20020617 Building Public Trust

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BUILDING PUBLIC TRUST:

THE FUTURE OF COPORATE REPORTING

Text As Prepared

NATIONAL PRESS CLUB

June 17, 2002

Samuel A. DiPiazza, Jr.

Introduced by: John Aubuchon, President of the National Press Club

Thank you, John.

It is a real pleasure to be with you here at the National Press Club. I welcome the occasion to engage

in the debate surrounding the implications of Enron/Andersen. Given the announced verdict withAndersen this weekend, I do not think this conversation could be more timely. More importantly, Iwant to take this opportunity to help move the discussion beyond the rhetoric and finger pointing

toward real change. Specifically, I want to focus my remarks on the future of corporate reporting

and, in turn, the future of my own profession.

John, there was once a time that many of us in the capital markets operated in relatively obscurity.

Accountants, analysts, rating agencies, audit committees and the like.

I reflect on the times when my own mother would ask, over and over again, now what is it that your

firm does? Oh, for those days to return. Now my daughter suggests that maybe I would be better off

if I did not tell people that I was an accountant. Times do change !

Some would suggest that, given the swirl of controversy around the accounting profession and the

almost daily reporting of major business failures the National Press Club is exactly the worst placeto be.

Their advice: find a deep hole, hunker down, and wait out the storm.

For PricewaterhouseCoopers, the worlds largest and I would argue, leading professional services

firm, hunkering down has never been a consideration.

From the beginning, our response has been to draw upon the power of our collective globalknowledge and address this crisis head-on.

Not to weather it, but to look for real answers. Not to simply bemoan the painful erosion of public

confidence but to determine how to reclaim it.

Hank Paulson stood in front of you just two weeks ago and declared that US capital markets to be in

a crisis of confidence. I agree with Hank.


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I also agree that the US markets are the strongest in the world, in great measure because of theefficiency driven by a consistent, transparent and disciplined reporting structure. So we have a crisis

here in the US, The question is.. How do we respond?

There is a great sense of urgency -- but we must act responsibly. Heed Chairman Greenspansadvice, Be sure you consider the consequences of your actions. With shareholders and other

stakeholders clamouring for instant reform, we need to resist silver bullet solutions, the simple

ones that in fact are merely piecemeal and superficial. Instead we need to resolve the fundamentalissues underlying this crisis in financial reporting.

Now, do not misunderstand, I aggressively support many of the proposals on the table today.The New York Stock Exchange has taken a lead in corporate governance. We support those reforms.

Other proposals have significant merit.

There is no question that we must go the extra mile to regain the ground we have collectively lost.

This includes the formation of an independent body in the U.S to provide oversight to my ownprofession. We have been consistent supporters of the formation of a U.S. public oversight body,

dominated by people outside my profession. This body must provide oversight to the quality of ourwork, with investigative powers and resources, and must possess the power to discipline those who

operate outside the law or ethics.

Many countries around the world have this right. It is time to get it right in the U.S.

We have also been outspoken regarding limitations on services provided by accounting firms. PwCwas one of only two firms to support Chairman Levitt three years ago in his efforts to reform the

profession. We were the first firm to publicly announce its plan to move away from both ITconsulting and Internal audit outsourcing for SEC audit clients. We have committed to adding

outside directors to our Board (remember, we are a private partnership), to issuing an annual report

on our quality practices, to disclosing the compensation and evaluation policies of our audit partnershere in the US.

But the debate to this point has been far too focused on remedial actions, the dos and donts, the

conflicts and the oversight. We must begin to deal with the core issues, not just treating the patientbut instead to begin to create an environment that deals with the underlying issues of information,

and the confidence the investor has it its integrity.

That is what I want to offer today a vision of the future of corporate reporting.

This Vision is based on a fresh view of the responsibilities of every participant in the corporatereporting supply chain and, more importantly, a revised model for corporate disclosure. This

thinking is outlined in our soon-to-be-published book Building Public Trust: The Future ofCorporate Reporting. We hope and expect this book will generate significant debate and, in some

respects, painful changes. While we do not prescribe a rigid formula, we do advocate a clear pathfor the road ahead, reforms that insure that the sacred trust of the investing public does not

disappear.

Building Public Trust: The Future of Corporate ReportingJune 17, 2002

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The foundation for those reforms must lie in corporate reporting, for that is the basis upon whichmost investing decisions are made.

