Roundtable Discussion on Financial Disclosure and Auditor Oversight

Monday, March 4, 2002

Inter-Continental, The Barclay Hotel, Astor Room
111 East 48th Street, New York, New York

Harvey L. Pitt, Chairman
Cynthia A. Glassman, Commissioner

Panel 1: Improving Financial Statement Disclosure

Moderator: Marty Lipton, Esq., Wachtell, Lipton, Rosen & Katz
Warren Buffett, Chairman, Berkshire Hathaway
Dwight Churchill, S.V.P., Head of Fixed Income Division, Fidelity Investments
Stephen Friedman, Senior Principal, MMC Capital
Dick Grasso, Chairman and CEO, New York Stock Exchange
Joel H. Seligman, Esq., Dean, Washington University School of Law
John White, Esq., Cravath, Swaine & Moore

Panel 2: Assuring Adequate Oversight of Auditing Function

Moderator, Robert H. Mundheim, Esq., Shearman & Sterling
William Allen, New York University School of Law
Warren Buffett, Chairman, Berkshire Hathaway
James Copeland, Chief Executive Officer, Deloitte & Touche
David Shedlarz, Chief Financial Officer, Pfizer
Melvyn Weiss, Esq., Milberg, Weiss, Bershad, Hynes & Lerach, LLP

Panel 1: Improving Financial Statement Disclosure

Mr. Pitt: Good morning, everyone.

We are very fortunate to have a group of very distinguished individuals who are expert in various aspects of our markets. We have a whole day of significant discussions.

And, for the Commission, this is an opportunity to learn and to listen, not an opportunity, really, to put forth our own views.

We have asked for this morning's Panel, Marty Lipton to take the lead in moderating, and I am going to just express my brief thanks to all of the anelists and to Marty for taking time out of incredibly busy schedules and, in Marty's case, pro bono, to assist us with this effort.

So, I'll turn it over to Marty.

Mr. Lipton: Thank you, Harvey.

I thought the best way of approaching this would be to ask each of the Panelists to address some of the current issues, and then to go beyond that and give us their views of what has been put forward and what they think would be useful in resolving some of the problems that have arisen.

I thought one way to begin this type of discussion would be to pick up on a proposal that Chairman Pitt made back in December. At least that's the first instance of it that I saw, but it may actually pre-date December. And that's a requirement for the disclosure of the critical accounting principles that are being applied in the creation of the GAAP financial statements, and the critical assumptions, estimates, projections that a company uses in reaching its GAAP financial statements.

I'd like to combine that with another question: And, that's whether much of the complaint with respect to the failure of financial statements today to reflect a true picture of the company's assets and liabilities and earnings might be resolved if a company was required to, in addition to the GAAP financial statements, disclose a detailed reconciliation of the GAAP financial statements to the company's tax returns.

Just to illustrate, there has much been said of late about companies capitalizing items that might otherwise have been expensed and, indeed, which they did, in fact, expense for tax purposes, but that was not disclosed, and it was not clear in the financial statements. Clearly, such a reconciliation would at least expose the existence of that differentiation.

I thought, Warren, since, I think, alphabetically you are first, I might ask you to either comment on that or, if you decide that it isn't worth commenting on, go on to whatever else you would like to say.

Mr. Buffett: Well, I think there's a Schedule M on the corporate tax return that does provide for the IRS, at least, an explanation of the difference between book accounting and tax accounting. And, you can get at some of the more important points by looking at the deferred tax asset and the deferred tax liability in the financial statements, which you'd have to compare to the previous year to make certain deductions about what has happened. But, you can get at that information, to some degree.

I — if I can get on a soap box for a second, though — I really think that the disclosure problem does not revolve around the quantity of disclosure. I mean, the SEC and the auditing profession have provided us with, you know, just a wealth of information on a quantitative basis. But, in the end, it's the CEO that determines the qualitative aspect of disclosure, and that's all important.

And, I think, under any rules, the CEO, if he or she wants to obfuscate, they can do that; and if they want to make it clear, they can do that. If they want to provide you with fluff, they can do that. If they want to provide you with substance, they can do that.

The CEO will look at any rules through his own particular glasses, and either look at them as a way to give his shareholders more information, or to do some kind of tap dance number. And, I would suggest that — I would suggest some certain behavior for the CEO, and then I would suggest a way of possibly enforcing it.

I would suggest that the CEO regard himself as the chief disclosure officer of a company, that he write his own letter. And, he can certainly call on an editor. I have the world's best editor, who is here today, Carol Loomis. And, it's enormously useful to have a wonderful editor. But, the CEO should still write the letter.

And, the CEO should write that letter as if he had one partner, and that partner has been away for a year. The partner is intelligent. He's somewhat versed in accounting terminology and finance terminology, but he's no expert. He's interested because he has a large section of his net worth in the company. He's ready to be an indefinite shareholder — a shareholder for an indefinite period, if he's treated well. And, the CEO, if he has that mental picture of that partner, and just writes to that partner what's happened that year, I think that's going to be better than all the information that can be required by any rules. Because, the CEO has a definite desire to communicate to that partner.

And, I say the CEO's attitude should be what would I want, if our positions were reversed? It's that simple. I mean, what do I need to know?

Now, Berkshire owns pieces of businesses — small pieces of businesses — and we own entire businesses. And, we really want the same disclosure from the CEOs of both companies. Not in the same detail, not something that could work to a competitive disadvantage, which if we own a hundred percent of a company, I'm perfectly willing to have him tell me about that, but I wouldn't want that done if I own five percent of a company.

But, in terms of the tone, the candor, I would want, from the CEO of a subsidiary of Berkshire, I would expect them to tell me what the hell is going on, and I would expect them to tell me that directly, and not have a public relations firm or an investor relations firm write the report for me. I don't want it coming to me with a lot of pictures or whatever it may be. I just want to know what's going on in their business.

And, there's no reason why the CEO of a public company, leaving out some of the details, leaving out some competitive aspects — but there's no reason why the CEO can't talk to his owners the same way that a subsidiary manager of a Berkshire company talks to his owner, which is me.

And, I would say that one way of trying to upgrade the attitude of CEOs, in terms of how they look at this whole problem, and to behave more in line with what I suggested, is that maybe some organization — like AIMR — could review annual reports, perhaps taking them in blocks of ten and assigning them out and then have those recommendations, if they're negative, reviewed maybe by one other layer.

And, where they found that report was basically a public relations document or a lot of fluff, that they simply withhold their vote. I mean, they own the place. They can speak in that manner. And, believe me, there have been times when we've withheld our vote, and that's when we hear from management. They get very interested in who their owners are at that point. And, certainly, with the concentration of institutional ownership in this country, if owners want better reports, they can get them. And, if they don't want them and demand them, they're not going to get them, no matter what the rules are.

Mr. Lipton: Warren, while you're addressing the obligation of the CEO to provide this type of report, would you also comment on the proposal by the Secretary of the Treasury to change the legal standard for measuring the performance of the CEO of a company, so that the — according to Secretary O'Neill, the standard should be ordinary negligence, rather than recklessness? I'm not sure that he was correct in his original description of what the standard is. But, assuming that we take his reference points, do you think we would accomplish anything by changing the standard of performance for a CEO and making the CEO more liable to suits on behalf of shareholders or disciplinary action on the part of the SEC, or even a new disciplinary organization?

Mr. Buffett: I think it would be very difficult, Marty. I think it's much better to have the CEO disciplined by his owners than attempt to discipline him by courts.

I think if you — whatever rules you came up with on that, I think that the CEO would go to his lawyers and say, you know, How do I stay out of jail and tell them the least? And so, I think it would be very difficult.

I think the owners can discipline them. I mean, we own a hundred percent of some companies. Believe me, we can discipline the CEO if he doesn't tell me what's going on. Maybe in this room we've probably got representatives of entities that own a very significant part of many corporations, and CEOs will listen to them. They may not want to listen to them, but they will listen to them. And, I think withholding the vote would be the best approach.

I mean, the SEC came up with the management discussion and analysis. You know, I read about on the average of one 10-K a day and a couple of 10-Qs a day, and I don't get much out of the MD & As. The whole annual report should be an MD & A. I mean, that is what it's about. But, by codifying, essentially, what should be in an MD & A, basically there's nothing in it in nine cases out of ten.

Mr. Lipton: Am I correctly interpreting what you said? You say that imposing more legal rules, whether increased liability or specific line item disclosure, would not, in your opinion, further the objective of making the appropriate information available? It would have just the opposite effect?

Mr. Buffett: I really think it would, Marty, yeah.

Mr. Lipton: I think, alphabetically, that Dwight, you're next.

And I know Dwight focuses primarily on the credit aspects of financial statements. And, I think it's very important to hear his view as to how a credit analyst, someone who is looking at a company's financial statements not for the purpose of investing in their stock, but essentially for the purpose of either buying their bonds or lending money to them, views the current issues, with respect to disclosure.

And, Dwight mentioned something to me as we were chatting earlier this morning, and I hope, Dwight, you'll mention it, about how you do have computer programs that pick up this information and convert it to your own models for your analytic purposes.

Mr. Churchill: Yes, well, we can hit that in terms of details. I'd like to comment on some of the things that Warren was saying, and so I'll start with those comments.

I think it's incredibly important that managers and CEOs do take control of the accounting treatment of their books and records. The concept of I'm not an accountant is certainly an abused concept. It is really important to take control and understand the translation of what is going on in that company through those financial records. So, I completely agree with that, and I don't think enough of that actually does occur. And, it would be good.

I think the tools are available, also. There is a lot of concern right now about financial reporting, yet when you think about it, if the will is there, the tools are available. There are certain improvements that we can make. Certainly, we can talk about some of the micro issues that can be improved, but the tools are currently there. We have a very good system.

We have a very good system — to pick up on your comments, Marty. We have a very good system. I think management does see themselves as fiduciaries for the equity shareholders. They could do a better job of that in some cases, and in that case, hopefully people will vote to improve that.

But, on the credit side, I will say that I think we do take a secondary position with management, as creditors. There is not as much disclosure for liquidity positions. The current market environment demands more of that. But, that's a point in time issue, and I think there are some improvements we could make that would allow better information to flow through to the creditors of a corporation.

But, I also believe that most of that should come through the market. That, really, the market is the best discipline. If you go back over the last ten years or so, the places where we've seen the greatest improvements in financial disclosure in different parts of corporate America have been in areas where there were problems and the market disciplined the process and improved the disclosure to clearly lower the cost of capital at those firms. They felt absolutely required to improve their reporting. And so, there are certainly examples of those improvements that are out there.

I think the comment that I had made earlier, about access to information, if you think about the role of the analyst, I will agree completely with Warren's comment about reversing the roles. If management would simply step onto the other side and take a look at how these — at how this financial reporting, how these disclosures are used, I think it would really help.

As an analyst, you're taking a look at a lot of qualitative data and a lot of quantitative data. The qualitative data is valuable to understand generally what the company is all about. But, the quantitative data is what you're going to use, in terms of making comparisons to other organizations and then trying to use that to project into the future. If you can't decipher it, it makes it very difficult to make those comparisons.

If you think the only way to truly compare different organizations, to make the capital markets work, an analyst has to take clear data from a company, use their own modeling thought process and their assumption about external drivers, and then put that into a different corporate context to be able to derive a true comparison.

Evaluative data is one place where I might have issues — is the issue of evaluative data is pre-chewed management and, as a result, more difficult for an analyst to try to figure out exactly what is going on. I think there's been great improvement in disclosure over the years, but it's getting to the point now that the statements, themselves, are quite small relative to all of the disclosures.

We're requiring analysts, in terms of trying to make sure these capital markets work, we're requiring analysts to sift through a huge amount of information, to sort that through. They can't use the management MD & A issues to help them a whole lot, and so they end up having to sort back through to figure out exactly what's going on. It's putting too much of a burden on them. And, given the economics and the number of companies these different analysts are following, it's very difficult for them to draw the correct picture of an organization.

So, I would really hope that we take a look at the financial statement, the quality of the data in that financial statement. I think the tools are there, but that also improve the line items on the actual reporting, to make sure that analysts have the data they need.

I hope that that covers a number of things.

Mr. Lipton: Well, you raise two quite interesting questions. One, you say that the present requirements of the MD & A, and let me just focus it now in your area. As you know, MD & A requires a disclosure with respect to what I'll call access to capital and the future requirements for the company to amortize its debt and so on.

Do you find that not useful in your work?

Mr. Churchill: Well, everything that is said by management hopefully will be useful. But, if you think about it, an organization — particularly when it comes to liquidity, organizations are very much in option space. There are ratings triggers, equity triggers. We've seen some of those issues that have come out. Stock options, other kinds of options.

When you think about liquidity of companies, you want to understand the full spectrum of what affects organizations. And, that's not going to be fully disclosed, and that's what a credit analyst will do. They'll take a look at a balance sheet but also try to understand what are the upside and the downside risks, particularly the downside risks in that balance sheet, because that's where liquidity comes from. Management is going to be reticent to provide the kind of view that would provide a complete story there.

Mr. Lipton: And, Dwight, would you like to comment on the role of the rating agencies in the analysis of companies' debt capacity and your analysis of whether it's a company whose debt you are prepared to purchase?

Mr. Churchill: Well, I — I don't want to take — I think we have a number of issues to talk about. I would certainly like to talk about the rating agencies and some of the issues around the agencies. They have a critical role here. This is a role of understanding, again, where the financial position of a company is at this point, in terms of their creditworthiness, in terms of their access to liquidity. And so, this is very important.

They do have more access to information than the overall market, and so that should put them in a better position to understand what is going on. I think they're also looking at how that role should evolve. I hope that the credit rating agencies continue to look at themselves as organizations that focus on the financial fundamentals of companies, and let the market deal with the other factors.

And so, I think there are a number of issues around the agencies, but they are critical to the process.

Mr. Lipton: Dick Grasso, the Stock Exchange has been at the forefront of improving disclosure to investors for at least a hundred years. And, actually, probably going back to the 1850s. And, the Stock Exchange has certain rules with respect to disclosure and so on.

The present situation seems to be focusing on things away from the kinds of requirements that the Stock Exchange has for listed companies. Does the Stock Exchange — and I'm not asking you to pre- judge the recommendations that the committee you have appointed of directors of the Stock Exchange to make recommendations — but, what is the Stock Exchange present view of this situation?

Mr. Grasso: Well, thank you, Marty.

I think before I focus on the narrow-based role the Stock Exchange can play, I think it's important to start from forty thousand feet.

You know, I would hope that the collective change that we all seek, whether it be from the private sector itself, from self-regulators, from the regulatory agencies, and certainly from the legislative initiatives, are not cast through the very narrow lens of the poster child of what went wrong here, which is Enron. Because you've got to start with the premise that you cannot legislate honesty. Okay?

And, from there, I believe it is important to remember that the world is watching a system that has been so admired for the past hundred and thirty- plus years with a great degree of skepticism as to whether we can right the ship. And, righting the ship, I think, starts with the premise that Warren offered. And that is, when you communicate with your owners, you can lay out in a level of detail, certainly be it in the K or in the annual report itself, such incredible specificity that you effectively disclose nothing.

And, therefore, I think it's important for us to remember that it is the role and responsibility, in a transparent public company, to not only have everything out there, but to have it in a digestible manner to a very broad audience of recipients. I would take Warren's observation and say let us write a plain English MD & A that's the entirety of the annual report so that your least- sophisticated owner can understand the business, can understand how it's performed, and the challenges that it faces.

I also think that, as we look at the challenges coming out of Enron and the collateral issues that have caused such incredible focus at all of the bodies of public policy making, that we do it in a manner that takes all of the best and preserves it and grows from there.

And, I would say to your specific question, Marty, we've been in the business of governance since the late 1860s through the venue of the listing agreement, itself. Requiring of companies that we trade certain disclosures goes all the way back to the first listing contract, when we asked some of the railroads to do the astounding thing of reporting annually their results of operations to the public — to their owners and to the public. That was as early as the mid to late 1860s.

And, at the turn of the century, we required the regular issuance of financial statements, both interim and annual. It was because of some of the problems experienced in the foreign payments area, and the political payments are in the middle 1970s that the Stock Exchange first required the creation of an audit committee for all of its listed companies, and realized at that point there were still some very major companies traded on the Big Board who had yet to appoint their first outside or independent director. It was by June of 1979 that every listed company had to have an independent audit committee.

Tracing through to the 1999 requirement that audit committees be composed of three independents, and there was very specific definitional embrace of the blue ribbon committee's requirements for the audit committee's eligibility. We've used the tool of the listing agreement, Marty, and the governance standard, as the requirement for continued trading. And, those that have failed to meet some of our governance rules have, indeed, been removed from the list. Whether it's inadequate financial controls, to failure to obtain shareholder approval, audit committee composition and functionality, disclosure-driven de-listings, it's the tool that the markets have.

And, I think it's a very effective one, because if indeed we come away from the period we're currently experiencing with a stronger system of disclosure and accountability, and I tie those two. Accountability is not just the production of data. It's the translation of data to the owners of the enterprises that are publically traded. That accountability starts with quality production from management, internal audit controls that have the confidence of the independent auditor, and an audit committee that really is in the driver's seat as to the structures and safeguards that public companies have to insure that owners are being well treated.

You point out that we created a committee back at our last board meeting that will, in essence, examine the whole issue of listing standards and corporate accountability. And, I was so looking forward, Marty, to giving a disclosure statement as many from the Commission have to give, that these are my own views, and not that of the committee. But, the committee is going to begin its work through the narrow lens of the listing standards and listing contract, but with the broad public challenge that we are in a period where our system is being heavily watched by systems around the world.

We all worked hard to bring more than four hundred non-U.S. companies to the U.S. markets in the last dozen or so years. All of those companies have embraced U.S. GAAP as the cost of entry. People are now, from around the world, saying Well, look at what's happened with GAAP, and should IAS or should some alternative system of disclosure be just as well acceptable to the U.S. regulators?

I think not. And, I'm not going to pre- judge where our committee comes out. But, I think it is a very critical — a very critical challenge and a very difficult period we face, because it is the public's confidence in our markets that's driven the level of participation to the point where, literally, one in two Americans are owners of equity securities. And, if you trace indirect ownership, that number rises to more than two hundred million participants having a stake in what happens each day at the Big Board.

Clearly, the governance that a listing contract, be it listing on the Big Board or listing on any of the other markets, presents is that tool or that leverage which says You will abide by the following, or you will lose your status as a listed entity. I think that we are well-positioned to look at issues such as board compositions, committee responsibilities, charters, codes of conduct of public directors. We are not, as some in the legislative branch have suggested, we are not a good source for choosing auditors, or for assigning audit responsibilities. I think that therein is an opportunity, as Chairman Pitt has talked about, a public accountability board to work in partnership with those in the public sector to create a whole new level of confidence in our systems.

