Roundtable Discussion on Financial Disclosure and Auditor Oversight

Thursday, April 4, 2002

Securities and Exchange Commission
Midwest Regional Office
175 W. Jackson Blvd., Suite 900
Chicago, Illinois 60604

Panel 1: Improving Financial Statement Disclosure

Moderator, John Rogers, Chairman and CEO, Ariel Capital Management
James Dimon, Chairman and CEO, Bank One
Robert Litan, Economic Studies Director, Brookings Institution
John Markese, President, American Association of Individual Investors
John Rekenthaler, Research Director, Morningstar
Maryann Waryjas, Katten Muchin Zavis & Rosenen
John Zielinski, Senior V.P., Equity division of Northern Trust Global

Panel 2: Assuring Adequate Oversight of Auditing Function

Moderator, J. Carter Beese Jr., President, Riggs Capital Partners
Ken Bertsch, Director, Corporate Governance, TIAA-CREF
David Costello, President and CEO, National Association of State Boards of Accountancy
Professor Dan Fischel, University of Chicago Law School
Barbara H. Franklin, President and CEO, Barbara Franklin Enterprises
Edward Nusbaum, CEO, Grant Thornton

Panel 1: Improving Financial Statement Disclosure

Chairman Pitt: Good morning, Commissioner Cindy Glassman and I are pleased to welcome all of you here. This is the third in a series of roundtables, that the Commission has been holding to consider public views on two critical issues. Financial disclosure, and regulation of the accounting profession.

We have been blessed with, as you can see in front of you, a panel of diverse and enormous expertise, all of which is being devoted to this effort pro bono, for which we are very grateful. And with that, I'd like to turn this over to the moderator, John Rogers, who's the Chairman and the CEO of Capital Management.

I just would say that Commissioner Glassman and I are here to learn. So, you will not hear us speak during the program, but it's not because we're shy or retiring, it's because we want to learn. John?

Mr. Rogers: Well, thank you very much. I'm really excited to be here today, at such an important time in this country's history to be able to talk about these types of issues. And we do have a really prestigious group here.

We've handed out everyone's biographies, and handouts, hopefully everyone has one. So, I won't read all of the biographies in detail. But, I want to just introduce our panel briefly. Mr. Jamie Dimon, who is the Chairman and CEO of Bank One Corporation, and prior to that Jamie served as President Chief Operating Officer, and Chief Financial Officer of Travelers, Inc. And subsequently is President of City Group.

Next to Jamie we have Bob Litan. Bob is the Vice President and Director of Economic Studies, a program in — Family Chair in economics in the Brookings Institution. He also is co-director of the family AEI Brookings Joint Center on regulatory studies, and co-chairman of the — Financial Regulatory Committee, and co-editor of the Brookings Wardens Paper on Finance.

Next to Bob is John Rekenthaler. John is the President of on-line advice, from Morningstar Associates. In this role, John overseas the development of, and marketing of Morningstar's Clear Future. An internet based service that provides investment research, education, and health for individual investors planning for retirement.

Then, we have John Markese, Dr. John Markese, who is President and Chief Executive Officer of the American Association of Individual Investors, a non-profit educational association founded in 1978. Dr. Markese presents investment seminars for the association, and write columns, and stock analysis.

And then finally, we have Maryann Waryjas. And Maryann is the partner and law firm of Katten, Munchin Zavis & Rosenen. She focuses her practice in the areas of sophisticated corporate securities, and venture capital transactions, and executive compensation.

And then, John Zielinski is a Senior Vice President, and Senior Port Folio Manager of the institution of Equity Division of the Northern Trust Global Investments. John is the lead manager of the northern growth balance, and diversified growth mutual funds, representing over $1 billion in equity assets.

Again, we have a very, very diverse group of panels here today.

As you know, recently the SEC, and under Chairman Pitt's guidance, has really been pushing hard for more disclosure, and more financial disclosure for american corporations. Jamie, what do you think of this new push for more financial disclosure?

Mr. Dimon: You know, I think, first of all, I've always been in favor of good adequate proper timely disclosure. So, I don't think it's that new, I think that Enron brought it to a forefront again. And, you know, I think somehow in the last ten years things got worse.

And they should have, you know, it's a shame, because it's hurt a lot, and we should fix it. And there should be some rules and requirements that fix it. And I think all management should make an effort to make sure they're making full, fair, and adequate disclosures.

Mr. Rogers: How does Regulation FD, how do you think that initial thrust that occurred a few years back, how do you think that that has helped to separate this thesis?

Mr. Dimon: I don't think, I mean, Regulation FD, in my opinion, mostly changed the timing, and not the quality of disclosures. And, you know, so there have been some pluses from Regulation FD, and some minuses, but I don't think it changed anything about how much you disclose.

Mr. Rogers: Bob, do you have some thoughts on that also?

Mr. Litan: Well, I agree with Jamie on FD. But, back on the first question on the issue of financial disclosure. We're all here because of Enron. Although, as the Commission's well aware, there were a series of accounting lapses highly publicized that led up to Enron.

I think Enron highlights three issues, which I hope that we will get into, in more detail, as we talk about it this morning. Number one is how to improve the standard setting process for financial statements. And specifically what to do, if anything, about FASB.

Number two, how to improve the enforcement process. And there, of course, we have the SEC's proposal to establish the public regulatory board, and I think we ought to have a conversation about that, and other devices to improve enforcement of the standards. And not just with respect to auditing, but the larger scheme that is established to enhance enforcement.

And the three, I hope we have time to get to what I call the cutting edge issues. The long run issue, which actually Chairman Pitt to his credit was trying to discuss before Enron blew up. And that is, how do we adapt disclosure to a world of the internet, to a world in which non-financial indicators are as important, if not more important, than financial indicators. And there is not better proof of that, and I'll conclude this opening statement with the front page of the Wall Street Journal, by total coincidence today, it's all about intangible assets. And I think at some point we need to have a discussion about that.

And I think it will be a shame, if in our rush to fix "Enron", that we miss dealing with some of these longer run cutting edge issues, which didn't have the hot button quality to it that all the post Enron fixes have. But, frankly in my mind, or as important, if not more important to the future of disclosure, than anything we're going to talk about with respect to Enron.

Mr. Rogers: John, do you want to —

Mr. Rekenthaler: Yes, in preparation for this gathering, I reviewed Chairman Pitt's words on this matter. And I would say that at Morningstar we're generally in agreement with what the principals that the Chairman is espousing.

First, he talks about the need for more quality, rather than more quantity in financial disclosure. One of our stock analysts noted that Nortel's 10-K Report had 220 pages. I don't think we need another ten or 20 pages added to that, in fact, we could probably shrink it fairly effectively.

However, there are certain items that we'll touch on later, in terms of quantity, that where we do things some specific disclosure is needed. But, in general, I think the answer for financial disclosure lies along the lines of better formatting, and in some case simplification, as opposed to additional rules. In general, there are a couple of exceptions.

The second point made by Chairman Pitt is the need for stronger SEC oversight. Stronger enforcement possibilities, I mean, just in general the SEC having more control over accounting principals. We're certainly in favor of something to give more teeth to the accounting board, more teeth than FASB currently has.

However, we do note that the SEC itself is, certainly has no choice but to listen to Congress, and listen quite hard at certain times. And we've seen corporate pressure exuded through Congress on the SEC, so we still have some concerns or thoughts that that central issue of congressional pressure might not be alleviated.

And third, Chairman Pitt calls for stronger corporate government governess, a stronger better role of the independent directors. We're all for that principal, although we have a little difficulty seeing how that will occur in practice.

At Morningstar, we've been quite involved on the mutual fund side, with mutual fund directors. And despite various efforts over the years, I wouldn't really say that the mutual fund independent directors have become more independent, and really driven more change now than they did 15 years ago. It's fairly tough, the incentive structures for directors to, in many cases, to get them to do what you and I might think of as truly independent decisions, or shareholder oriented decisions.

So, we're with the Chairman in spirit, but we have to spare a little bit in practice that that will occur. A little more input in comments.

Mr. Rogers: John?

Mr. Markese: Thank you, I'm an individual investor advocate, so my viewpoint is fairly narrow here. I think we're driving individual investors into the hands of analysts, which may be good or bad. I won't let individual investors off the hook, they need to have minimal education, they need to make an effort here.

But, if you've picked up a 10-K lately, it's not a question of undisclosed information, as much as over disclosure. There's so much information, and there's no points of relevancy, points of importance made. We have tremendous amounts of information, should we get it sooner? Of course. Should we get it in better formats? Of course.

But, we have to sit back and ask management of these corporations to summarize. We've done this in the mutual fund area, gone to the simplified prospectus. Plain English, we need a summary, we need management talking about value drivers, risk drivers, major accounting policies.

In other words, here's the 10-K with its enormous amount of information. We have to ask the management of these corporations to say what's important. In summary form, we have to ask them what major accounting policies, decisions, estimates, disclosures, what foot notes. We have to help individual investors, at least half way. And I think we don't have that. I think it's a legal, let's say a legal initiative to disclose everything. And there's no emphasis on the importance of the various issues disclosed.

So, I would encourage the SEC to encourage the corporate management of this nation to essentially talk about what's important, talk about forward looking things, talk about estimates, talk about trends. Talk about important accounting policies, not every accounting policy. We need to give individual investors summary financial information, and summary guidance on what this corporation is doing, what are the important elements.

So, that I think is —

Mr. Rogers: John, could you follow up on that? It seems that that's come up already a couple of times this morning, that there's possibly a danger of having too much information. And so could you maybe give a little more of your views of how you would determine what were the important issue that should be focused in on?

Mr. Markese: Well, you can ask, you can set it up. You can say at very detail, this is what management has to touch upon in an MD&A discussion. But, I think that changes by industry so much, and by firm, I think to ask them to say, okay, you're a manager, what do you need to communicate about these financial statements that are most important, that will most effect the future of this corporation? Whether it's individual issues to the firm, whether there are metrics involved, whether there are trend issues involved.

We talk about the foot notes, as I mentioned, two things happen. Number one, and when we collect the data, and we send it out through data vendors, those foot notes don't get attached along to that data. When we say, everybody's heard this, read the footnotes, read the footnotes. Well, there's 30 footnotes, which one of them are important? And they're all fairly intricate.

I think it behooves management to sit down and say, are these are the decisions we're making? These are the estimates we've made, here are the value drivers in these industries. Is that where we think we're going in a forward looking sense? And if we need more safe harbor rules to allow them to do that, than I think we should do that.

I don't think it's probably worthwhile for the SEC to sit down and enumerate for every firm a 20 point check list. But, I think, let the management decide, and let the markets decide if they've done a good job. Let's see how it works.

Mr. Rogers: It seems, you know, it seems to make so much sense. The question is, why doesn't that happen? And is there anything that, and I think John you're having some thoughts or Dave?

Mr. Rekenthaler: I just wanted to echo what John said. I think that, the way I look at that is the change in the mutual fund prospectuses. When I started at Morningstar in the late 1980's, my actually, my first job was to go through mutual fund prospectuses, to try to glean relevant information from them.

And fairly quickly I learned that that meant, you know, searching for a nugget on page three, then another nugget on page eight, and in between was five pages of the same boiler plate language that was in every prospectus. And what you had at the time for mutual fund prospectuses were 25 or 30 page documents that really contained about two pages, at most, of information that was different from one fund to another. And 28 pages of the same boiler plate, but not in the same places, in different prospectuses.

So, you might have the fees and expenses on page nine in one place, and page fourteen in another place. And it was just a, what was really a fairly narrow range of information became just a chore to pull this out. And that's what I hear our stock analysts saying about stock reports right now.

