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entitled 'GAO Forum on Governance and Accountability: Challenges to 
Restore Public Confidence in U.S. Corporate Governance and 
Accountability Systems' which was released on January 24, 2003.



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Comptroller General of the United States:



January 2003:



GAO Forum on governance and accountability:



Challenges to Restore Public Confidence in U.S. Corporate Governance 

and Accountability Systems:



GAO-03-419SP:



GAO Highlights: 



Highlights of GAO-03-419SP:



December 9, 2002:



Governance and Accountability:



Why GAO Convened This Forum:



On December 9, 2002, GAO convened a governance and accountability forum 

to discuss challenges facing regulators, the accounting profession, and 

boards of directors and management of public companies in effectively 

implementing the Sarbanes-Oxley Act of 2002 and related regulatory 
actions 

to improve public confidence in U.S. corporate governance and 

accountability systems. Major accountability breakdowns in recent 
years, 

exacerbated in the last 2 years by the unprecedented massive breakdowns 
and 

bankruptcy of Enron and WorldCom, have contributed to the decline in 
investor 

confidence in U.S. capital markets.  The forum focused on the four 

interrelated areas of corporate governance, the financial reporting 
model, 

the accounting profession, and regulation and enforcement that the 

accountability breakdowns have surfaced as critical areas to be 
strengthened.



Addressing these challenges will involve the public, private, and not-
for-

profit sectors.  In general, there must be the proper incentives, 
transparency, 

and accountability mechanisms in place to ensure the effectiveness of 
any 

system. As a result, these overarching principles were considered in 
connection 

with the issues discussed.



Forum participants included individuals from federal and state 
government, 

the private sector, standards setting and oversight bodies, and a 
variety 

of other interested parties.



Forum Discussion: 



There was general agreement among the participants that the root causes 
of 

the accountability breakdowns are systemic in nature, complex, and will 
require 

leadership and alterations to the current models in each of the four 

interrelated areas to transition to an overall system that is more 
focused on 

protecting the public interest and, in that regard, accountability. 
They also 

agreed that considerable actions have been taken and/or proposed 
towards 

achieving those objectives, but that having the “right people” and 
“stakeholders” 

involved was critical to successfully achieve and effectively maintain 
the 

necessary reforms.  Several other key observations follow:



* Many boards of directors are reassessing their roles and 
responsibilities 

and currently it is difficult to determine what is working and what is 
not 

working.



* Participants agreed there is no “silver bullet” to enhancing the 

effectiveness of boards of directors in their role of overseeing 
management 

and protecting the public interest.  However, for a board to 
effectively 

perform its responsibilities, it must have the “right people” who 
possess 

an “independent spirit” and are “knowledgeable” of the company/industry 
and 

the company’s constituencies.



* Little progress has been made moving toward a more comprehensive 
financial 

reporting model that would include such information as operating and 

performance measures and forward-looking information about 
opportunities, 

risks, and management’s plans.



* The impetus for changing the financial reporting model needs more 

involvement of investors and other users of financial information as 
the 

current model is too driven by those who have historically focused more 
on 

the technical aspects of financial reporting, such as accountants, 
regulators, 

corporate management, and boards of directors.



* An “artful blend” of principle-based and rule-based accounting 
standards, 

as well as a financial reporting model with different tiers of 
reporting that 

provides full disclosure, are fundamental changes needed to improve the 

financial reporting model.



* An “expectation gap” of what an audit is and what users expect 
continues 

to exist, especially with the auditor’s responsibility for fraud 
detection.



* Supplementing the traditional financial statement audit with a 
“forensic 

audit” as well as with a more informative auditor’s report could help 
to 

narrow the “expectation gap.”



* A strong, viable Securities and Exchange Commission is needed to 
maintain 

investor confidence.  Concern was raised that the Commission is not 
fully at 

that status and that funding issues need to be resolved.



* The new Public Company Accounting Oversight Board needs to officially 
get 

up and running with immediate priorities focusing on establishing 
policies 

and procedures for performing its disciplinary, inspection, and 
standard-setting 

functions.



www.gao.gov/cgi-bin/getrpt?GAO-03-419SP.



To view the full report, click on the link above. For more information, 

contact Jeffrey C. Steinhoff, Managing Director, Financial Management 
and 

Assurance, on (202) 512-2600 or steinhoffj@gao.gov.



Contents:



Letter:



Corporate Governance:



Financial Reporting:



The Accounting Profession:



Regulation and Enforcement:



GAO Observations:



Corporate Governance:



Defining the Roles and Responsibilities of the Board of Directors:



Identifying the Right People to Serve on Boards:



Financial Reporting:



Little Has Changed with the Financial Reporting Model:



Current Financial Reporting Model Has Limited Value in Today’s Business 

Environment:



Considerations for Moving toward a Comprehensive Financial Reporting 

Model:



The Accounting Profession:



An Expectation Gap Exists Concerning the Role of Auditing:



More Attention Is Needed on the Quality of Audits:



Auditors Need to Strengthen Their Relationship with Others in the 

Corporate Governance Process:



Regulation and Enforcement:



Providing the SEC with Sufficient Resources to Restore Investor 

Confidence:



Reconsidering the Existing Approach to Enforcement Actions to Restore 

Public Confidence:



Establishing Priorities for the PCAOB:



Appendix:



Appendix I: GAO’s Governance and Accountability Forum:



Participants:



Letter:



January 24, 2003:



The last 2 years witnessed major accountability breakdowns at Enron and 

WorldCom leading to significant restatements of financial statements 

and bankruptcy adversely affecting thousands of shareholders and 

employees. Unfortunately, such failures were not isolated instances as 

other accountability breakdowns in recent years included Qwest, Tyco, 

Adelphia, Global Crossing, Waste Management, Micro Strategy, Superior 

Federal Savings Banks, and Xerox. Although stakeholders of these 

companies were directly affected by the accountability breakdowns, 

these failures have cumulatively contributed to the general shaking of 

investor confidence in U.S. capital markets.



Last year, on February 25, 2002, GAO held a forum to discuss systemic 

issues related to these accountability failures, such as corporate 

governance, accounting and reporting, and auditing.[Footnote 1] Since 

that time, major reform legislation has been enacted--the Sarbanes-

Oxley Act of 2002--and regulators have proposed and/or finalized a 

number of new requirements to address issues related to the failures. 

However, much of the regulatory reform action is in process and 

experience will be needed to evaluate the effectiveness of the changes. 

Moreover, the changes to date do not address all the issues raised by 

the accountability breakdowns.



On December 9, 2002, GAO convened a governance and accountability forum 

for the purpose of identifying past, pending, and proposed actions 

designed to protect the public interest by:



* identifying challenges to improving public confidence in U.S. 

corporate governance and accountability systems to assist regulators, 

the accounting profession, and boards of directors and management of 

public companies to effectively implement the Sarbanes-Oxley Act of 

2002 and other related regulatory actions and:



* placing special interest on steps designed to enhance independence of 

the corporate governance system and enhancing the accounting/auditing 

and attest/assurance models for the 21st century.



Specifically, the forum focused on four interrelated areas--corporate 

governance, the financial reporting model, the accounting profession, 

and regulation and enforcement.