The consequences of Enron, Global Crossing, Aldephi and others are enormous. Billions of dollars

in value have been lost, and questions are being asked about how much of that value was real in thefirst place. Public trust has been shaken in the institutions on which this value creation depends,

namely what I like to call the Corporate Reporting Supply Chain.

Who makes up this Corporate Reporting Supply Chain?

The Corporate Reporting Supply Chain begins with company management, who prepare thefinancial statements that are reported to investors and other stakeholders. They own the information

and are ultimately responsible for its adequacy. These financial statements are approved by an

independent board of directors, operating under a code of governance, responsible to theshareholders. The information is attested to by an independent auditing firm, hired and overseen by

the Board. It is analysed by objective security analysts, and broadcast by information distributors,including data vendors and you, the news media.

Based on this information, investors and other stakeholders then make their decisions.

The Corporate Reporting Supply Chain is critical to making markets work. It has enabled ourmarkets to be the best in the world. Until now.

Lets be clear, business failure will always exist in free capital marketseven the best corporatereporting will not make this go away. Improved reporting can reduce losses incurred in business

failures when it enables management, the board, and the market to respond more quickly to moreaccurate information.

The aftermath of Enron serves as a lens to sharpen our focus on the key elements that actually createpublic trust in the markets. These elements transparency, accountability, and integrity --are easy

enough to describe, but frequently difficult to practice.

And they must exist at every point in the information supply chain. The first is a spirit oftransparency. By transparency, I mean that corporations have an obligation to willingly provide to

shareholders the information needed to make decisions.

For many reasons, management and boards are not consistently making available information they

know investors want and need. Sometimes business leaders simply want to hide information that

may attract increased scrutiny or cause embarrassment. And we all understand the pressures inmeeting quarterly earning forecasts.

Stakeholders are growing increasingly aware of the importance of transparency -- they will not

accept being left in the dark.

The second element is a culture of accountability.


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Just providing information is not sufficient. It must be accompanied by a commitment toaccountability among participants in the Supply Chain. That means taking responsibility, and this

can only occur when an ethos exists that values and understands accountability.

For example:Management must hold itself accountable for using shareholders' money to make decisions that will

create value for those shareholders;

Accounting firms are responsible for never forgetting that their work serves the interests of thepublic and the shareholders, not the management that simply writes the check; and,

Analysts are responsible for providing objective research that is free from any bias due to economic

conflicts of interest.

Most importantly, every member of the Corporate Reporting Supply Chain must commit to

collaborating with all others. This chain is only as strong as its weakest link.

Finally, even transparency and accountability do not automatically earn the public trust. In the end,both depend on people of integrity.

As Hank Paulson said, Integrity is the cornerstone, if not the bedrock, upon which all financial

markets are based.

Individuals of integrity do the right thing, not what is expedient or even necessarily what is

permissible. Doing the right thing cannot be compromised, especially through actions that purport to

create value for shareholders, but which ultimately betray them.

Transparency - open, consistent, comparableAccountability Ownership and Responsible

Integrity Do the right thing

Wholeheartedly embracing and demonstrating these three elements is key to building an

environment of public trust. If members of the Supply Chain dont concur on these objectives we

wont get very far. The key issue is How? Yes, more oversight, less conflicts, and more clarity

regarding relationships. But frankly, this is just not enough.

To help address the challenge, participants in the Corporate Reporting Supply Chain must have toolsand standards that will provide stakeholders with more relevant and reliable information.

Information that is timely, easy to understand and easy to analyze. Investors need confidence that it

is complete, accurate, and trustworthy.

Our response is the Three-Tier Model of Corporate Transparency.

These three tiers include:

First, a set of truly global generally accepted accounting principles (Global GAAP).


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Secondly, standards for measuring and reporting information that are specific to respectiveindustries, consistently applied and in understandable form.

And, the third tier, guidelines for company-specific information such as strategy, plans, risk

management practices, compensation policies, corporate governance, and performance measures.

This is not about just more disclosure for disclosure sake, but instead a new model of information

reporting. Investors will benefit only if companies communicate the information in an integrated

fashion that provides a holistic view of the enterpriseits marketplace opportunities, its strategies,its value drivers, and its financial outcomes.

Lets examine each tier more closely:

Tier One -- A set of truly global generally accepted accounting principles (Global GAAP).

Todays world of global capital markets, global companies, global competition, and global investorsunquestionably needs one set of global accounting principles that applies to companies in all

countries Global GAAP. The European Union has taken an important step forward by requiring

all EU members to adopt International Accounting Standards by 2005. I believe the US must movein this direction as well.