Now, the mutual fund side, it really made a great deal of improvement. There's now a summary section of mutual, in particular with the fees up front, that's formatted. There's a move towards plain English prospectuses. And there's a lot of good stuff up front, where frankly you don't really need to go back and look at the stuff at the back that's added. It's really, it summarized it, and got to where you can get to the key points in a mutual fund prospectus, at least the better designed ones, in two or three pages.

I'm not saying we can do it in two or three pages for stocks, for various reasons, they're a little more complicated. But, I think we can have the same process of prioritization and focus in formatting, up front, where the average investor can get meaningful information without being forced to wade through page after page of what turns out to be boiler plate. And this can be very difficult, unless you do this a whole lot, to be able to distinguish between the boiler plate, and the meaningful things.

So, let's pull that out, get it up front, say this is meaningful, and this part is more routine.

Mr. Rogers: Well, you're just saying adding, you're talking about in terms of written communications with prospectuses and the like, I've often noticed in the last year or so that corporate board meeting rooms, and committee meeting rooms are now getting into the point where people are filling up the time with all the, checking the boxes with all the information that needs to be discussed, and then not leaving time for there to be thorough discussion to prioritize what's really important, and to really get at what the driving issues are.

So, I think it's as equally important in the written communication, as well as in the way our board rooms are working these days. Is there another side of the argument that someone thinks that prioritizing and simplifying isn't a good idea?

Ms. Waryjas: Well, I'm not going to say I don't think it's a good idea. But, I guess as working stiff attorney who's out there in the trenches, what I would like to report back is that I have personally experienced, and my colleagues have experienced, a much heightened awareness of the overall scope of materiality. Which, John, I think does go contrary to the checking the box.

We still go through, and check the boxes as part of the due diligence that we do, because we want to make sure that we've covered the broad range of issues. But, in the dialogues that we are having with the companies auditors, with the companies management, with members of the boards of directors, there is a much heightened awareness. And people are paying attention, and are asking questions about what's material. Things that in the past might have just been presumed to be ordinary course, or how things are done, are now being questioned. And those meetings are lasting longer, and there are being other calls made to council from directors or other managers in the company, or from the general council's office.

I think that more disclosure is not necessarily better, in and of itself. I think we are all living in an age, right now, with information overload. I have the difficulty myself. But, I do believe that different individuals, different analysts, may ascribe different values to different types of information.

So, for example, while some folks might consider the pension, or the tax information, to be not particularly relevant, certainly in the mutual fund industry the tax implications of how fund earnings that are, you know, are channeled through, became very relevant. And more so, I would say in the last three to five years.

So, things that have previously been considered not as important can take on a new light. I think that the Commission working right now to address matters, to address financial products which have taken a driving force in our economy, which really didn't exist in any way the same shape or form ten years ago, is admirable. And the rules need to be more dynamic, the rules need to be reviewed more frequently, and updated so that the application has a broader base.

Mr. Rogers: John, do you want to?

Mr. Zielinski: Yes, I was just going to jump in for maybe a slightly different perspective. And I think most of the panel has hit a couple of very key points.

As an investor I listen to a lot of conference calls, as I'm sure others might. And you listen to the quarterly conference call, when a company talks about their earnings, and how the quarter went and so forth. And I think, you know, one of the earlier comments about Reg. FD, I think, while well intentioned, Reg. FD, in may respects, may have, kind of had an opposite effect.

And I think what it's done, like a lot of laws, it's caused a lot of the, kind of law abiding good citizen companies to really be very, very reluctant to want to talk to their investors, for fear that they may either disclose some information that might be viewed as forward looking, or promising results, and so forth.

And I think what's happened is that with many companies, the way I, when we talk to managements, when we invest in companies, we obviously want to have a high confidence, in terms of what they're doing, the products they're producing, what their next quarter's going to be like, what the future looks like. And what we find is that many companies, I think, are reluctant to be able to discuss things with investors, for fear of litigation, and so forth.

And I think what's happened is that while, as I say, while there are a lot of good intentions with Reg. FD, a lot of the information that you do get from companies now is that really, it's just that check list. It's just going over the numbers, it's not really talking about some of the things that Dr. Markese talked about. Talking about trends, talking about business outlook, which I think most investors would be probably more interested in, than just what were the earnings per share last quarter?

Additionally, to the extent there's some subjectivity in accounting, which I think there is, I think companies have to disclose to the extent they're using various accounting techniques, or various accounting tools in formulating their financial statements. At least prioritize, or disclose what the, you know, what types of interpretive data, if you will, is in the numbers.

And as I say, I think many companies would welcome the opportunity to do that, but may be reluctant to do so today, for fear of maybe a lack of a safe harbor provision, or adequate safe harbor provisions, and fear of maybe litigation on the part of some of their investors.

So, as I say, I think it really runs the gamut when you look at companies. The good law abiding companies out there, which I say the vast majority are, want to be more open, and want to have more disclosure to the extent that they can, and not jeopardize potentially their competitive position. Other companies that have things to hide, obviously, are reluctant to provide more disclosure.

So, again, I think there are plenty of laws, there are plenty of rules on the books already, I think we just need to enforce, and maybe that's the key, enforce the ones that we have for those that currently break the rules.

Mr. Rogers: Bob?

Mr. Litan: Yes, on this issue of summary information, let's just call them executive summaries of financial information. I'm going to express a little skepticism. I think it's very hard for the SEC to write rules about this, because it's hard to mandate, and define in advance, what's material and not material, that goes in the front part of the statement. And whatever the SEC decides to do, if it ends up writing a rule, is going to be taken by the Maryann's of the world, or the Chairman in his former life as a securities lawyer, you're going to reduce this to a formula. That's what's going to happen. Every company is going to want to just go by the checklist. And at the end of the day, are we really going to get that much more improvement?

I think, what I, what I would suggest is more productive, is to have the SEC out front exhorting companies, that they should have more meaningful executive summaries. And then let the markets punish and reward companies that do a good job, and that don't do a good job, on the issue of executive summaries.

Now, there are two broader issues though. And that is, I think what's even more important than the executive summaries, and a quarterly statement, or an annual statement, are much more frequent, and relevant intra-quarterly disclosures. And this is addressed by the Commission's 8-K filings, and the Commission has provided us with a list of a number of additional events, now, that it wants companies to publish within two days. Things like changes in management, changes in rating agencies, and so forth. This is the kind of thing that the markets want. They want more frequent, relevant information.

There's a lot of hand wringing about information overload. My experience is, is that there are always consumers out there for more information. Whether it's analysts, or underwriters, or rating agencies, or whatever, it may not be the individual investor, because they're at the end of the rope. But, there are all of these translators in there. More information is better than less.

And I'm actually an advocate of internet based disclosures. I think ultimately one day we ought to get to daily financial reports. I know that sounds totally far fetched, but banks such as Jamie's, balance their books every night. Securities firms do this. There is no reason why, there is no reason why in the world of the internet we can't at least have financial companies, and other companies, report much more frequently their financials on the internet.

And I will tell you what I think a side benefit of this is. Everyone wrings their hands about earnings management, and they don't know what to do about it, with companies trying to hit the quarterly targets. I think the best way to address earnings management, is to put more information out there more frequently, and people will forget about the quarterly numbers, when you've got numbers coming out weekly, or monthly, or even daily. The quarterly thing will disappear, and you can't manage weekly earnings. People will give up managing, and they will just report. And I think that will solve the problem of earnings management. I haven't heard any other good suggestions to address it.

Mr. Rogers: Jamie?

Mr. Dimon: Yes, I just want to talk about these issues. One is the executive summary. I agree there should be an executive summary. I think most companies try to write it up until it goes material. There is always a requirement that we disclose material stuff, that didn't change.

And, I, you know, so, but, I agree, I don't think it's going to solve this problem. I mean, people are looking for simple quick answers. You all have bought houses and cars? Do you want a three sentence summary on the house you're going to buy? You can do a title search, kick the tires, look at the roof, and look at the garage. So, there has to be fair, and full adequate disclosures.

The problem, in my opinion, and you know, is that, and in those days you could say it. You know, are we going to spank the people who don't do it? You know, you have to have some rules and requirements that can be followed, that actually make sense.

The disclosures aren't adequate, and fair, and full in a lot of environments. The accounting policies are not fully disclosed, they are not, they're too wide, okay? When, you know, these or whoever sets rules and requirements, it takes them four years to do something now. It's got to be done quickly, and then fully, and fairly disclosed.

So, anyone of us who, those of us who buy and sell companies, the first thing we do is we go and say, how did you account for this versus that? And what's this on your balance sheet for? And why did we do this? We make those adjustments to put it in an apples to apples basis. And it could be made a lot simpler.

I'll give you one example, just from my past that sticks in my mind. The proxy statements years ago had requirements to disclose contracts between executives and the company. And this was when — was first coming out. And so, all of you, if you wanted to figure out what those were, you could have gone and read the proxies. And they were fully disclosed, everything was in there, and how many years of bonus, and how many years of this, and how many years of pension.

But, if someone had said very simply, disclose how much it will cost your company if that parachute is triggered for, you know, individual "A". That's the one number you really wanted, and that's the one number you couldn't get, and would have taken you six to nine months to figure it out, and you would need actuary, but, in fact, the companies knew.

So, I think that someone, I mean, if I was in, you know, the Chairman's role here, I think that someone's going to have a faster, fuller, hold people's feet to the fire, what they disclose, and how they disclose it. And then let the people do their homework. And there is not totally simple answer for that at all times.

And the footnotes are important, some of them are worthless. You know, what they should do is change the ones that are worthless. I've never read a fair value footnote disclosure to a company. There's pages and pages of disclosures, I don't what they mean, you know? But, we spend a tremendous amount of time doing it. So, but there are other footnotes you absolutely read. I always read the tax footnote, always, every single time. It tells you a lot of information.

So, I think that this disclosure, the accounting policies are too wide. I can go to a lot of companies today, and they're reporting $100 of profit, they could report 130 or 70, by changing five accounting rules. I personally think that's wrong, okay? And that that should be buttoned up, and changed quickly, and disclosed. The Board should look at stuff like that, ask what's the quality of your earnings, and the quality of all the things like that.

And, so I don't think it's the summary that needs to be fixed, I think it's the quality of information that's already there has gotten a little bit lax, and should be changed over time.

Mr. Rogers: John and Maryann, you didn't have a chance to weigh in on the many broad themes that you wanted to get across.

Mr. Dimon: Just let me comment, I don't think, with all due respect, I don't think FD, any company who says they're not — we are required to make adequate, fair, full, and material disclosures. FD doesn't change that. So, if a company says, well we can't tell you that because, the only thing to get worried about at FD, the only thing is that we inadvertently tell you something that might be material.

Do you know what we've done? We go out and make a disclosure right away. And that's, we have a safe harbor for that, and that's, I think it works fine.

Mr. Rogers: Do you guys have any other themes?

Mr. Zielinski: The only kind of general theme I would maybe weigh in on is that I think the market, in many respects, is already fixing some of its problems. I mean, I think the accounting statements are very complex, they've gotten more complex, they're going to remain complex. There's probably things that can be done to simplify them, to make them more clear, and make them more timely.

But, I think the incentive on the part of most companies, will come through the normal market mechanism. I think we see that in the debt markets all the time. High quality bonds trade at lower interest rates than lower quality bonds. I think over time, those companies that might be viewed as lower quality, because either they have inadequate disclosure, or inappropriate disclosure, or their statements are too complex. Over time, I think what that does is their cost to capital rises relative to those companies who have understandable financial statements.