And, I'm very sympathetic to that, by the way, because I do think that it is a period where it will require both some legislative — certainly in the area of fiduciaries and 401s — but I think that the regulators, combined with the markets and private sector initiatives, can be very, very effective at avoiding unintended consequences. I think that my final message to those who would like to see the Big Board in the position of assigning auditors, realize there are five auditing firms in the world that have the scope and resources that could cover the three thousand companies that we trade. And, I certainly wouldn't want to be in that position of having to choose amongst those five.

I do think that, in closing, Marty, that the Big Board and the NASDAQ and the other primary markets in the United States have a shared responsibility with the Agency to step back and say how can we, as markets, re-energize the public's confidence in the public capital system that we have in this country? With all of the recent disclosures and failures, it is still the finest system in the world. It is still a system in which an idea can become a business of enormous proportions to change society. And, I would hate to see this period of focus be one that simply takes the horrific, horrific stories of an Enron and some others, and use it as a basis for legislating a market structure that has served this country so well over the last hundred- plus years.

Mr. Lipton: I think we all agree with that, Dick.

Prior to falling on my head yesterday, I knew that F came before G —

[Laughter]

Mr. Lipton: But, I'll use that as an excuse, Steve, to pass the ball to you.

Mr. Friedman: Let me go back to Warren's formulation, which I am extremely comfortable with, a letter from a Chief Executive Officer to a partner who is financially intelligent and has been away.

Explicit or implicit in his formulation, and certainly in my way of thinking about it, is it's their money, and they're going to think of it that way. The reader of that letter can't be passive. That reader has to be prepared to ask questions, and the writer has to write that letter with the intention of answering everything that the logical reader is likely to ask.

And, thirdly, I think it's frequently very useful to think of it as if it was a private company, and what would that reader really care about, about the substance of his or her purse? Now, since this is a mind model and there is not a real single reader, I think that it might be very useful to make the audit committee actually the reader, actually to read that and ask those questions. And, inevitably, I think we're going to put some more burden on audit committees.

One practical suggestion I would make is that, to the extent that the company has a complex capital structure, use of derivatives and so on, there ought to be for the full board, and certainly for the audit committee, a derivatives university, some form of tutelage. You don't have to make them have the ability to run the trading book at a major bank, but make sure there is literacy there.

Another thing that I believe would be very, very constructive to make the audit committee a more useful interlocutor CEO in this exercise of making the MD & A a useful descriptive analysis, would be for them to make a determination, in their discretion, whether they want to retain special risk management counsel to help them.

If you look at the footnotes to Enron's annual report, there is a statement that they were operating within risk parameters that had been passed by their board. We will determine, as this unfolds, just what the board did or didn't understand. But, these are very, very complex matters, the risk managements. And if you read the annual reports, you see discussions of the value of the risk analysis, and the stress testing, and all kinds of fancy Greek terms, and Monte Carlo simulation discussions. In the last analysis, the devil is not in the details. That's small change. The devil is in the assumptions.

And, unless the audit committee has had sophisticated — it needs three or four things. It needs time. It needs the willingness to ask initially naive questions, which will, if they're smart people, will turn into sharp questions. It needs sophisticated risk modeling tools. And, it needs objective advice.

Because, the CEO may be — and the Chief Financial Officer may be honorable and good people. But, reasonable people disagree frequently about assumptions. And, if you — you will find many people have great difficulty dealing with low-risk/high-consequence, or low-likelihood/high- consequence risks. People frequently have enormous difficulty making assessments of what liquidity will be at a time of crisis.

And, the Enron executive who has testified has talked about the fact that, well, this was a bank run, as if that was a force of nature. Well, liquidity was one of the things that, in their risk discussion, they said they modeled for. What were the assumptions? This is complicated stuff.

So, I think we have to ask more from audit committees. I think they have to be the interlocutor in this approach. And, I believe they should, in their discretion, determine if they need help.

Now, you're not going to get this done unless you have good people on audit committees, and good people means not only financially sophisticated but independent and willing to spend some time at it. And, I can't think of anything more dysfunctional than to threaten to increase the liabilities. If you don't think these folks are already sufficiently on the edge of their seat, take a look at what's happening to D and O rates, insurance rates. I think, if anything, we have to encourage them and not scare them any more.

Now, very often, as I said, I think it's helpful to think about it as if the company were private, and what is the impact going to be on the wallet of the owner. And, some of the proposals that are floating around now for changing the rules strike me as going in the other direction.

For instance, if a financial institution has securities on its books that trade at a hundred dollars a share if you're buying or selling a thousand shares, the notion of doing away with a liquidity discount, were I the partner who's been away for a year reading this letter, I would think you were kidding me if you told me that your blocks of stock were being valued at — even if they were ten million share blocks, were being valued at the same price that you could sell a hundred shares. I would really want to know what it's worth? What can you get for it over a reasonable time period?

Another thing, there's been a lot of talk about special purpose entities, these limited-use non-operating entities. And, to me, as a non- accountant, some of the discussions about whether the assets or liabilities should be consolidated gets exceedingly theological and hard to understand.

Were I Warren's partner overseas, my question would really be I'd like to see the impact on the P and L, which should be just the same whether it's consolidated or not consolidated. But, as far as putting those liabilities on the balance sheet, do we owe the money or don't we owe the money? Is there a contingency under which we owe the money? Or is there not? If there is not, I wouldn't think it would matter whether the equity was three percent, and what percentage was owned by someone else, et cetera.

I'll give you another instance of something that just doesn't comport with the way I would think about it, if

it was a private company. If I were the majority owner of this bank, and let's say the entity is a bank, and I was getting a letter from the CEO, I would find it hard to understand why, if securities were held in one account called hold to maturity, and another account called available for sale, if we bought each security at a hundred and the security is down to sixty, in one account you'd mark it to market at sixty, which coming out of a mark-to-market world as I have, seems to me the right way to deal with financial instruments, and why the other account would still be at a hundred. I would need to understand what the thinking was, and that somehow should be spelled out.

So, in short, I think it's an exceedingly good framework. I think that the MD & A should be expanded and made plain English and commonsensical. And, I think the audit committee really should bear the responsibility to review it and read it in draft, and ask those intelligent questions.

The last thing I'd say about this is that there is an enormous obligation for the reader of that letter not to be passive. If you look at the footnotes of some of the companies that have come into enormous troubles — i.e., bankruptcy qualifies as enormous trouble — I don't know anyone smart enough to say they really sorted things out from the footnotes. I do know some people who were smart enough to say I couldn't understand the footnotes, so I stayed away.

And, the real issue in many ways is the dog that didn't bark and then didn't insist on this kind of disclosure. The hints were there.

Mr. Lipton: Steve, you put a lot of emphasis on the role of the audit committee, and the work that the members of the audit committee might be looked to for. I think, since we have two — two lawyers next — not that you're not one, having made the right turn early on in your life —

[Laughter]

Mr. Friedman: That's the only time you can make it.

Mr. Lipton: — Joel, in addition to everything else, would you comment on the complaints that have been made from a number of the activist institutional investor organizations about the amount of fees that are paid to directors and members of the audit committee? It seems to me that if you're going to impose significant additional obligations on members of an audit committee, there ought not to be any objection to increasing the amount of compensation that directors and members of audit committees receive from the company.

Mr. Seligman: Marty, let me follow up Dick Grasso's wise counsel and, perhaps, start at forty thousand feet and circle back to that.

I think the real issue today has to be a much broader one. I think the question that at least strikes me as appropriate to be uppermost in everyone's mind has to be framed somewhat like this: We have gone through a twenty year period where we had the greatest bull market in the history of the twentieth century. Literally, the value of the New York Stock Exchange and other exchanges increased eleven-fold between 1981 and early 2000. We've now seen some very serious challenges to the integrity of the mandatory disclosure system, epitomized by Enron.

The question at this moment is what should we do? And, it seems to me that the time is appropriate for a very systematic review, along the lines of what the Commission did between 1975 and 1977, the last time it had an Advisory Committee on the corporate disclosure system. It's not a question of just what the audit committee is, or critical accounting principles, or reconciliation to taxes. It's more a question of looking at the whole system as a system.

And, it seems to me, from that perspective, if I could just offer a few notions the Commission might consider if it wishes to pursue this course.

Number one, there is very valuable empirical information one can gain from the users of financial statements. If we're going to have the kind of confidence in securities markets that Dick Grasso and others urge is absolutely crucial to us, we could start with the question what will users want to see in financial statements? How can we most effectively address them?

Number two, I think there has been very thoughtful consideration to the fact we both need to have clear overarching principles, such as presentation of fair financial results, and disclosure of all material information, in an appropriate level of specificity. And, we need to work harder at this point to re-invigorate a system which may have gotten a little slack after twenty or so years since the integrated disclosure system began in the early 1980s.

Number three, I think it's appropriate to focus on the fact that when we last looked at the corporate disclosure system, we were focusing on the textual items. The experience of Enron and other corporations has highlighted, at least to me, there's a closer and very fundamental linkage between the quality of financial disclosure and the quality of the textual disclosure in which its enveloped. And, it seems to me an appropriate review of the mandatory disclosure system today has to be top-to-bottom, systematic, looking at both text and financials, and it has to be done on a time line. We live in an impatient world. But, on the other hand, there is great danger in proceeding too quickly from anecdote, or this crisis, or that crisis. It's a time, it seems to me, where if the Commission were to put together a thoughtful group to within, let's say, one year, or whatever an appropriate period would be, systematically review the disclosure system, have the ability to do fact-finding in a way that not all advisory committees have had, to focus at least on specific pivotal issues. In the Seventies, you were at looking at things like forward-looking statements and segments. These days, perhaps derivatives and stock options might be the more important specific pivotal issues. Then a great deal of good could occur.

Now, with respect to the narrow question concerning audit committees, the issue is audit committees in what framework. And, if we have a world in which markets always go up, I would anticipate that management would be concerned about how much the outside auditor costs. If you have a world in which you realize markets can go down, in which there can be grave imperfections, those questions seem a little dated at the moment.

Mr. Lipton: John, in addition to anything else you'd want to be citing, would you address the question of how do you require — in other words, how do you get some consistency in the kind of information that both Steve and Warren were talking about? I can understand a whole new approach, the kind of thing that Joel is talking about, coming up with a new set of rules and guidelines, and such.

Now, short of re-doing the system, as Joel was suggesting, is there some way of getting CEOs to write the kind of letter that Warren and Steve were talking about, apart from sort of hoping for the discipline of the marketplace, that investors will insist on it? Because, the experience, at least to me, seems to be that while some do, some don't. And, that without more than just the marketplace as the means for getting something done — after all, the Commission has a responsibility across the board with respect to both non-compliant situations as well as compliant situations — that the Commission can't say, Well, we're going to look to the market to discipline those companies that don't do this.

Do you have any ideas as to what might be done to sort of move MD & A into this new form, and still have the requirement there to get it done?

Mr. White: Well, let me not start at forty thousand feet, and I'll come back to your question.

Mr. Lipton: Okay.

Mr. White: But, let me start with a couple of practical things, if I could.

When you started, your first comment today was focusing on the new critical accounting policies disclosure, and the new MD & A disclosures. And, I guess I should first say I am certainly supportive of those and think that that is — that the Commission and the Staff is going in the right direction with those.

I guess I would just first point out that, as you alluded to, these aren't anything new. The Blue Ribbon Committee, back in 1999 — the Whitehead Millstein Committee — came out with a recommendation that was almost exactly on point, to disclose critical accounting policies at the audit committee level, that that was one of the things that the audit committee was supposed to be discussing with the auditors. And, within six months, the AICPA amended their standards.

There's a Standard Number 60, that deals with communications between audit committees and auditors, and that was amended back in 1999 to specifically require almost all the kinds of disclosures that are now being suggested in the SEC release. And, I say all that because, it seems to me that, in many ways, we have the rules out there already that we need. The question is, is to get people to follow the rules.

And, I mean, as Warren was alluding to is what you want to do is to get your audit committee, get your managers to exhibit the candor and to do what has basically already been enacted by the accountants.

The one — one other thing on this particular front, that I guess I would focus on, is the focus on critical accounting policies has been on the policies that the company has already adopted, in terms of how are they applying the estimates, how are they applying the judgments. I think it would be very useful if you went one step further, in terms of disclosure. And, that is to figure out how to convey to investors whether the company has chosen aggressive policies or conservative policies.

And that is, again, supposed to be part of the discussion between an audit committee and the auditors, but it's less clear to me how that information is going to get — assuming it's occurring at the audit committee level — how that information is going to get conveyed to the investors.

I actually had one of my colleagues go out this week and try to figure out is there a list of conservative policies and aggressive policies in each of these different areas. And, this information isn't even out there, as best I can find, in any kind of, like, organized fashion. But, one of the things that I think that the Commission and the Staff ought to think about is going one step further on this.

Mr. Lipton: John, before you leave that, as somebody who I know has given a great deal of thought to these disclosure issues, if the company or the auditors discuss with the audit committee — let's just take three assumptions — that if you used other perfectly acceptable reasonable assumptions, the earnings would go from fifty cents a share to thirty-five cents a share — do you think that that would then have to be disclosed?

Mr. White: Interesting. I mean, certainly if there was a change in the way you had done it in the past, I think you have to disclose it, as a change in the method of determining your estimates.

If it is purely a judgment that the audit committee concurs in, I suppose the answer is probably no, in terms of disclosing the dollar amounts that go with it. But there's probably some sensitivity to it. Certainly disclosing that you had that problem area, and maybe some sensitivity analysis would be the way to address that issue.

Certainly, if you changed your method of assumption, you definitely would want to do that.

Mr. Lipton: In sort of looking over audit committee charters and considering amending audit committee charters to pick up some of the things that the Commission has noted in the past few months of talk, one of the issues that occurred was as you begin to explore more conservative assumptions or estimates, do you create a disclosure problem that if you don't make disclosure, you may be incurring liability. And, how do you answer the audit committee member who says, Well, now that we know this and we're members of the audit committee, don't we have to talk to the board about this? And then, after we talk to the board about it, doesn't it have to be disclosed?

I'm not trying to —

Mr. White: I think the alternative is to put your head in the sand, and it's not going to work very well.

Mr. Lipton: Absolutely. And it may be that it's desirable to disclose it.

The issue that sort of brought this home to me was a number of pres reports, financial and analytical reports, and so on, have made reference to the fact that many large companies are still continuing to carry assumed return on their pension assets in the nine, ten percent range when it would seem that certainly was not reasonable in the year 2001, and may not be reasonable in the year 2002. And, in some of the larger companies, it may make a difference of, really, billions of dollars in pension expense for the year. And, how do you deal with that?

Now, some of the analysts are out there who have made that computation and are talking about it. But, in a quick review, I didn't see any company that was talking about it.

Mr. Buffett: Yeah. There are some who are talking about it, Marty. And, I will address just what you were talking about there.

I made the suggestion of a couple of questions — I wrote a letter to Dick a few years ago on it, as a matter of fact — that audit committee members should ask the auditor, and where the questions and the answers should be recorded in the minutes. And, I've actually been involved in that. And, since I'm only on one audit committee, people can probably figure it out.

But, in that case, I asked the auditors whether where there is a range of accounting methods, which ones that if they were preparing the books themselves, they would handle in a way differently than the management has handled, whether it were material or immaterial. That's a question they don't like to get asked, but once they get asked it, it's actually quite useful to them, then, subsequently. Because, in their dealings with management, when management is pushing — and I'm not thinking of the specific company that I'm on the audit committee of, but I've seen over, being on nineteen boards over the years and observing the behavior of many other companies, that managements push, in many cases, for the ultimate in earnings, and they do it sometimes operationally and sometimes through accounting.

And, in informing the auditors and the management that that question is going to be asked at every audit committee meeting, you modify behavior by managements and you modify behavior by auditors, because they don't want any record there that's going to be subject to somebody looking at it at some later date.

And, I will say in this particular case, for example, I asked that question that Marty posed, and if I were on the audit committee of some much larger — companies where pension accounting was a much larger factor in determining earnings, that might be one I would focus in on very, very strongly.

In the case of the company I'm involved with, the auditors gave us twelve different items, in writing, with a discussion of exactly the accounting policy that the company was using and the alternatives, and said that in two of them, that they would do it somewhat differently. And, then, we took the arguments from both the company and the auditors about those two items in particular.

But, all twelve items were laid out, including pension accounting. But, pension accounting was not a big item in this particular company. But there are dozens and dozens of companies that, if I were on the audit committee, I would pose that question directly to the auditors, and ask that their answers be recorded in the minutes.

Mr. Lipton: John, I'd like to go back to what you were saying.

Mr. White: I might say that, as a disclosure lawyer, which often runs into this process a little bit later, when the financials have already been prepared and you're more working one step later at the offering process, that I have always felt quite strongly to basically say that good disclosure trumps bad accounting.

And I, in the setting of the pension numbers, if you've got your rate of return that you're assuming in the pension plan, and you've got that disclosure there, I think you've gone a long ways in terms of where you need to get, even though it may not be the most conservative assumption. Because the analysts can take that number and get back to a different number if that is the appropriate thing.

Mr. Buffett: There's one company in the S & P that uses twelve percent as an assumed rate of return. I'd just like to have them managing my money, as —

[Laughter]

Mr. Buffett: I mean, I understand what you're saying, and that's okay with me. I mean, if they want to lay it out and let their owners decide how appropriate it is, I don't have a problem with that. I do have a problem with anything like that, if it doesn't come to light.

Mr. White: But, Marty, there's one other point that I wanted to talk to —

Mr. Lipton: Go right —

Mr. White: — on this direction.

Mr. Lipton: Please do.

Mr. White: When we looked at the notice that came around about this roundtable, basically it talked about what additional information investors needed, how to make it more intelligible, and how to make it more timely. And, I just wanted to make sure that the Commission and the Staff didn't miss that I think there's a fourth inquiry that belongs there just as much. And, that is to make sure that the information is accurate and reliable.

And, I say that because what we're talking about doing here is this new disclosure on accounting policies, a lot of new MD & A disclosure, which I think is excellent. When we talk about MD & A, we're really creating an off balance sheet balance sheet in the MD & A. We're talking about an off balance sheet cash flow statement, and an off balance sheet income statement. All this new information is going into the MD & A.

And, the question is how are we going to make sure that it is accurate and reliable. Because the direction that things are headed right now, all this new information that we're talking about disclosing is not getting the benefit of independent accountant scrutiny. It's not getting the benefit of the audit process. The generation of that information is not subject to the internal controls that are checked by the auditors as you generate the information.

You often, as part of the auditing process, get management representation letters, where you make management actually sit down and make sure they're comfortable with what's going into the financials. None of that really is generated for all this new information, because it's outside of the audit process.