The invited participants were from public, private, and not-for-profit 

entities having extensive experience and subject matter expertise in 

the accounting profession, corporate governance issues, financial 

reporting and disclosure models, auditing, accounting, and related 

regulatory issues. GAO also extended invitations to chairs and ranking 

minority members of relevant Congressional committees. Over 40 invites 

attended. As agreed with the participants, the purpose of the 

discussion was not to reach a consensus, but rather to engage in an 

open, no attribution-based dialogue. Therefore, this report summarizes 

the collective discussion and does not necessarily represent the views 

of any individual participant or GAO.



Corporate Governance:



The participants acknowledged that recent legislative and regulatory 

reforms in response to issues raised by significant restatements of 

financial statements and corporate failures were placing greater 

emphasis on the roles and responsibilities of boards of directors. They 

noted that many boards are reassessing their roles and responsibilities 

and, at this time, it is difficult to determine what is working and 

what is not working. Information on best practices of boards would be 

useful to help improve board operations, for example in areas of 

improving communications with management and using external advisors. 

However, participants generally agreed that there is no “silver bullet” 

for enhancing the effectiveness of boards of directors in their role of 

oversight of management and protecting shareholders.



In discussing the role and responsibilities of boards of directors, 

participants stated that it starts with having the right people on the 

board who are independent, knowledgeable, and ethical and whose 

integrity is unquestionable. The basic roles and responsibilities of 

the board were defined as enhancing shareholder value, assessing and 

monitoring risk, and ensuring management accountability. It was noted 

that boards need to do a better job of identifying their constituencies 

and understanding and addressing their concerns. In addition, board 

members have a responsibility to educate themselves about the company’s 

operations and plans and to seek advice of external experts, when and 

as appropriate.



Participants also focused on the roles of the nominating, compensation, 

and audit committees noting that (1) nominating committees need to 

independently identify candidates for board membership rather than 

“rubber stamp” management’s candidates, (2) compensation committees 

need to focus more on achievements related to the company’s long-term 

strategic objectives and less on short-term accomplishments, such as 

meeting earnings projections, and (3) audit committees need to work 

more effectively with the independent auditor as defined by the 

Sarbanes-Oxley Act of 2002, and not get “tied up” in procedural matters 

concerned with their legal liabilities as committee members.



Participants stressed that having the “right people” on the board was 

just as important if not more so than having the right rules. In that 

respect, it was noted that board members should possess an “independent 

spirit” to ask the tough and probing questions of management. 

Participants stated that the existing system for identifying board 

members might not always be attracting the “right people.” For example, 

it was stated that some board members are serving on too many boards to 

be effective, and that some board members are serving for personal 

incentives that could adversely affect their independence. Some 

participants believed that in today’s environment, potential legal 

liabilities were adversely affecting finding qualified board members. 

Other participants believed that there is no shortage of qualified 

board members willing to serve and that the board needed to look beyond 

the “list of usual suspects.”:



Financial Reporting:



The traditional financial statements, in terms of form and content, 

have not changed much over the years. The financial reporting model 

uses a mixture of historical costs and fair value to present a 

company’s transactions. This model has value but fails to meet the 

broader range of information needs of investors who want more forward-

looking information and data that reflect a company’s overall 

performance, risk profile, and expectations for future performance.



Little progress has been made in moving toward a more comprehensive 

reporting model that would include both financial information 

(financial statements and related disclosures) and nonfinancial 

information (such as high-level operating and performance measures used 

by management and forward-looking information about opportunities, 

risks, and management’s plans). Participants stated that the current 

model is too driven by accountants, regulators, corporate management, 

and boards of directors who have historically focused on the technical 

aspects of financial reporting and are more likely to move slowly and 

cautiously in making changes. As a result, the current model has failed 

to get adequate “traction” to move toward a more comprehensive 

reporting model.



Going forward, participants believed that the impetus for change to the 

financial reporting model would have to come more from the investors 

and other users of financial information who need timely, accurate, and 

useful information to make value and risk judgments about publicly 

traded companies. Also, a safe harbor for preparers and auditors of 

more forward-looking information may be necessary to progress. Other 

suggestions by participants included moving toward more principle-based 

accounting rules to provide more substance versus form in reporting. 

There was general agreement that (1) a combination of principle-based 

and rule-based standards would be needed and (2) principle-based 

accounting rules were not a panacea to solve financial reporting 

problems. In that respect, some participants suggested that standard 

setters first needed to get the basics right with the current financial 

reporting model, for example in areas such as accounting for pensions, 

post-employment benefits, and pro-forma financial statements, to help 

restore investor confidence. It was also suggested that the financial 

reporting model have different layers of reporting, while still having 

full disclosure, coupled with different levels of assurances depending 

on users’ needs. Such layering would allow a user to “drill down” to 

the level of detail needed.



The Accounting Profession:



An expectation gap between what an audit is and is not continues to 

exist, especially with regard to the auditor’s responsibility for 

detecting fraud. Some participants believed a periodic forensic audit 

may be needed to supplement the traditional financial statement audit 

to assist in detecting fraud. However, it was recognized that an audit 

cannot create precision or certainty where such factors do not exist, 

as financial statements are not as precise as users may believe. In 

addition, management and audit committees have important roles and 

responsibilities for internal control to prevent and detect fraud. The 

Sarbanes-Oxley Act of 2002 will help to close the expectation gap 

concerning the effectiveness of internal control over financial 

reporting by requiring management and auditor reporting on these 

controls. Nonetheless, an expectation gap may still exist as users may 

be expecting that an audit addresses internal control over the 

company’s overall operations and performance. Educating users on the 

terminology of internal control reporting, such as reportable 

conditions, was also urged so that the users and capital markets do not 

over react in interpreting the internal control reports.



Participants suggested the need for a new reporting model for auditing, 

a renewed focus on the quality of auditing, and building more effective 

working relationships with the audit committee. It was recognized that 

the standard auditor’s report could be made more useful to users who 

are seeking greater information about what the auditor did and found, 

as well as expanded assurances. Tiered reporting that would provide 

expanded optional assurances was suggested. Participants stated that 

the quality of audits can be adversely affected by “time and fee 

pressures” that lead to less substantive auditing. Caution was also 

urged that rotation of audit partners required by the Sarbanes-Oxley 

Act of 2002 does not have the unintended consequence of adversely 

affecting the quality of audits through loss of experience with a 

particular company’s operations and financial reporting. It was 

recognized that confidence in audits needs to be restored not only for 

investors, but also to attract and retain the best people for the 

accounting profession over time.



Regulation and Enforcement:



A strong, viable Securities and Exchange Commission (SEC) is needed to 

maintain investor confidence in the markets. Participants recognized 

that the SEC’s resources had not kept up with its increased workload 

over the years. This situation has adversely affected the SEC’s ability 

to adequately enforce the securities laws and also its ability to 

invest in technology to more efficiently manage its workload. Some 

participants suggested that the SEC may wish to consider pursuing the 

status to operate independently in setting its own funding levels, as 

the Federal Reserve does. It was also suggested that the SEC needed to 

explore how it is using its enforcement powers, as civil penalties may 

ultimately be hurting shareholders more than those who have violated 

the securities laws. In that respect, the SEC should reexamine the 

amount and targeting of its civil sanctions, its use of criminal 

statutes, and working effectively with the Department of Justice to put 

violators behind bars when appropriate.



