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Restoring Trust After Recent Accountability Failures:

Governing the Corporation:

Institute of Governing, Public Policy, and Social Research:

Queen's University:
Belfast, Northern Ireland:

The Honorable David M. Walker:
Comptroller General of the United States:

September 21, 2004:

High Profile Accountability Failures Around the World:

* Enron;

* WorldCom;

* Tyco;

* Global Crossing;

* Quest;

* Adelphia;

* CitiGroup;

* Tenet;

* Parmalat;

* National Irish Bank;

* Delorean;

* Royal Ahold, NV;

* Lernout and Hauspie;

* Superior Federal Savings Bank;

* Micro Strategy;

* Arthur Andersen, LLP;

* ImClone;

* Waste Management;

* Xerox;

* Health South;

* CreditSuisse First Boston;

* Fiat;

* Yukos;

* Dexia;

* Elan;

* Adecco SA;

* Seibel Systems;

* Lucent Technologies.

Accountability Breakdowns:

* The major accountability failures over the last several years were 
not isolated instances. Many were the result of significant structural 
weaknesses in institutional corporate governance and accountability 
models combined with a lack of personal ethics and integrity.

* These failures have shaken investor confidence in U.S. and global 
capital markets and in financial reporting and auditing matters. They 
have resulted in:

-- loss of investor confidence;

-- loss of tens of billions of dollars in investor capital;

-- loss of livelihood/retirement for tens of thousands of employees;

-- significant impact on national economies;

-- significant impact on public trust in a variety of institutions and 
parties;

* Forces that led to the corporate scandals and audit failures include:

-- ineffective governance systems;

-- ineffective regulation and oversight of the accounting profession;

-- inadequate accounting and auditing standards;

-- inadequate attest and assurance procedures;

-- financial managers, along with their legal and financial advisors, 
working to achieve certain reporting results;

-- inappropriate and unreasonable executive compensation arrangements;

-- confusion over who the auditors work for;

-- auditors' services to clients that impaired independence;

-- auditors and financial professionals doing what was minimally 
required and fighting tighter standards;

-- individual and institutional greed.

Ongoing Reforms in the U.S.:

* The Sarbanes-Oxley Act of 2002 included reforms in corporate 
governance and the accounting profession that were intended to:

-- improve corporate financial reporting and internal control;

-- provide management certifications of financial reports and internal 
control assessments;

-- strengthen audit committees;

-- change the relationship between the auditor and client;

-- improve auditor independence;

-- provide additional auditor assurance over internal control;

-- provide oversight and regulation for auditors of publicly traded 
companies through creation of the Public Company Accounting Oversight 
Board (PCAOB);

July 2004 marked the two-year anniversary of the passage of the 
Sarbanes-Oxley Act.

Benefits are being seen in the following areas:

-- enhanced public trust and confidence in the capital markets;

-- transformation of many aspects of corporate governance;

-- needed changes in auditor relationships with clients;

-- more active and effective audit committees;

-- increased CEO and CFO attention to financial reporting;

-- internal control requirements providing beneficial results and 
adding value for many companies;

-- PCAOB inspections of audit firms identifying areas where significant 
future improvements can be made in audit quality;

-- entities not covered by the Act considering implementing similar 
practices;

Companies are encountering the following challenges:

-- many companies are finding the internal control requirements to be 
more difficult and costly to implement than expected;

-- implementation timeframes have presented difficulties for some 
companies;

-- roles and workloads for members of boards and audit committees are 
greatly expanded;

Moving forward:

-- although progress is being made, it will take some time before we 
realize the full benefits of the Act;

-- a comprehensive review of the effectiveness of the Act will be 
needed after at least one full implementation cycle;

-- other issues of modernizing financial reporting and auditing will 
need to be addressed by standards setters.

Impact of U.S. Reforms in Other Countries:

Non-U.S. auditing firms and corporations have identified the following 
challenges:

* potential conflicts between U.S. and home-country laws and 
regulations;

* administrative burden of meeting requirements of both U.S. and home-
country regulators;

* inspections by U.S. regulators resulting in dual oversight;

* implementation timeframes difficult for some firms;

* delisting requirements make it difficult to withdraw from U.S. 
exchanges;

Ongoing progress:

* PCAOB working cooperatively with non-U.S. regulators and placing 
reliance on those regulators;

* constructive dialogue and discussions on auditing oversight with 
European Commission, European countries, Canada, Australia, Japan, and 
others;

* recognition of home-country laws and regulations in tailoring 
requirements for non-U.S. corporations and auditors.

* accommodations for auditing firms: extended deadlines and 
registration flexibility;

* accommodations for corporations, including;

-- interim reporting on the basis of home-country rules;

-- alternatives for satisfying audit committee requirements;

-- extended compliance deadlines, e.g. internal control reporting;

* movement toward harmonized international financial reporting 
standards;

* landmark European Commission legislative proposal that contains 
requirements similar to Sarbanes-Oxley for corporate governance and 
auditing;

* European Commission efforts to develop common oversight approach for 
European Union financial services market.

Corporate Governance Challenges:

* Corporate and other governing boards must take steps designed to:

-- maximize value to shareholders over time;

-- manage risks for stakeholders;

-- hold management accountable for results both currently and over 
time;

* Investors outside the company should have the information they need 
to clearly judge corporate performance and to compare one company's 
performance and practices against others.

* Corporate leadership must establish a climate of integrity and 
transparency at the top that reaches to every level of the 
organization.

* CEOs must remember that they are stewards, not owners, of the 
organization and are ultimately responsible for:

-- hiring the right type of people with the right skills and values;

-- creating/demanding accountability throughout the organization;

-- ensuring that ethics and values are an integral part of the 
workplace, i.e., "tone at the top";

* Everyone at every level should understand the role and function of 
the organization, how decisions are made, how decisions should be 
executed, and where to go if they believe that illegal or inappropriate 
acts have occurred.

