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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Remarks Before the AICPA Governing Council


Chairman Harvey L. Pitt

U.S. Securities & Exchange Commission

Miami Beach, Florida
October 22, 2001

In recent years, the unremarkable notion - of an SEC Chairman meeting with this group - has taken on considerable mental, if not physical, risk. To put a fine point on it, as accountants often say, the agency I am privileged to lead has not, of late, always been a kinder and gentler place for accountants; and the audit profession, in turn, has not always had nice things to say about us! Given that recent history, I am especially pleased to have this chance to be with you today. The invitation shows either enormous good will, or very poor judgment! But whichever result it reflects, I want to give Barry Melancon full credit, and my sincere thanks, for inviting me. Unfortunately, Barry has asked me to refrain from attributing any of this to him until he sees how it all works out!

As those here doubtlessly will attest, the accounting profession is comprised of keen and inquisitive minds. At the SEC, we take great comfort from that fact. Indeed, it was well known when I was in college, many years ago, that students like Barry, who had both intelligence and personality, were steered toward the School of Accounting. Those with intelligence, but little or no personality, were encouraged to go to the School of Engineering. Those with personality, but not much intellect, were directed toward Acting School. The rest of us, of course, went to law school! Perhaps that explains why, traditionally, the SEC has always been thought of as a "lawyer's agency."

Recently, the SEC has been quite adept - some might say facile - at saying what is on its institutional mind. This serves many useful purposes, to be sure. The laws we regulate are complex and intricate, and guidance from those charged with implementing these laws can often be helpful. But, in what may reflect a change of pace, I'd like to use most of our far too brief time together to listen rather than to speak; to urge you to tell me what is on your mind, and how you believe the SEC can be even better than it already is. Before I do that, however, and with your indulgence, let me spend a few minutes laying out for you some of the challenges I believe we must confront together, in partnership, in this new millennium.

The starting point, I suspect, is to tell you how I see our relationship with the profession, going forward. For the past two decades, I have been privileged to represent this fine organization and each of the Big Five accounting firms that are among its members. Predicated on that experience, I know that the profession is comprised of individuals who are committed to our disclosure system, and who are critical partners with us in making financial disclosures meaningful. Somewhere along the way, accountants became afraid to talk to the SEC, and the SEC appeared to be unwilling to listen to the profession. Those days are ended. I speak for the entire Commission when I say that we want to have a continuing dialogue, and partnership, with the accounting profession, and we will do everything in our power to evidence a new era of respect and cooperation. Of course, there is a catch - we expect the same from you!

The test will be whether the profession can raise and resolve difficult issues with us, without fear that we will play "gotcha" with you when you do. It is my firm commitment to encourage you all to discuss your issues, raise your concerns, and work together with us to find solutions, without fear of recrimination. Questions and issues posed in good faith will be resolved with you. Practices that reflect venality and disservice to public investors, however, will not be tolerated. To lead us in this effort, we have had the remarkable good fortune to have Bob Herdman serve as our new Chief Accountant. Most of you know Bob, so you know that there are no superlatives that exceed Bob's capabilities and professionalism. I am confident that, with Bob's leadership, the Commission will make sound decisions, in a respectful, affirmative way, not in a demeaning, demanding or demonizing way. You may not always like what we say, but you will always like the way we say it.

At the Commission, we view the accounting profession as our partner in maintaining and developing a financial reporting system that serves as the bedrock of our financial markets. We face so many challenges ahead that we must all recognize that the long and successful history of collaborative efforts between the profession and the SEC needs to be the rule, not an often-unused exception. We and the profession share a common dedication to the public interest, a common commitment to quality financial reporting, and a common pride in succeeding together once again, as we have in the past.

I am committed to the principle that government is and must be a service industry. Now you and I probably share a common background - when I was growing up (in Brooklyn, where else?), I was always taught to be wary of the man who says, "Hi, I'm from the federal government, and I'm here to help you." But, for better or worse, that is exactly what I am saying, and what I hope to achieve.

The AICPA has always evidenced its deep commitment to protecting the public interest by ensuring that investors have access to reliable financial information and by enhancing the credibility of financial reporting throughout the world. Our reporting system is acknowledged to be the best in the world, and has set the standards by which all others are judged. As good as our system is, however, it can, and must, be strengthened and made relevant to our new global world of rapid communication in the common language of business. The new technology available to our global marketplace is blurring, if not eradicating, geographical and other barriers to worldwide competition.

But this is not the competition of the last century. U.S. companies face competition from every corner of the world; investment bankers and U.S. markets no longer have an ironclad grip on capital financing transactions. The Commission is determined to maintain our capital markets as the world's best. The events of the past month have shown that they are the world's most resilient. If we want companies worldwide to list and trade their securities in our markets, we will need to rethink our existing disclosure system - a system that is, in the main, nearly seven decades old. Age alone, does not necessitate change, of course; it is the model of the world on which that disclosure system was predicated that necessitates change.

Our disclosure system is built around the concept of "periodic" disclosure. But, periodic disclosure - that is, disclosure every quarter - implies that information is static, not dynamic, and that allowing companies to wait until the end of a quarter to disclose significant information is the best that we can do for investors. Because our current system focuses principally on so-called "objective" numbers and disclosure, it does not provide nearly enough useful information to investors, for example, the kinds of trend information that corporate managers use continuously to make critical management decisions. By the time the information our system provides is actually available to investors, it is often stale. And, the information currently supplied is not always capable of being deciphered by sophisticated experts, much less ordinary investors. Combined with a hyperactive litigation environment, our disclosure system can appear focused less on disclosure and more on liability avoidance.