The new Public Company Accounting Oversight Board (PCAOB) needs to 

officially get up and running. Suggested priorities for the PCAOB 

included establishing policies and procedures for disciplinary actions 

and conducting inspections of registered public accounting firms. Also, 

decisions need to be made on the setting of standards for auditing, 

quality control, ethics, and independence. It was also suggested that 

the PCAOB should evaluate the recent events that have affected the 

public’s confidence in auditors to consider what further actions may be 

needed beyond those mandated by the Sarbanes-Oxley Act of 2002 and 

recent regulatory changes and proposals. In addition, the PCAOB needs 

to work cooperatively with the SEC and state boards of accountancy. The 

fragmentation of the regulatory system for the public accounting 

profession was not completely dealt with by the Sarbanes-Oxley Act of 

2002. At a minimum, the PCAOB will need to effectively work with the 

other public regulators on enforcement/disciplinary matters. 

Participants generally believed that the provisions of the Sarbanes-

Oxley Act of 2002 should be implemented and assessed before the 

Congress should consider adding any new legislative requirements; 

however, participants agreed that much can and should be done by other 

responsible parties, such as by regulatory and self-regulatory bodies, 

within their existing authority.



GAO Observations:



Restoring public trust and confidence in a manner that can be sustained 

over the long-term will require concerted actions by a variety of 

parties, including accounting and auditing standard setters, 

regulators, management and boards of directors of public companies. The 

Sarbanes-Oxley Act of 2002 provides a strong framework for more 

effective corporate governance and regulation of the accounting 

profession. The SEC and the stock exchanges, along with the Financial 

Accounting Standards Board, have also been actively making progress to 

address a range of issues raised by the accountability breakdowns. 

However, the fundamental principles of providing the right incentives, 

providing adequate transparency, and ensuring appropriate 

accountability are even more important and relevant as the new 

structure and reforms are being established.



It is important to recognize that rules alone will not effectively 

resolve the problems that resulted in massive restatements of financial 

statements and ultimately bankruptcy of certain public companies. The 

Congress cannot legislate nor can regulators establish by rule human 

behavior or integrity to always do the right thing in protecting the 

public’s interest. Public company management needs to set the 

appropriate “tone at the top” and that culture needs to be carried 

throughout the company and exhibited by the board of directors in its 

oversight of management and in its protection of shareholder interests.



The accounting profession needs to vigorously work to rebuild its 

greatest asset--public trust--in order to restore faith in the 

integrity and objectivity of the profession. Accounting and auditing 

standards need to be reexamined to provide enhanced value to users of 

financial statements, related disclosures, and more comprehensive 

business reporting. Users of these products will need to step forward 

to help ensure the value of an enhanced financial reporting model and 

related auditor assurances for the effective functioning of U.S. 

capital markets. Accountants and regulators who have historically 

driven changes to the financial reporting model do not have the same 

set of needs as users of financial statements. In that respect, a 

broader performance and accountability reporting model is needed and 

should include not just financial statements but also performance and 

other information necessary to better assess institutional value and 

risk.



GAO will continue to play a professional, objective, nonpartisan and 

constructive role in assisting the Congress, regulators, and the 

accounting profession as initiatives are proposed, agreed upon, and 

become operational. In that respect, the views of the participants in 

this forum represent considerable experience in the matters discussed 

and represent one way in which an independent party, such as GAO, can 

assist those who define and/or implement policy.



The results of the forum are organized by the major areas of discussion 

and reflect subsequent comments we received from the participants on a 

draft of this report. Appendix I provides a list of the participants.



For additional information on our work concerning corporate governance, 

the accounting profession, financial reporting, and related regulatory 

matters, please contact Jeffrey C. Steinhoff, Managing Director, 

Financial Management and Assurance, on (202) 512-2600 or at 

SteinhoffJ@gao.gov.



I wish to thank each of the participants for taking the time to share 

their knowledge and to provide their insights and perspectives on the 

important matters discussed during the forum. I look forward to working 

with them on these important issues of mutual interest and concern in 

the future.



David M. Walker

Comptroller General

of the United States:



Signed by David M. Walker:



[End of section]



Corporate Governance:



Defining the Roles and Responsibilities of the Board of Directors:



Recent legislative and regulatory initiatives, such as the Sarbanes-

Oxley Act of 2002, Securities and Exchange Commission (SEC) proposals 

and rules, and proposed revised stock exchange listing requirements, 

have addressed weaknesses in corporate governance exposed by the major 

financial reporting issues raised by restatements and corporate 

failures, placing greater emphasis on the roles and responsibilities of 

boards of directors. Although these reforms are not yet fully in place 

and not all issues have been addressed, many corporate boards are 

reassessing their roles. However, participants agreed that there is no 

“silver bullet” and that it is difficult at this time to say what is 

working and what is not working.



Participants believed that it is important to continue working toward 

more effective boards of directors and discussed the importance of 

clearly defining and, in some cases, redefining, the roles and 

responsibilities of the board of directors of public companies as a 

significant measure to help restore investor confidence in the market. 

The board has a responsibility to enhance shareholder value, assess and 

monitor risk, and ensure management accountability. In that respect, 

the operations of the boards should reflect a culture that embraces 

these responsibilities. In addition to focusing on what accountants, 

regulators, and corporate management and boards of directors (the 

“supply side”) should do, boards need to focus more on what investors 

and other users of financial information (the “demand side”) want from 

corporate governance.



In order to fulfill its responsibility of effectively overseeing 

management, the board must have a thorough understanding of the 

company, its business model and related risks, corporate culture, and 

the various interests the board represents. Participants believed that 

the board has a responsibility to educate itself through the use of 

external advisors or other means and not rely solely on information 

provided by management. This will better allow the board to raise 

difficult questions and probe issues to provide input on strategy, 

assess and manage risk, and hold management accountable for its 

actions. The time frame needs to be very clear, as creating value is a 

long-term, not a short-term, process. Investors are not looking for 

quick schemes that endanger the company.



In addition to its responsibility to oversee management, the board also 

has a responsibility to shareholders and other stakeholders of the 

company, such as employees, creditors, and the public. Participants 

believed that boards need to do a better job of identifying their 

constituencies and understanding and addressing their concerns. For 

example, from the shareholders’ point of view, many believe that board 

structures have not been working properly to both protect shareholders’ 

interests and grow share value. We have become a nation of investors, 

and boards need to focus attention on the fact that there has been a 

shift from shareholders not only being individual investors but also 

institutional investors, such as pension plans and mutual funds, which 

are acting as fiduciaries for others. Institutional investors may have 

concerns different from those of individual investors regarding 

expectations for corporate governance and the role of the board of 

directors.



