GAO Forum on Governance and Accountability:

Challenges to Restore Public Confidence in U.S. Corporate Governance and Accountability Systems

GAO-03-419SP: Published: Jan 24, 2003. Publicly Released: Jan 24, 2003.

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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 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.

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.

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