So, I mean, I think there's things that the Security and Exchange Commission needs to do from an enforcement standpoint. My hope is that over time, though, the normal market mechanisms work their magic, and companies will be, I hate use the term forced, but be incented to more adequately disclose, and have more transparent financial statement. Because over time that means a lower cost to capital, rather than a higher cost to capital. That, therefore, improves their competitive position relative to their fears.

So, I would just say as kind of an over arching theme, you know, that's my hope. So, while I think the laws that we have are, you know, need to be probably updated to the new internet age, or whatever, I think the market's already begun to kind of work its wonders, and differentiate those companies that I would just generally call high quality from low quality.

And I think whereas before, you know, the financial statement was just kind of a given, now the understandability, and the complexity of that is being differentiated in the market place, and there's a price to that. So, I think the, I would just say, I think that's all, that process has already begun.

Ms. Waryjas: I think it's important to note that the disclosures are not only in the financial statements, but in the MD&A. In one of the prior sessions, Warren Buffett spoke about having that MD&A communication read like a letter that the CEO is writing to a partner who has been out of the country for a period of time, and trying to bring that individual up to speed on the state of the business.

One of the other commentators at another one of the roundtables referred to the current state of MD&A as elevator music. And I chuckled when I heard that, because I found reading or participating in MD&A drafting sessions mind numbing. Revenues went up, cost of sales went down, this went here, you know. You know, and you do it once for this year to last year, then you do it again for the last year to the year before. By the time you're done, you find yourself thinking who cares.

Obviously people do, but to see that kind of information in tabular form, and to see what the Commission has called for about trending, and other information. To have a discussion about what the trends have been over the past three years, over the past five, six quarters, would probably be much more informative to both the investors, and the analysts. So that MD&A would read more, perhaps like the president's letter to the shareholder, than its current very static requirements.

That information should still be provided, but I think that there is a lot of current MD&A requirement that could be put in tables, which could be attached as exhibits or elsewhere, you know? But, maybe just before, or included there. But, the MD&A would be a discussion of the information that's presented in tabular form, rather than this mind numbing elevator music.

Mr. Rogers: Maryann, you mentioned Warren Buffett, and he had some very eloquent remarks at, I think, one of the prior sessions, about the kind of questions that should be asked by auditors, by audit committees. And I've been on a lot of audit committees, and it's been very rare that I've seen those kind of insightful questions asked. Can you comment on that?

Ms. Waryjas: Well, the one question that I find very intriguing, I think it's going to get a lot of information, but it's one that I think that the audit committee members should make sure that senior management knows, and the auditors know before they're asked, so that they're prepared.

His key question is, would you have prepared these financial statements any differently if you were doing them for your company? Okay? If this was you, if you're the auditors, would you have done anything differently here?

And Mr. Buffett wants the answer to that question recorded in the minutes of the audit committee meeting. One would hope that the answer there would be, no, everything here has been done the way we all agree it should be done.

On the other hand, I've been in practice long enough to have realized, Jamie has spoken about transactions, merging acquisition transactions. I don't think I have participated in any transaction where there has been a post closing purchase price adjustment where the parties have not negotiated, or argued vigorously, as to how the accounting was different. Okay? And over the years I joke that there has been, you know, a PriceWaterhouseCoopers GAAP, there was the Deloitte Touche GAAP, there's different GAAPS. Within a major accounting firm, within different offices you may have different interpretations.

So, GAAP, I think what's important to communicate to individual investors, I think that there is this sense out there that you pour all this information into a giant like concrete mixer, or computer program, and it spits out, and the numbers go into the appropriate boxes. And that's not how it works, there is not that level of scientific precision.

But, again, you know, understanding what's important, would the accountants had done things differently? Do the auditors really report to the audit committee? And I think that that change is occurring now, but I think in prior years, it was very clear to see that in many instances the relation was with the auditors and the CFO. And I'm not saying that was a bad relationship, I'm just saying that I believe that that's how it was.

Mr. Rogers: Bob, do you want to follow up on that? Because I think that's really, I think a crucial issue that I think hasn't been discussed as thoroughly as much as the consulting versus auditing issue is front page all the time. This issue has just recently started to bubble up a little more. You know, I think it's really more at the heart of it.

Mr. Litan: Yes, let's focus on the audit committee, because I think that's where the rubber hits the road. I testified before the Senate Banking Committee about three weeks ago, based on some work that I'm currently doing, thinking about, among other things, who should hire the auditors.

And the way it's done now, of course, is that management typically hires the auditors. And then we get all these kinds of proposals to try to objectify that process. Example, let's bar the auditors from doing non-audit work, let's rotate the auditors, those are the two most popular proposals. And I had expressed skepticism about whether either one of these will actually work. In the sense that you can bar, you know, from now until forever, accountants from doing non-audit work. But, the reality is if all they're doing is audit work for a CFO who is picking them, they will still have incentives when the times get tough, to bend the CFO's way, because they're going to lose all their business.

So, I find this, to be perfectly honestly with you, a sham issue. I know it's the issue, everybody talks about, that this is the root of all evil. But, I think if you stopped auditors from doing all audit work, you're not going to solve the problem.

Ditto with mandatory rotation. We've only got big, you know, if Anderson fails, we've got four firms left. And so we're going to basically rotate them on four firms. Do you really think this is going to help? And you're going to have beauty contests every four years with firms basically interviewing the auditors. I do not see how rotation's going to help as long as management is hiring the auditors.

And I survey all the other kinds of people that could hire the auditors instead. You could have the SEC do it, you could have the exchanges do it, you could have the new PRB do it. I saw an op ad in the New York Times a couple weeks ago, somebody suggested insurance companies ought to do it by offering financial statement insurance, and let the insurers do it. I don't think any of these other proposals, while they're attractive in principal, will actually work, once you go into the details. The only practical proposal for separating or insulating the auditor from being infected from management, is have the audit committee do it.

It is not perfect, because audit committee are still composed of board members, and board members are still influenced, if not chosen by management. On the other hand, it's better than all the other alternatives. At least it's insulated from the CEO telling them, telling the auditor what they ought to do.

So, I want to underscore the absolute imperative. I mean, maybe the SEC can do this by rule tomorrow. It ought to say that audit committees should have the decision to hire and fire auditors, period.

Mr. Rogers: Dr. Markese?

Mr. Markese: I want to make a comment on audit committees. But, first I have to say this. I still have the bruises from Reg. FD, from going around championing Reg. FD. I was beaten up in so many forms, and I just have to tell you the individual investor reaction to Reg. FD.

There were two reactions. One was dancing in the financial aisle, right? They've now been enfranchised. The second one was shock. Do you know what the shock was? That we didn't have Reg. FD all along, they thought we did. So, I'm delighted we do it, it's done great good for everybody, and the individual investor community, let's not change that. We can work on it, but let's not change it.

Now, I have what I would have said the privilege of being a Chairman of an audit committee, I don't know these days if that's a privilege anymore. But, just as a comment, we just redid our charter. And in that charter we have that the audit committee hires and fires the auditor. Very simple, and that the audit committee controls that decision. The auditors do not report to the management, they report to the audit committee as a function on the Board.

And if you have a good charter, you have good people, it will work. I don't think we have to look beyond that. So, I'm in sense saying yes, and no. I think any good board, with any good audit committee, and now, by the way, a good audit committee has to be financially literate, it has to be public, and independent, and they have to have the power, and they have to have the support of management. But, that's true of all our disclosures, all our ethics issues. Enron was an unusual configuration of a black moons lined up. I don't think the average board has that. I think we have the abilities to have great disclosure, and great control.

I think we all need to look at these audit charters, and the effective power. So, the audit committee I'm on, I feel we have the power, we have the mandate. And we hire those auditors, and those auditors better tell us what's going on. And we will fire them, if necessary.

So, I think I'm seconding it in a sense, but I think the system does work, and it can work.

Mr. Rogers: Is there a third out there? Or, is it worth this?

Ms. Waryjas: I guess I have a question for John. John, you said you're not sure it's a privilege anymore, and that is a comment I've heard from individual directors. There is concern about serving on the audit committee. The concerns relate both to personal liability, as well as to significant increases in the amount of time these individuals think that they need to spend now to appropriately fulfill their obligations. And I was, it would just be interesting to hear your reaction.

Mr. Markese: Well, I read an article on audit committees a while back, and that's where they stuck a lot of people that they couldn't figure out what else to do with. O.J. Simpson being one, being on an audit committee.

So, I think we're evolving here, and there is, I hope we're evolving. We have an enormous time commitment for all the committees, and I think there's liability on any board situation.

So, it behooves anybody, I think, to understand the management, and the trust in the management. I think that is ultimately your only safeguard against liability, is the quality of the management, that board you serve on, and the people that sit next to you. We've all served on boards, and that's ultimately the only — the SEC can't do anything about that. That's a quality of ethics. And we can have rules about it, but it's simply those people that are on that board, and are managing that firm.

Mr. Rogers: I'm just, back to this court issue, is there a new consensus opinion that audit committees really should hire and fire the auditors more directly? Or, is there another side to that argument?

Mr. Dimon: Well, obviously, first of all, it's almost always been that way for most companies already, that's not a massive change. And, you know, obviously they should be directly involved in interviewing and getting, you know, making sure it's done properly, and all that.

But, I, just again, as management, I would not, okay, rely, and I do not rely on our auditors for our proper numbers, we rely on us. They audit, but we are responsible for the accuracy, the timing this, and stuff like that. And, you know, I don't think that, you know, for example, Arthur Anderson is not to blame for Enron. Enron is to blame for Enron, okay? Arthur Anderson is also to blame for not being made the theme work better.

And so I go to committees, some do and some, it's hard. You know, it's very hard for a director, any director, to walk into a meeting, you know, and spend three or four hours once a month, or once every two months, and actually know what management's going to know, or what the accounting firm should know.

But, there are certain rules and requirements. It's absolutely — make it better, that they do hire and fire, that they meet privately with them, that they have a full disclosure about material accounting policies. And the best thing I heard, somewhere I was at a recommendation, was that an — this, I can, you know, sometimes putting these things in practice is much more complicated than just saying it here. But, that the audit firm would give a grade to management as to their, both their conservatism, and their proper financial disclosures and stuff. And that's A,B, or C, let's keep it simple. And that if it's going to be a "C" for a second year, it's got to be made public.

And boy you'd have audit committees spend a lot of time if there were C's, about making sure we don't ever go public. That we have, you know, our financial disciplines would get rated enough to see that we're not a "C" rated company. And, something like —

Mr. Markese: What about F, Jamie, you left out "F".

Mr. Dimon: Or "F", or "F" for that matter.

Mr. Rogers: John, do you want to?

Mr. Rekenthaler: Well, actually I have a question for the panel, because in many respects in relation to the other panelists, I'm a bit of an outsider here. I mean, I've not served on a public corporation Board of Directors. I've been in Morningstar's Board of Directors meeting, it's a privately held company.

So, I have a question. You know, what is the responsibility of directors in overseeing accounting practices? In this company like Xerox, that ends up restating earnings. What should, what is the role of the directors in that process? Is it absolutely unacceptable to be a director, associated with a company that has accounting practices that are later deemed to be bad? Is it understandable? I don't know, I'd like to know.

Mr. Rogers: That's a good question. Are you asking if that's, it follows up with sort of a, Jamie's discussion of saying that it's the Enron management that ultimately is responsible for the disaster that occurred there?

Mr. Rekenthaler: And I would assume that the, that internal management clearly bears responsibility, and there can be no shirking of it if the accounting is bad. But, the external directors?