The recent phenomenon of "pro forma" financials is indicative of the need to rethink our current system. Unstructured and undisciplined, this form of financial disclosure starts by rejecting the bedrock of all our financial disclosure requirements - Generally Accepted Accounting Principles. Pro forma financials appear to be based instead on the philosophy Robert Frost identified in his Hardship of Accounting:

"Never ask of money spent,
Where the spender thinks it went.
Nobody was ever meant
To remember or invent
What he did with every cent."

We need to consider the void that pro forma statements may be attempting to fill. Investors anxious for current, simplified and comprehensible financial reporting are today more likely to rely upon a company's "pro forma" disclosures than the same company's meticulously prepared, mandated GAAP financial disclosures. One basic impetus behind this new "pro forma" disclosure is often - but unfortunately not always - a legitimate desire by companies to demystify mandated financial statement disclosures, and to encourage shareholders to focus on what management believes are the most salient details to be gleaned from their company's financials. Some of the information in pro forma statements can be useful, such as trend information. The FEI's draft best practices statement on pro forma profit figures is helpful, because it strives to bring structure to this area.

It is axiomatic that comprehensible information is the lifeblood of strong and vibrant markets. The time is right for us to step back and rethink our financial disclosure model, with an eye toward simplifying it so that everyone can understand the fundamentals of every company and find absolute comparability from firm to firm. Technology will play a very exciting role in this process. As we have seen in the post-September 11 world, the Internet is capable of disseminating critical information quickly. It is inherently customized: users can find as much or as little information as they want and quickly. Information is there and it is powerful. In rethinking our existing disclosure system, we should consider how technology can put information into investors' hands more promptly and help investors sort through material in a user friendly way.

I do not know what the ultimate results of our efforts will be - except to say that we will not throw out our current system, and we will be very sensitive to the costs and benefits of any changes. While it is too soon to provide an advance peek, our financial reporting model will continue to focus on core principles such as definition, consistency, verifiability, comparability, credibility and integrity. These great principles, on which our accounting profession has been built, will form the foundation of any reporting system we jointly develop. We will solicit the input of all of our constituencies, and offer full transparency for any decision and conclusions we reach, before we make any changes in our current disclosure regime. But, in my view, at the outset, several attributes are clearly required if we are to enable all our citizens to identify the opportunities that abound in our marketplace, and to avoid the pitfalls that lurk behind every opportunity.

First, given our ability to communicate instantly, we need to consider whether investors are best served by supplementing our existing "periodic" disclosure regime with a new concept - "current" disclosure. In that type of system, public companies might be required affirmatively to disclose unquestionably material information when it arises and becomes available, even if the information is learned before the next-scheduled periodic report is due to be filed.

Second, we need to consider the benefits to investors if public companies are encouraged to disclose trend information more broadly, in a manner that does not create false illusions or expectations, but also does not raise the specter of liability for good faith disclosure, forecasting or future judgments. Conversely, any system would have to preclude even the inadvertent disclosure of proprietary and sensitive competitive information.

Third, we must consider simplifying financial disclosures to make accounting statements useful to, and utilizable by, ordinary investors. In this regard, we should reexamine the language of financial reports and textual disclosures - replacing jargon as the favored method of expression. Technology can, and must, play a role here as well.

Fourth, we should consider whether we can meaningfully update our accounting model. We may need to reconsider whether our accounting principles provide a realistic picture of corporate performance. Our accounting literature is now so voluminous that no one person - except, perhaps, Bob Herdman - can know all of it. While rules can be useful tools in achieving our reporting goals, such as comparability and verifiability, they are not and should not be treated as ends in themselves - rather, the goal is clear, verifiable information. When rules get in the way of providing clear, reliable information to investors, then it is time to change them. We could consider, for example, whether financial disclosure would be more relevant if this picture contains more information about intangibles, and, if so, whether that information would be contained inside or outside financial statements. Of course, we would work closely with FASB in any such undertaking.

There is much to consider and this is only a partial list.

In addition, we need to reach an understanding on accounting principles that will enable foreign issuers to list here and enable investors to purchase their securities with confidence that they understand what they are buying. This is another area in which an open dialogue will be most helpful. As Bob Herdman stated at a recent meeting of the IASB Advisory Council, "There is tremendous value to be gained from the experience and knowledge of other standard setters." In certain significant areas, a pragmatic approach tending toward short-term convergence on important issues may be helpful. The SEC affirmatively desires to see our securities markets flourish and compete successfully with global counterparts, while we make it inviting for global business enterprises to offer and trade their securities on our markets, without sacrificing appropriate investor protections.

I am very excited about this new era and the possibilities that lie ahead. Of course, we have been diverted of late with other issues of more pressing importance. The tragic events of September 11th were deplorable. I wish with all my heart they had never happened. But we should be proud of our Country's Leadership, and the Nation's response to this tragedy. There has been incredible unity throughout the Country, and most of the world. We also have seen tremendous examples of what we can accomplish when public and private sectors team together. I hope this spirit of cooperation is one of the legacies of September 11. Put succinctly, we should approach this new era with a spirit of civility and cooperation that impel all of us to a higher ground.

I encourage your input and look forward to working with you. And now, I'm ready to listen. Thank you.



Modified: 10/22/2001