Participants also felt that boards needed to reexamine how they are 

structured and how they operate. Many boards were not perceived to 

function properly for investor protection, which is a negative 

reflection on the entire corporate governance process. To some extent, 

deficiencies in the functioning of boards may have been masked by the 

effect of a flourishing market and may not have been readily apparent 

until market downturns began to occur. It is incumbent upon boards to 

establish processes that are appropriate and effective to restore 

investor confidence rather than relying on a checklist approach to 

corporate governance. Participants believed that information on best 

practices of boards would be useful to help to improve board 

operations. Some best practices include focusing on improving 

communications with management and using external advisors. It was also 

suggested that boards should effectively use the “gatekeepers” 

(auditors and audit committees) for help in the board’s oversight of 

financial management and reporting activities of the company.



Independent committees of the board of directors, such as the auditing, 

compensation, and nominating committees, play an important role in 

effective corporate governance. Audit committees should not only 

oversee both internal and external auditors, but also be proactively 

involved in understanding issues related to the complexity of the 

business, and, when appropriate, challenge management through 

discussion of choices regarding complex accounting, financial 

reporting, and auditing issues. In that respect, the role of the audit 

committee, which in some cases has not been very active or effective in 

its oversight of management or auditors as related to financial 

reporting, is evolving into not just financial management oversight, 

but the overall aspects of the company’s financial reporting, such as 

releases on earnings expectations and quarterly financial reports. In 

addition, the Sarbanes-Oxley Act of 2002 defines a number of audit 

committee responsibilities for the hiring, compensation, and oversight 

of auditors. However, a serious concern exists over whether audit 

committee members are focusing more on procedural matters to protect 

themselves from liability than on improving their competence and 

effectiveness as a committee. Also, compensation committees need to 

understand the implications of compensation to provide incentives for 

management to do the right thing for the company and its shareholders 

versus themselves. Compensation committees need to focus on executive 

performance more related to the company’s long-term objectives rather 

than just short-term business results. In addition, nominating 

committees need to ensure that they identify the right mix of talent to 

do the job and make it clear to candidates what is expected of them as 

a board member rather than merely approving candidates identified by 

management. In that respect, some participants stated that boards are 

often made up of consensus builders and, in that case, a dominant 

member of the board could effectively control the board’s agenda.



Participants also discussed the importance of providing reasonable 

transparency of key information, with regard to both financial 

information of the company and board operations. Boards need to focus 

on enhancing the quality and reliability of financial reporting, 

identifying key elements of disclosure, and ensuring that such 

information is appropriately disclosed to investors and the public. 

Participants also believed that there is a need for better transparency 

of board activities to help restore investor confidence, such as 

reporting on the board’s progress against best practices of leading 

companies[Footnote 2] noted for the effectiveness of their boards. If 

the board is not following best practices, it should report why it is 

not following these practices. The point was also made that successful 

companies have reinvented themselves through two fundamental focuses--

ethics/integrity and respect for people. These behaviors have been 

demonstrated by long-term successful companies.



Identifying the Right People to Serve on Boards:



Participants stressed the importance of independence, both in fact and 

appearance, as essential for the board to be able to fulfill its 

responsibilities. Participants expressed the belief that having the 

right people on the board is just as important if not more so as having 

the right rules under which the board operates. Nominating committees 

need to identify competent individuals who possess an “independent 

spirit” which allows board members to raise difficult questions and 

probe issues related to management’s decisions to ensure that the 

company operates honestly and effectively in the shareholders’ 

interest. Even if board members are independent, they can be 

ineffective as directors if they lack expertise or knowledge relevant 

to the company and its business. Therefore, board members must also be 

willing to educate themselves about the company and the risks it faces 

rather than relying on a checklist mentality of corporate governance 

requirements issued by the stock exchanges.



Participants also noted that unfortunately, as a result of the recent 

major financial reporting issues leading to restatements and, in some 

cases, bankruptcy, board members have focused on the rules and may be 

concerned more about their personal reputation and financial liability 

rather than focusing on protecting shareholders’ interests and adding 

shareholder value. Participants expressed concern that disincentives 

such as legal liabilities, including financial and reputation risks, 

may limit a board’s ability to attract the right people to serve over 

time.



Participants raised the question whether the current system of 

selecting directors needs to be reexamined because the existing system 

from a shareholders’ point of view has not been working to get the 

right people on boards. For example, it was viewed that individuals who 

serve on numerous boards at the same time and/or who serve for personal 

incentives, over time lose the “independent spirit” needed to be an 

effective board member. Participants also stated there is some evidence 

that the recruiting of directors is being adversely affected by the 

current environment that is placing ever-increasing demands on board 

members. Examples were cited of increased premiums for finding 

qualified board members and such searches needing to identify 15 

candidates for a board position just to get one who is willing to 

serve. Other participants commented that there is no shortage of 

qualified people to serve on boards of directors. Many people are 

willing to serve higher goals and the selection process needs to go 

beyond “its usual pool of suspects.” Some participants suggested that 

perhaps serving as a director on a board should be a salaried position 

if shareholders were willing to bear the cost. Other participants 

noted, however, that having salaried board members could be problematic 

because shareholders would have to be able to hire and fire the 

directors that would cause great instability and salaried board members 

may also lack an “independent spirit.”:



Participants also discussed the appropriateness of the chief executive 

officer (CEO) serving as chairman of the board of directors, which 

could present potential conflicts resulting from a single individual 

functioning in these dual roles. Some participants believed that 

separation of the CEO and chairman of the board positions recognizes 

the differences in their roles and eliminates conflicts in functions. 

For example, management is responsible for the operations of the 

company and members of the board in their oversight function should 

have the ability to challenge the CEO in managing the company. Although 

the corporate governance community in the United States may not 

currently be receptive to requiring the separation of the CEO and the 

chairman of the board, such a practice does exist in the United 

Kingdom, where apparently there is more receptivity. Therefore, 

regulators may need to look beyond the United States to consider the 

merit of whether these positions should be held by different 

individuals.



Other participants pointed out that not allowing the CEO to also serve 

as the chairman of the board of directors does not guarantee that 

problems will be avoided if the board lacks an independent spirit to 

question management, citing such examples as Enron, Global Crossing, 

and WorldCom, all of which had a separate CEO and chairman. Some 

separations of the CEO and chairman functions are successful and others 

are not. A CEO may lose authority when the position is too diluted. 

United States firms have been successful because they have had strong 

leaders running them, and an effective and strong board of directors 

can counterbalance a strong executive.



[End of section]



Financial Reporting:



Little Has Changed with the Financial Reporting Model:



Participants commented that traditional financial statements, in terms 

of their form and content, have not really changed over the years. The 

model we have today can be traced all the way back to the early 1970s 

(back to the Trueblood Committee).[Footnote 3] Participants attributed 

this lack of change to the financial reporting model being largely 

driven by the supply side, that is accountants, regulators, and 

corporate management and boards of directors. Participants referred to 

a landmark study on financial reporting by the Jenkins 

Committee[Footnote 4] as evidence that little has changed. Participants 

acknowledged that accounting standards have changed to capture fair 

value in addition to historical value, resulting in a model that is now 

a mixture of the two, whereas the original financial statement model 

was based solely on historical costs. However, the majority of the 

Jenkins Committee’s recommendations never got any “traction” to move 

them forward. The Financial Accounting Standards Board (FASB) has many 

of these items on its agenda. At the same time, there are many other 

items on FASB’s agenda. Participants felt that if stakeholders were 

serious about improving the financial reporting model, a group would be 

established and funded specifically for this purpose. Participants 

stated that such a group was proposed by the Jenkins Committee, but it 

was never established. There needs to be a sense of urgency in order to 

make the investment, commitment, and ultimately change the model. 