And, I think that — I mean, if the Commission is going to step back — I mean, I think that this new information is a good idea to put in there, but that the Commission should step back and figure out how they're going to make sure it's accurate. And, it seems to me there are really sort of three different ways you can go about that.

One is, is to get it into the footnotes. And, I realize that's going to take the next step, to work with the accountants. But, that would be one choice.

A second choice would be to get it into the SEC-mandated schedules for the financials. Once it goes into the schedules, it's subject to the audit process. I actually think the footnotes is a better choice. But, for those people who think that footnotes are too cluttered, then maybe you get it into the schedules.

The third choice is one that is out there, and it has not been widely followed yet. But, about three years ago, the Auditing Standards Board of the AICPA, with the support of five of the then six big accounting firms, actually adopted a set of provisions called SSAE-8 for the audit or examination of MD & A. I mean, a whole set of procedures was set up so that you can audit MD & A. It has not really taken off, at least in the 1998 environment that it was adopted in.

There are couple of examples. One, I guess the SEC mandated this in its enforcement proceeding against Sony, where Sony had a bad MD & A and the SEC required that, as one of the remedies, they have Pricewaterhouse audit that MD & A. And, the other well know example is the Goldman Sachs IPO. They actually had their MD & A audited.

But, I would suggest today that maybe a prudent audit committee would consider, given all that's out there, that maybe they should turn to their accountants and ask their accountants to come in. And, by auditing the MD & A, you pick up all these procedures that I was talking about.

And, I assume the principal objection is cost. And, I am not sure, in today's environment, that that's necessarily the only thing you should worry about.

Mr. Lipton: John, in going through the questions, you also mentioned timeliness. Would you address that?

There are some proposals that have been made for what I call instantaneous disclosure. I mean, I'm not talking about moving the annual report from ninety days to sixty days, or moving the quarterly report to thirty days. But, there are a number of proposals that have been made for what I'll call quick or instantaneous disclosure, with reference to the Internet and the ability for a company to sort of disclose daily sales on its web site and that sort of thing.

What's your view of that? What would your advice be to the Commission, with respect to rules in that area?

Mr. White: Well, a couple of things. I know you don't want to talk about the changed time periods on the 10-K and 10-Q, but I would only point out —

Mr. Lipton: No, I'm perfectly willing. I just wanted to carry it on.

Mr. White: Okay. I should only point out, on these new proposed time periods on the 10-Qs and 10-Ks that basically the same proposal was made as part of the Aircraft Carrier proposal, about three years ago. And, I again had somebody last week go in and pull out the comment letters from the Aircraft Carrier. There were hundreds of comment letters, and I was really quite surprised that, basically, everybody was against that proposal. I mean, the major investment banks, numerous small corporations, just an endless list of them. All the major bar associations had commented, most of the major law firms. I mean, even people like the Business Roundtable said things like accelerating reporting deadlines will only encourage more estimations in the calculations, less diligence in the audit testing process, and a great sacrifice of precision in pursuit of speed.

And it just goes on and on about it, on that point. So, I would just suggest that, as the Commission thinks about these new shortened time periods, that they have a lot of comment out there available already.

The other possibility, it seems to me, on the timeliness is again a proposal that was back in the Aircraft Carrier. And that is to mandate that you get a news release out with your earnings within a shorter period of time, and file that on an 8-K, with perhaps a thirty-day time period.

Mr. Lipton: Do you see a major distinction between some of the larger, more sophisticated companies, and the smaller companies? It seems to me most of the larger companies have a press release out in less than sixty days.

Mr. White: Sure. I think, in the Aircraft Carrier, they used the two hundred million dollar market cap as the standard for whether they were going to require this or not. But, you could certainly put something like that in, if you wanted to.

Now, going on to —

Mr. Lipton: Move on.

Mr. White: — to move on to your question about the —

Mr. Lipton: Yes, move on to the web page.

Mr. White: Well, first of all, in one of these articles that was in the materials, I was making fun of it when we were talking before the session here, where it was suggesting that we should move towards daily disclosure. In fact, even more than daily disclosure — instantaneous disclosure. Frankly, I think that's ridiculous.

I don't see how any kind of disclosure regime like that works. But, I — well, other than just, you know, hooking up the public to the internal web pages of the corporation, in terms of how they generate data. And, when you talk about the lack of reliability of data, that's it.

But, anyway, going back to just your basic question of sort of current reporting or continuing reporting versus periodic reporting. We, obviously, at this point have a periodic reporting system, and there is a substantial pressure coming from the Commission and the Staff to move towards a more current program.

The problem that always seems to come up as you move towards a current program without having sort of fixed points at which you have to say something, or fixed things that you have to speak about — and when you speak about fixed things, such as that list of things in the 8-K. But, if you have a continuous obligation to identify things, to speak when something is material.

I mean, I guess the obvious one would be you put out a release, a projection of what you think your earnings are going to be. If you had a continuous obligation to then correct that when it's no longer accurate? Whenever you do that, you inevitably are going to be two weeks late from the plaintiff's lawyer's standpoint. Whatever point in time you decide it's material, the plaintiff's lawyers are going to come in and say, Well, there was stuff there that you could have known it earlier.

And, I think, to me, that's the biggest problem with any of these proposals of continuous disclosure, is that you just don't know. Materiality — it's hard enough to figure out when you have a fixed point in time when you have to determine whether something is material, but if you have to do it every day.

Mr. Lipton: Steve, you wanted to comment on that?

Mr. Friedman: I wanted to comment on assumptions. I would just say in passing I certainly take John's points there.

But on one issue which stuck in a number of peoples' craws, the notion that if an executive sold his stock back to the corporation, it didn't have to be reported until some forty-five days after —

Mr. White: Oh, I could not agree more. I mean, that rule is crazy.

Mr. Friedman: That would run —

Mr. White: You've got one rule where if you sell it to the public, you've got to report it within forty-five days, and you get a year and forty- five days if it's —

Mr. Friedman: Yeah, I agree with you.

I wanted to suggested a distinction with respect to Marty's initial question about assumptions, at least a distinction that, in my mind, is useful. I really think there is a difference between different assumptions on issues which have a certain static quality to them and can be relatively quantified at the end of the year. For instance, the pension one may be one. Someone could believe that option expense should or shouldn't be expensed, but whichever way you come out in that, it can be encapsulated in a footnote.

There is a whole other range of assumptions which don't necessarily relate so directly to earnings per share, but can relate enormously to whether a company implodes in a crisis. If you just think of an asset side which has a million-two of securities, and a liability side which has liabilities of a million. The company looks — it's got a net worth. It looks solvent.

If the management assumes if the liability side is going to have to be paid off in a couple of weeks, if the asset side can be converted into cash in six months, that company's got some real problems in a tough credit environment. If it can be converted to cash in a week, they're solvent.

That situation, in a complex company, is going to be changing hourly. It's going to be changing daily. The assumptions that go into how quickly that asset side can be made liquid are going to be constantly subject to variations based on what's happening in the market. That's the kind of thing that I think — the kind of assumption that I think has to be questioned internally. It has to be modeled. And, I don't really necessarily see that that is going to impact earnings per share.

So, when I talk about putting some more burden on audit committees, I'm certainly not talking about putting more legal liabilities on them. They've got more of those than — we're going to watch things play out with Enron and others over years. I am saying it will take some more time. And, we're living in world where I think we have virtually a test tube laboratory of proposals floating out there which will have incredible unintended consequences.

I think the biggest concern I have is that it will create an environment where you're not going to get competent people who want to go through the additional work we're all asking them to do.

Mr. Seligman: Marty, can I comment?

Mr. Lipton: Yes, Joel.

Mr. Seligman: I think the SEC is on the right track with respect to 8-K. I think, to the extent that the notion of a continuous disclosure system has some operational significance, it will be through the 8-K. It will be through an effective modulation of which items should be disclosed on a more current basis.

It also has to recognize that technology has dramatically changed since the 8-K evolved. We can, either through web sites or whatever, disclose things very, very rapidly.

There are legitimate liability concerns. There are legitimate questions about precision. But, it seems to me the 8-K has long been, if you will, a form whose appropriate significance has not been recognized.

I'm reminded of a Law Review article that Don Langerborg wrote in the 1980s, talking about current disclosure, and talking about using technology to make it possible. And, it was as if, in spite of the fact that it was in the Harvard Law Review, it just kind of sat there. I think, at this point, the wisdom of trying to figure out which material events need to be disclosed currently, how do you define events of such significance that they're important for investor protection should be the focus of the Commission, and I think they're moving in the right direction on this one.

Mr. Lipton: Joel, as a clearly independent observer, let me throw out a problem that most corporate advisors and corporate lawyers feel, that the real enemy of the improved disclosure and the more timely disclosure is the potential liability for making a mistake or not moving quickly enough. The two-week issue that John mentioned before, which one sees time and again, where a disclosure is made and now there's a lawsuit that it should have been made two weeks earlier. Or, making early disclosure and reasonably accurate, but you should add something at one point and another, and you just delay a little bit in adding it, and so on.

What's your view as to that? Should we come down more on the side of Safe Harbors, and less litigation and less exposure, with a view towards having more information out there in the marketplace? Or is the present system working more or less as it should?

And, particularly if you change things along the lines you're indicating.

Mr. Seligman: The proposal I made was for review, and the what changes would be appropriate only comes after you've done the review. But, that's the toughest question, Marty. That is, you want to have an effective disclosure system. You need to do it in a way where you don't stultify innovation in corporations where directors will be able to do their job, managers will be able to do their job. And, there are risks on both sides.

And, you know, to give you the countervailing risk, since 1994 and the Central Bank decision, we haven't had an applied cause of action for aiding and abetting, in spite of the fact every Circuit Court that had addressed the issue before 1994 had recognized one. You worry whether or not the situation at Enron and other corporations would have played out quite the same way if there were a risk of aiding and abetting liability for outside accounting firms or law firms under circumstances where they engaged in truly egregious behavior.

And, in effect, how you draw the lines right here is the toughest issue on the Commission's plate right now.

Mr. Buffett: Marty, I think the CEO usually knows when something material has happened. It's the time when, with my hypothetical partner, he would place the long distance call over there to him, you know, if he's on a one-year trip, and say, We've just had this happen.

And, the classic case would be an insurance company, with September 11th. And, we had that situation. Obviously, it was going to impact almost all insurance companies in a significant way. And, if I had one other shareholder, I think I would behave pretty much the same way — behave with a lot of public shareholders, which is initially we knew it was a big loss, and we had no idea what sort of loss it was. And, we put out a statement saying that it would be many years before anything close to the final figure could be achieved, and that what we were saying would be a guess, but that we would guess based on past experience that our loss could be three to five percent of the industry loss. Now, that we knew up front, and that's about all we knew.

And then, a week or two weeks later, we could make a better estimate, both of our own loss and what the industry loss was, but we still would label it a guess. But, with the industry's loss, in my opinion, probably being around fifty billion, we had come up with our own figure of two-point-two billion, which happened to be in that three to five percent range.

But, we said what we knew. It was an important issue, very important. It's the kind of thing you would call your partner about if he were overseas and owned half the company along with you. And, the first day, all you could tell him is that, or the second or third day, is that we would probably pay three to five percent of whatever the industry ended up paying. And, a couple of weeks later, we could tell him more. And, at the end of the year, we could tell him a little more, as claims came in, but there's still a question of one occurrence and two occurrences, and so on.

And, I don't think there's usually a huge problem in deciding what's material. I mean, I think if they can just apply that test of that if you had a partner, what would you tell him about, recognizing that they don't want to be called every hour or every day. I think it's quite workable, from a chief executive's standpoint.

Mr. Lipton: Dwight, I think you wanted to comment on that?

Mr. Churchill: I think I would agree with that. I think management should know, hopefully they should know of material events.

And, in terms of from a liability standpoint, that should help that they should be in that position. But, at the same time, when we're talking about timeliness of information, whether it's a material event in the insurance industry or other things, those are things where estimates are necessary. But, in a lot of cases, we're talking about real data, producing real data when it's available. And, that would be a positive improvement.

But, to be honest, I think there are, again, a lot of good examples of that occurring in the industry, where if in between two dates, in between the 10-K, data is coming out. In fact, you could argue in some industries — I'll use the retailing industry or some of the other industries that are out there — enough sales data and other things make the 10-K nothing but a validator at that point.

So, there are some examples where we have good data. It's real data. I think the concern that management may have from a liability standpoint may be around the same kinds of things we have now, with pro formas or earnings before the bad stuff. And, the way of trying to spin that creates some liability. But to the degree that actual, real data is being produced, or the best estimates that are available at the time are being discussed, I think that does take down the burden, but I don't know how to solve all the legal issues around that.

But, I would like to see more disclosure around real data, again providing people with that information to use for an analytical process.

And, I wanted to comment on one other issue that's come up in a couple of cases here, which is, again, disclosure and putting things in the footnotes. The thing that comes to mind here is the usefulness of the data. The disclosures — I've watched the disclosures grow over the years, and it is phenomenal.

It is a lot of good information, but, it is becoming less and less useful because it is not in tabular form. It is not in schedule form. And, as a result, it makes it more difficult to use that information in a process where you're trying to do reasonable comparisons.

And so, I would hope that disclosure is offset with this idea of trying to develop more information in schedules, or more information in tabular form, even if it is in footnotes. I think it will become difficult for people to continue to use more and more footnoted information.

Mr. Lipton: Yes. I notice the Commission has, of late, proposed tabular disclosure in the MD & A for some of the liquidity and capital —

Mr. Churchill: I believe it's really an important concept.

Mr. Lipton: It makes it much more useful.

Dick, I know you had a comment on that.

Mr. Grasso: Well, just a footnote to both Dwight and Warren's observations, Marty.

I think there has got to be some incentive, or some protection. There's an excellent piece written recently on the difference between complex and crooked, okay? And, I think as you look at some very complex businesses in the public arena, management and boards have got to feel that they're going to be rewarded by being transparent and that they do the translations that are not just discernible to the analyst community, but to the real public owners of those companies.

And, whether it's Safe Harbor or some sort of a balanced approach on just what is and what is not an actionable disclosure, I do think that we will take a lot of very legitimate, complex businesses to a wrong valuation if we don't provide the proper incentives for management and those boards to translate to the least common denominator level their businesses, apart from just the discrete events of a material development. Just their ongoing recitals in their continuing financial statements have got to be rewarded, not penalized.

Mr. Lipton: John, as someone who works in this area day-in and day-out, and are very concerned with it, how do you feel about this liability issue, and how it plays out with the kind of disclosures that we've just been talking about?

Mr. White: I think the principal problem is the one that I alluded to before, which is the continuing or continuous disclosure, as opposed to having fixed points in time.

Mr. Lipton: All right. Is there a fix for that? Is there some way we can fix that, so that we can have the best of both worlds? That we can have the kind of disclosures that have been proposed, and at the same time, not expose the companies and the officers and directors to these liability concerns?

Mr. White: I mean, other than some version of Safe Harbors, I'm not sure that there is anything that really comes to mind on that.

Mr. Lipton: Well, let me pose that —

Mr. White: I mean, I might mention that there are Safe Harbors already in place, —

Mr. Lipton: Yes.

Mr. White: — and particularly with respect to MD & A.

Mr. Lipton: Right, and with respect to future trends and so on, but is that balance just about right today?

Mr. White: This is a dangerous question to ask me, with my clients out there.

[Laughter]

Mr. White: Actually, I think it probably isn't too far off right now.

Mr. Lipton: No, I would —

Mr. White: It's a dangerous question to answer.

Mr. Lipton: — I would — no, I would say exactly the same thing. I think that's a fair — you know, for those of us who work in this area, I think it's fair to say that there's a reasonable balance there.

I was addressing more the question of, okay, we're reasonably content with where things are now. Can you move further, without extending the Safe Harbors?

And, it seems to me, as you go further and further with quicker and more extensive disclosure, you need to at least think through whether you're going to have a situation where what you're doing is imposing greater and greater liability. The liability worries me a lot less than what I think all of us have experienced in the last few months. Steve mentioned it before, sitting on the edge of a chair. eople just today no longer want to serve on boards, and particularly on audit committees.

And, I think that that is probably the single most difficult problem we face today, is to try to resolve these issues and not discourage competent, ethical people from being willing to serve on boards of directors.

Mr. White: And, I might say, another trend that is heading in that — that is causing problems there is that a lot of the additional proposed disclosures or suggestions of proposed disclosures are moving somewhat outside of the financial arena. I mean, it's somewhat outside of what would normally be in the accounting systems.

And, once you do that, you've got information that is both inconsistent as it comes from companies, but more importantly you don't have the internal checks and balances that are normally there within an organization's financial group that generates that information. And so, the risk of coming up with inaccurate information or unreliable information goes up substantially as the Commission and the Staff thinks about other areas of mandated disclosure.

Mr. Lipton: Yes. I was hoping you would get back to that. I wanted you to sort of re-visit the recommendation that had been made before, with respect to maybe the scope of the auditing work or the attestation work ought to be expanded, so as to provide some assurances that the information is going to pass muster.

Mr. White: Well, as I suggested, I certainly am in favor of the suggestion of auditing MD & A.

Mr. Lipton: Um hmm.

Mr. White: Now, if we're suggesting — I used audit. Examine, I think, is the technical word.

Mr. Lipton: Or attest.

Mr. White: If we're suggesting that the auditing function go to information that is not generated as part of the financial systems at the company, that it seems to me is just too far away from what accountants do, and where the internal controls worked and so on. I mean, that's way beyond anything in use so far.

Mr. Lipton: Right, and on the other hand, I think I understand Warren to say he would go beyond that. Certainly his letter to his partner goes far beyond the information that's generated from the financial activities of the company. That's the issue I'm trying to focus on.

Mr. White: Well, maybe I've listened to the accountants too long, then. They tell me you can't go beyond the financial systems of the company.

Certainly, they're not set up and prepared to do that, at this stage.

Mr. Buffett: I think the auditors often don't — they certainly can be far more aware of what's going on than the audit committee is going to be, and that's why I have another question that I suggest asking the auditors, for the record. And, that is, very simply — and bear in mind, I mean, the managements can flim-flam them or defraud them. But, I just want them to answer honestly to me the question that, if we're talking on a quarterly basis, do they know of any operational or accounting facts that I, as an audit committee member, should know about things that may have moved, either revenue or expenses, from one quarter to another.

And, if they don't know of any, that's fine. But, they may very well know about trade loading, if it's taking place, and if the management is not telling its board about that. And, you know, if they see an abundance of orders on March 29th, or if they see a lot of bill and hold, or whatever it maybe, or extended terms, you know, I want to know about that as an audit committee member. And, they're going to find that out. I'm not going to be able to find that out, unless I go out and conduct a trade survey, basically.

And, they may not know about it, and the management may be lying to them. And, in that case, they should — you know, they're entitled to be protected. But I at least want to ask that question, and I want to get the answer on the record.