Mr. Rogers: Right, and we've all heard this. Maybe just to put it, maybe expand it a little bit, too. Is that, you know, when you go around, like we all are, we go around town, and everyone, some people want to blame Arthur Anderson, some people want to blame Enron management, others want to blame the Board of Directors, some want to blame the regulators.

You know, where is that responsibility? And how much of it is the Board of Directors, as John brings out?

Ms. Waryjas: Directors have a duty of care under state law, to certainly oversee the company, and to ask appropriate questions based on what is brought to their attention. Audit committee members would have, I would think, if not a heightened duty of care, certainly the responsibility to take the initiatives on behalf of the entire board to drill down a little bit deeper into the financial statement, in the financial reporting area.

But, that duty is one where, again, I have participated unfortunately in some independent investigations of companies that have not complied with their financial reporting obligations. And you can't legislate honesty, you can't legislate integrity. People have been moved to do things for various financial rewards, and they've made some very bad, very poor judgements.

And I was involved in one situation where the outside directors were clearly uncomfortable, they weren't sure what was wrong. One individual in particular was uncomfortable, and that's why the audit committee sought separate counsel. Many companies would feel that on a regular basis, the audit committee does not need separate counsel, and I would concur with that.

But, certainly if there's a situation where the audit committee has particular concerns, and perhaps to assist the audit committee in connection with fulfilling the responsibilities, that that might be appropriate. Or other experts, so that they have fulfilled their duty of care.

John mentioned meetings, or Jamie mentioned meetings that are, you know, three to four hours, you know, every couple of months. That may work for a basic manufacturing company, that may work for some basic technology companies. But, once you have a company that is engaged in either multi national operations, or is using significant sophisticated financial products, I would think that that discussion could go a little bit longer.

Jamie, you said you've read footnotes, you know, and you don't know what they mean. I go through, and if I'm helping a company, I try to work very hard with the financial team, so that we understand. I'm not sure who else in the world may understand, but we need to understand what's there before it goes out.

So, I think that directors are aware of their duty of care. I would also, this is not a matter for the Commission, but as companies are going public, many of the newer public companies, despite the efforts of their accounting firms, and their outside counsel, and the underwriters, are not necessarily as aware. on a one and one basis, as to what their duties and obligations are going forward.

And if we are talking about having the CEO being personally responsible for negligence, and even if that doesn't occur, it might be a good idea for the listing agencies, for NYSE, NASDAQ, AMEX, to consider whether or not individuals who are going to be named executive officers, or directors, participate in some form of formal training.

Everyone has suggested training, companies are doing it for their audit committees, but it might be something to consider, that Professor Joe Grundfest out at Stanford, does an outstanding directors college every year. But, certainly to get the individuals somewhere where they I, yes, are exposed directly, and learn more about their duties and responsibilities. Because some of these individuals just haven't had that training.

Mr. Rogers: One thing, that maybe follow up a little bit, you talked about the three or four hour meetings. And I've noticed that there are some CEO's nowadays, who want to make the meetings longer, have more meetings, and it seems like maybe they feel like they're doing their fiduciary responsibility.

The interesting thing is there's academic research now that talks about that, you know, just like we all, a lot of us went to college or graduate school, and there's a certain time that your courses are, you know, how long they last. You know, typically a college course maybe is an hour and half. And that's because the academic research shows there's a certain amount of information that somebody can absorb effectively, and be able to, you know, really understand it, and respond to it.

Mr. Rekenthaler: Let's hope the boundary's two hours, not an hour and a half.

Mr. Rogers: But, do we run the risk as we move to four hour meetings, and sometimes six hour meetings, that we have filled directors with so much information that you would have to be some kind of Einstein to be able to absorb it all, and be effective as a manager? Just throw that —

Mr. Dimon: Yes, I, honestly I don't think making longer meetings, I mean, I agree with Warren Buffett, I should be able to describe to my Board, John happens to be on my Board by the way.

Mr. Rogers: Full disclosure.

Mr. Dimon: Full disclosure, what's going on, what's important, as best as I can. Not that we're perfect, not that we won't make a mistake in the three hours, okay? That does not mean you could be an expert in, you know, our tax returns, and things like that, that could come back and haunt us.

But, I want to give a legal, a non-legal answer to the question. The Board is absolutely to blame, the management is absolutely to blame, Arthur Anderson is absolutely to blame. They're all a hundred percent, in my opinion. Anyone of them could have stopped that fiasco, anyone of them.

So, it's, you know, now, we may look at the Board, because this is going to be an absolutely great book that gets written one day, and say, how much, maybe they weren't told enough to know. But, there was a, there is a, so maybe they're less contingent, you know, liable for all the things that happened. I'm not talking about legally, I'm just talking about what could've, should've happened in these kind of circumstances. And so —

Mr. Rogers: So, Jamie, if the Board is absolutely is absolutely to blame in Enron's case, is it absolutely to blame in more moderate accounting scandal? One that has restated earnings, but the company's still going?

Mr. Dimon: No, because I, no, I didn't read in detail, they haven't given the information, how Xerox is restating. But, lease accounting can get very technical, I don't know what happened there, and I don't think Board's going to get involved in technical lease accounting, okay?

And so the answer in that one would be no, not really. I wouldn't put that in the same category. Now, if it turns out that their accounting was virtually fraudulent, that there were memos that had gone on for years about some of the stuff, then the debates with partners about, you know, how we could move it offshore, so we don't have to book it the same way, well then, yes, then someone should be responsible for some of that stuff.

Mr. Rogers: It depends on the circumstances.

Mr. Dimon: Absolutely, it depends on the circumstances.

Mr. Zielinski: If I could jump in there. I think the, one of the questions, or the earlier question was, you know, what's the directors responsibility? I think in a broad sense at the end of the day, the directors are elected by the shareholders, and so theoretically they represent the shareholders interest.

If certain directors would want to micro manage the Accounting Department, or the audit committee, that's their choice. If other directors choose to delegate that function, and are comfortable with accepting the recommendations of the auditors, or the Finance Department, I mean, that's their choosing. I don't know that you can regulate, or mandate they need spend "X" number of hours managing the process, I mean, I think it's up to them.

But, again at the end of the day they represent the shareholders interest, to the extent they want to be detached, and may be not as interested, and to the extent then there are accounting problems. I mean, therein lies there, I guess the risk of not being as involved. But, I think it's up to them to either take at face value what the audit committee says, or what the outside auditors say, or what the Finance Department says. Or, micro manage if they so choose.

And I think most director's responsibility at the end of the day is not to micro manage. But, unfortunately the current environment probably dictates that they be more engaged than maybe they have been in the past. So, I think over time, though, that sorts itself out.

Mr. Dimon: Can I make a, can I give a specific example that there's a full disclosure, and what a board can, and can't do, okay? And this is a very personal one at Bank One, is that we lease cars. And, you know, when I first got there someone said, we're going to have a residual value adjustment, it's a $20 million loss, with all this technical stuff about operating leases, and accounting, and stuff like that.

I'm going to tell you what the real facts were, which I told our board the second I looked into it. We had $10 billion, these numbers may be off now, $10 billion of car leases. We had estimated the residual value of those to be worth six billion. Now, these are cars, remember people, you ever heard the saying people don't wash rented cars? Okay?

That means that six billion, in three years, or four years, they are going to hand back to us, stinky, dirty, rotten, smelly cars, which we've estimated to be worth $6 billion in three years. That's what that number is.

Now, I don't expect the Board to get into, now, we could be wrong on that six, it could be six two, it could be five eight. Does anyone know the answer to that question? I absolutely defy anyone to ever know the answer. We wrote up at $800 million, by the way, full disclosure is that it's six, that these are estimates. I don't expect them to know exactly how we did all those estimates. I do expect, my real question was, my opinion, you know, we should have never had that much. It was just too much, and we hadn't done it conservatively, okay? That conservatism is probably half of that $800 million write off.

And so there's full disclosure, but not the technical aspects of it. And by the way, it is in, I would talk about it in the Chairman's Letter every year, how much of that crap is left, okay? And it could be wrong again.

Mr. Rogers: Under the circumstances, I mean, that's even, it's also under — I mean John gives a good example. On John's point about how board members spend their time. You know, I remember Bill Bowen, who was the former President of Princeton, wrote a book about corporate government, and it was sort of the traditional view that board members were there to hire and fire the CEO, think about succession planning. Now, like if you'd naturally add hiring and firing, maybe the auditor.

Are we going to a world where those sort of traditional standards really are not acceptable anymore? And that you want a board that's micro managing? And if so, then what's the downside to that? And, you know, because I think we should confront that issue. Because I think a lot of board members are confused about whether they should be trying to get into every minute detail. And I think then there's a risk of, I guess I'm getting my opinion out here now, there's a risk of losing the forest from the trees, and the big core issues that really drive, that profitably the business could be lost if you're trying to do too much.

Mr. Zielinski: Yes, again, I guess my part would be, I certainly don't want my board members micro managing. You know, they're there to maybe kind of set the strategic course, assist in many of things that you mentioned, John. And to the extent they are micro managing, you're right. That's spending more time on probably things that they should not spend their time on.

I think that what we may be setting ourselves up for is kind of this, kind of an, you know, if you're, you know, kind of an asymmetric payoff. If you're thinking of being on the Board, you know, there's, you know, there's nowadays, maybe not, you know, not a lot of upsight necessarily, but if we tack on a lot more liability and problems, a lot of potential downside, either emotionally, financially, or otherwise.

So, again, in kind of viewing the role of the Board, unfortunately I think recent events have probably kind of forced them, in a sense, to get more involved in kind of a day to day, then what they're either comfortable doing, qualified to do potentially in some cases, or probably should be doing. Again, they're there to kind of set the strategic course, assist senior management in visioning the business. And that's what I think strong board members do, and don't micro manage.

Mr. Rogers: Let me just pursue one more moment, too. I just think about my own career, we're, you know, in the same field, and I'm in the money management, and mutual fund business. When we started our company 19 years ago, we used to have some clients who would approve every single trade, every stock we bought or sold was approved by the investment committee of our customer.

As the years have gone on, now, you're finding more and more of the big endowments and pension funds, they're delegating the endowments and pension funds to the staff, to really pick and choose the money managers who pick and choose the stocks. And it's gone, you know, totally away from the micro management of picking individual securities by those committees.

I think that's been a major improvement. And the performance, I'm on the investment committee at Princeton, and have an $8 billion dollar endowment. If they tried to pick and choose every stock in that endowment, it wouldn't be, they wouldn't run it effectively. I think the Boards made the right decision in delegating the management team to do that.

So, I get really concerned if we start to move toward where the board members feel this need to get in and run the show, and not have the confidence and faith in the management to make the core decisions that will be important. But, I guess, I'm sort of getting my opinion out as moderator, which maybe I shouldn't do.

We talked about how the board meetings themselves are run. One other thing that I guess I've noticed, and ask the question about is that, how much time should be spent in an executive session with the auditor? And who should be, and how much time should be spent with management in the room?

Because I think that's important to, in how information flows. When you asked me those great creative questions, and Warren Buffett, you know, brought up the other day, the answers will be different if you've got a room full of people versus a smaller group in an executive session. How do people view that?

Mr. Litan: Well, you can't give a hard and fast answer to that. Obviously you should do both. You want to see management in front of the auditor, just to see what they say. And then go into the executive session, and see what the auditor really thinks. And the facts and circumstances will dictate this.

But, let's get to the larger issue of how much time the audit committee is going to have to spend in this brand new world, assuming that they're going to have all these responsibilities, which I think they're going to end up getting. The fact is they are going to have to spend more time, and if they do, companies will have to pay them more in order to attract them.