However, one participant questioned that since almost 10 years have 

gone by since the Jenkins Committee made its recommendations, is there 

really a demand for change?



Current Financial Reporting Model Has Limited Value in Today’s Business 

Environment:



Some participants agreed that financial statements are an important 

aspect of overall business reporting, but were concerned that the 

existing model focuses too much on financial statements rather than on 

the broad range of information that is needed by investors to make good 

financial decisions. Other participants commented that financial 

statements that exist today, while they may be useful to some, are not 

used very much by investors. Financial statement disclosures are 

difficult to understand, as though written in a “foreign language.” 

Participants stated that the disclosures must be made more 

understandable.



However, there is a lot of dialogue taking place today concerning 

business reporting. For example, regulators are asking what should be 

disclosed, what is the purpose of financial statements, and how useful 

are they? What are analysts doing with financial statements? What do 

analysts use to value stock? Are they using financial statements? If 

so, what information in the financial statements are they using to 

value stock? What additional information would assist them in more 

accurately valuing stock? Participants noted the need to report 

information about the business model, as users of financial reports 

first must better understand the entity’s business model in order to 

comprehend financial and nonfinancial information about the entity.



Financial statements today focus on reliability much more than on 

relevance. Historical information is reliable, but not necessarily 

relevant. Fair value information is evolving but improvements in 

reliability are needed. Participants agreed that reliability is 

fundamental to useful business reporting; however, participants felt 

that financial reporting would be much more useful if it were expanded 

to include key performance indicators and measures (including 

disclosures on how the key measures were chosen). Participants raised 

questions about the gaps in reporting of intangibles. For example, in a 

knowledge-based economy, one could argue that the most important assets 

are people (human capital); however, current financial reporting 

records investments in people as an expense and liability. Participants 

agreed that it would be useful if financial reporting recognized people 

as assets, but raised the difficulty in valuing human capital. 

Participants generally agreed that there is a demand for both 

historical and fair value reporting. However, participants felt that 

FASB needed to better differentiate between the two. In that respect, 

some participants felt that FASB is marching toward a “fair value” path 

and cautioned that the fair value reporting model is not always good 

and needs to be used only where it really makes sense.



Participants acknowledged that financial reporting, in addition to 

being largely driven by the accounting profession, also has been driven 

by the legal system, resulting in an overload of information that is 

too complex and not easily understood. Disclosures that run on for 

pages are not understandable. Experts are needed to interpret the 

disclosures and sometimes even they cannot decipher what is being 

reported. However, participants understand that accountants are taking 

a risk when they issue an opinion on the financial statements. The 

litigious environment has also led to a “check box” mentality where it 

is more important to follow the accounting rules when preparing 

financial statements than actually reporting the economic substance of 

the transaction.



Considerations for Moving toward a Comprehensive Financial Reporting 

Model:



Participants generally agreed that financial statements are not 

designed to serve all business needs and that other types of business 

reporting are needed to assist investors and other users in making 

decisions. Participants also generally agreed that the demand side 

(investors and other users of financial information), has not been as 

involved as it needs to be to make financial reporting more meaningful 

and understandable. More needs to be done to convince investors and 

other users to demand different reporting. Voluntary disclosures are 

rare and only in industries that demand this type of information. The 

voluntary process has resulted in some movement toward better 

reporting, but it is very slow moving. Change is going to have to come 

from the demand side and is going to require a lot of leadership from 

very influential people. Input from advisory councils may also be 

beneficial for developing a broader business reporting model. While it 

is essential that a new model not be driven totally by the supply side 

(accountants, regulators, corporate management, and boards of 

directors), there cannot be a disconnect between the supply and demand 

sides.



Participants also cautioned that we need to move forward patiently 

toward a new comprehensive reporting model. It was viewed that forward, 

real-time, qualitative information, all of which would be helpful in 

predicting future cash flows, may require a safe harbor from liability. 

It is also important to keep in mind the role of the regulator in this 

process since the public needs to have confidence in the regulators to 

enforce rules. Regulators may not be totally supportive of a more 

comprehensive business model because they are concerned that the 

information would be based on a lot of judgment and, therefore, lack of 

precision, which could make enforcement of reporting standards 

difficult.



Participants discussed the lack of investor confidence in the current 

financial reporting model and the need to first improve the reliability 

of financial reporting before adding any new reporting. First, get the 

basics right, that is, the “blocking and tackling” of financial 

reporting. Participants cited accounting for pensions, postemployment 

benefits, and pro-forma financial statements as examples of accounting 

treatments that need attention before building on any new reporting 

requirements. Issuers of financial statements who are inappropriately 

bending the current accounting rules need to know they cannot get away 

with this anymore.



Participants discussed the merits of replacing accounting rules with 

principle-based standards to promote more substance versus form in 

reporting. However, some participants cautioned that principle-based 

standards should not be viewed as a panacea to solve the problems with 

financial reporting and could lead to an undesirable situation where 

you would not have comparability or agreement as to the treatment of 

similar transactions. Also, stakeholders may not interpret principles 

consistently, and it is important for stakeholders to have the same 

conceptual framework as preparers when interpreting a principle. In 

addition, you would need the right kind of implementation guidance to 

carry out a principle. Participants agreed that while accounting rules 

are also needed, there should not be such blind adherence to accounting 

rules to result in reporting form over substance. Participants offered 

that an “artful” blend of both principles and rules would be useful. 

The Employee Retirement Income Security Act (ERISA) was cited as an 

example of an approach that blended both a principles-based (general 

fiduciary standards) and rules-based (prohibited transactions) 

approach to an important issue (retirement security).



Participants also discussed the idea of exploring different levels or 

layers of reporting while still having full disclosure. Such layering 

will allow users to get only the information they need. For example, 

the basic level of reporting would include performance and risk data, 

an industry layer could include benchmarking information, and a company 

specific layer could include information management feels it is 

appropriate to disclose that is not contained in other layers of 

reporting. Along with this idea is the need to explore different levels 

of verification or assurances by independent parties based on the 

users’ need for such verification or assurances. For example, what type 

of assurances are needed for nonfinanical information and can auditors 

provide such assurances? Overall, it is critical to get the demand side 

(investors and other users of financial information) to weigh in on 

what information they need and want. It is not realistic to only expect 

the supply side (accountants, regulators, and corporate management and 

boards of directors) to come up with the best solutions for improving 

the financial reporting model.



Although time did not permit its discussion, financial literacy was 

raised as an important issue that needs addressing. Participants agreed 

that there clearly is a need for more education and for investor 

assistance in this area.