Mr. Friedman: I'd just like to reflect on those — Warren's comments and John's comments — and then related to the proposal that's in the proposed legislation to rotate the auditors on a four-year basis.

The studies say a lot of the most serious errors occur in the first two years of an audit. And, that in the last year, there tends to be a lame- duck problem. If you talk to people who run it, the complex — I mean, yeah, that gives you one good year.

[Laughter]

Mr. Friedman: If you — yeah, maybe, maybe.

If you talk to people who run complex companies, I think they will tell you it may take two cycles for the auditor to really understand their business.

If you go back to this point about audit committees asking questions, I think you're going to make it tougher for people to want to serve on those committees. And, if they don't have an auditor who is educating them, but is in the process of being educated themselves, I think the train has left the station. I think about separating certain types of consulting from the auditing function.

But, in my own view, it ought to be left to the audit committee's discretion as to whether they're comfortable maintaining that auditor. I don't think the right kind of committee would be uncomfortable about having a bake-off and getting rid of them if they're not comfortable. And, I think it ought to be left to their discretion as to whether they want to use the auditor for certain auditing- related types of matters, like tax advice, or things of that nature.

Mr. Lipton: Am I summing you up correctly, Steve? You're saying leave this to the audit committee to make the choice? That they should look at the issue. They should discuss it. And, it's up to the audit committee to decide whether to rotate or not rotate or change.

Mr. Friedman: I am on a board. We happen to be a non-profit. But, the audit committee chairman felt comfortable, and the committee, after many, many years, changed auditors. And, they felt no impediment to doing it.

But, I sure as heck would not want to be forced to do it. And, that learning curve could be a very costly one.

Mr. Lipton: I made a suggestion, I guess a couple of months ago, that audit committees should at least review the competence and look at the resumes of the key audit partners that service the company. And, one of our clients said, But, it would take up a whole meeting. And, we proceeded to show how their auditors — there was a partner in Frankfurt, and there was on in Paris, and one in Milan, and New York, and Houston, and so on, and all over the world, in Tokyo, and so on. It's just an impossible burden, really, to bring people in to interview them, or even just look at resumes and discuss it. You would use up the entire time of the audit committee meeting.

So, I think in large measure, that with respect to most of the suggestions for imposing restrictions on the activities of the auditors, or what they have to produce, or who they need to bring in, and so on, that the only reasonable approach — and this is my personal view — the only reasonable approach is to say to the audit committees, Look, these are all issues that you should take into account, but we're not going to second-guess you, if you, in good faith, come to a conclusion that it isn't necessary to rotate the auditors. There mere fact that you failed to rotate and that there was a problem doesn't mean that you did something wrong.

Mr. Buffett: I think rotating them would be a mistake. But, I do think that I would say, in a very high percentage of the cases, if an auditor has been around for a while, the auditor is going to know whether they're dealing with a client that likes to push and maneuver with numbers or not. And, the same could even be said for the company's lawyer.

But, in any event, I've always asked the auditors, on a scale of ten, how would you rate this company's accounting, in terms of aggressiveness. And, most of the time they say they'll give them a nine, and then I say, Well, what would it take to get them from a nine to a ten, and explain that in detail.

[Laughter]

Mr. Buffett: And, you know, the answers are there. The auditor, absent being put on the spot, I have found over forty-some years, is not going to want to sit there and criticize the client. I mean, it just isn't going to happen. I mean, you've got to make him more worried about you than he is worried about the client, basically.

And, in effect, you get that by pointed questions that are recorded in the minutes, in my view.

Mr. Churchill: If I can comment? It may be better to try to focus more attention on some of the practices that have been discussed, as opposed to the liability issues. And, I recognize there is a balance between these things.

But, it is easier, if you think about it as an auditors — well, any of us, it's easier to stand up to our competition than it is to our associates, people that we are friendly with. And an audit committee, or a board in general, has that obligation, to the degree that we give them some tools to do that. It seems that they will be in a better spot to think about all of the things they should think about, to actually stand up to management that may actually be trying to shade one direction or another.

And, how to get that information from the auditor, I think there are some really good suggestions that are terrific. But, provide more of that to the audit committees. I assume there are best practices out there, but they may not be detailed enough to provide these kinds of questions. I would think that's where audit committees could really become better.

And, at the same time, I think it was Steve had mentioned the issue around time, making sure that if somebody is serving on a board or serving on an audit committee, that they, in fact, have enough time to spend the time to have the full- day meeting, to talk through the resumes, or to go through the kinds of questions they should be going through. It does take a lot of time. And, I would hope that there is certainly the ability to commit that kind of time. And I'm not sure right now that's always the case.

Mr. Lipton: Do you think there ought to be a limit on the number of audit committees on which a person is eligible to serve?

Mr. Churchill: I'll say yes. I think it would be difficult to have somebody serve on a large number. Maybe it's just two or three or four. robably two or three. But, I'll open it up to others. I'd be very interested. Warren, maybe you have some thoughts on how many?

Mr. Buffett: Well, I think any are too many.

[Laughter]

Mr. Buffett: We had an audit committee at Solomon that had two of the smartest people I know on both accounting and finance on it, and one was chairman, and the meetings would run six hours. And, at the end, we would — these were very smart fellows, and they would know what they didn't know, to some degree. But, they still could not really get their arms totally around the financial condition of the company.

I read all the footnotes of major financial institutions, about derivative instruments. And, I don't know that in reading those footnotes, or perhaps if I had attended their audit committee meetings, I don't know that I could really know what the situation would be with those companies under various stress situations, which is all you're interested in basically. It's a very tough problem.

And, Marty mentioned the question of time. And, that's a huge question, because usually there are a dozen items at an audit committee. You know, there's code violations, there's internal audit reports. A few years earlier, there was a lot about Y2K and how the company was preparing for it. And, it — you know, to really get to the guts of whether the company is playing around with the numbers, which is what you're trying to do as an audit committee member, I think you can get very easily distracted from that.

And, I would rather have an hour meeting where I just honed in, in every way I could, to get at that kind of question, than have an eight-hour meeting that went through twenty-eight points.

And, as a practical matter, when you get back down the audit committees, you want to be on it. You know, there really aren't many rewards for being on the audit committee.

[Laughter]

Mr. Buffett: You know, it's sort of the punishment they put the new directors through, or something.

[Laughter]

Mr. Friedman: And, there's a certain constructive tension that you, I think, sometimes want to have. It doesn't have to be adversarial.

But, that's why I said I think audit committees should have the flexibility to call for outside risk management consultants to give their own views as to the assumptions the company has used, to do modeling techniques, and to set up a dialogue between these experts and the company. And, I think the people on the audit committee would frequently learn a lot from that kind of flow.

Mr. Lipton: Do you think that — Warren, you raised the point that it is quite interesting.

Do you think audit committees ought to be limited to just reviewing the accounting and auditing?

And, many audit committees today deal with the Foreign Corrupt Payments Act, the code of ethics, and conflict transactions, and reviewing litigation, and so on.

That there ought to be at least a recommendation, if not a requirement, that the audit committees confine themselves to the audit — what we would consider the traditional audit committee matters — and that these other matters be dealt with by a compliance committee or whatever other committee the corporation would like to delegate them to?

Mr. Buffett: That would be my inclination, Marty.

I think it's the logistics of most or many boards, anyway, are such that to expect more than two and a half or maybe three hours for an audit committee is — it just isn't going to work in most cases. And, if you get into a whole variety of things, what you do is you get a bunch of show-and- tell things going on.

I mean, just take when Y2K was around. I mean, you would have somebody come in with a owerPoint thing for thirty minutes, and then everybody would feel obliged to ask a question or two, just so that the fellow didn't feel like he wasted his time.

[Laughter]

Mr. Buffett: And, you'd go through all of that sort of thing, and that really isn't what counts.

I mean, if the company was having a Y2K problem, you wouldn't know about it, anyway, when you see it, when you get through.

I think your job as an audit committee member is to make sure those figures mean what you would like — that they should mean, if you were the owner. And, you will have to, as Steve mentioned adversarial. You have to be a little adversarial, and it undoubtedly varies with different companies.

But, unless there's at least an undertone that you might get adversarial, it is just too tough for an auditor who's been working there for eight or ten years and is not only friendly with the management, but — they are not going to volunteer to bring up all the shadings. Are they going to bring up pension fund accounting? They're not going to bring up pension fund accounting. I mean, they're going to say, you know, that the actuaries supplied it, and everybody is happy with it, and it's like everybody else is doing.

And, you know, the question is would they have chosen those assumptions themselves? And, they might say, Well, you know, maybe we would have chosen a little bit different. They can say anything they want to say. I just want to hear what they've got to say, but it has to — you can't do it if you have thirty items on the agenda.

You know, I'm sure a lot companies that have codes of conduct get into code violations. And, I've been on those and, you know, somebody has taken a case of Coke, you know, in Columbia or something, home to their family to use. And, you know, those take thirty seconds, or twenty seconds, or forty seconds.

It's just that the important thing is the figures.

Mr. Lipton: Joel — all right, I'm sorry. John, did you have something? You looked like you wanted to respond to that.

Mr. White: No.

Mr. Lipton: Oh, okay.

Joel, do you want to say anything about the relationship between the Commission's accounting standards authority under the 34 Act, and the creation of standards by the FASB or the other organizations, with respect to the accounting standards?

Is there a disconnection that the Commission be more active, less active? Is that working well, in terms of coming up with the standards? Now, I'm not talking about the quality of the audit, just the principles that are to be applied?

Mr. Seligman: I think a lot of people are deeply troubled by the focus recently on off balance sheet transactions, the notion they didn't have to be disclosed. And, you have to kind of scratch your head, and say, If the SEC is the ultimate overseer, how could they tolerate this? Why did the FASB tolerate it?

I think it deserves a hard, new look. Specifically, when you focus on the FASB, one of the major issues that Chairman Levitt addressed during the 1990s was the extent to which they were capable of being independent, in fact, giving the underlying funding basis for them. And, that is part of the mix, as well.

The Commission, fairly early — I mean, you can go back to 37 and 38 — decided that they didn't want to try promulgate all accounting standards. And, in retrospect, that looks wise. It's a level of technical proficiency that it's unclear that the Commission would have had. The Commission had other priorities on its plate.

When we come to 2002, and the real lesson I think we've learned in the last several months is that there is a much greater significance to the accounting principles and to the auditing than the SEC has historically, perhaps, given it. That they need more people in Corp Fin, they need more people in the Office of Chief Accountant, and they may need to have a somewhat more — to use a term used here a lot — aggressive role as an overseer.

Whether the FASB, in its current form or with a different funding basis, is the effective mechanism, I don't know. But there are a lot of sharp questions that need to be asked right now.

Mr. Lipton: Should the Commission — when a question arises, should the Commission defer to the fact that the accounting firm comes in and says, Look, here's the literature, and there is no question that this is the appropriate principle ?

Mr. Seligman: Chairman Pitt, I think thoughtfully, quoted the Simon case a number of times over the last several weeks. And, I think that's the basic text we should be focusing on.

If you strictly follow the literature, but do not result in a fair presentation of the underlying financial realities, that's not good enough. We have to have this overarching concept that there has to be fair presentation, and there cannot be omission of material information.

Mr. Lipton: John, why don't you address this, because I think each of us on this Panel feel the same way about this. Well, somebody — I thought you were —

Mr. White: This was just an article from The Wall Street Journal, on February 4th, —

Mr. Lipton: Yeah, but I think the frame is extremely well taken, and ought to be emphasized. Because, you know, we're talking about changes that corporations should undertake, we're talking about changes that the Commission should undertake, we're talking about legislation, and so on. These things are not easy. They are difficult to achieve. And, why don't you go on with that?

Mr. White: The headline on the article — and Harvey was smiling here — is White House is expected to recommend only a slight boost in funding for the SEC.

Basically, the SEC is going to need more staff, which requires more money and parity, in terms of pay and a variety of other things, if they're going to step up to the role that I think this country is asking the SEC to step up to today.

Mr. Lipton: Well, I think we all heartily endorse that, but we can't really expect the SEC to shepherd these changes and guide the resolution of these changes if it's starved for resources. These are very difficult issues. They require competent people, and you can't expect to have sufficient competent people if you don't pay them any basic wage. It's not as if they were being overpaid or anything. I think they've been substantially underpaid, to begin with. And, if you don't provide enough of them.

I think that one of the key problems, now, all sorts of legislation is being introduced to impose new requirements on the Commission to try to get enacted all sorts of new rules and so on, that would be applicable here, most of which are probably pernicious, rather than helpful. But, there's not enough focus on what's necessary to resolve the situation.

And, if you have, you know, two hundred really expert, highly-paid accountants coming up with new standards, and you have six people at the SEC to review this, it's not going to work the way it should. So, I think that's one of the key things that, in formulating any recommendations, that that has to be dealt with.

What I'm going to do is, because we have only a couple of minutes left, Steve, if I could just ask each member of the Panel to sort of take two minutes for whatever thoughts they might have.

Warren, I'll start with you. I promise, Steve, that I will remember that F comes before G.

[Laughter]

Mr. Buffett: Well, it seems to me that, in terms of getting better disclosure, there are four possible forces that you can look to.

One is the law. Secondly, the media. The third would be the owners. And, the fourth would be conscience. And, we've probably played out conscience. So, I would — and I'm leery about the law. I think the media can be very helpful and have been very helpful.

And, I think that it really is time for the owners to do something about it. And, I do think that if some organization that has clout — whether it's in institutional services, or whether it's AIMR, or whatever — really recommends withholding votes on companies where it's clear that the CEO is not treating his shareholders as partners, I think that that might be an added weapon that will lead toward better disclosure in the future.

Mr. Lipton: Dwight?

Mr. Churchill: I think, in terms of financial disclosure, that if we can spend the time thinking about how these statements, how these reports will be used, it would serve us well. Again, whether it's AIMR, or some of the other organizations that can represent analysts' views on these things, I don't think there's enough user input into the process. And, I think it would be very helpful, whether it with FASB or with the SEC, to try to understand how the information would be used.

So, in any work or task force that get put together, I hope there is a way to try to pull that group together — the users together, because we're trying to offset, whether it's the accountant's interest or the management's interest, we're trying to develop an offset here.

And, I think the media also can help in that regard. Good financial analysis is very difficult. It's not easy work. And so, the degree to which we can help the analysts, help the market understand the information that a management is providing, I think we will really be well served.

To the degree that management disclosure, their evaluative disclosure can help us, guide us through their financial statements, and help us understand the company, again, I think that would be very helpful.

But, I'm going to really focus, again, on the data, itself. And that is, to make sure that, whether or not — it was discussed before, whether or not we use thirty-five cents or fifty cents as the right earnings, let's get some more of the specific data that's underlying that information, so that an analyst can make the determination, that the market can make the determination as to whether the earnings was really thirty-five cents or whether it was actually fifty cents, as originally disclosed.

So, I would hope that we get better specific data, tie that together with a management explanation of what's going on within the company, and allow analysts to do the work they're supposed to do. I think that helps the capital markets. And, again, I would really hope that we get more user input into the process.

Mr. Lipton: Steve?

Mr. Friedman: I'd like to make a modest proposal about securities analysts. The Enron and some of the other problems were really gross failures of the watchdogs, and securities analysts in both the recent episodes, the dot-com collapses, have clearly forfeited a great deal of confidence.

I think it would be a bad idea to do some of the things that have been floated around, like having a complete and total separation of analysts from investment banking. I believe that they do provide useful advice, in terms of public offerings that should or shouldn't be made, mergers that should or shouldn't be done. There's a lot of things that are relatively obvious. They shouldn't, as I know they did in at least one case, have any reporting lines to the investment bankers. They shouldn't have formulaic compensation.

But, my suggestion would be, in a securities law framework that relies on disclosure and transparency, I would like to see analysts' recommendations collated in some standardized way. And, anytime Analyst Smith writes about a company in his or her area — let's say it's energy — I'd like to see in a standardized way what the analyst's recommendations have been over the past five years, whether it's done as buys, sells, holds, and just how they performed.

I think that competition, pride, full disclosure might keep people — make people a lot tougher markers than they've hitherto been.

Mr. Lipton: Dick?

Mr. Grasso: Well, Marty, I won't need the entirety of the two minutes.

I'll simply say I think this Commission has begun a process where it can play a catalytic role in the brining together of issuers, certainly markets, the legal and accounting professions, and those in the public sector, towards a system where there is greater accountability to the owners, as Warren talks about, through the independence of one's board and one's independent audit committee. I think that we have a mutual and a shared deep interest.

There are so many — right now, so many public companies that are painted with a broad brush of conviction in the court of public opinion that we have an opportunity to take this system, and this agency is the right agency. And, I share wholeheartedly your observation, Marty, that it's got to be an agency staffed with the best and brightest, paid on a competitive level, towards a translation — and, again, Dwight, I believe it's really important that the least sophisticated of my investors, as the CEO of a public company, can pick up my documents and understand them as well as those who have spent years steeped in quantitative analysis.

I think the time is ripe for that. I think this agency has focused on doing that. And, I think we do, as a capital market system, have an awful lot that's in the mix here. Because if we don't get it right, our system falls prey to competitives from offshore that are clearly not at the same level of competence and the same level of transparency that we've enjoyed in this country for better than a hundred years.

Mr. Lipton: Joel?

Mr. Seligman: When you look at the Enron case, you see an almost extraordinary confluence of different types of systems simultaneously breaking down. We've got questions about GAAP, particularly with off balance sheet items. We've got internal accounting controls, which are questioned. You have auditing. You have management. The board. Outsiders, like accountants and attorneys.

It seems to me, in the wake of this, we've got to ask some hard questions which are factual. Is this a pathological corporation, or is this type of breakdown more widespread? To see that number of redundant systems break down strikes me as highly unlikely to be widespread.

You need to focus on where the major problems are. You need, in terms of, I think Dick Grasso's wise ultimate goal, is how to maintain the greatest confidence in the markets, to focus on the system as a whole, a total gestalt.

How do we get to a point where we can maintain the highest levels of investor confidence in the securities markets? And, it seems to me a major part of this review will not only be with auditing, but also with generally accepted accounting principles, and with the SEC's disclosure requirements.

Mr. Lipton: Okay. John?

Mr. White: I won't try to close with any great thoughts, but three little don't forgets, if I can cover them, since I didn't get any of these three as we were going through it.

The first is that don't forget that Enron and Global Crossings and many of the other recent failures were not because — would not have been cured by timely filings. A more current would have not corrected the principle problems that we've been encountering with those.

Second, I know that the Staff and the Commission have been giving a lot of thought to 33 Act reform, particularly in the communications area. And, I just don't think we should lose track of the fact that, under the current rules, there is a substantial impediment to communications, whether it be research, or information we put on web sites, or road shows, and e-mails, or whatever. The current system creates impediments to communications of information, which I think is not what we all want. And so, I would just urge that that not be forgotten as a priority here, as well are all swept in by the Enron and related events.