I mean, there's nothing wrong, it seems to me, in saying that if you're going to serve on the audit committee of the Board, that the audit committee, because it requires all this extra time, these people get paid more. Because they've got to go to more meetings, both inside and outside of the company, and they have more responsibility, that's how the system works.

Mr. Markese: Bob, as a comment, I agree with you. I think audit committees should be paid more. But, I'm joking really. Because I think there's an issue of being bought here, and I think there are limits on compensation for all the committees.

I have to tell you, I mean, a structure of an audit committee is one where when you have meetings and you have management there, then you go into an executive session with the CFO for instance, management in a sense, you're external auditors, your internal auditors, you know, the general council, I mean that's a standard format. I can't believe a company would do that.

But, my point is, I guess is that if you look at this whole concept of trust, and audit committees, and payment in time, I think in the Enron's case there was substantial stock holdings, and option holdings by board members. There was, I hate to say it, the classic empty suit there, there was a celebrity, there was a political consultant, there was the people that actually had become corporate officers in a sense. They've been on this board so long, that we had such great familiarity, and we have the same concept with the audit firm being at Enron. We had alumni of that audit firm, again another issue, at Enron. And Arthur Anderson had substantial staff there.

And now we have audit committees, supposedly they're looking at those hires, who should be looking at those hires. I guess the whole issue comes down on, they're working harder, but we have to be careful about paying them more. I think we corrupted a lot of people at Enron, on the Board, and in the audit committee there.

So, while I think there's a compensation issue there, I think there's a dangerous issue also.

Mr. Rogers: Let me, I think the, how the meetings worked though, I think is something maybe people, I think, haven't explored it very much. But, there is actually a lot of, also, academic research on the number of people that should be in a committee meeting, to have an effective meeting where people can really communicate, and not give speeches to each other.

And I think what's happening more and more, is everyone feels the need to be in the room, because the pressure is so high right now. And so in effect, again, you could have ineffective, less effective meetings because of this pressure that's coming.

Mr. Dimon: I'll give you a great, great quote. Someone once said, the bigger the crowd, the better the news. And I kind of agree with that. You know, if you want to, you should, I mean, a lot of managements, you know, there are auditors who I want to make sure that they air everything, so that we overall, do much better. We're not going to be well served if they think they're doing us a favor by putting some problems under the rug. And so I think they should be lean, and full disclosure, you know.

Mr. Rogers: I think that would be something if the regulators would, you know, I think if we actually give them some guidance on who should be in the room, and how much time should be spent with the auditors in the executive session.

Because I think sometimes a lot of boards have rushed that at the end. They'll bring in the auditors for the last ten minutes, and people are rushing to the next committee, or to lunch, or dinner, and they've gone through all the, they've checked the boxes for an hour and 50 minutes, and then they've got ten minutes left for the auditor. And I think we've all been there in that situation, and I think that's something that needs to be thought about a little more.

Making change in gears, one thing we haven't talked about is the issue of the major investment banking firms, and their conflicts in terms of how the information flows to investors. How much responsibility, it's been recently that these sell side analysts are getting a lot of criticism for their inability to actually do their job effectively. Is that fair criticism? And what can we do to help resolve that?

Mr. Litan: Let me jump in on that. Yes, the criticism is fair. There's so much out there about sell side analysts, it's hard to know where to begin. I'll be totally candid. I think you've got to be pretty much crazy to trust a sell side analyst. That gets my views out.

Now, the real question is, from an academic point of view, is why aren't there more independent analysts out there? And the sort of standard answer you get from a lot of academics that I've talked to is, customers don't seem to want to pay for it. Right?

Mr. Rekenthaler: Right, we can tell you that.

Mr. Litan: Yep, they just don't value the information. And a second reason is, is that as more and more people go to index investing, I'm talking about individual investors, you don't need analysts to be an index investor, I mean, I'm an index investor. And most academic research tells you that that's what the little guy ought to do, they shouldn't be out there picking stocks.

So, there's a real conundrum here of how we're going to get to a world in which we have more independent analysts. I think in a world of more rapid, and more frequent internet disclosures, that it is conceivable that demand will grow up before an independent analyst industry. Especially as we go to, this is another sort of insider, or inside the beltway term, it's called XBRL. It's basically a business language that will, that is currently being developed by the accounting profession in a number of firms, to enable people to manipulate data much more easily than they're able to do now.

But, as we get more and more information out, there will be a greater need, I think, or a greater evidence of a need, for independent people to interpret this information, as more and more of it comes out. And so it's conceivable that the independent analyst industry will grow up, and the investment banking owned analyst industry will wither. Because I can certainly tell you now that the investment banks have suffered a severe setback in terms of their credibility.

Mr. Rekenthaler: Bob, if I can follow up on your point, because I've been thinking about your earlier comments on the dissemination of information, and this moving to a monthly, weekly, daily, and I've been wondering where that leaves the individual investor?

As you've touched on that, if the individual, presumably most individual investors are not going to be tracking many stocks on a daily, or weekly basis, and it's going to be difficult to compete with professionals. As you increase the time limits, you increase the demand. I mean, the professionals, that's what they do, they get paid to sit there and look at the terminals, and look at the information, as opposed to somebody, individual investors may have another job. And in addition, if they can't rely on the sell side analysts, it doesn't seem that there's much of a world for individual investors picking stocks, which is what you alluded to when you talked about indexing. And I just wanted to kind of confirm that that seems to be where your viewpoint leads. Without the development of this independent analyst industry, there's not a lot of good reason for an individual investor to be selecting stocks. In which case, you know, I mean, that has implications on this whole issue of disclosure, as it is how much are we trying to satisfy the individual investor?

Mr. Rogers: Jamie?

Mr. Dimon: Well, here, I'll split it between the way I think is fair, and unfair criticism. Fair criticism, if research people report to investment bankers, that's not, that's fair criticism. And if they're paid directly for deals or recommendations, etcetera, that's fair criticism. Here's the, I probably would put the unfair category. They're all different, some are very, very good, they do great work, okay? And some aren't that good, and they are independent. Sanford Bernstein's independent, mutual fund people are independent. If I want to know about this company, and John's done research, I could talk to his analyst, and learn a lot about it. So, there is a lot of independent stuff.

I think that if you were, that and most people, again, they want the quick little answer. And then now, they're going to, because after the grateful market, they're going to come down and blame someone. They didn't buy it because those people made recommendations, okay? I defy most money managers, if you got all the money managers all lined up, and you said, did you buy that because of the analyst's recommendation? It's almost never true. They like reading the research for the quality information, and again, it's quite good. And again, some aren't that good. And that's, that's the free world, there's nothing you can do to change some of that.

So, you know, I don't think you're going to totally change it. I think that maybe eventually, like more like utilities that, where people do some great research on companies. And, you know, I always go, when we look at companies, I always read the research reports that other people did. Particularly the ones who I think are really smart. And I don't look at what it says, whether they say buy or sell. I would agree, and if somebody says, you know what, maybe just get rid of that in total. Just wipe it out, and stop doing it, and just read it for the quality of the work that's been done, and their analysis that they've added extra value to the understanding of a company, or an industry.

Mr. Rogers: That's the same way that I read reports, Jamie.

Mr. Zielinski: Yes, I'd, I guess as a reader of many of those sell side research reports of maybe kind of chime in here. And I'd agree with Mr. Dimon, I mean, it runs the gamut. I think, certainly post Enron, most, if not all sell side analysts have kind of become the whipping boy, or the poster child for, you know, the fact that over time, you know, and you see the statistics, you know, 95 percent of the recommendations out of Wall Street are, you know, buy or strong buy. And, you know, very rarely will you see a sell recommendation.

But, you know, there's been independent analysis for years. In fact, I'd say right now the booming industry, and if I were, if I had a little pocket change, I think that the great, a great industry, which has thrived and really thriving even more, kind of an independent forensic accounting research boutique. I mean, believe me, there are going to be money managers that will pay for that kind of independent research, for firms that can go through and analyze company's financial statements.

But, there's been a lot of independent research, and I think, now, what probably happens over time is that it's not cheap. I mean, you know, we buy independent research, I'm sure John Rogers buys independent research, and it doesn't come cheap. And so what that does though is, it certainly makes, I guess, the larger investment houses, the larger mutual fund complexes who have access to that, who can obviously absorb that high fixed cost, and buy that research at a somewhat competitive advantage to those maybe smaller, or individual investors that don't have access to that independent research. Which, again, is somewhat costly.

But, I guess, that fact that, you know, there's been a lot written in the press lately that, oh gee, all the sell side analysts only issue buy recommendations. I guess that's something that we've kind of known all along. And you do have to take some research with a grain of salt, but again it runs the gamut. There are a lot of very, very bright people on Wall Street working for investment banking houses that happen to write research reports, that I use in my day investment activities.

But, again, I think what does happen, though, I think you'll see, and we've seen signs already, that those maybe sell side firms that had maybe more of a traditional structure where maybe research was kind of joined at the hip, if not formally, only somewhat informally to the investment banking side, certainly try to, you know, separate those two functions a little more formally to at least create the aura, and probably make them more independent going forward.

So, I would say there's a great need right now, and people are willing to pay for that independence. And I think a lot of these research boutiques that are out there are really having a field day, now, in terms of signing up new clients, to be honest with you.

Mr. Litan: I just want to amend for the record, since I made the outrageous remark about sell side analysts. I was referring specifically to the recommendation, at the end. And I certainly agree with Jamie that, I mean, I read a number of these reports too, and they have incredible amounts of very useful information in them.

The economic question though is, is who's going to pay for this stuff going forward? If they're really delinked from the investment side, who's going to pay for it? Now, in the work of institutional buyers, there is a demand. And it seems to me that one thing we could see evolving naturally, is some of these really smart people that Jamie's talking about, and I know some of them. They may leave the investment banks, and form their own firms. And we'd end up getting the independent analyst industry developed that way, because once you've divorced them from the investment banking side of the business, why should they hang around a Morgan Stanley, or a Goldman Sach's, when that supposed advantage, two or three years ago, now may turn into a liability?

And if people are really paying for brains, why don't they go off and do it themselves? And without issuing recommendations, all they're doing is selling their smarts. And if they do that, that may be the industry structure in the future.

Mr. Markese: Bob, the independent analyst for the individual investor turns out to be newsletter writers.

Mr. Litan: Right.

Mr. Markese: All the newsletter writers that are out there, they're not the formal on Wall Street analysts. But, we have thousands upon thousands of investment newsletters, I wouldn't venture to guess how many are good. But, those are your independent analysts who are simply putting out advice.

So, and by the way, the individual investor's always going to be buying stocks, and probably, hopefully indexing. They're not mutually exclusive, so we need to arm them better in all of this. And we need not to force them into the hands of an analyst, if they choose to make an effort, and choose to educate themselves, at least minimally.

But, I think what we've talked about today is a good start, I think we're moving that way.

Mr. Rogers: Is there any downside to the hardening of the Chinese Wall, with truly investment operations, and the analyst positions? And how about Jamie's suggestion of getting rid of the buy and sell. Is there another side to that argument?

Mr. Rekenthaler: Well, I think there's certainly a market demand for buy and sell. So, unless you want to regulate, you're not allowed to say buy or sell. I think you probably could see it, despite the articles, and the suspicion that's been given here about sell side analysts. There are a whole lot of people out there that believe sell side analyst's viewpoints, and that buys and sells are valuable. And, you know, these folks are on CNBC for a reason. People pay attention to it, and, you know, I don't see that changing.