[End of section]



The Accounting Profession:



An Expectation Gap Exists Concerning the Role of Auditing:



The participants discussed the auditor’s responsibility for detecting 

fraud and the meaning of the assurances provided by the auditor’s 

report on the financial statements. These issues have continued to 

plague the accounting profession since the 1970s despite actions taken 

by the profession to narrow the so-called “expectation gap” between 

what the public expects or needs and what auditors can and should 

reasonably be expected to accomplish.[Footnote 5] Users often equate a 

clean audit opinion with a seal of approval that fraud does not exist 

and annual reports are both complete and accurate. However, auditors do 

not provide absolute assurance and the scope of the opinion is limited 

to certain financial-related information. One participant explained 

that there are a lot of things an audit cannot do. For example, an 

audit cannot create certainty in an environment where there is no 

certainty. An audit cannot guarantee precision in an environment where 

estimates are made. An audit cannot ensure that stock prices will be 

achieved. We cannot lose sight of the fact that in a risk-taking 

environment businesses do fail. Auditing is not the “be all” and “end 

all” to solve the problems in the business place. However, participants 

generally agreed that while the accounting profession needs to take 

additional steps to address any misunderstanding as to the limits of an 

audit, there is room to improve the audit process and auditor 

reporting.



Participants recognized that management has the responsibility for 

preventing and detecting fraud. At the same time, they agreed that it 

is fair to expect auditors to provide “reasonable assurance” of 

detecting any material fraud. Participants discussed the need to 

mitigate the opportunity and risk for fraud by educating boards of 

directors and ultimately changing the tone at the top of the company. 

Some participants liked the idea of auditors periodically performing 

more of a “forensic-type” audit[Footnote 6] in which auditors would be 

more skeptical of management, but cautioned that this approach could 

have a negative effect on audit quality because management and the 

auditor might not work as actively together on an ongoing basis. 

Participants agreed that an adversarial relationship between the 

auditor and management would not be constructive in that the 

cooperation of management is critical to both an effective and 

efficient audit. However, participants agreed that auditors should be 

more skeptical and should say no and walk away from clients more often 

than they currently do. The participants applauded the deterrent put in 

place by the Sarbanes-Oxley Act of 2002, which sends a signal that 

persons who prepare or attest to fraudulent financial statements can go 

to jail. This deterrent has raised awareness and conscientiousness 

within all levels of the financial reporting and auditing process as to 

the significance of their job in preparing financial statements.



Participants generally viewed the new internal control reporting 

requirements of the Sarbanes-Oxley Act of 2002 as a good requirement. A 

participant added that earlier mandatory internal control reporting 

probably would have surfaced problems with ineffective boards of 

directors and audit committees.[Footnote 7] However, participants 

cautioned that reporting only on internal controls over financial 

reporting could lead to more of a gap in what investors perceive as the 

scope of the auditor’s work. For example, users of financial reports 

are interested in a company’s overall performance and outlook and, 

accordingly, would be interested in the effectiveness of internal 

control over the process that produces that data. In that respect, 

participants also discussed the need for auditors to expand their focus 

on internal control to include controls over performance data in order 

to better meet the needs of investors for assurances on financial 

statements and for understanding all business risks. Also, new 

information not only needs to be useful, but also needs to be 

understood by investors. For example, investors do not understand 

terminology such as “reportable conditions,”[Footnote 8] which could 

result in investors over-or under-reacting to problems. Participants 

also suggested that the one-page audit opinion should be replaced with 

“tiered” reporting of audit results, where firms can obtain the level 

of assurance they desired. For example, in today’s environment, audit 

committees would most likely ask for the deepest “tier” of audit 

reporting to better carry out their responsibilities.



Participants generally agreed that the profession needs a new reporting 

model for audits to eliminate the misunderstanding as to what an audit 

of financial statements is and what its limits are. The participants 

acknowledged that the financial audit process is largely driven by the 

accounting profession and suggested that the profession needs to spend 

more time understanding what the demand side (investors and other users 

of financial information) needs and wants from auditors. However, the 

participants recognized that one of the big obstacles for innovation in 

reforming the audit process and auditor reporting is the auditor’s fear 

of legal liability. One participant added that the current regulatory 

structure has dampened the profession’s spirit for innovation.



More Attention Is Needed on the Quality of Audits:



Participants commented that there are good solid audits being 

performed; however, some participants expressed concern that overall, 

time and fee pressures both from company management and from within the 

auditing firms have resulted in less and less auditing, particularly 

less substantive testing of transactions. In that respect, the 

financial audit is considered the “loss leader” in many audit 

organizations with a focus on cutting hours and costs and as a means to 

obtain consulting engagements. Some participants also pointed out that 

most of the auditing is currently being performed by inexperienced 

auditors. Further, several participants cautioned that the auditor 

rotation rules currently being developed by the regulators could 

further reduce audit quality by resulting in a loss of continuity, 

experience, and technical knowledge on an audit.



Participants felt that the profession needs to elevate and restore the 

importance and the quality of the financial statement audit. 

Participants stated that the accounting profession needs to candidly 

discuss what it is doing to improve the audit process to restore public 

trust. Further, a growing concern for the profession is its ability to 

attract and retain the best people over time. It was stated that 

auditors frequently leave the profession early in their careers to join 

clients, and that over half of CPAs are not practicing public 

accounting. One participant added that the interest in the profession 

over the past 10 years has dropped by half, although the recent 

publicity stemming from Enron and WorldCom, albeit negative, has 

actually sparked increased interest in the profession. Participants 

generally agreed that the profession needs to aggressively address the 

issue of attracting the best people to the profession.



Auditors Need to Strengthen Their Relationship with Others in the 

Corporate Governance Process:



Participants generally agreed that improvements in corporate governance 

will bring about improvements in auditing. It was viewed that one of 

the more positive outcomes of the Sarbanes-Oxley Act of 2002 is the 

relationship the act establishes between the auditor and audit 

committee by making the audit committee in essence the client, versus 

company management. Historically, participants felt that auditor 

communication with audit committees has been variable. Participants 

generally agreed that auditors should be able to speak more freely, 

openly, and honestly with:



audit committees on risks facing the company and on the appropriateness 

of the company’s accounting policies. Audit committees should be 

demanding more information from auditors and asking auditors if they 

have sufficient resources, both in number and expertise, to adequately 

perform the audit. Audit committees and auditors together can become 

good safeguards for investors. A point was also made that the role of 

the internal auditors, specifically their cooperation and coordination 

with the external auditors and the board of directors, should be 

improved, which ultimately could improve the quality of financial 

reporting and the external audit. In addition, disclosures, such as 

those required to be reported to the SEC on Form 8-K,[Footnote 9] 

should be improved to be more transparent and helpful to regulators in 

determining the reasons and circumstances surrounding auditor changes.