And, third, as you think about proposals, don't forget that foreign issuers are extremely important to our markets. We want to attract and retain them, and we should not be adopting proposals that run counter to that goal.

Mr. Lipton: Well, Commissioner Glassman and Chairman Pitt, we have rounded the table.

[Laughter]

Mr. Lipton: I don't know if this has been useful to you and the Staff of the Commission in what you're trying to do in resolving these issues.

Mr. Pitt: It's been very useful, and I'd like to thank all of the Panelists for giving us their time, as well as their wisdom.

And, we're going to take a lunch break and then we have another Panel at two o'clock.

(Whereupon, there was a luncheon recess.)

Panel 2: Assuring Adequate Oversight of Auditing Function

Mr. Mundheim: My name is Bob Mundheim, and I am the Moderator for the Panel on Auditor Oversight.

As this morning's Panel underscored, the accuracy, completeness, and transparency of financial information is a key ingredient of properly functioning securities markets. And, we look to the accounting profession as having a public responsibility to provide comfort about the quality of financial information prepared by management of publically-traded companies.

The auditor's certification typically states that the financial statements fairly present the financial position of the company, in conformity with generally accepted accounting principles. ublic confidence in the accounting profession's discharge of this responsibility has been shaken by a number of recent events.

To be sure, it is not the only point relevant to the securities markets about which public confidence needs shoring up. The issue for us this afternoon is what changes in the environment need to be made to ensure that audits are done competently, and with integrity.

And, to address those issues, we have a anel of quite diverse background. We have an accountant, Jim Copeland, who is the CEO of Deloitte and Touche. We have a Chief Financial Officer, David Shedlarz, the CFO of Pfizer. We have an investor, Warren Buffett. We have an academic, a former Chancellor of the Delaware Chancellory Court, and the former head of the Independent Standards Board, all rolled into one individual, Bill Allen. And, we have a leading plaintiff's lawyer, Mel Weiss.

We also have this afternoon, as we did this morning, the Chairman of the SEC, Harvey Pitt, and Commissioner Cynthia Glassman.

We're going to begin this presentation or this Panel with a very brief presentation by each of the Panelists, and then we'll proceed to a discussion in which all of us will participate.

And, let me start differently than our Chairman of this morning's Panel. I will not look to the Panelists alphabetically, but I will look down to my far right, and start with Mel Weiss.

Mr. Weiss: Thank you.

It's obvious, from what we heard this morning, that there has been a serious and tragic breakdown of the watchdog functions, not only by the auditors, but by many other institutions that we give that responsibility to. One example is the audit committees of the boards, the boards themselves. Wall Street shares a tremendous of blame for what's going on. Management of the companies are probably the most to blame, because they're the ones who force the auditors, in my view, to do the things that break down the system of protections for investors and for creditors.

It seems to me what we need is a strong counter-force that we can arm the auditors with to stand up against management. The system has failed dismally, and every time there's a debacle like this, whether it was the junk bond debacle of the 1980s, or prior tragic financial failures, we always wind up either doing nothing or blaming litigation for the whole situation.

We heard this morning, almost every question asked by the Moderator was should we protect these people from litigation. That's not the answer. And, when we protected them in the Reform Act of 1995, we wound up with far more tragic financial disasters following it.

Now, I have some ideas that we'll address later concerning how to arm the auditors so that they can best stand up to what management tries to force them to do, which is not helpful to our society.

Mr. Mundheim: David, —

Mr. Shedlarz: Thank you.

Mr. Mundheim: — is it management's fault?

[Laughter]

Mr. Shedlarz: This sounds like Point- Counterpoint.

All of us, I believe, can agree that investor confidence is of paramount importance in the way in which America's capital markets operate. All of us, I think, can agree that investor confidence has been shaken not only by the failure of the Enron Corporation but, unfortunately, by almost daily reporting of various accounting matters raised by various companies. I think, finally, all of us can agree that something needs to be done about it.

The overarching question is a simple, but difficult, one; and that is, what is that something? As leaders in the business community, we must weigh the current debates on the various concerns and be sure that we do not precipitously react to a series of issues that are still being drawn into the light of day.

The SEC is still investigating whether Enron's problems were a matter of lack of accounting quality, competence, ethics, and other factors. It's one thing that is clear is that the public needs to be assured that members of the auditing firms and executives of publically-held companies adhere to high standards of quality, competence, and, yes, ethics.

We currently have a self-regulatory system for accountants who audit financial statements relied on by investors based on peer reviews. I agree with the Chairman sitting right next to me, Harvey Pitt, that we should continue to build upon and improve the current system rather than implement a new or intrusive approach. However, the self-regulatory system has shown that it may be flawed in a number of ways.

As I see it, there are a number of constituencies that have an interest in financial reporting, and these constituencies must play a part in the regulation of the auditing functions. They include audit firms, financial statement issuers, analysts, investors, regulators, among others.

As most of these constituencies are in the private sector, I believe that a private sector body that would regulate the auditing function would best serve the constituents' interests.

Chairman Pitt has suggested that it be called Public Accountability Board, or PAB. This new body should be perceived as an evolutionary step in enhancing the oversight of the auditing profession. Any new Public Accountability Board must put in place tough, no-nonsense, disciplinary systems to be fully effective. The charter of the PAB must be carefully considered, in order to optimize the effectiveness of such an organization.

My personal experience has been that if the charter is too broad and overambitious, then the progress therefore comes at a very slow place. The AB should focus its efforts solely on the oversight of the auditing function, including a major overhaul of the peer review process. It should not become involved in setting accounting standards or making decisions about controversial accounting issues. These activities should be left to others with strong expertise in accounting.

The PAB should also permit auditing standards to be set by the Auditing Standards Board. However, the PAB should be free to make appropriate recommendations.

Similarly, the SEC should remain a body to address improprieties by accountants to avoid redundancy of effort.

With respect to membership of the PAB itself, I believe it is essential for the PAB to draw upon the majority of its members from the accounting field, whether from corporations, academia, government, and other areas. Only in that way can we insure that the board will possess the necessary level of technical competency required to discharge its responsibilities.

I do not believe, however, that the majority of the members should be drawn from the audit profession. The SEC must play an active role in this new PAB. Indeed, I think the SEC should approve the overall charter, the activities of the board, review its disciplinary proceedings, and to help develop its annual budget.

In other to fulfill this role, consideration should be given to drawing one or more members of the PAB from the SEC. In selecting the membership, the AICPA can play a valuable role in advising the PAB.

The Board should be funded by its various constituencies, not solely by audit firms, as was the case of its predecessor organization.

Finally, to highlight public confidence in the systems, all audit SEC registrants should be subject to the authority of the PAB. Even foreign firms that audit the financial statements of SEC- traded registrants should be required to submit to the PAB's oversight. In that way, all auditors would be operating with the same set of rules. None would be competing with an unfair regulatory advantage.

In summary, the creation of the Public Accountability Board as a private sector body with the focused charge of the oversight of the auditing function, with people standing behind its decisions, a no-nonsense disciplinary system, would be a major step in restoring confidence and trust in one of the key pillars supporting our capital markets.

Mr. Mundheim: Thank you, David.

Jim?

Mr. Copeland: Thank you, Bob, and I'd also like to thank the Commission for reaching out to the business community and hosting these roundtables. From the profession's point of view, it's another step forward in re-building a constructive relationship with the Commission, and I applaud it, simply because we must reassure investors that we're making important progress. And, perhaps, most importantly, making it together.

These are extraordinary times. Once again, the accounting profession is at a critical juncture. Much has been written and broadcast in the media in the wake of Enron, and many issues are under serious discussion in the Congress, and that's good. But, I think we'd be wise to remember something Federal Reserve Chairman Alan Greenspan recently said, It's important to ask what are the consequences. I could not agree more.

Some of the worst disasters in history have been the result of unintended consequences. We should heed the physician's creed: First, do no harm. Only a fraction of one percent of audits are ever even challenged. Before Enron, the U.S. capital markets and the U.S. auditing profession was the envy of the world. We should not allow one business failure, and the problems of one audit firm, to destroy seventy years of continuous improvement.

I believe, unfortunately, that this is the most likely outcome. I believe most of the proposals will take us backwards, rather than forwards.

For example, some of the points that we will touch on today are ideas that have come to the fore and seem attractive because of their simplicity. And, we need to be careful with ideas like mandatory auditor rotation, and examine why it now makes sense when so many groups have previously studied the issue and consistently concluded it's a bad idea. What is different today?

Limitation on scope of services is a central theme in the current debate. Some of the proposals impact services only indirectly related to our audit capability. Most, however, are more severe proposals which will adversely impact the quality and the independence of audits that companies in this country receive. And, I fear that we're likely to see change that will cause audit quality to suffer, rather than improve. We need to be careful.

But, there are things we can do to restore the confidence in the capital markets, and I mentioned some of these in a recent speech to the National Press Club.

Create an investigatory board of experts, like the NTSB, to investigate financial disasters in much the same way the NTSB investigates airline disasters. That would eliminate the overlapping and inefficient investigations, such as those we're now seeing in the aftermath of Enron.

Second, the profession needs to rebuild a constructive relationship with the SEC, focused on eliminating reporting problems before they become problems for the investing public. Our relationship, at the end of the day, is symbiotic. The SEC can't do its job without us, and we can't do our job without the SEC.

Third, the profession should adopt most, if not all, of the recommendations of the Panel on Audit Effectiveness, chaired by Shaun O'Malley. My firm already has.

Fourth, Management's Discussion and Analysis should cover key performance indicators to avoid the current obsession with earnings per share.

Fifth, auditors should address in their reports risk in a registrant's business model. Currently, high-risk companies and low-risk companies receive exactly the same opinion.

And, finally, companies should report on a range of results that different accounting policies or assumptions would produce. This could be similar to discussions currently required to be held with a company's audit committee on the quality of earnings. An auditor should review that data.

Finally, I want to assure the Commission that Deloitte and Touche is committed to achieving effective, comprehensive, and long-lasting reforms. We take great pride in our long-standing record of product quality. Going forward, we consider ourselves part of the solution, and we're working intensively and constructively to make our profession better.

Thank you.

Mr. Mundheim: Thank you, Jim.

Warren?

Mr. Buffett: Now, we'll raise the question of or center the problem around the fact that too often the auditors have been more responsive to managements than to the shareholders, and ask what could be done to create a counter-force to the perfectly natural situation, not because anybody is a bad person or anything of the sort. If you've been selected by somebody to take the job, and no matter what the ritual is, as a practical matter, the management generally does select the auditor. And, if you get paid by that person, and you work with him year after year, it's natural to have some greater bond with the management than with some amorphous group of ever-changing shareholders out there someplace, who you never see and never hear from.

So, you have this natural tendency, in my view, at least as I've seen it exhibited over the years, to the auditors some degree — and it varies among auditors — being somewhat compliant when management has pushed them about getting close to the line on accounting practices or doing various things that would nudge up earnings a little bit, or make the financial position look somewhat better.

And that problem. which we all realize exists, was attacked by the Blue Ribbon Committee, and I felt they did not come to the right answer. And, I wrote Dick Grasso in May of 1999, and I suggested a different approach. Because his approach, basically, was to upgrade the audit committee, to improve the breed, which there's nothing wrong with, but I didn't feel it would get the job done.

What is needed — an audit committee can't be auditors, and they're not going to be auditors, and they're not going to know, coming three hours or so three times a year, they're not going to know what's going on in the company. They're not going to see the choices that are made on accounting methods, unless they get very specific about asking questions. They're not going to see operational tricks that may be played to move earnings from quarter to quarter, and so on.

Their function, as I see it, is to hold the auditor's feet to the fire. And, the way to hold the auditor's feet to the fire is to ask pointed questions and to get the answers into the record so that they'll be sitting there when and if Mel was required to come around some years later.

[Laughter]

Mr. Buffett: And, if they're in the record, he won't be able to come around as often.

And, I suggested three questions that the audit committee ask of the auditors. I won't give you all three, but the very first one is the basic one. If the auditor were solely responsible for preparation of the company's financial statements, would they have been prepared in any way differently than the manner selected by management?

They should inquire as to both material and non-material differences. If the auditor would have done anything differently than management, then explanations should be made of management's argument and the auditor's response.

And, there's two others along the same line. And, I think that's what the audit committee can do.

They can't go out and look at physical assets and decide whether amortization periods are proper. And, they might not even know about things that the company is doing in the way of setting up pre-paid expenses instead of expensing items as they go along. Or, whatever it may be.

And, my experience has been that it's typical for an audit committee to get the auditor in a private session and say, Is there anything we should know? And then, the auditor always says, Well, no, there really isn't, or he mentions something that's inconsequential. But, if the question is pointed enough, and the answer is going to be recorded in the minutes, I really think that there are a lot of things that have happened that would not have happened if this procedure had been followed.

And, I think that, typically, audit committees spend a lot of their time, as we discussed this morning, on a lot of matters that really aren't going to have any effect at all on shareholder value. It's sort of a show-and-tell type arrangement and you go through various rituals. But their job, as I see it, is to hold the auditor's feet to the fire. They have the ability to do so.

I think, incidentally, that Enron itself has had somewhat the same effect. I mean, they have made auditors more worried of some other force than the management, in a very dramatic way, which is namely survival of the firm. And I think that's a lesson that every auditor in the country has learned in the last couple of months, and it will have an effect.

But, I would suggest that if the audit committee did nothing but walk in and spend any amount of time required — it might be ten minutes, and it might be forty-five minutes. I would not hold the auditor responsible for what — you know, if he's lied to, if he's unaware of something, but I've stuck one other in since I wrote this letter, which is: Is the auditor aware of any operational or accounting activities that had the effect of moving revenues or expenses between quarters?

It's a very simple question. And, if they were not aware of it, they say, No, I'm not aware of it, and I wouldn't hold them liable for the fact that they didn't know that trade loading was going on, or bill and hold, or extended dating, or whatever it may be that companies use to bolster a weak quarter.

But, if they do know of it, I want to hear of it. And, they're way more likely to know of it than I am, as a member of the audit committee, and I'm never going to find out if I don't find out from them.

So, those are my suggestions.

Mr. Mundheim: Well, Bill, you ought to feel comfortable being the last one to speak. That's the role a Judge normally has, right?

[Laughter]

Mr. Allen: Well, I don't know. Following Warren Buffett doesn't sound like my idea of building to a crescendo.

[Laughter]

Mr. Allen: But, I'm happy to be here and to add my comments to this very worthwhile effort on the part of the SEC to re-think the legal structure within which accounting services and auditing services are offered in the United States.

The status quo is always privileged in our environment, and it always takes a jolt of some type to move us to think about fundamental change. The accounting profession has been governed in a very dispersed and decentralized way for a long time. State licensing is the basic legal requirement, and there are some state disciplinary proceedings that go on.

At the national level, the governance is largely voluntary. It comes through the POB which, itself, was a result of an earlier jolt to the profession; and through the AICPA, with its SEC ractice Section, its Ethics Committees; the ISB, which is no longer an organization that functions, was a joint effort from the AICPA and the SEC; and peer view. These are not coordinated organizations. They're not well-coordinated organizations. And, the last regime in the SEC felt a need to try to bring greater coordination and entered into a long set of negotiations to try to increase the power of the POB, and that was a difficult and drawn out process.

So, I think one of the benefits of the tragic failure of this leading firm is that we will think in a rational way about organizing our governance, our legal — the shape of the legal institutions around auditing. And, I think what Chairman Pitt has suggested is a great starting point. And, as we proceed in this conversation, I'll have some specific remarks directed to some of that.

The only other point I would say is I guess I was invited because I was to be here — was because I was Chairman of the Independent Standards Board, which was an institution that was designed to try to think about issues of independence.

That Board was put out of business by the fact that the SEC adopted a rule in November or December of 2000 to address independence issues. And, one thing that I think is clear is the existing rule on independence is not adequate, that it was a pragmatic compromise and not a principle-based approach. And that, as we think about now a more sensible structure for the organization, or the governance of the auditing and accounting professions, we will return to some kind of institution that can think in a principle-based way, and in the transparent public process about these important issues about independence.

So, with that, I'll pass it back to our Chairman, and we'll begin our discussion.

Mr. Buffett: There have been, as you heard, really two kinds of themes. One relates to the issue of the dependence of audit firms on management, and a number of us panelists have talked about that. And, the other relates to the governance structure which has been suggested by the SEC — by the SEC's Chairman, I guess, accurately.

Now, let me just describe, so that we all are on the same page, the latter, and then we'll talk a little bit about that. As I understand it, the ublic Accountability Board would be created by SEC rule and would have responsibility for that part of the auditing profession which certifies financial statements of publically-traded companies. It would have the following characteristics:

Members of the Board would be predominantly public, but not governmental. In other words, it's a private, predominantly not representative of the auditing profession.

It would be responsible for discipline and quality control of the profession, or that segment of the profession.

It would not be in the standard-setting business, except possibly to put items on the standard setting body's agenda.

And, it would act under the supervision of the SEC.

Further, the Public Accountability Board would exercise its disciplinary authority with respect to competence — or negligence, if you'd like — and integrity, or ethics. The SEC would continue to pursue issues of federal securities law violations.

And, I guess the first question is would anybody on this Panel not support that structure?

Mel? I know from having talked to you, you might take the view that you'd not be wholly in favor of that structure as outlined.

Mr. Weiss: That's correct.

Let me make myself clear. The objectives that you've stated are something that I want to achieve. The question is whether, pragmatically, doing it under the aegis of the SEC is the way to go.

Unfortunately, the SEC has been almost consistently starved for resources. The President recently made a statement that I read in the recent article, that he wasn't going to recommend a budget increase of any size for the Securities and Exchange Commission.

I want to be practical about this, and I want there to be a lot of transparency and sunlight on what's going on in this particular area that I consider to be of great importance to our capital markets functioning properly and as a leader in the world.

I would suggest that we have an independent government agency. It could be something like — it could be a quasi-governmental agency, but it should be staffed — first of all, led by residential appointments, subject to Senate confirmation.

It should be a separate budget item in the government's budget so that we can look at it as a stand-alone function and make sure that it had adequate funding.

It has to have the ability to hire a staff that's adequate to deal with the kinds of issues that you laid out a few minutes ago.

Ethics has to be one of its priorities. It has to have the responsibility to oversee the adequacy of auditing standards. It has to have the ability to do spot audits on a surprise basis, something like the IRS performs from time to time on taxpayers.

It has to have an office of ombudsmen or inspector general, that would be available for anybody that participates in the issuance of financial reports and auditing opinions, with respect to public companies. I think I read recently that there's over twelve thousand public companies today, and we have only five — maybe soon to be four — auditing firms that are probably capable of auditing most of those companies. We've got to give the people within those organizations — the accounting firms, the internal auditors within the audit client itself, the members of the accounting department of the audit client — the ability to come forward and speak to somebody if he or she is unhappy with what they see.