So, you know, if I ran a firm with sell side analysts, I'd keep buys and sells, or mostly buys in this case, going.

Mr. Rogers: John, you work with Morningstar, which is a wonderful, the successful mutual fund ranking company that's sprout out into lots of other areas. But, could you talk some about the disclosures issues that are front and center in the mutual fund industry right now? I know, you've been fighting some battles, and we'll get some of those out.

Mr. Rekenthaler: Yes, well, one of the issues in the mutual fund area that's similar is the, relates to what I was talking about earlier, one of the downsides, I think, of the argument, that you have summary information. I like the idea of having summary information up front, and the detailed information, or more marginal information back there. And force management to prioritize, which is important, and work with that.

But, what we've had in the mutual fund industry is something called a statement of additional information, and which used to be, I think, in the old days part of the traditional prospectus. At any rate, it's not mailed with a, it's considered to be marginal information that somebody can get upon request. The trick is, it's really hard to get it, even when you request it. We found that the statement of additional information, which is the part "B" of the mutual fund prospectuses, that's available upon request, in reality there's still many mutual funds we don't have them for, because we just can't get them. People are so unused to sending them out, that that's a — so, it's withered away, and become too marginal in our view.

So, that would be, I noticed there's some ideas about having some kind of summary annual report. And then you might be able to ask for additional parts of the annual report upon request. And based on my experience, you might not get it.

Now, possibly this could be addressed to be of the internet age, that this is up and freely available to anybody with an internet address. So, that's, it's possible the technology will solve that.

Mr. Rogers: I know Morningstar's also talked about how disclosing more quickly to the stock holdings that the portfolio managers pick. I'm curious, we have another portfolio manager here, John, and what your view of that is? And then other's might have opinions on that?

Mr. Zielinski: I've got to be very careful, because one of my chief compliance officer's is in the audience here, so I've got to — as a, you know, surely we follow the SEC mandates in terms of our annual reports, and our semi annual filings. Additionally, if I'm not mistaken, we do furnish other periodic reports, monthly and quarterly. At minimum, I believe, disclosing our top ten holdings. I happen to run in equity funds, so if the things I'm describing are unique, or particular to an equity fund, a fixed income fund, we would probably need to disclose different types of information.

But, things like our sector diversification, our capitalization, distribution, et cetera, our average PE ratio. In some respects I have no problem with having that information disclosed. I mean, I think in the normal course of business, again, it kind of gets — I see a parallel track in here in terms of what companies need to do. To the extent, we want to attract more investors to our funds, I'd like, like companies may want to attract more investors to their stocks, more disclosure is better than less disclosure.

I think investors, whether they're investing in an individual stock, or into a fund, will put their dollar into those funds that they have the highest confidence in. And if that means disclosing things like our fund holdings on a monthly basis or something, you know, that's perfectly acceptable, to a degree. I mean, I think having a disclosure fund holdings everyday may be a bit onerous.

I mean, I'm competing with other funds in my category, in some respects, I, while I welcome the opportunity to tell my investors what we're investing in, and why we're investing in it, I guess in some respects I'm a little reluctant to tell my competitors what I'm doing, for fear that that may lessen my advantage I have over them in this competitive environment that we're in.

So, I mean, I think, again, more disclosure is better than less disclosure. I think over time, those funds that may disclose more information find that that attracts more investor dollars to their funds. And so being profit minded, I would expect that we'd favor more disclosure.

Mr. Rekenthaler: Just a couple comments. One, for clarification. Yes, what Morningstar, and some others, have been requesting in terms of mutual fund disclosure is, I think, fairly parallel to what Chairman Pitt has been talking about. You know, a modest increase, and cut down in disclosure time, as opposed to anything like daily.

Right now, the rules are that mutual funds need to disclose their holdings twice a year, and there can be a 60 days lag time from the point of the measured, say June 30, and when you actually need to release that report. And we've been asking for quarterly with a monthly lag.

So, a fairly modest increase. Although that's not one that has necessarily been embraced by all the mutual fund companies, and by the investment company institute, which is the fund trade group.

The second point to make is, John, your notion of the market addressing this. You know, I don't know. I mean, I'm in favor of market solutions. On the other hand, one could argue, you know, we don't need any regulations regarding corporate disclosures. And the market will solve, and reward the companies that make good disclosures, and not buy the stocks of the bad disclosures, and we're probably back to the 1920's, or something like that. And I will note that Fidelity is a notable opponent of disclosing more frequently. And they seem, the market seems to be treating them pretty well.

So, I wouldn't say that the evidence has been strong, that the market has rewarded companies that have disclosed information more often. Which one can say, then maybe it's not that valuable, get that information more often. At least that's the market place score card.

Mr. Markese: You know, what seems obvious to me, and I may be inventing something that already exists. But, anytime there's a filing by a firm, an 8-K, a 10-K, whatever, why aren't we requiring firms put that up on the internet immediately at the same time they file? I don't see any great cost burden on firms to have an underside base. And maybe that's something the SEC is considering.

But, that would be a mandate the SEC could make, and it seems to me it would improve disclosure, improve the timeliness, get it a broad distribution to shareholders. And, in fact, the shareholders could request, push E-mail on that. So, whenever an announcement is made like that, it could be pushed to everybody who submits their E-mail, all shareholders, and in fact, anyone interested.

A simple solution, we have the technology. Again, a disclosure, not related mutual funds.

Mr. Dimon: I think it's already pretty much done.

Mr. Markese: But, it's not mandated, I don't believe.

Mr. Dimon: No, but it is, once you're, I think once you file with the SEC, you know, within hours it's on their public sites.

Mr. Markese: Yes, but that's different.

Ms. Waryjas: So, within less than hours.

Mr. Markese: Yes, but you're, that's different from sending it out to your shareholders.

Ms. Waryjas: Shareholders. The Commission has proposed that there be posting within one business day after the filing of any of the mandated reports. So, I think that is a positive. But, I do think many companies are already doing that.

Mr. Markese: Probably the larger companies, a lot of the smaller ones do not.

Ms. Waryjas: The 8-K incremental list of items to be filed, and including the posting on the website, I do think there's a change, which will provide additional disclosure to investors. In the past, companies have been able to file an 8-K without having to do a press release, or post the information in the 8-K. It was not really a secretive filing, but was sort of a, there would times the company would decide that they did not want to go forward with a press release regarding a particular item, but they would, or matter, but they would prefer to do the filing on the 8-K, which would fill the disclosure requirements.

That decision was not necessarily made because the company had something that it wanted to hide. For many companies, they have so many press releases going out, that it would get buried, or they felt that the nature of the disclosure was such that it didn't rise. It was a mandated disclosure, but they didn't think it was appropriate to include in a press release.

However, now having that information, the 8-K information available on the website, I think will provide a lot more information to investors, and analysts.

Mr. Markese: Yes, I agree. But, the 8-K comes out episodically. And if we had pushed technology to send it out as soon as it, in other words, an individual investor would have to know what was coming, and they couldn't know that.

So, I think it's something that could be done. There's no cost to it involved. You simply get everybody's E-mail, and you send it out as a notice.

Mr. Rogers: And then, on this issue of disclosure, how about the, how do we think about evolving the way that we disclose insider trading transactions? Should that be something that we move up the time frame on?

Ms. Waryjas: Well, again, the Commission has proposed that the disclosures in that area be accelerated substantially. And we do have the technology today. Again, we're dealing with a situation where the rules were written many years ago, and we now have the technological advances. I'm not as technologically proficient as John is, I'm still real lucky if I can get a conference call going with three people in my office.

But, the insider trading information, if there is, I guess, information that an individual investor is interested in, it's information as to are the key executive officers at the company buying or selling? And I think that that is important.

And I have certainly recommended to clients, that if their executives have 10b-5(1) plans, where they have a plan of selling on a periodic basis, and they've put that into place, that it's a good idea, though not required, to issue a press release, which describes the fact that that plan is in effect. In effect, it's a proactive step, so that investors are not surprised to see the CEO selling shares. But, it's part of a plan that the CEO has put in place, and this will happen over a course of time.

The new disclosures as proposed, I believe, are within two business days after the sale.

Mr. Dimon: I think it's one of those things where it's a kind of no brainer improvement to just — forget the technological side for a second, you know, that it'll be easier for people to make mistakes. But, there's no reason that you shouldn't do it. And it should incorporate all things that look like equities, derivatives, swaps, trades, asset transfers, 401-K's. So, there's no noise in that. Just, what did you do in your own position, if you're a 16-B insider? And I don't, I think that's rather easy to do.

And, also, if you're going to have a periodic close, just disclose it.

Mr. Rogers: Very well. This has been a great discussion, and we've kept, I think, right on time now to have time for some questions from the audience. We've been trying to keep this very informal today, for discussion and dialogue, and so we'll promise if you ask precise questions, we'll do our best to give you precise answers.

So, if you will, I'd like to open it up for questions and answers. (Questions from floor)

Ms. Waryjas: The question was comments regarding the Federal Reserve and Chairman Greenspan's recent comments. Which I apologize, I had not followed, regarding caution, regarding accounting changes.

I think accounting will be dealt with this afternoon. I would certainly recommend that the Commission proceed a pace. But, again, the issues here are fairly complex, as we've noted. There are calls for additional types of oversight, there are calls for new accounting rules.

We have seen, in recent years, a development of financial products that, on a basis that I don't think we had experienced historically, with repeatedly. The creativity of the investment banking firms are the consulting firms out, and developing the products. So, adjusting the rules. There has been quite a bit of discussion between, or rather about the time delay between rules being discussed, and when they're actually implemented.

I think that these are issues for a new oversight board to look at very carefully. But, I would concur that we don't want to shoot from the hip here. We, the rules that come down, again, need to be thought through. And they need to allow for interpretation as we go forward.

Mr. Markese: Alan always calls for caution on everything, so it's hard to sort that out. I do think there's an issue. I think there's some outstanding issues we have to address, that's options. I think part of the Enron problem we had, were there were a lot of options floating out there, highly leveraged. And there was incentive to pump and dump the stock. Pump it up, keep the price up no matter what, and have the executives dump. Because the game was so enormous with those options.

So, we have to start looking on how to account for options, I think that's something we have to do. Whether we can account for it, whether we need to disclose more, whether it should be considered as expenses or not, the enormous leverage, the impact on earnings in the sense of dilution, it's out there, and we've sort of said we can't do it, therefore we won't do it. But, we have to something there.

So, I think, I think there are other things we have to move forward. I would also suggest we need a public oversight board, and I'll go along with Bob Glauber, who heads the NASD, that we need a board, something like the NASD. An industry board completely independent to supervise the accountants.

But, I think that's coming, and I think it's all in the works, but, and I don't think we should be cautious on that, I think we should go ahead and do it.

Mr. Rekenthaler: A further thought on options, and I think Warren Buffett has said this, he pretty much has said anything I can think of. But, the issue with options, and the compensation for management, and directors to be so heavily incented towards options programs, is options prices are rewarded by volatility. And that, you know, there's an enormous incentive when you have the fact that the prices are positively affected by volatility, and the fact that there's no loss, only potential of gain, to take on risks.

I mean, that's the idea behind options. There is, you give, you want to encourage management to take risks, and not play it too safe. But, that also means accounting risks can be a rewarding strategy for, and it's different if compensation is in stock, and there's a chance for meaningful losses. You know, there's an opportunity loss with options, but there's an actual loss, particularly if the CEO or management has invested their own money, not just been given the stock.