[End of section]



Regulation and Enforcement:



Providing the SEC with Sufficient Resources to Restore Investor 

Confidence:



Participants uniformly agreed that the nation needs a strong, viable 

SEC to instill investor confidence in our markets. The SEC plays an 

important role through its responsibilities to regulate activities of 

public companies and their auditors and to conduct related enforcement 

actions, as well as to establish and sustain the new Public Company 

Accounting Oversight Board (PCAOB) established by the Sarbanes-Oxley 

Act of 2002 until the PCAOB is certified by the SEC as ready to 

operate. However, participants noted the SEC may not have been provided 

with sufficient resources to achieve such results. For example, 

participants stated that the SEC has recently been operating on a 

budget of about $450 million.[Footnote 10] It was noted that although 

the Senate authorized about $750 million for the SEC for fiscal year 

2003, an amount that the Senate believed would be sufficient to 

implement provisions of the Sarbanes-Oxley legislation to restore 

investor confidence, the Office of Management and Budget only proposed 

a funding level of about $500 million.



Participants believed that a lack of sufficient funding provides 

constraints in two areas that are vital to the SEC--staffing and 

technology. To carry out its important function of restoring investor 

confidence, the SEC may not always be able to attract the right people 

and retain them under the existing structure. In addition, to 

effectively conduct its reviews of public companies, the SEC will 

require a large technology investment and related training of SEC 

staff. Participants questioned whether, given the current funding 

restraints, existing models for generating revenues for the SEC were 

workable. Participants believe that models that provide temporary 

resources to SEC, such as through fellowships from the accounting 

profession, are not the answer to its funding and staffing problems and 

can raise conflict of interest issues. Accordingly, some participants 

believed that it is time to think about having the SEC operate 

independently in setting its own funding levels, like the Federal 

Reserve, and to let the SEC determine and set its own fees, with 

industry participation, for the activities it conducts. If the SEC were 

able to establish its own annual budget and collect fees, the SEC would 

be better able to conduct its activities, attract the best people, and 

enhance its technology to more efficiently and effectively operate. 

Participants noted that even if the SEC were independent regarding its 

funding, the Congress could still oversee the SEC.



Reconsidering the Existing Approach to Enforcement Actions to Restore 

Public Confidence:



Participants discussed the importance of effective SEC enforcement 

actions as a means of restoring investor confidence in the markets. The 

SEC tries to create deterrence and be measured in imposing sanctions. 

If there are no clear negative consequences to securities violations or 

wrongdoing, investors may perceive that the system is not working 

properly. Although the SEC has an array of sanctions available, all SEC 

enforcement actions are civil based, which ultimately results in 

shareholders bearing the burden of the costs of legal proceedings and 

sanctions. Some participants believed that shareholders were benefiting 

from litigation and questioned the appropriateness of civil-based 

enforcement actions, citing the fact that shareholders have already 

been financially hurt by the actions that lead to the sanctions. 

Participants also discussed whether the right people were being held 

accountable and whether the SEC’s civil-based enforcement actions were 

sufficient to discourage the bad actors.



Participants raised questions about whether the SEC should reconsider 

the amount and targeting of its civil sanctions and more frequently use 

other types of remedies, such as criminal sanctions, to hold people 

accountable for wrongdoing. In that respect, participants noted that 

the SEC should be effectively using the option of referring cases when 

appropriate to the Department of Justice for investigation for possible 

violation of criminal statues. Participants questioned how well that 

process was working.



The Sarbanes-Oxley Act of 2002 provides for additional enforcement 

authority for both the SEC and the newly created PCAOB. In response to 

the question of whether the Sarbanes-Oxley Act of 2002 should be 

revisited, participants believed that although ultimately some 

technical changes to the act may be necessary, the SEC and the PCAOB 

needed to move forward to implement the act. Also, the SEC and the 

PCAOB should explore integrating their activities to get the new 

enforcement mechanisms in place to determine how well they may address 

some of the issues discussed.



Establishing Priorities for the PCAOB:



Participants believed that the PCAOB needs to be quickly set up and 

establish its priorities so it can begin the difficult task of 

restoring public confidence. Many participants believed that the 

PCAOB’s most immediate priority should be implementing a disciplinary 

process to let the public know that failed auditing will be dealt with 

and trust can be restored. The disciplinary process needs to have the 

necessary incentive measures to serve as preventative measures before 

problems can become more serious. Other immediate priorities should be 

setting up an inspection function of auditors that audit SEC 

registrants and determining how standards that govern the work of the 

accounting profession, such as auditor independence rules and standards 

for conducting audits, should be set. Some participants believed that 

the existing inspection process could be improved by looking less at 

the accounting firms’ internal systems for quality control and more at 

the quality of the judgments that were made by the auditors in 

conducting the audit.



Participants also believed that the PCAOB also needs to evaluate the 

events that have lead to the lack of public confidence in the markets 

and take a fresh look going forward. For example, the PCAOB should 

consider the reasons the accounting profession is organized the way it 

is, including federal/state regulation such as the licensing structure, 

reasons accounting firms practice as partnerships, the effects of 

private litigation, and the structure and role of the state boards of 

accountancy. Participants also noted that the PCAOB should take 

advantage of the fact that under the current environment no one has 

more motivation for getting “bad auditors off the street” than the 

accounting firms themselves. The accounting firms do remove “bad 

auditors,” but this is accomplished without publicity so that their 

efforts are not well known.



Participants also believed that a challenge facing the new PCAOB will 

be dealing with the complex relationship between federal and state 

governments involved in regulating the accounting profession.[Footnote 

11] Participants identified the need for better communication and 

sharing of information between federal entities such as the SEC and the 

new PCAOB and the state licensing and regulating entities. For example, 

states are often hampered in their ability to take appropriate 

regulatory actions because they do not get referrals from the SEC and 

the AICPA, or because those organizations have made the information 

confidential. Also, ongoing litigation impedes information flow. In 

addition, participants stated that some states have been independently 

trying to address accountancy reform and, in some cases, have proposed 

reforms that have gone further than the Sarbanes-Oxley Act of 2002 

because they feared that the federal government would not act. This has 

led to additional inconsistency in requirements between states.



Participants encouraged the SEC and the PCAOB to work closely with the 

states in taking actions to restore public confidence and ensure an 

appropriate degree of consistency needed for viable interstate 

commerce. Some participants suggested that the PCAOB consider the 

banking industry to provide examples of the integration of federal and 

state regulation and lessons learned about that structure from the 

savings and loan and banking crises. Participants noted that with 

increased globalization of businesses’ operations and the need for 

harmonization of accounting and auditing standards, as well as the need 

for preemptive measures, there may be more federal involvement such as 

the Sarbanes-Oxley Act of 2002.