These are the things that have to be done. They have to have supervisory responsibility with respect to the adequacy of accounting principles. They have to set time deadlines for the work to be done, so that we don't sit around for years on end waiting for some pronouncement from FASB or some organization like that.

They have to have the ability to issue subpoenas and do investigations, or to assign that function to the Securities and Exchange Commission or any other government agency that might be adequate for that kind of job.

Mr. Mundheim: Mel, the functions that you assume for that organization could well be functions adopted by the PAB.

Why is it that you think you need a separate agency with Presidential appointees?

Mr. Weiss: I think there has to be political accountability. There has to be a debate at budget time as to the adequacy of the funding for that function. If you bury it in some other organization that's off the radar screen, or if you depend upon a self-funding type of procedure such as an add-on to the audit fees of the companies that are public companies that would go to fund some PAB, I think that the public confidence won't be as great.

Now, look, I'm a pragmatist, as I said before. If I can't get this kind of approach to the problem, then we're left with the SEC. If Harvey itt were to be the Chairman for all the future SECs in this world, I would have a great degree of confidence that the job would be done with the same aggressive nature that Harvey has shown thus far. He took on a terrible situation in a very short period of time, and he's organized these discussion groups, I think very effectively and with a great deal of conscientiousness.

But, unfortunately, the SEC is subject to political pressures, as well, because the budget is controlled by Congress and the President. And, I just — you know, I have never seen it adequately funded to do the job that it's already been assigned, so why should I assume that it's going to be adequately funded to do this job?

Mr. Mundheim: Warren, you've now got the AB and you've got the Mel Weiss separate agency.

Do you like A or B or neither?

[Laughter]

Mr. Buffett: Or none of the above.

I'm just generally skeptical of how much boards will achieve. I mean, I think that there may be some incremental benefit from having such an entity, but as I've watched supervisory boards in other areas, I think that the nature of such an operation would be to focus on process within accounting and auditing firms and that sort of things.

I think that the attitude is much more important, actually, than the processes they go through. I think you have to build in human nature, and then you have to counteract where human nature takes you, when it takes you some place that you don't want it to go.

And, I wouldn't have any quarrel with the board. I mean, I'm willing to pay my share of the taxes to support it indirectly. But, I would not expect a great deal from it.

I think that — I think, as I mentioned this morning, auditors in a significant percentage of the cases where people have not only played close to the line but gone over the line, I think they've known they were dealing with that kind of a client. And, I think they have rationalized, or relied on GAAP, or in some way decided that maybe it would be okay to do this at this time, and maybe hope that the management got so they behaved better in the next year. Although, they usually behave worse if they find out they can get away with something.

I think they know those clients, and I think that what you really want them to do is to have the — have it be imperative, really, that they stand up and say no. And, I think that audit committees can create an atmosphere where that happens. And, I think it will happen more effectively that way, frankly, than with a board that is censuring people maybe a year or two later. It just doesn't get to the guts of it, to me.

Mr. Mundheim: Let's just — I just want to be recognizing the notion — your notion that that's not a hugely helpful device.

Mr. Buffett: I think if we had had such a group ten years ago, I don't think that the accounting would have been a whole lot better in public companies now than it has been.

Mr. Mundheim: Let me — I still think I'd like to press and ask a few more questions about the proposal.

One is what's the sense, Bill, that you'd have about whether or not it would be good if you have this organization, to have it created by an SEC rule, as opposed to asking Congress to adopt it?

Mr. Allen: Well, first let me say, in response to what Warren just said, I think about corporate governance a lot. And, if you have the right directors, all the corporate governance structures in the world are really unnecessary. And, if you have very poor directors, the best state-of- the-art corporate governance is not going to save you very much.

But, it's all that the legal system has is to build in these little structures that, at the margin, may make the world a little better. And so I think that the existence — I don't disagree that implementation of something like this will radically change the nature of the auditing profession and the performance that we get from auditors. But, I think it's a good idea to re-think the governance of the profession.

Now, I would suggest for the SEC, if they believe it's wise to think about this proposal, to think about something that is both a little broader and little narrower. I would give consideration to an overarching organization that was a board dominated by private citizens of sophistication and knowledge, with maybe the chief accountants from the SEC as a member, some members of the profession for expertise, that would be a board that would essentially govern the other necessary boards such as the Auditing Standards Board, FASB. I think there's going to have to be an independence board or an ethics board, an enforcement board, a quality assurance board. That there would be a series of substantive boards.

And, that the role of the PAC might simply be appoint and remove people from those boards, approve agendas, and approve budgets. You might not even give the PAC any substantive responsibility with respect to the standards set by the Auditing Standards Board, or the Financial Accounting Standards Board, et cetera, because if you do, you begin to make it unattractive for good people to serve on those standard-setting boards if their work just gets thrown up to somebody else.

So, I wouldn't think that the PAC might have — might not have —

Mr. Mundheim: And PAC is PAB, right?

Mr. Allen: PAB, excuse me. PAB.

Mr. Mundheim: Yeah, I thought maybe we had a third organization now.

Mr. Allen: Yeah, I invented a new acronym.

So, I would think about a board that was broader and coordinated more, but was limited in its governance role. And, whether or not it's an SEC- created entity or a Congressional entity — this kind of board might actually require Congressional approval. I'd have to defer to Mr. Beller to give a legal opinion on that.

But, I don't have a strong view. If it can be done either way, I think that — I'm not that sensitive to Mel's point that you just want the political process to be engaged by it, so that there would be annual budgets and so forth in Congress.

Mr. Mundheim: Does the Allen proposal for a very broad Public Accountability Board that has an oversight function with respect to specific things that includes standard-setting for auditing, standard-setting for accounting principles, does that appeal to you, Jim?

Mr. Copeland: It would bother me a lot if this amounted to basically a sort of governmental appointment of those who set standards for auditing and for accounting. I just think that the worst possible outcome here would be anything that in any way politicized the process.

And, there may be things that Bill is thinking about that would protect the process from politicization, but I think that's one of the real improvements that could be made in the system that we have today. I think making the Financial Accounting Standards Board truly independent — independent of all of those who might otherwise influence it in perhaps the wrong way — I think making them financially independent is important.

At this point in time, the firms pay, basically, for the Financial Accounting Standards Board, except for that portion of income that they derive themselves. I think it would be better if that were paid by a portion of the registration fee, for example. That would eliminate any appearance of undue influence that the firms might have, with respect to the Financial Accounting Standards Board.

And, I think having the auditing standards setting process somewhere other than under the control of the people of the profession whose standards they're setting would be a strange outcome. I would think it would be a good idea to have some independent members on that board, or public members on that board, just for transparency sake and so people would understand the due care that goes into the setting of standards.

But, I don't think having those as part of the same chain of command would be a particularly good idea.

Mr. Mundheim: When you say you'd want to avoid politicization, that suggests to me the question of how do you appoint the members of this board? What's the mechanism for doing that?

And, I guess there's the question of who does the initial appointing, and how do you make appointments going forward?

Mr. Copeland: I really believe that's a more important question than what's the organization structure, or is it governmental, or is it independent, or is it self-regulatory, but do we have people there that everyone can trust in the process?

And so, I think it needs to be a system that provides for sort of mutual vetoes, if you would, so that the people that finally make it through that process are people that are trusted by all constituents in the process — the users, the profession, the SEC, investors, all of the various constituents that have an interest in the answer.

How that would happen, you know, there has to be an initiator. But then, I think, having some mutual veto for each of the parties involved would be important to making it successful.

Mr. Mundheim: I mean, for example, who vetoes on behalf of — and I don't know whether or not investors are a party. Do you give that veto to Warren?

[Laughter]

Mr. Copeland: At the risk of seeming to cave into my clients, I'd accept that.

[Laughter]

Mr. Mundheim: Anybody else have thoughts on how you appoint the members, particularly the initial group of members, of any of — whether it's the Weiss board or — well, the Weiss board, of course, would have the President appoint some —

Mr. Weiss: Well, you can set it up as the SEC is set up. I think it's split between the parties, with the controlling party getting three and —

Mr. Mundheim: No, but I was trying to think of something less than — I mean, if you concentrate it in the President, that's one system. But, if you didn't do that, who is going to — I mean, will we all trust the SEC to make those appointments? Or how do we — how do we get it started?

Mr. Shedlarz: Well, I think you cannot disassociate the charter of this organization from how you appoint the members and what should be the makeup of the members. I think what you're seeing here is a difference of opinion of some significance amongst the Panel, in terms of the role the PAB should be playing.

I mean, if it's going to play largely an oversight role, in the interest of making sure that there is an appropriate oversight of the audit and accounting community, and it has muscle in terms of disciplinary action, it might suggest one makeup with one approach to appointing the members. If it's going to be some government body, with a very large charter, which ranges anywhere from what I just mentioned to the setting of actual accounting standards, it would suggest a dramatically different approach.

I still believe we need to drop back in this environment and be very careful about setting the equation for what we're trying to solve here. Clearly, Enron is Enron. Bad cases make bad regulation and bad law. And, I think we've got to be careful not to throw the baby out with the bath water in terms of what's going on here.

It is clear we need to do respond aggressively, in terms of, at a minimal, the loss of investor confidence in the financial reports and financial statements. I believe the PAB as chartered and focused by Chairman Pitt is a great start in that direction. I think the SEC, in that regard, should play a critical role, along with the AICPA and others, in terms of making sure you have people with the requisite competency to fulfill that charter. And I also, as I highlighted in my introductory comments, would not have it come from the audit profession.

Mr. Mundheim: But, David, are you saying that when you say the AICPA and the SEC, should they sit down together and get a mutally-agreeable set of people?

If you set up the PAB as you seem to support in your opening statement, who determines who sits on the first board? How do we take that first step?

Mr. Shedlarz: Ultimately set up the guidelines that I characterized, that would be suggestions which would be submitted by the SEC and would be the SEC's determination.

Mr. Mundheim: SEC determination is what I heard, and that's the ultimate, the SEC being quite open to recommendations from a variety of sources, I take it.

Mr. Shedlarz: Right.

Mr. Mundheim: All right. Now, let's talk a little bit about substance of what the PAB ought to be doing.

One of the things that it was suggested that it have is quality control characteristics. In other words — or responsibilities. And, I guess the question is what does that mean?

Does it mean, for example, that the PAB would say, Well, you know that Volcker Group at Arthur Andersen? That's actually a terrific idea. Every accounting firm or every large accounting firm should have one, two, or three outsiders with significant responsibilities.

Or, does it mean that this group would set out after having informed itself about practices in a variety of areas, in existing firms, it would then say, Here are the best practices. You don't have to follow the best practices, but if you don't, you ought to have a good reason not to.

How should that aspect of the responsibilities work?

Judge?

Mr. Allen: Number one, it shouldn't be just an organization to manage the continuation of the peer review process that is ongoing. The peer review process should be given some greater — these are periodic reviews by other firms of the auditing practices of their fellow audit firms. The public, I think, is suspicious of the peer review process. And so, this organization should have some staff of its own to do peer review.

Secondly, I think it should have some capacity to do these sort of crisis or audit failure reviews. The profession does that currently.

And I must say, as a lawyer, when I first began to see how the auditing profession organized itself, I thought it was much more thorough in its self-regulation than we lawyers are. When there is an —

Mr. Mundheim: That's not a very high standard.

[Laughter]

Mr. Allen: It's not sufficiently high, I'm sorry to say.

And then, there's the third point which you raised, and it has to do with the internal dynamics of the audit firms. Because, when we think of the Enron situation, you think of what has happened to the Andersen firm. You understand that the incentives for any of these audit firms is such that their reputation for integrity is enormously more valuable to them than any client. And no CEO making a rational choice would ever get close to a line where he thought or she thought that the risks for the entire firm were great.

The problems come up within the firms, on the incentives and the control systems within the firm, because it's not true of any single auditor that his or her incentives make it irrational to cross over a line. Because if your one client is your whole career, you may be willing to be more compliant than the CEO of the firm.

So that the critical fact is how is the firm internally organized to compensate and incentivize auditors and to control them. So, what should this — if we do have some kind of quality assurance function, how should it be done?

Should it be done by best practices? I kind of think best practices are better than trying to get — there's only one Paul Volcker, and even if you expanded it to Jack Bogel and Warren Buffett and a few other people, there are still limited numbers of this kind of human capital. So, I think best standards are maybe one way.

There may be more intrusive things. I mean, there may be review of the audit control systems. But, it all gets a little bit unappealing. I mean, you begin to sound like some controlling agency in Washington organizing the guts of the firms. And so that's not so attractive either.

So, maybe best standards or best practices are —

Mr. Buffett: But post-Enron, wouldn't you say that top management of — of either four or five firms, depending on whether you want to talk about it — but that they have an incredibly greater incentive to have every possible procedure in place to prevent recurrences, at least of that type, than any board or supervisory group or anything could — and they've got it on a contemporaneous basis rather than with a, you know, a long delay.

I mean it seems to me that that board is not going to bring much to the management of auditing firms that the top managements presently will not bring themselves. And, at lunch it was mentioned, I think, that fifteen percent of the auditing fees now go to paying claims resulting from infractions or what juries decide are infractions of the way auditing firms should have behaved.

So, I mean, there's these incredible incentives in place already, but much of what Enron did is allowed under GAAP. And, I would say that the greater problem exists in how GAAP has evolved, than in terms of the threats its posed by how auditing firms, themselves, are going to be organized internally in the future.

Mr. Weiss: Warren, excuse me. I think that's ignoring history. It's not as if this was the first major audit failure. We've been having them consistently and with big explosions for a long period of time. I mean, it brought down the savings and loan industry in the 1980s. Everybody was asleep at the switch, including the Securities and Exchange Commission. When the auditing firms were permitting the junk bonds to be carried at cost, without being marked-to-market when everybody knew that they were not satisfying the standards that were set by the accounting profession for how to account for those bonds.

So, all of a sudden, one day we woke up an the whole industry was gone, and the government took over and it was because the government brought those actions against the accounting professions that the big numbers were paid out, not the private bar.

Then, we take Arthur Andersen, Colonial Realty, in the late eighties. There was document destruction. They paid a huge amount of money. Sunbeam, same auditing firm, document destruction. They paid a huge amount of money. They didn't learn by their own experiences.

Enron isn't the only example of this. I can go on an on, whether it be Cendant and Waste Management, it — and, it's not only Arthur Andersen. So, it's not working the way it is now. Self- policing isn't working. The threat of litigation, in and of itself, is not enough. We need something more.

And, to ignore history is not where we should be at this point. We have an opportunity to do something.

Mr. Mundheim: I want to turn to Jim. I just have a couple of observations.

One is it is interesting — I mean, I don't know accurate, but the newspaper reports suggest that Paul Volcker had some very quick suggestions for changes in the internal governance structure of Arthur Andersen.

Secondly, I don't know — I'm sure you're right, Warren, that today everybody feels the alarm clock has run. But, part of the reason for having the board is two years from now, will people have forgotten the call? And, is this kind of a board useful?

Now, Jim, I'm sorry.

Mr. Copeland: Yeah, I'm sorry.

If anybody is even remotely thinking that by the end of the reform process, that we aren't going to have any more business failures, or that we aren't going to have any audit failures, and that's the measure of success here, then, I'm sorry, we're not going to be successful.

You know, we have airplane crashes every year where people die and we still fly airplanes. And, we have a reasonable process to make sure that the air travel is as safe as we can reasonably make it, still being consistent with an air traffic system.

We're going to attempt to, in this reform process, make the capital markets as safe as we can reasonably make them, consistent with still having a capital market. We can audit down to the point where you'll never have another audit failure, but you'll never have enterprise, either. The markets will grind to a halt. And no one wants that.

This is a matter of doing a good job of policing. Policing does not mean that there are no accidents. As we all know, we lose about twenty-five thousand people a year to traffic fatalities. Nobody suggests that the police be taken off the roads. You know, we tried to lower the speed limits for a while, and we decided that was too restrictive, and we increased the speed limits again.

So, you know, if the idea here is perfection in a judgmental exercise, I would just tell you that we surrender, white flag.

Mr. Mundheim: But, don't surrender quite yet.

[Laughter]

Mr. Mundheim: Would you — I mean Bill Allen has said best practices would be a useful contribution that the PAB could make.

Do you think that it is useful, or do you think that best practices are well known in the industry and it really adds nothing?

Mr. Copeland: I think some attention to best practices in any profession or in any industry is a good thing. I mean, it's hard to argue with that.

But, I also take Warren's point that if we had that sharing of best practices, which we basically do through the peer review process, that at the end of the day, we would still have, perhaps, the Enron problem.

There is no substitute for auditor or management competence and integrity. And, there's a great quote that says people want systems and processes so perfect they no longer have to be good. And, that just doesn't exist.

There is no way to regulate it. There is no way to legislate it. There is no way to litigate it out of the responsibility of professionals. We have to be willing to make hard decisions when there are incentives to do the wrong thing. We have to be willing to do the right thing, in spite of those incentives. And, we also have to be sure that we have the necessary competency.

You could have the most righteous person in the world doing audits, but if they're dumb as a stump, you're still not going to get a good result. So, we have to worry about those two things: integrity and competence. And, to a large extent, I think independence has gotten confused with integrity here, and we ought to recognize that those are two different issues.

Mr. Mundheim: You had mentioned, I think, in your statement, Jim, that you thought performing autopsies of situations gone wrong was very useful. And one question is: Should those — I mean is that a function for the Public Accountability Board? And, if so, should that be limited to the audit firm failure?

And, if the PAB is given that assignment, should they then publicize their findings? In other words, should they publicize the autopsy, and should they publicize their suggestions for improvement?

Mr. Copeland: The autopsy absolutely should be transparent, and public, and quick. And, it should not be performed by the PAB, because it would continue a problem that we have today; which is that people overestimate the potential for what a well-conducted audit can do. It is a risk reduction activity. It is not a risk elimination activity.

And implying that business failures are strictly an audit failure, by having these done by the Public Accountability Board, I think would not necessarily send the right message. So, I think raising that up to a level that crosses jurisdictions would be a much more constructive approach to the autopsy process, as you call it.

Mr. Mundheim: Who's going to do?

Mr. Allen: May I say something, to respond to that?

Mr. Mundheim: Yes, of course.

Mr. Allen: It seems to me you're putting the rabbit in the hat when you say if you want the — if you require a system with no audit failures, I give up. Anybody that thinks about this system understands that there are risks in the business world. Risks will cause companies to fail, independent of auditing. And, that auditing is a human process. And, there will be failed, busted audits, even when we have a good system.