So, the trend towards stock options, and expenses, and should this be showing up in expenses? And will this change the incentive programs that are done? I think this has, definitely it ties back to the full issue of accounting, and disclosure, and practices. Because as long as you have economic rewards that, or an economic system that rewards aggressive accounting tactics, you know, we can talk about different disclosure rules all day. And there will be another, maybe not something quite as dramatic as Enron, but other situations like Enron.

Mr. Rogers: What's interesting is the issue seems to be getting hotter and hotter. Just in today's Wall Street Journal, there's a wonderful editorial by Burt Malkiel, who wrote the classic, A Random Walk Down Wall Street. In making the case that maybe Warren Buffett is wrong for the first time. And, so it's a, you know, it's, so it's an interesting, that you're really getting this high profile of folks fighting it out in the press.

I'm just curious if any others have any insights? Because I think it is important, an important issue these days.

Mr. Litan: Yes, I want to make a general point, just generally about the setting of accounting standards. It's important to distinguish between the Public Regulatory Board, which has been proposed by the SEC, and may even be legislated by Congress, that's going to deal only auditing standards. It's not going to deal with accounting standards, which are set by the Financial Accounting Standards Board.

And one of the issues we have not talked about, which I feel very strongly about, is how to insulate better the FASB from the political process. Now, some people say that because accounting standards are inherently political, like any other standards, you can't take the politics out of them, and you ought to just give up. I don't take that view. I think what we have now is an imbalance in political forces. So, that when FASB considers a rule, like stock options, they get heavily lobbied from one sector of the economy, namely high tech, and they don't get effectively counter balanced, or counter lobbied from the other side. Which is the retail investor, and institutional investors.

And with all due respect, there just isn't enough clout on the other side. And the reason is, is that investors don't have enough financial incentive to do the homework, and do all the lobbying that is required to have a fair game at FASB. Because if they don't like a particular stock, they sell it. There's no reason to exercise what Albert Hershman calls voice, when you can exit.

So, one solution to this problem is to try to encourage the institutional investors of the world to have more organized participation in FASB proceedings. I pray for that, I don't know if it'll ever happen. And the other solution, frankly, is to go to a world in which, this is something I called in my Senate testimony several weeks ago, a world of constrained competition between U.S. GAAP standards, and International accounting standards.

If we had a world in which we had a true competition in standards, and we did not have the reconciliation requirement, which is now required between GAAP and IAS, we would have a lot more companies picking and choosing which standard that they wanted a report on. And we could constrain some of that competition by, I think, urging the two of them, FASB and the International Accounting Standards Board, to get together to resolve some of their differences on some of the key issues, without harmonizing the standards completely.

In a world of constrained competition, if you really believe the markets will reward the better standard, that will give the powerful incentive for standards to have honest reporting. And we have a real live example of that in Germany, in their noire market, where basically the companies there report 50/50, whether it's GAAP, or International Accounting Standards.

And so I would encourage the SEC to think seriously about a world in which we get to a competition in standards. And that would dilute some of the political influence now that is exercised by very narrow interest in the United States on FASB.

Mr. Rogers: You mean, on the option issues specifically, we need to give a brief answer?

Mr. Litan: Yes.

Mr. Rogers: There was an article recently, also, that talked about the fact that, if the information is disclosed in the footnotes or elsewhere, that market's are being so efficient, and analysts being so thorough, that it really doesn't matter. This whole issue is kind of an issue that really shouldn't be such a big deal, because disclosure is there, and markets are going to reflect all the information.

Mr. Litan: Yes, and no. I didn't buy Burt Malkiel's article today, in the Wall Street Journal. He made the argument that "A", you can't value options by a Black- Scholes formula, because they're long term. And "B", if you use a sort of a second best method, it's not perfect, so let's don't do it.

Well, let's not let the perfect be the enemy of the good. The fact is, is that stock option is giving somebody something valuable. And right now, at least in the income statements, it's recorded at zero, and that can't be the right answer.

Mr. Rekenthaler: I can tell you, our stock analysts don't feel that they have all the information that they would like to have, regarding stock options, and the potential effect on stock prices. Maybe our analysts aren't good enough, I don't know. But, they welcome some additional disclosure, or expensing of these items. So, that's one of the requests that they gave to me to pass along.

Mr. Rogers: There's a question in the back? (Question from audience member.)

Chairman Pitt: I'm going to exercise the unique prerogative of remaining silent on that. We, I would say, are benefiting enormously from these panels. And we also think there's a need to move quickly, so we're going to have to balance that. (Question from audience member.)

Mr. Rogers: Can you at least stand up, and let us, everyone hear you? (Question from audience member.)

Mr. Litan: Let me, let me try to address that. I think Enron exposed that we have both problems. On the standard side, we woke up to the fact that special purpose entities were not treated right under FASB. And while we can celebrate GAAP being the greatest standard in the world, we were horribly embarrassed Internationally.

I'm working on a book right now on Global Accounting Standards, and I've got two co-authors from Europe. And the E-mails they sent me, making fun of the U.S. GAAP, you know, were no joy to read. So, Enron exposed that we did have a problem. FASB, in record time, attempted to fix it, by changing the three percent rule to a ten percent rule. I mean, this is something that was unheard of, I've never seen FASB act so fast in my life. And that, by the way, is proof of the fact that if there were competition in standards, you'd see a lot more rapid standard setting, or standard changing.

Now, on the auditing side, or on the enforcement side, Enron also exposed problems there in spades. And all the other previous accounting scandals that we've had before Enron, were examples not of the standards, but of the failure of the enforcement.

And so that's why we need something like the PRB, or I've argued frankly that, in my personal opinion, and it's not going to happen likely, but I think the SEC ought to do the enforcement itself. It can give the PRB the auditing standards. But, I, my own personal view is that enforcement is inherently a government function, the SEC ought to do it.

But, putting that aside, enforcement is, in my view, just as big a problem as the standard side.

Mr. Dimon: Can I, because it's a little bit, a very big perspective. The United States has the best capital markets in the world. And people forget that, you know, everyday on the phone, millions of people buy, sell, do things, sell securities, raise capital, start new ventures. And it's unbelievable, it's by word of — these agreements are verbal, they're deep, they're adequate. But, they always can be improved. And the attitude should be, can you always make it a little bit better than it was?

I think Greenspan was talking about the unintended consequences of laws, rules and regulations. And they're enormous. And, you know, very often, you know, you're taking up the nuclear weapon to kill the mosquito. And so in most of these things, the unintended consequences dwarf the intended ones, and so I think people have somewhat the same intent.

And I, you know, I look at the, and I think it was right to separate audit from accounting standards, this did bring up some disclosures in GAPP. Now, this three percent, ten percent, in my opinion is a joke, okay? If that's the solution, I mean, what they did was fraudulent, okay? Let's not kid ourselves at all about accounting rules, and stuff like that. They, there's no way that any one valid company would have done what they did in that kind of accounting. I don't care what the accountant said, or what rule said, or something like that.

And there are some gaps in GAPP. And the fact is, the world is moving so quickly now. You know, maybe if FASB was moving along at, you know, 20 miles an hour, and now is — and it hasn't kept up in my opinion, okay? Because most of us who buy and sell these things, well, we spend an awful lot of time making these adjustments.

Now, the other thing I want to put a little perspective in is, as a management of a company, let's see, I've been down at the SEC 30 or 40 times in my life. And when we file things, we get questions, calls, and so forth. We're terrified of enforcement. And they do a pretty good job, you know? And they have over the years, about full disclosure, and 8-K's, and 10-K's. It doesn't mean you can't look at how to make it look better, or a little bit more readable, or clearer.

I mean, like even, you know, we spend. And I know that, you know, a lot of the people who, you know, who I work with, and other companies, other CEO's, we spend ten, 20, 30, 40, 50 hours going through these things, making sure they're proper. When we do a press release, when we say the reasons for increase, you know, MD&A is mostly requirement, I agree it's not that great, but when we say that earnings went up for the find reasons, A,B & C, we try to make sure that A's the biggest and most important, B's the second biggest and second most.

Now, we can't always be perfect, and stuff like that. But, this, I think these things did roll, and I think Enron showed that there need to be changes in GAPP, okay? That there needs to be quicker, more fixing of rules. There's too much flexibility in certain areas, certain businesses, and it should be changed.

Disclosure, by the way, is 90 percent of it, fair disclosure. If you get that right, then at least the investor, and other people can decide. Fair disclosure, you know, we all learn the whole truth, and nothing but the truth, and it was the whole truth part. The part truth part doesn't work, that's the equivalent of lying, even though you didn't technically lie.

And so, you know, we, that's when, people do try to do that, and so I would worry like Greenspan said, too. And like, you know, the 401-K's, and the executive. I mean, there are some things that are very reasonable, that can be done right now to fix some of the problems that were created. Others will take a little bit more time.

Like, you know, this thing about people owning company stock. Well, you know, when we got into Bank One, we put our 401-K matching company stock. And I think our people should a lot of money if our company doesn't do well, it's our company, it's our team. This is part of one of the greatest things that happened in America, is that these things did get spread wide.

And that, now we're going to take it away, and mandate what people can do with their money? And so, maybe we should mandate a little bit, but not just totally using the blunt instrument to eliminate, from one problem, eliminate, you know, the 99 good things that happened from it. And I think Greenspan's right, we should use care and caution on some of these things, others we could do very quickly.

Ms. Waryjas: I'd just like to emphasize what Jamie has said about materiality. Again, the overall thrust is that the disclosure be full, that it be fair, that it be complete. That it not just be complying with a number of individual line items, in either Regulation SK, or SX. Those are where you start, but you have to look at the overall disclosure.

I don't believe that the accounting system is horribly broken. I think we had some areas where things did break down. I don't believe that our public company system is horribly broken. As you recall what happened with Enron, and we're focused on that today, please remember that five business days after 9/11, the U.S. markets reopened. Trades were executed, and within 30 some days, the market went back to where it was, to the pre 9/11 levels. That took not only the work of Chairman Pitt, the SEC staff, the New York Stock Exchange, NASDAQ, AMEX, the other exchanges, the investment banking firms, but it also took real reliance on the disclosures that were made by the individual companies that are trading on all of those exchanges in the industries.

There are many, many people out there who are trying to do the right job, who are trying to comply. And I think that, again, referring to Jamie's comment, we don't want to take a nuclear weapon, and wipe them out. We don't want to scare people serving on audit committees, because they are so concerned about personal liability, that the good people decide that it's not worth it.

And maybe we need to consider some, you know, some way of looking at how they are indemnified, how they are protected. But, we need to keep encouraging the positive, while punishing the negative.

Mr. Rekenthaler: And Enron aside, we would be, in general, more concerned about the disclosure in accounting standards than the audit issues. Although admittedly the audit issues, when they strike you, are, tend to be a gigantic bomb. But, we feel like we're nicked to death in a variety of ways by, in hundreds of cases where the disclosure could be improved. And we're having a little trouble getting to the bottom of what a company's business is like.

Also, I would like to note for the record, we do not share Jamie's viewpoint on 401-K in company stock, which is a different issue, but we don't all agree.

Mr. Rogers: I just want to follow up on one thing about Maryann's point, and it came up earlier, too. This issue of how we can make these jobs on audit committees more interesting for people, for people who want to serve. And I think part of it is trying to make the meetings themselves, as we touched on earlier, where there's more of an opportunity to have a dialogue, to make the meetings more meaningful.

But, I think that people who are successful executives, if they keep getting spoken to in slide show presentations, and check the box kind of structure, the mind numbingness of it, I think, will discourage, you know, thoughtful people, successful people, from wanting to serve on these committees.

