corporate offices, there is the problem of over-qualification of the accountant with his refined techniques. Accountants request documents, whereas investigators go in and dig them out.

To date, no accounting firm has demonstrated success in the neutral body business. An accounting firm staff, even though it is shipping industry oriented, is not suited to the shipping industry neutral body business. These firms have never had all the required authorities and have never performed all the necessary audits and inspections. They have also suffered from turnovers in personnel. The obvious conclusion here is that an accounting firm should not be retained for the investigation of shipping malpractices.

B. CONFERENCE CHAIRMAN OR COMMITTEE OF MEMBERS
IN THE ROLE OF SELF-POLICING OFFICER

Numerous conferences designate the conference secretary or chairman as the investigator in malpractice cases. A variation on these is to have a committee of members do the investigation.

The self-policing mechanism in these cases usually relies solely upon carrier complaints as the basis for

investigations. Some of the agreements do provide for
the chairman to initiate an investigation, but these are
few in number and rarely has the authority been exercised.

This system suffers from two basic weaknesses. First, the vast majority of officials agree that the chairman and line officials do not have the inclination, the time, nor the expertise to be investigators. They do not have the capability to investigate in-depth in an area where malpractices are occurring, nor do they always have an overview of malpractices in the industry as a whole. Additionally, the conference chairman's position calls for complete objectivity and neutrality in conference matters. An investigator ideally possesses these qualities but, during the heat of an investigation, there does arise an adversary climate between the investigator and the complained-against party. Oftentimes, there are scars from the battle.

The chairman depends upon the conference members to maintain his position as well as to secure increases in pay. It is acknowledged that investigating your boss is not the best way to further one's career as it creates a basic conflict situation. Neutral bodies, under their present operating conditions, encounter the same problem, with the additional burden of adjudication and fining.

The second basic weakness in the system usually involves dependence upon carrier complaints as the sole method to discover the presence of malpractices. Practically every witness stated that to rely on complaints as the means for detecting malpractices would result in a meaningless selfpolicing system. Also, some witnesses state that, in the subject type of system, the carriers are reluctant to complain because they fear retaliation from fellow members inasmuch as they themselves are committing malpractices, or that the shippers would react against them in some way.

Testimony to the ineffectiveness of this system is the longevity most chairmen enjoy in their positions. More basic evidence of this premise is seen in the fact that, during the five-year period ending in 1975, over seventy conferences filed negative self-policing reports with the Commission. At the time these reports were submitted, the system of self-policing used was the arbitration, secretary, chairman or committee method. However, during the past year, some twenty of these conferences have hired, or are in the process of hiring, a neutral body