The Future Financial Reporting Model:

In modernizing financial reporting, we need to:

* review and revise the existing accounting and financial reporting 
model to reflect several dimensions:

-- meaningful financial reporting that is useful, timely, and relevant;

-- generic provisions;

-- industry information;

-- entity-specific information (i.e., value and risk);

* recognize the difference between certain types of financial and other 
information:

-- historical cost;

-- readily marketable assets;

-- non-readily marketable assets;

-- projection information;

-- performance information.

The Future Audit Model:

In modernizing audit reporting we need to:

* determine whether "generally accepted" is the appropriate framework 
versus "authoritative accounting principles" that could be used when 
the "generally accepted" framework may not provide a full and fair 
representation in the view of the auditor;

* review and revise the existing audit reporting model to accomplish at 
least two objectives:

-- recognize that the opinion should address whether the financial 
statements are fairly presented in all material respects and prepared 
in accordance with authoritative accounting principles promulgated by 
FASB, FASAB, IFAC, and others, applied on a consistent basis;

-- update the audit reporting model to link it with the new financial 
reporting model, and provide appropriate degrees of assurance for each 
type of information;

* ultimately go global in connection with all major accounting and 
audit matters;

* coordinate U.S. and domestic efforts in the interim.

U.S. Auditing Standards Coordinating Forum:

* Composed of PCAOB, GAO, ASB (AICPA);

* Seeks to:

--maximize complementary standards-setting agendas;

--minimize duplicative or competing efforts;

--identify any significant gaps not being addressed by the standards 
setters;

--assure consistency, where appropriate, in core auditing standards in 
the U.S.;

--develop strategies for overcoming challenges and avoid unintended 
barriers to movement between the sectors;

--modernize the accounting profession in the U.S.;

--explore opportunities for international harmonization.

GAO's Work to Modernize the Accountability Profession:

GAO is actively working to modernize and transform the accountability 
profession in government and the private sector--and to lead by example 
in this area.

* independence standards issued in 2002;

* assistance to the Congress in evaluating accountability profession 
issues and needed reforms prior to the Sarbanes-Oxley Act;

* monitoring implementation of the Sarbanes-Oxley Act;

* 2003 revision of Government Auditing Standards;

* continually modernizing Yellow Book standards;

* enhancing federal financial management, reporting, and 
accountability;

* expanding the definition of success in financial management: clean 
opinion, no major weaknesses in controls or compliance, and financial 
systems that produce timely, accurate, and useful information for 
management;

* coordination with accountability organizations around the world 
(e.g., INTOSAI, IFAC, IAASB);

* promoting modernization of accounting/reporting and attest/assurance 
practices both domestically and globally;

* creation of the U.S. Auditing Standards Coordinating Forum:

Key Concepts in the Accountability Profession:

* Public trust vs. personal interests;

* Recognizing the difference between the floor (e.g., rules, 
regulations, laws, accounting standards) and the ceiling (e.g., 
principles, values);

* Doing what is right vs. what is acceptable;

* Economic substance vs. legal form;

* Being concerned with both fact and appearance (e.g., independence);

* Using judgment vs. completing checklists;

* Recognizing that continuing improvement in today's rapidly changing 
world is essential;

* Remember that trust is hard to earn, but easy to lose.

Rebuilding Public Trust:

For any system to work, it must address three fundamental issues.

* First, provide incentives for people to do the right thing.

* Second, provide transparency to help assure that people do the right 
thing.

* Finally, have effective accountability mechanisms if people don't do 
the right thing.

Restoring public trust will require that every participant in the 
corporate reporting supply chain embrace and live by the following core 
concepts*:

* A spirit of transparency--stop playing games with financial and 
performance data. Use full disclosure.

* A culture of accountability--management, staff, boards, auditors, and 
stakeholders. High quality, unbiased information to support decision-
making.

* People of integrity--commitment to individual integrity.

*Excerpts from Building Public Trust: The Future of Corporate 
Reporting, Samuel DiPiazza, Jr. and Robert G. Eccles, 2002:

Corporate Governance and Accountability on a Global Scale:

….The globalization of business and communications, increasing 
technology and increasingly complex financial transactions, mean that a 
business failure anywhere touches people everywhere. A failure in 
London impacts the markets in Lagos. This is why a recent survey of 
business leaders by the Economist Intelligence Unit found that the 
attention being paid to corporate governance is increasing worldwide 
and will continue to do so into the future.

Good Corporate Governance Ian Ball, IFAC Chief Executive Presented 
before the Association of Accountancy Bodies in West Africa April 26, 
2004:

How Do We Move Forward?

* Good governance and accountability are critical:

-- in the private sector to promote efficiency and effectiveness in the 
capital and credit markets, and overall economic growth, both 
domestically and internationally;

-- in the public sector for the effective and credible functioning of a 
healthy democracy, and in fulfilling the government's responsibility to 
citizens and taxpayers;

-- in both sectors to support a healthy economy that provides economic 
opportunities and benefits to citizens;

* Sorting out the needs and effective and appropriate governance and 
accountability mechanisms for different sectors and types of 
organizations and on an international scale will be critical.

Remembering Our Key Responsibilities: As business and governments face 
the increasingly complex and challenging issues of our modern and 
increasingly inter-dependent world, effective and appropriate 
governance structures and accountability systems are critical. As 
accountability professionals, we must always be mindful of our unique 
responsibility to do the right thing and to lead by example in order to 
maintain the public trust and show others the way forward.

Three Key Personal Attributes Needed for These Challenging and Changing 
Times:

Leadership;

Integrity;

Innovation. 

[End of slide presentation]