So, it needs an added reason to try to make sure that we think more about how board meetings actually work, and how committee meetings actually work. And on Jamie's board, he does an excellent job with creating a small group climate where there's quality discussion. And I know we actually had lunch once with the former CEO of —

Mr. Dimon: Citibank.

Mr. Rogers: — of Citibank, who talked about the way that they created a board room where people were talking with each other, and there was discussion, versus people being talked at. And I think more information actually gets disclosed when people have a chance to discuss things, and have a dialogue. And we'll define more of these problems if we can create that kind of environment, that kind of a climate. Are there any other last questions as we're winding down?

Okay, maybe we could just, I'd like to thank Chairman Pitt for allowing us to be here today. This has been an exciting morning, and a meaningful morning. And let me, I'd like to thank all of the panelists for being here, and volunteering their time today, to be here for this discussion. And would you give them all a hand?

Chairman Pitt: Thank you all very much for this. There is a session this afternoon, which will start at 1:30. Which will deal with assuring the adequate oversight of auditing and the accounting profession.

Thank you all for attending.

Panel 2: Assuring Adequate Oversight of Auditing Function

Chairman Pitt: Good Afternoon. This afternoon we have a continuation of our Roundtable with a new panel to discuss the assurance of adequate oversight of auditing. We are very fortunate to have, as our moderator of this session, former SEC Commissioner, and now a member of Briggs Capital Partners and a friend, Carter Beese. So, Carter, thank you and it's all yours.

Mr. Beese: Thank you, Mr. Chairman. We are all here today because there is a credibility crisis in the accounting industry. Mr. Chairman has pointed out in his speeches and testimony, there have been failures.

We do have markets in the U.S. that are the best in the world. We have a disclosure system that has been regarded as the best in the world. Our markets and our disclosure and the oversight of those markets is not perfect. We've never said it is. We've said it is the highest standards in the world. And we've also said these standards should constantly evolve. That is what the SEC does on a day to day basis.

Often the change is incremental. It's evolutionary. Today, we are here because the change that is confronting the accounting industry is that one of wholesale change and is one of potentially revolutionary change. Revolutionary possibly on the same scale that led to the founding of the SEC back in the early '30s.

I'm confident of the outcome of this wholesale change. It is that the U.S. will still be the model for the world. And that's because of the process. The process of which we are part of today. The process of the comment letters. The process that is taking place in Congress. And certainly these Round Tables are a significant part of that.

We will be the model for the world unless it emproaches on balance. Unless we, if we don't resist the temptation, which happens at times, of heavy-handed regulation or so-called shutting the barn door after the horse has escaped regulation, we will be the model for the world if we resist that temptation.

It's a temptation that particularly, in my view, has to be resisted on Capitol Hill. And we also will be the model for the world unless we create significant disincentives. Disincentives to join the accounting profession. And disincentives for the right people to serve on Audit Committees.

I just want to add a personal note that I have a particular concern that the events that we are now living with regard to these issues, could put us in a position, could put many people in a position, where we're going to take the A Team off the field when it comes to having the right people on Audit Committees, if it becomes onerous to serve on that. That is something we're here today, certainly, to start to talk about. The Chairman's proposals for an SRO and the other proposals that in the other issues surrounding a new SRO for the accounting firms. But we're also here to talk about auditing standards and we're here to talk about the whole process of auditing and the role of Audit Committees.

We're here to talk about whether the SRO's should be a private or government body. And who should appoint the directors and what should the background of those directors or governors be.

We're here to talk about who funds this new SRO. We're here to talk about who plays the, who has the enforcement role, with regard to both discipline of the profession and enforcement of other infractions that are related to these issues.

We're here to talk about what the proper SEC role is with regard to oversight of this entire issue. And we're here to talk about many other related issues.

We're going to begin today by introducing the panelists. And I'm going to introduce them one by one. And as I introduce them, I'm going to ask them to give some brief opening remarks about the issues that they would like to see covered today and issues that they would like to have on the table. The only ground rules for this afternoon's session is that it's not enough to name issues. You have to name solutions during the course of the program.

So to start, we're going to start with the honorable Barbara Franklin, our former Secretary of Commerce, the highest ranking woman in the 41st President Bush Administration and very apropos for today's discussion, have served on more Audit Committees than anybody I think I've known, Barbara.

Ms. Franklin: Really? I don't know if that's a distinction or not as somebody said this morning. Yes, my role here, I believe, is, although I have to say too, I'm a former regulator, a Commissioner of a Regulatory Agency, not the SEC, 25 years ago, Consumer Products Safety Commission when it was new. So, I have a public interest that appears in my background.

But I'm here today as a Director. Been a Director of more than a dozen public company's. Served on at least that many Audit Committees, I feel. Chaired six and am currently chairing two. And if I could, Carter, do you want me to take a few minutes and just —

Mr. Beese: Please.

Ms. Franklin: — okay. I wasn't sure how many minutes you wanted me to take.

If I focus, then, on the relationship of the audit committee with the auditor, what I would expect from the outside auditor is the following, independence. And we got into a thing this morning about reporting directly to the Audit Committee. I concur with that. I believe it. And in most Audit Committees that I'm involved with, that do have the power to hire and fire the auditor, the nub comes about who negotiates the fees. I'm going to leave that for a different part of this discussion.

So, independence, competence in all areas, highest ethical standards, guts, courage, and then candor with the Committee and there's a communication skill that I think goes with that.

So, how do we get this, in terms of the best quality performance from the auditing firm? Well, one thing that I do think will help is what has been proposed by Chairman Pitt, the PAB or whatever we're calling it, every legislative proposal has a different set of letters, but I think that this will be a good step forward. It should be private. It should be overseen in the right way by the SEC. And it should deal with quality and ethics, not accounting standards or auditing standards. But quality and ethics and I would like that, if there were standards somewhere that the firms are being peer reviewed against independent members, independent staff and I think that's enough to be said.

What I really want to go into for a minute, is what I think the Audit Committee has to do to ensure this level of performance that we'd like from the outside auditors.

Fundamental to this is the Audit Committee's got to be proactive. Got to be proactive across the board, but particularly in the relationship with the auditors.

We mentioned the reporting relationship. I do think that is the way it should be. Audit Committee is where the auditor reports. But there's more that has to be done. Because, let's face it. The auditors are around management people more than they are around the Audit Committee. So you need to make sure that the reporting relationship is intact. So you have to always keep the balance as much as you can toward the Audit Committee.

One thing that was mentioned this morning is closed executive sessions without fail at every meeting with the outside auditor. Not perfunctory, but really two-way communication. I always, in setting up an agenda, use 30 minutes, allocate in a two, two and a half hour meeting, 30 minutes for executive sessions. Outside auditor, internal auditor, financial management and the Committee itself. And not perfunctory. And do it every time no matter what, whether the sky is falling or whatever.

Secondly, in between meetings, I think the Chair, who, and here the Chair has got to set the tone of candor anyway. And there are ways to do that. Small rooms. Crowd people together. I mean, there are a lot of little things you can do, but in between meetings, I think the Chair needs to be interacting with the engagement partner. And not necessarily just to ask inquiring questions, but just to chat about, you know, what's going on, what do you think? It's got to be real two-way communication so that you're building your relationship. That's the bottom line here. You want a relationship with the guy on the other end here.

And then, if you're the Chair, you've got to be able to hear the nuances in what people are saying or what they're not saying. And then be able to know what to do about that, if you hear something that's slightly changed.

This happened to me last week. And I did do something and I e-mailed the Committee about what I had done. Which is another thing. I like to engage the Committee if something like that happens, they get an e-mail from me. So everybody's kind of up to speed the next time we walk into the meeting room.

I also sometimes talk to the client service partner and the CEO of the firm, just to make sure everybody understands who reports to whom here.

It's also important to use the checks and balances that are already in place in a very vigorous manner. In other words, really questioning the outside auditor in the open session of the meeting about management's accounting policies, quality, about the estimates that management has come up with. And do it even kind of offhandedly. And people now know I do it so that it's not a big deal. Say, "Well, what do you think about that, Jack?"

And then I would ask it again, probably, in the closed session. And then to the, the Audit Committee needs to stick up for the outside auditor if it's necessary against management. And we've probably all had to do that one time or another. But that's important to, again, keeping the relationship the way it ought to be and keeping the reporting relationship coming to the Committee and not overly influenced by management.

And I think I should stop right there. But proactivity is the bottom line here.

Mr. Beese: Proactivity, and as you said, setting the right climate, setting that type of climate so that the auditors do feel comfortable talking to the Audit Committee when they have a disagreement with management. Letting them know that not only is the door open for that, but the Audit Committee insists upon that.

But, Barbara, as we take a look at how the Audit Committee interacts with a PAB or body like that, what can be done at the SRO level to encourage the type of climate that you've described in an Audit Committee and also encourage the people that you want to be on the Audit Committee to agree to serve on the Audit Committee? How can that be influenced by —

Ms. Franklin: The SRO?

Mr. Beese: — the SRO?

Ms. Franklin: I'm not sure the SRO can really deal with the second one.

I think it helps, though, if the SRO, if we know that there are standards for the various things we care about and that there is a peer review. And I think the suggestion is, on an annual basis.

I always ask anyway, if, every year, when the audit firm is being renewed, there's due diligence that, if the audit firm is being renewed I should say, there's due diligence that the Committee always need to do. Has to do with the performance of the auditor, but it also has to do with peer review. I always ask about peer review results.

Now, you know, it's kind of not very interesting. Every three years, and nobody's ever had anything other than a clean opinion with one comment or something. I mean, it's been, it's kind of a sham. I would feel an awful lot better if I knew there was a peer review being independently done and I could really look at and grapple with the results. I think Committees would just feel a whole lot better about that part of it.

And I think it reinforces, also, the independence of the auditor and helps the Committee to reinforce that.

Mr. Beese: Yes. And I think that's helpful and I think maybe we should just move right down the table to Edward Nusbaum, the CEO of Grant Thornton. We're delighted to have Edward here today to represent the view of the accounting firms.

And I would just add, to Barbara's remarks, when I was at the SEC Speaks several weeks ago, I heard a proposal that for interpretive relief, before interpretive relief will be issued from the Commission on accounting issues, there is a proposal that each member of the Audit Committee individually give their opinion before the SEC. I'm not sure if I'm paraphrasing correcty, Chairman Pitt.

But it was a proposal along those lines and what worried me about this from the public policy issue, is you start to disintermediate the audit members from the accounting firm. And I'm a strong believer that audit members have to rely on the accounting firm. They are the full-time people on the job. Audit Committee members are Boards. And that is a dangerous road to go down. I think there was some discussion on this broader public policy issue during the Blue Ribbon Commission Reports.

In fact, Barbara, would you just comment on Number 9 and why this issue came up?

Ms. Franklin: Yes. If anybody remembers that report, and I just remember Recommendation 9 because it got everybody's attention, where they were trying to, initially, it got changed, set things up so that the Audit Committee was in effect attesting to everybody else's comments, including the auditors. And I don't believe Audit Committees are equipped to do that. Nor do I think they should be doing that.

We are in an oversight capacity. I would call it proactive oversight, but it's oversight. It's not attestation.

So this did get changed and we are now not in this situation, happily. And, Carter, what you've just said came up at that meeting. I think it's a bad idea. It's going in the same direction and it's a bad idea. And I really do believe if Audit Committees are put into that kind of a situation, they're going to disappear. I mean, people are really not going to want to serve.

I have not seen people baling out, maybe others have, of Audit Committees right now. But there's certainly a lot more nervousness and I think we're going to have trouble getting people to