So, this isn't the issue, and also is not the issue that if the PAC has been suggested — is that —

Mr. Mundheim: B, B, B.

Mr. Allen: PAB — PAB. I'll just call it the new —

[Laughter]

Mr. Allen: If the PAB — I'm dyslexic.

[Laughter]

Mr. Allen: If this new board is charged with the responsibility to do peer reviews, it does not mean that this group will have the idea that an audit is a failure if it doesn't catch a fraud. I mean, they can bring to that process the correct degree of sophistication that the current Peer Review Committee does. It would just have the advantage of not being perceived by the public like an I scratched your back, you scratch my back organization.

Mr. Copeland: And, don't take my comments wrong. I think the PAB idea is a good one.

It's just I would not have that organization be the one that performs the post mortems on business failures.

Mr. Weiss: Just one question. If you just had the PAB, or whatever organization it is, say that you cannot have a revolving door in the industry — in other words, people in the auditing firm can't go to work for the client for x period of years, or whatever — isn't that a tremendous advance?

The accounting profession refused to do it. Every single fraud that I've been involved in, and it's been literally dozens if not hundreds, involving accounting has had revolving door problems. It happens every time. Why not stop it?

And, if you can't do it through self- regulation and self-improvement, why don't you just let somebody else do it for you so you can avoid all of that legal liability?

Mr. Mundheim: I think what you're suggesting is what I thought I heard before, is that there are — that you can either set standards or, as Bill said, he would prefer saying best practices would have, and I don't know whether it would be that rule or whatever. But, at least that would be one of the functions of the PAB.

I just want to come back on this post mortems or autopsies; which is, when you say the PAB ought not to do it, who, then? Who are you nominating?

Mr. Copeland: I would create a board similar to the NTSB, the National Transportation Safety Board, as I mentioned earlier in my remarks. And that would have cross-jurisdictional responsibilities, so you wouldn't have the turf battles between SEC, Comptroller of the Currency, and that kind of thing.

Mr. Mundheim: But that — the National Transportation Safety Board, that's got a lot of governmental folks doing the investigations. Is that what you're saying? That only the government should have the authority to do those post mortems?

Mr. Copeland: Well, I mean, you can always do a post mortem individually. We do for every single audit failure, or potential audit failure that we see in the press, whether it's ours or anyone else's. We do a post mortem, to see what we can learn from it.

But, this is a much more public process that we would see as advantageous because, again, the public would understand how these were going to be investigated. It wouldn't require Congressional hearings sort of falling all over each other. The process would be in place.

It would also be staffed by experts. Again, it would be a government organization, hopefully a non-partisan, rather than a bi-partisan, political organization. But, it would have the experts, the kinds of people that staff the NTSB, except that they would be people with business expertise.

Mr. Mundheim: Warren?

Mr. Buffett: Bob, if Andersen had done their job perfectly, how much would Enron — assuming they set out to do so — have been able to distort economic reality within the bounds of GAAP? And, let's just assume that Andersen, from —

Mr. Mundheim: Perfectly is a — you know, that's not —

Mr. Buffett: Well, then, okay, okay —

Mr. Mundheim: — within reason.

Mr. Buffett: — in a standard manner. I'll put it that way.

As I read the press accounts, I mean, it seems to me that some of those transactions which distorted economic reality in a very large way would have gone by other firms.

Mr. Mundheim: Well, I mean, but the question you're really asking is if Andersen —

Mr. Buffett: If the problem lies with the standards.

Mr. Mundheim: Well, or the auditor's relationship to the audit committee, and raising the substantive risk issues, as well as simply saying This is within the guidelines.

Mr. Buffett: Somebody said it once that there were eight hundred and three — I think it was Mel said that there are eight hundred and three pages dealing with just derivatives in GAAP.

And, I think just concentrating on the auditors may — if we upgraded the breed, not that many of them need upgrading, you know, would that solve the problem? Or come close to solving the problem, even?

Mr. Mundheim: Well, I guess Bill's answer would be there are lots of pieces that you put into place, and that would be one helpful — or may be one helpful place.

Let me now turn to the other function that the PAB has been assigned, which is discipline. Is the present disciplinary system inadequate?

Mr. Weiss: Well, from my experience, very few of the auditors that are engaged in the major audit blow ups that lead to litigation are fired, that they remain with the firm. They're re-assigned to other offices. So, I don't know what kind of discipline goes on.

Every now and then, there will be 2(e) proceeding at the SEC, or there will be some state interest in penalizing the firm, but they're relatively rare, given the number of audits.

Mr. Mundheim: In other words, you're saying the perception for you, outside, is that discipline is not adequate. From inside view?

Mr. Copeland: It is a perception issue at least. I can't speak about the other firms, but basically in our firm, when you have a problem on an SEC client, your career is over, for a lot of reasons, including the fact that we can't have Mel looking at a second situation where one of our partners was previously sanctioned by the SEC and is now involved in a second problem.

So, I think the answer is that some disciplinary process that allowed transparency to the investing community I think would actually be useful. I don't believe it would require very much change in the disciplinary processes that the firms have, at least certainly that our firm has. But, I do believe that the investment community would be comforted to know that those actions have been taken and that partners who are even suspect of being a part of a problem are re-assigned away from audit responsibilities very quickly.

Mr. Mundheim: One criticism or question that I have heard is that if someone is sued, an individual accountant is sued, or maybe both an individual and the firm is sued, that discipline would be delayed pending the resolution of that suit, as long as the individual is what they call benched, or terminated, or shattered.

Is that delay in discipline a good idea that is helpful, or one that you think ought to be eliminated?

Mr. Copeland: Well, I think if you believe in due process, the individual does have rights. That does not mean that we can afford to re- assign them to other audit engagements until the litigation is resolved and their responsibilities are resolved.

But, at the same time, I do believe that even accountants have a right to due process. So, I think that requiring an immediate termination of people without letting the facts unfold is not something that we, as a society, would buy into.

Mr. Weiss: Do you use those people as part of your defense team in the civil litigation?

Mr. Copeland: I don't know what you mean by defense team. They have an interest in the litigation and if we conclude that the firm and the

individual have separate interests, then of course we would have to see that they engage separate counsel.

But assuming that we are trying to defend their performance, and I believe we should defend their performance, then I suppose they would be part of the testimony.

Mr. Weiss: And what process do you go through to determine whether or not you have a consistent interest with that person?

Mr. Mundheim: Well, I mean, I suppose that would be in part, Mel, determined by counsel —

Mr. Copeland: Yes.

Mr. Mundheim: — for the accounting firm.

Mr. Weiss: And it's a self interest for the firm. There's no independence there.

Mr. Mundheim: No, but I think that Jim's point is those people are taken off public audit assignments.

Mr. Copeland: Yes.

Mr. Mundheim: And, that would be — they would say that's a penalty to the individual, because they'll feel that in terms of advancement and pocketbook. And, it's a protection to the public, —

Mr. Copeland: Right.

Mr. Mundheim: — because those folks are not, pending resolution, allowed to work on audits. And, I think you could well ask is that enough, because it takes place outside the public viewpoint.

Mr. Copeland: Right.

Mr. Mundheim: The other question is if you terminate somebody, how does the next firm that that person goes to know that that person has been terminated because of questions raised about their audit performance?

Mr. Copeland: We do have laws about what you can say.

Mr. Mundheim: Right.

Mr. Copeland: So, we abide by the laws.

Mr. Mundheim: Which means that that information may not necessarily be communicated to other firms.

And, I guess one of the questions is whether the PAB becomes a repository of information which can be tapped by firms when x goes to be hired, and see is there anything on x 's record. And you would say that might be a plus.

Mr. Copeland: That would perfectly legitimate. I think anything that gives visibility to our disciplinary processes is going to do nothing but restore — help to restore confidence in the processes themselves and in our profession.

So, I don't have any objection to visibility, to the extent that it does not violate the rights of the individual to confidentiality.

Mr. Mundheim: Well, are we all ready to talk about independence as a facilitator for integrity?

Mr. Allen: Before we get to independence, Bob, —

Mr. Mundheim: Yes, sir.

Mr. Allen: — I would mention that when you ask somebody if they want more discipline, there is a character — there are people that like that, but it's usually thought of as deviant in this culture.

[Laughter]

Mr. Mundheim: All right, now —

Mr. Allen: We have enough of those.

Mr. Mundheim: — are we all ready to talk about independence?

Bill, I think you started us by saying that you felt that the question of what should constitute independence, as it's been used in connection with the auditing profession, really is not a definition that should be left with the SEC. And, I might say there is actually a very interesting paper that you and a colleague have written, called Threats and Safeguards in the Determination of Auditor Independence.

And, it may be worthwhile for you to take a minute and summarize why you think that the SEC really — that its approach to defining independence is not the most desirable.

Mr. Allen: Independence is at the core of the identity of auditors. I concur completely with Jim, in that we don't want independence simply because we like independence. We want independence because it's a signal to us of something more important, which is integrity.

For auditors, we want integrity and competence and maybe expertise. Integrity is the thing we really want, but we can't measure integrity. It's very difficult. You can measure integrity of someone that you know for a long time, perhaps, or you hope you can. But, for third parties, it's hard for us to measure integrity.

Independence can be something that we can sort of infer from the objective circumstances that the person is in. Are they in a conflicted position, in some respect?

So, it's been at the heart of the governance of the auditing profession, essentially forever. It's been regulated in a very kind of ad hoc way. The SEC never actually defined independence, and there have been a long series of sort of specific rulings, that this is — you're independent if you're in this circumstance, but if you own a share of stock, you're not independent. You're independent if your third cousin works for the client, but you're not independent if your wife works for the client, et cetera, et cetera.

So, we ended up with a great long list of situations in which there was or there wasn't independence, and there were some over the years attempts to sort of codify these a little bit.

So, in 1997, there was an effort by the AICPA and the SEC jointly to try to put independence regulation on a new basis, which was a basis that would be principle-based. And a board was established, comprised of leaders from the profession and from outside individuals, and a staff was put together. And the Independence Standards Board began a process of thinking about independence, creating a conceptual framework for dealing with independence going forward, recognizing that the auditing profession had changed a great deal over the last twenty years and something more needed to be done.

Well, this process did not move quickly enough, I'm afraid. And, at some point, it became clear that by the time Chairman Levitt was going to leave office, we would not have reached the issues that were of paramount concern to him and his senior staff, which was consulting services. And so, the SEC went into a rule making and abandoned the ISB process.

Now, the rule or rules which was published in November of 2000, any of you may read and reach your conclusions about it. In my opinion, this rule is not a helpful, systematic principle-based attempt to deal with independence issues, but is in fact an amalgam of political compromises between agents with some degree of power, against others with some other degree of power.

I think, as we move forward, and maybe it's in the PAB structure, or its in some other structure, it will be necessary for us to return to some sort of thoughtful principle-based way of thinking about independence issues. It's not the case that the only issue out there is consulting services. This is the one that the press writes about the most. Perhaps it is the biggest dollar and, therefore, the most pressing issue. But, there are many other issues that need to be addressed if we want to offer to the capital markets assurance that reasonable regulations are in place that provide for independence of the auditing firms that are making attestations.

So, my prediction is that either in the current reform mode, or at some other point in the future, we're going to have to return to a different process, in that the existing rule is not adequate to deal with independence.

Mr. Mundheim: Warren, would you say well, why don't you just leave that to the audit committee, and they can ask questions and they can make their own judgment about adequate independence so that the audit committee believes that the auditor will act with integrity?

Mr. Buffett: Yeah, actually, I want to get him dependent. I want him to be dependent on the audit committee.

[Laughter]

Mr. Buffett: And, anybody operating in any sphere probably has somebody that they're worried about the most. You know, maybe Mel, or it may be their boss. And, very often, it's the person who writes their check.

And so, I would agree with Bill. I mean, there is — if somebody's writing you a check for a hundred million dollars, you are somewhat more dependent than if it's five million, and the more services you're buying from them. It increases in some way.

But, I would really like the auditor to be the most worried about the shareholders. And I think I wouldn't quarrel with anything that creates counter-forces there, and they create overwhelming ones. I mean, if there's a billion dollar consulting assignment, and a five hundred thousand dollar audit, I mean you can push it to extremes.

But, I think — I do think the bigger thing is to create dependence and giving the right answers to the shareholders.

Mr. Mundheim: That sounds wonderful, —

Mr. Buffett: Yeah.

Mr. Mundheim: — but —

Mr. Buffett: It was meant to.

[Laughter]

Mr. Mundheim: — but I don't know what it really means.

Mr. Buffett: Well, it —

Mr. Mundheim: After all, the auditors work with management.

Mr. Buffett: Yeah, and that's the problem.

Mr. Mundheim: They're constantly working with management.

Mr. Buffett: And, they're paid by them.

Mr. Mundheim: And, they're paid by them.

Mr. Buffett: And, they're selected by them, as a practical matter.

Mr. Mundheim: As a practical matter today.

So, how do you break that cycle of dependence and forge —

Mr. Buffett: You have them more — you have them more worried about something else.

Mr. Mundheim: Okay, what is that — other than Mel, what are we making them worried about?

[Laughter]

Mr. Buffett: Well, we'll always have Mel, so — and, if it was fifteen percent — I mean, Enron itself is wonderful, too, I mean, from that standpoint.

Mr. Weiss: Can I make a suggestion?

Mr. Buffett: Yes.

Mr. Weiss: You have to put the auditor in a position where he or she can be adversarial to management and not be penalized for it. And, one of the things that has recently happened and I think it was an exposure draft adding fraud detection as a part of the audit function.

Now, I wrote about this in 1993, and I said in the article, as a profession, accountants have to accept the responsibility affirmatively to look for and report fraud. It's logical to me that accountants should accept this responsibility for their own and society's protection, that I cannot believe that the contrary view exists. If I were an auditor, I would want the ability to stand up to the client and say, I have an independent duty to look for wrongdoing. You can't hide information. If you don't like my searching for wrongdoing, you can't fire me and go down the street and hire somebody else. And, you can charge more to do it, because you're going to increase the scope of the audit.

I have several different things that I have thought of that could assist in fraud detection. We know where the frauds take place, and how they take place. We know about the side letter agreements that are rife throughout certain industries. We know about channel stuffing. We know about so many things that it's unbelievable. Now, why close your eyes and be a three monkey type routine, when you can get paid more, protect yourself from liability, and improve the quality of the product?

Mr. Buffett: And, they may be doing it for self-serving reasons, but I've had auditors tell me that they prefer having dobermans on the audit committee, because if they have a doberman, the management will recognize that they're going to have to go back to that doberman, and then they're going to get reported on. And, if they've got a bunch of cocker spaniels, you know, they've got another equation.

Mr. Mundheim: Well, let's talk a little bit about how you turn an ordinary mutt into a doberman.

[Laughter]

Mr. Mundheim: Because, the furthest —

Mr. Buffett: It's been done with me.

[Laughter]

Mr. Mundheim: But, in the problem, in part, there are lots of intelligent people around. They're not experts. For example, do the organized markets have a responsibility to see that audit committee members are properly educated, or have the opportunity for appropriate education?

Mr. Buffett: Well, it obviously helps if you're on an audit committee and you understand a fair amount about accounting. I mean, you will know and you're better able to ask questions. But, you still won't find out things if people are determined not to —

Mr. Mundheim: No, no, no. But, I mean, let's just start at the basic level. You've got four suggestions —

Mr. Buffett: Right.

Mr. Mundheim: — in your letter.

Mr. Buffett: Four questions.

Mr. Mundheim: I'll bet you, if you asked ninety-eight percent of the audit committee members What are the four questions that Warren Buffett would have you ask, they would say, I don't know.

Mr. Buffett: Well, but —

Mr. Mundheim: And, should they know?

Mr. Buffett: That's why I'm here. That's why I'm here, Bob.

[Laughter]

Mr. Buffett: The point is you don't have to be an expert if you ask those questions. And, particularly if you get the answers on the record in the minutes. I mean, that — auditors just aren't going to want to duck. It'll be too easy to prove later on.

So, you don't have to be an expert to ask those. And, you won't have to be an expert in accounting to know if you're getting a tap dance in response. But, you won't get it. I mean, you will — at least in my experience, I've had two other people who have picked up on this who are on audit committees at other companies, and they say it's changed the whole tenor of things.

Jim, maybe, can comment on this.

Mr. Copeland: Yes. I just passed Warren a note and said I do sit on a board of a non-profit organization that's audited, and the first question I asked was exactly the same first question as Warren asked. You know, if you were doing the accounting, would it be any different than what the company is reporting? That's a very personal question to that specific partner. You're asking, all right, does this set of accounts look like you would cause them to look if you were doing the accounting personally?

Mr. Mundheim: There are a huge number of publically-held companies with audit committees. Do you think that the audit committee members are adequately educated about their task? And, if you think the answer is no, what ought we to do about it?

David, you've got a thought?

Mr. Shedlarz: I think, in a somewhat diverse sense, and I can testify personally to this, the heightened sensitivity, in terms of what's gone on in Enron, has not missed any audit committee or any board of directors. And, I would say to you that the richness of discussions are probably exponentially greater than they've been right across the board, even for companies that have practiced exemplary governance and disclosure in this area.

So, I think one of the critical issues is the sustainability of that diligence and the capabilities of individuals. I think there should be some consideration, in terms of education as it relates to people that practice on audit committees, ongoing education, possibly having some certification, in terms of people that participate on audit committees.

While what goes on as it relates to the auditor and the financial community of any company, it goes on in a very sophisticated and a contemporaneous matter. The audit committee, at the same time, I believe, has a wonderful opportunity to play a critical role in that regard.

And whether it's education in terms of contemporary financial reporting practices, contemporary accounting, the best practices and the right type of questions to be asking, I think that could be instrumental across the board in twelve thousand-plus companies that have to deal with this, and audit committees that have to deal with this scope of activity.

So, I would encourage education. In certain respects, I think we should look to a number of bodies in terms of not only assuring that, but encouraging it at the same time.

Mr. Mundheim: Bodies such as?

Mr. Shedlarz: I think there's an opportunity, in terms of whether it's the FEI, the Financial Executives Institute, it's academia. I think there is an opportunity in terms of enhancing the capabilities of those who participate on audit committees.

Mr. Mundheim: Jim?

Mr. Copeland: Well, I guess I can go back to the original question, about auditor independence. And I think it's a misleading perception that the problems that we have today because of Enron or like Enron and others are because of independence issues surrounding the scope of service. I think that is too easy. I think the solution to it is too simple. And, I think that the unintended consequences of it will be awful.

I believe, again, that good auditing is all about integrity, the personal integrity of the auditor, and all about the competence of the audit team. And, I believe when you ignore independence altogether and in other words don't notice whether or not auditors have investments in the companies that they audit, for example, that you have real problems.

And I think, at the other end of the spectrum, when all care about is auditor independence, competence goes down the drain, and you end up with failed audits for an absence of capability and expertise.