[End of section]



Appendixes:



Appendix I: GAO’s Governance and Accountability Forum:



Participants:



Tom L. Allen: Chairman, Government Accounting Standards Board:



Lawrence F. Alwin: President, National Association of State Auditors, 

Comptrollers, and Treasurers:



Raymond L. Bromark: Partner, Pricewaterhouse Coopers, LLP:



Roel C. Campos: Commissioner, U.S. Securities and Exchange Commission:



Richard E. Cavanagh: President and CEO, The Conference Board:



Peter Clapman: Senior Vice President and Chief Counsel

Corporate Governance, TIAA-CREF:



James L. Cochrane: Senior Vice President, Strategy and Planning

New York Stock Exchange:



J. Michael Cook: Retired Chairman and CEO, Deloitte & Touche, LLP:



Jackson Day: Acting Chief Accountant, U.S. Securities and Exchange 

Commission:



Daniel Dustin: Executive Secretary, New York State Board for Public 

Accountancy:



Michael Emen: Senior Vice President Listing Qualifications, NASDAQ:



William Ezzell:	Chairman, Board of Directors, American Institute of 

Certified Public Accountants:



Stephen R. Ferrara: Assurance Practice Leader, BDO Seidman, LLP:



Randy G. Fletchall: Vice Chairman, Professional Practice Ernst & Young, 

LLP:



Timothy P. Flynn: Vice Chairman-Assurance Services, KPMG, LLP:



Carl R. George: CEO, Clifton Gunderson, LLP:



Gaston L. Gianni, Jr.: Vice Chairman, President’s Council on Integrity 

and Efficiency:



G. William Graham: Partner, Grant Thornton, LLP:



Holly Gregory: Partner, Weil, Gotshal, and Manges, LLP:



Barbara Hafer: Treasurer, State of Pennsylvania:



Steve Harris: Staff Director/ Staff Director/Chief Counsel Committee on 

Banking, Housing and Urban Affairs:



Robert H. Herz: Chairman, Financial Accounting Standards Board:



Janice Hester-Amey: Principal Investment Officer, CalSTRS:



Wayne A. Kolins: National Director of Assurance, BDO Seidman, LLP:



Robert J. Kueppers: National Managing Partner of Professional Practice, 

Deloitte and Touche, LLP:



Congressman John J. LaFalce: Ranking Minority Member, Committee on 

Financial Services, United States House of Representatives:



Phillip B. Livingston: President and CEO, Financial Executives 

International:



Robert Mednick: Retired Managing Partner--Professional and Regulatory 

Matters, Andersen Worldwide:



Barry C. Melancon: President and CEO, American Institute of Certified 

Public Accountants:



Jack Miller: Vice Chairman, KPMG, LLP and Chairman, Comptroller 
General’s 

Advisory Council on Government Auditing Standards:



Charles D. Niemeier: Acting Chairman, Public Company Accounting 
Oversight 

Board:



Nell Minnow: Co-Founder, The Corporate Library, Former Partner, Lens 

Investment Management:



Robert A.G. Monks: Founder, Institutional Shareholder Services, and 

Former Administrator, Pension and Welfare Benefits Administration, U.S. 

Department of Labor:



Aulana L. Peters: Retired Partner, Gibson, Dunn and Crutcher, Former 

Commissioner, U.S. Securities and Exchange Commission:



Gary John Previts: Associate Dean, Undergraduate Programs, Department 
of 

Accounting, Case Western Reserve University:



Charles J. Schoff: Chairman, New York State Board for Public 
Accountancy:



Navid Sharafatian: President, California Board of Accountancy:



A.W. “Pete” Smith Jr.: President and CEO, Private Sector Council:



Stanley Sporkin: Former Director of Enforcement, U.S. Securities and 

Exchange Commission and Former Judge for the U.S. District Court of the 

District of Columbia:



Mike Starr: Managing Partner, Assurance and Advisory Services, Grant 

Thornton, LLP:



Richard Steinberg: Senior Partner and Corporate Governance Leader, 

PricewaterhouseCoopers, LLP:



F. Michael Taylor: President, National Association of Local Government 

Auditors:



William D. Travis: Managing Partner, McGladrey & Pullen:



James S. Turley: Chairman and Chief Executive Officer, Ernst and Young, 

LLP:



Paul L. Walker: Board of Center for Continuous Auditing Research Fellow 

and Associate Professor, University of Virginia:



FOOTNOTES



[1] U.S. General Accounting Office, Highlights of GAO’s Corporate 

Governance, Transparency and Accountability Forum, GAO-02-494SP 

(Washington, D.C.: March 2002).



[2] One source of information on best practices of leading companies is 

the 1999 Report and Recommendations of the Blue Ribbon Committee on 

Improving the Effectiveness of Corporate Audit Committees.



[3] The Trueblood Committee (named after the chairman), a group formed 

by the American Institute of Certified Public Accountants (AICPA) to 

study the objectives of financial reporting, recommended financial 

statements that set forth the objectives of financial accounting and 

reporting and provided a conceptual framework for deliberations about 

accounting matters. (See the AICPA’s Objectives of Financial 

Statements, Report of the Study Group on the Objectives of Financial 

Statements, October 1973.)



[4] The Jenkins Committee (named after the chairman), a group formed by 

the AICPA in 1991 to address concerns over the relevance and usefulness 

of financial reporting, recommended in its 1994 report that standard 

setters develop a comprehensive reporting model that includes both 

financial information (financial statements and related disclosures) 

and nonfinancial information (such as high-level operating data and 

performance measures used by management, management’s analysis of 

changes in financial and nonfinancial data, and forward-looking 

information about opportunities, risks, and management’s plans). (See 

the AICPA’s Improving Business Reporting--A Customer Focus: Meeting the 

Information Needs of Investors and Creditors, Comprehensive Report of 

the Special Committee on Financial Reporting, 1994.)



[5] We reported on this issue in The Accounting Profession: Major 

Issues: Progress and Concerns (GAO/AIMD-96-98, Washington, D.C.: Sept. 

24, 1996).



[6] The concept of forensic auditing was recently suggested by the 

Panel on Audit Effectiveness to improve the likelihood that auditors 

will detect fraudulent financial reporting (see The Panel on Audit 

Effectiveness Report and Recommendations, Aug. 31, 2000). Forensic 

auditing, as explained by the Panel, would require that auditors 

undertake an attitudinal shift in their degree of skepticism and 

presume the possibility of dishonesty at various levels of management, 

including collusion, overriding of controls, and falsification of 

documents.



[7] This comment was based on the standards and guidance contained in 

Internal Control-Integrated Framework, published by the Committee of 

Sponsoring Organizations (COSO) of the Treadway Commission, for 

reporting on the effectiveness of internal control, which addresses a 

company’s control environment including boards of directors and audit 

committees.



[8] The AICPA’s Generally Accepted Auditing Standards defines a 

reportable condition as a significant deficiency in the design or 

operation of internal control that could adversely affect the entity’s 

ability to record, process, summarize, and report financial data 

consistent with management’s assertions in the financial statements.



[9] An SEC registrant must file a Form 8-K when its external auditor 

resigns, declines to stand for reelection, or is dismissed.



[10] Prior GAO reports and testimonies discuss SEC resource issues and 

the need for the SEC to improve its strategic planning to more 

effectively manage its operations and limited resources. See U.S. 

General Accounting Office, SEC Operations: Increased Workload Creates 

Challenges, GAO-02-302, Washington, D.C.: Mar. 5, 2002) and U.S. 

General Accounting Office, Protecting the Public’s Interests: 

Considerations for Addressing Selected Regulatory Oversight, Auditing, 

Corporate Governance, and Financial Reporting Issues, GAO-02-601T, 

Washington, D.C.: Apr. 9, 2002).



[11] Our report, The Accounting Profession: Status of Panel on Audit 

Effectiveness Recommendations to Enhance the Self-Regulatory System 

(GAO-02-411, Washington, D.C.: May 15, 2002) discusses the various 

bodies that regulate the accounting profession.



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