So, if you envisioned a sort of normal distribution curve with either end of attention to independence being at the low end of the curve, and the height of the curve representing the quality of the audit, I think you would have it just about right. I think we need to pay attention to be sure that auditors are not auditing their own work, they're not investing in the companies they audit, so and so forth. But, I do believe that when we push out to scope of services, we begin to systematically hive off competencies and capabilities that are absolutely essential to the audit process. And, I believe that's what we're going through right now.

And, again, that's the reason for my sort of lack of optimism about the outcome of this whole process, is it seems to be headed toward focusing in on the scope of services that auditors are providing as being the principal problem. And, to the best of my knowledge, we're yet to find the first instance where that was clearly the problem in a failed audit.

Mr. Shedlarz: And, I think that point of view is extremely well founded.

One of the greater concerns that I have, in terms of the massive amount of auditing that has to happen, is whether or not we're truly going to have the capacity to do that on a global basis. As we go from six, to five, to potentially even four, does it look to people who have the capabilities of carrying out the breadth of activity in order to do a private audit and audit-related services. If we parse this too far in the interest of independence, I've got to question whether or not we, at the same time, severely compromise the capacity to really get this done on behalf of industry and shareholders and investors.

Mr. Weiss: This is really a shocking revelation that after all these years of holding yourself out as being independent public accountants, you suddenly want to walk away from that whole concept of independence.

This morning, Warren said auditors are not happy about criticizing the client. They're getting paid by the client. There's all kinds of problems that are already built into this independence issue, and now laying on top of it is this big economic incentive to pacify the client because you're going to get other clients and more profitable business. And, the audit is a way into that client, to get that more profitable business, and you want to now shed the whole concept of independence.

That's fine. Well, let's call it what it is, then. Let's call it the auditing industry, big business, not a profession, and then we'll deal with it in an appropriate manner.

Mr. Mundheim: But, Mel, you can't assume — and I think this is the point that Bill made earlier — that anybody is totally independent. All of us constantly have conflicts that we have to wrestle with. And, the question is how well do you wrestle with them.

And, I don't think that I heard Jim or David say do away with the concept of independence. I think, if I heard them correctly, it was how do you deal with those tensions. Because, Jim was saying there are real costs, and maybe you ought to talk a little bit more about the costs to the quality of auditing that occur when you limit the kinds of businesses in which auditing firms can be in.

Mr. Copeland: First, I think auditing is probably the only profession that has an independence requirement, other than being a judge. You know, lawyers are the advocates of their clients. They're not independent. The auditing profession is independent only so far as that term is defined by the Securities and Exchange Commission. And, that decision was very overtly made at and around the debate at the time the 1933 and 1934 Acts were passed, and a reasoned decision was made that they wanted auditing to be paid for by clients and done out of the private sector. And, all of the definitions around independence have been modifiers of that relationship.

So, it's not a matter of are we independent with respect to a dictionary definition. But, rather, are we independent as the Securities and Exchange Commission has chosen to define that term?

As far as the cost of not providing other services, it's very easy to explain. If I were drafting the team to audit Enron today, my first draft choice would not be someone like me from Georgia State University with a degree in accounting in auditing. It would be a markets trading control expert out of our consulting practice, that works principally with Wall Street firms. You know, the next person would probably be an actuary. The next person might be a tax specialist or an IT specialist. If you've ever seen the trading room of an organization like Enron, you would understand the need for IT expertise.

You know, then you'd get to accounting and auditing capabilities. We certainly need those. They are, in essence, the general contractors, if you would, for the audit process. They understand the entire broad scope of the audit process.

But, the idea of being able to audit a multinational corporation with the technology that exists today, strictly out of accounting and auditing competencies is something that I don't believe anyone believes in. So, that is the cost of continuing to hive off these businesses.

People invariably say, Well, can't you just keep those competencies and just have them provide consulting services to the other Big Five firms' clients? Well, there's prima facie evidence that that doesn't work. We've just had all five of the firms basically divest themselves now — or decide to divest themselves of their IT consulting capabilities. Nobody's going to work for an organization where you can only address part of the market — sixty percent of the market, perhaps.

So, as we restrict these services, we are in essence saying that we will be removing them from those Big Five firms, and the intellectual capital loss there is just huge.

Mr. Mundheim: Bill?

Mr. Allen: I'm a bit of an agnostic, but I'm also disagreeable by nature.

[Laughter]

Mr. Allen: When I spoke a few minutes ago, I said independence was at the core of the identity of auditors, and I think it's the case. I don't think it's an artifact of the 1933 Act. I think that independence is critical because it's a signal of integrity and without that, the services are worthless to the market.

And, if you look before the 1933 Act, you would see that more than half of the corporations that were traded on the New York Stock Exchange required in their corporate charters that their books be audited annually by an independent public auditor. The markets demanded this. It's not that the SEC invented it all of a sudden.

Mr. Copeland: It's eighty-five percent.

Mr. Allen: Maybe the number was —

Mr. Copeland: Eighty-five.

Mr. Allen: — eighty-five.

The idea of independence is tightly bound up with the value of this service, in my view.

I'm agnostic about this scope of services for the reason that — I mean, look at Enron. Does anyone actually think that Mr. Duncan, who I think was the guy in charge, needed the additional consulting revenue to be pulled away from the path of righteousness? He had a twenty-five million dollar audit client. This supplied all of the incentive he needed to be compliant. It doesn't have anything to do, I don't think, with having additional services.

Nevertheless, there is a huge perception problem. I don't know what the underlying fact is. There is a huge perception problem, and I think the perception problem is part of why the firms have given up on this business. But, I don't understand, and I've heard Jim say it before. And, I just don't quite get it. Why, if you need these services to do audits, and you can only do audits, you can't hire people to do this, and the answer is, Well, it won't be exciting enough for them, and maybe that's the case. But, I know that audit prices are going to go up, if it's the only business that you can be in and if you have to employ fancy technicians to do other things, then you're going to have to charge more. And, why can't you do this business for the — Jim says sixty percent and I would think it would higher than that — percentage of the market that are not your audit clients?

The answer to that, I guess, is that the business unit that provides it is worth more when it can cater to potentially a hundred percent of the market, rather than when it's limited to sixty or seventy percent of the market. But, if you're sitting there with maybe twenty percent of the market, I'm not sure how much more it's worth.

So, the fact that the firms have sold these units I think is probably a reflection of political reality more than it is that they're not economically in their own hands.

Mr. Copeland: I can just tell you that we would have been perfectly happy to have kept our consulting group, had they been perfectly happy to have stayed. But, they weren't, once they realized they weren't going to be able to be effective. And, it is about forty percent of the market, because the SEC has restricted entity rules which extend beyond your audit clients. And, it basically doubles our market share loss by applying those same rules to restricted entities. So, that's the economic reason for not being able to hold onto those units.

But in terms of why great practitioners won't practice in a firm where all they do is audit support, I think it's self evident. If you're the best in the world, you want to do the most challenging things in the world. And, frankly, for an actuary, the most challenging thing in the world is not doing audit support work. And, for an IT specialist — most IT specialists, at least — the most challenging thing in the world for them to do is not to do audit support work. They're happy to do some of it, as a part of being an overall professional services firm, but they're not happy to spend all of their time doing that work.

So, I've used examples before, where I've spoken to groups of reporters. I said, You know, I might be able to talk you into working a few extra hours at night to do a technical accounting manual for Deloitte and Touche, but I doubt very much that even if I paid you a lot more money than you're making now, that you would spend your entire career developing technical accounting manuals for Deloitte and Touche, because it's not challenging to you. It's not what you do.

And, that's the same problem that we have with very capable, world class technicians.

Mr. Mundheim: But, what you're then predicting is that the quality of audit personnel and, therefore, audit service, is going to decline significantly over the next five to ten years.

Mr. Copeland: I believe we have already done significant damage to the future potential of our profession with the market place restriction on financial systems and other services. And, I believe the potential for doing even more damage is enormous.

Mr. Weiss: But this is a new marketing opportunity for you. The world wants a better product and we had the colossal tragedy that brought it home, and business is going to be forced to cooperate with you to have the credibility in their financial reports that they need for the market to fairly value their stocks.

So now, you can get together with the business community and work out a model where the audit is being done properly, with an increased scope, and you get paid more. And you go out to the universities and you say, Look, we're going through maybe a little recession here, but this is a great future profession for you. Come on board. And, sell them this wonderful opportunity.

Mr. Copeland: And, I can do that with accounting and auditing types. But, I don't know what I'd tell the people that I need on the IT side, on the actuarial side, on the capital markets side. You know, if I tell them I have a great opportunity for them to do audit support work for the rest of their lives, I don't think they're going to be interested.

Mr. Mundheim: David, are you worried about this?

Mr. Shedlarz: That's the issue I've raised, in terms of the capacity for well-qualified, talented individuals to handle the ever more sophisticated financial reporting and accounting. It's getting a lot tougher, especially on a normal basis. The advent of financial products, the nature of risks that global concerns face by nature require much more complex financial reporting and accounting structures.

The accounting rules are such that they require a heavy level of sophistication as well. Hedge accounting, I think the guidelines for hedge accounting runs into over a hundred pages at this point in time —

Unidentified Speaker: Eight hundred.

Mr. Shedlarz: Or eight hundred pages. So, you can imagine the level of sophistication which is required to carry on this activity.

But, it's the capacity issue that I think we need to be very sensitive to. We basically today have five firms that are capable of covering the global, complex organizations. And if we lose one of those, it puts us even at severer risk in terms of the capacity to carry on the activity that everybody on this Panel thinks is so critically important.

That's the last thing, I believe, that we want to compromise.

Mr. Mundheim: Now, I want to go to one more topic which will appeal to the Panelist on my far right. And, the question there is what role does litigation properly play in keeping the audit firms professionally competent and honest?

Mel, does litigation influence behavior? Has the Litigation Reform Act really hurt in litigation being able to keep people to the mark?

Mr. Weiss: Let me start with a little history.

Mr. Mundheim: Not too much.

Mr. Weiss: Okay, just a little.

Prior to 1966, nobody ever held an accountant accountable in a litigation. In 1966, Rule 23, which is the Class Action Rule, was adopted. After that, we started to bring actions against auditors when we saw blown audits and evidence of wrongdoing.

As a result of those litigations, and you can go back and check this in the newspapers, the auditing profession squeaked and squealed like crazy that they were being sued too much, but they changed, and we went from generally accepted accounting practices and ARBs, to the APB, and then when that didn't work, we got FASB, and we started to get more definitive pronouncements, more auditing standards, and litigation was the driving force.

Come 1995 — in 1995, the auditing profession and the Silicon Valley high-tech companies sold Congress a bill of goods that we needed reform. There was never any real evidence of a litigation explosion. What happened after we did away with aiding and abetting liability, joint and several liability, when the pleading standards were made very, very much more difficult, we started to see a greater number of re-statements of accounting financials, we started to see bigger companies get involved in auditing frauds, because the auditing profession started to feel very free and easy about what they were doing and what they could do to be compliant with the clients.

The result is that despite the fact that there has been an increase in the number of public companies by fifteen percent, there's been an actual decrease in the number of litigations against the accounting firms, statistically. However, the recoveries against accounting firms have

increased in amounts because the PSLRA forced the plaintiff's bar to do more investigation and those cases seem to get more money out of the defendants when there's accounting wrongdoing than the other kinds of cases, by a large margin.

So, what the evidence shows is that the deterrence wasn't great enough, because the standards for suing were tightened and aiding and abetting liability was not restored after the Supreme Court ruled that it didn't exist. It wasn't put into the securities laws. And, there was really no teeth. And, we have all of this disaster in big companies, huge companies, Fortune 500 companies for the first time in our history. Prior to 95, they were fringe companies that were involved in blown audits. Now it's among the biggest, and there's lots of them.

Mr. Mundheim: Now, I'm not sure whether the lesson from that is that you're still able as a litigation bar, as a plaintiff's bar, to impose significant liability on audit firms which ought to at least get some attention, and Jim says yes.

[Laughter]

Mr. Mundheim: Or, whether you would say it's not enough. You need the ability to sue a broader set of people, or under more generous standards.

Mr. Weiss: No, I think what you have to do is recognize that aiders and abetters should be held responsible for investor and employee losses, like we have in Enron. And, second, we should avoid what happens in a lot of these cases, where management comes in — and you can see it in Enron — and takes the position that they relied upon their auditor and they said the auditor said it was okay. And, you don't have the auditor in the case, because you don't have the aiding and abetting liability.

It takes a really egregious, Enron-type situation, to have the auditor in the case. And, I just think that that's wrong.

If there's going to be losses and the auditor is involved in causing those losses, the auditor should be responsible for restoring the money lost by the investor or the employee.

Mr. Mundheim: Should the focus be on compensating the investor, or should the focus be on creating the standards of conduct which are likely to lead to good, honest, competent audits?

Mr. Weiss: Both. But don't —

Mr. Mundheim: Well, some —

Mr. Weiss: Excuse me.

Don't pull a fast one and say we're going to increase the standards a tad bit and have people who are very sophisticated, like Warren Buffett, say I don't think it's going to make too much difference if we have this oversight board, and then take away the remedies and the deterrents of the litigation at the same time.

Mr. Buffett: Bob, I would say that litigation — punishment, which litigation is — is going to modify the aider and publicity will, and conscience will. And the idea of having the proposal I suggested is it weakens the auditor's position if there is litigation. So, in effect, by raising the stakes to the auditor, if will modify behavior in terms of who he's really working for. And that's the goal of it.

And, the auditor who answers those questions accurately will not have a problem with litigation. Maybe occasionally. You can't wipe it out entirely, but they will actually be protected if they do their job under that, and they will be made vulnerable if they don't do their job. And, I think that's quite appropriate.

Mr. Mundheim: Well, I guess the question to Jim is, is the measure of punishment, which is the loss that investors have in the marketplace, too heavy a punishment?

In other words, one way to look at is to say, Sure, we ought to be punished, but it ought to be related to making us behave properly.

Mr. Copeland: And, it ought to be proportionate to our involvement. I mean, the change that Mel's suggesting would go back to the — now you're five percent culpable in a situation, and you're responsible for a hundred percent of the losses. And that's — I mean, it's basically an insurance policy that nobody else would write, I don't think.

As far as the — you know, Mel might be surprised to hear me say that I really think that litigation does play a positive role with respect to auditor performance. But, I think that the significance of that is to a point now where it becomes counter-productive. Mel says it's difficult to sue accounting firms. That's a little hard to square with his earlier comment about whether there were going to be four or five firms, Big Five firms. That now, if that's even being called into question, whether or not a Big Five firm can be taken down effectively by one engagement, it's a little hard to argue, I think, that there's not enough access to the courts in order to take care of auditor malfeasance.

Some countries have limits based on a multiple of the fees involved in engagement as a method for capping liability. I don't know about that.

My biggest concern is that if something happens to Andersen as a result of litigation exposure, and that scares all of the talent out of the profession. They watch one — one of my partners watched a partner from Andersen having to sell his house and suddenly, you know, they wonder whether or not they want to continue in this profession. I think those are the challenging things on the litigation side.

There are a lot of things that auditors do, because of litigation. One of those things is the development of all of those very detailed standards that everybody is now unhappy about. We first had legislation that said you couldn't hide behind principles because principles were not a basis for defending an auditor because the variation of application under the principles was too broad. Now, we're hearing that as detailed as the standards are, that even complying with those very detailed standards is not adequate defense for the auditor.

So, we're just kind of wondering if there is an adequate defense for the auditor at the end of the day.

Mr. Buffett: I'm curious of the equity and joint and several. I don't know, maybe Bill could educate me a bit on that, as to why the law would recognize that somebody — let's just say that an auditor was one percent at fault, which may not be the case, and the management was ninety-nine percent at fault, and then you can't get at the management's money, so —

Mr. Allen: Right. It's just a Common Law rule that tended to look at the injured person first. And, any degree of participation in causing the injury — the first concern of the law was making the injured person whole first.

And, in these situations, I mean, there is a very good argument that the rule is unbalanced and Congress really has changed it to proportionate, and many states have also changed their laws to proportionate liability, instead of joint and several.

Mr. Buffett: So, it's the problem with joint and several, right?

Mr. Allen: Right.

Mr. Mundheim: Let me give you a suggestion, and see how you react to it.

And the effort here is to see whether you can create incentives for desired behavior on the part of audit firms, without raising the threat of bankruptcy. And, that suggestion has got two parts.

One, greater use of criminal penalties or lifetime publicized bars to deal with individual wrongdoers. Because I think that individuals, one has a sense, don't tend to get caught up in the disciplinary mechanism, at least pubic disciplinary mechanism.

And, the second is that you import for auditors a kind of duty to supervise concept, rather than respondeat superior, to determine firm liability, with a defense or limited liability cap if the firm discharges its duty to supervise.

What do you think of that?

Mr. Weiss: You mean if Arthur Andersen has three incidents of document destruction in ten years, that was the pattern of conduct that would impose liability on all the partners?

Mr. Mundheim: No, no, no. This would be —

Mr. Weiss: Because they failed to supervise properly? Is that what you're talking about?

Mr. Mundheim: Well if, for example, you might have a disciplinary proceeding against the firm for failing to have appropriate procedures, failing to implement them, yes. That's a mechanism available in the securities industry.

Mr. Weiss: I'm more sympathetic to working out a reasonable joint and several liability contribution, based upon an assessment of the degree of risk and taking into account the inability to collect from others as maybe one of the factors, than I am in using that kind of punishment as an alternative, because I don't have confidence that we're going to be punishing many people, quite frankly.

Mr. Copeland: Just one other comment.

You know, the auditing business is basically not a business where you can effectively transfer risk today, before Enron. Tactical amounts of insurance can be obtained, but not strategic amounts. So that you can, in fact, transfer minor amounts or, again, tactical levels of risk that might protect for the business-as-usual kind of events. But, you really can't protect yourself through insurance.

And that, also, I think, is a statement about whether or not the litigation environment is adequate today under current law. If it is, surely you should be insurable. And, in fact, the situation we find ourselves in is we're only able to insure ourselves at tactical levels, not at strategic levels.

Mr. Buffett: You're not going to get a policy from me.

[Laughter]

Mr. Mundheim: I was afraid you'd hear that.

Well, I think that brings us to the magic hour of four. Thank you, very much, to the Panel.

I don't know whether or not the Chairman or Commissioner Glassman may have a question or so that they want to direct to the Panel?

Mr. Pitt: Well, I won't speak for Commissioner Glassman, but I don't have any questions that I would put right now. I've got about twenty pages of questions, however, to still be pursuing.

But, I'd like to thank you, Bob, for moderating, and all of our Panelists for a very enlightening discussion. [Applause] (Whereupon, the proceeding was concluded.)

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