I have been outspoken in my comments about US GAAP and its shortcomings. This is not about thestructure of the FASB or its governance. And it will not be solved if the government gets into the

standard setting business either. Take my word for it, accounting standards and politics just do notmix.

No, it is about the philosophy of standard setting. It is about moving to a principles based approach,one short of volume and long on principles. To date a major obstacle to achieving Global GAAP has

been the focus on US GAAP versus the rest of the world. This is really about a debate of rules

versus principles. US GAAP, containing significant detail, exceptions and direction, is generally

cited as an example a highly rules-based standard. The broad guidelines of UK GAAP and mostimportantly, the current International Financial Reporting Standards exemplify a more principle-

based standard.

This principles-based approach is the best foundation for making financial reporting more relevant to

investors. It assigns responsibility to management to select the most appropriate accounting methods

to reflect the economics of the transaction, not just those accounting methods dictated by narrowrules.

The current US GAAP begins with a principle but then moves to dozens and dozens of rules and

exceptions, all designed to appease somebody out there in the market. Lets move back to principlesand force management to be held accountable for their decisions and auditors for their judgments.

More importantly, a single set of global standards will create consistency around the globe. If Global


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GAAP existed, investors could more easily compare the performance of any company, in any

country, in any industry.

At the Tier One reporting level, market regulators worldwide would agree to allow any company

using Global GAAP to list on the exchanges within their jurisdictions.

But the objectives of transparency, accountability, and integrity will not be fulfilled if the reporting

model fails to move beyond the adoption of Global GAAP. Markets are made today on much more

than the basis of some historical record based in accounting.

Markets are driven by both financial and non-financial information, much of which exists but is not

made available to the investor. Investors need more complete, reliable, and useful information on acompanys overall performance and prospects, benchmarked within the companys own industry.

This brings us to Tier Two: Standards for measuring and reporting information that are

industry-specific, consistently applied, and developed by the industries themselves.

Assume that an investor has decided to invest in a particular industry. The next decision is to choose

among companies within that industry -- comparing one company's performance, financial and non-financial, to that of another. No broad set of accounting principles can capture all of the key value

drivers of specific industries.

The competitive dynamics of specific industries, how those industries create value for shareholders,

and the knowledge needed to create value are very different. Even for the same measure, the

methodology used can vary substantially. Banks, for example, do not measure customer satisfactionin the same way that hospitals do.

Standards are needed to make such industry-specific informationthe domain of Tier Twotruly

useful to investors.

Ideally, these standards will be developed by global, industry-based groups such as trade

associations. This will be done in collaboration with the investor community, analysts, professional

services firms, and independent accountants. The Society of Petroleum Engineers and the World

Petroleum Congress, for example, have jointly developed a set of principles for petroleum reserves.

If industry groups do not step up to the plate, analysts, institutional investors and others will

ultimately create the platform for Tier 2 reporting.

Therefore, we begin with global GAAP, a principle-based set of standards, uniformly applied around

the world. We have the disclosure of Industry relevant data, consistent from company to companywithin an industry. But investors would still seek additional information relevant to an individual

company.

This brings us to Tier Three: Guidelines for Company-Specific Information.


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More robust disclosure of relevant company information would give investors a better framework

for making informed decisions. TierThree measures could include information about strategy, riskmanagement and compliance, compensation policies, and company-specific performance measures

on key value drivers.

To report publicly and completely on these value drivers, within the bounds of competitive goodsense, would achieve the very meaning of transparency. Management can turn this transparency into

action by sharing its complete value proposition with investors. This will demonstrate the links

between marketplace opportunities and strategy, between value drivers and measured results, andbetween management decisions and value creation.

While well-defined external standards cannot be developed for Tier-Three content, general contentguidelines certainly can be. The U.K. Accounting Standards Board has issued draft recommended

revisions to a company's operating and financial review statements. The draft proposes that a

company's board of directors should discuss the business objectives and the strategy for achievingthose objectives, as well as comment on the key measures used as performance indicators in

managing the business.

How do we get this to happen? I believe in the end, the market can demand this model of corporatetransparency by simply not rewarding those companies that do not play.

This is the Three Tier approach for the future of corporate reporting

1. Global GAAP,

2. Industry-based standards and3. Company-specific information.

In adopting the Three-Tier Model, however, equal attention must be paid to the format in which this

content is communicated. If investors are unable to access or analyse the information, however

accurate it may be, it is of little use.

Despite advances in electronic technology, most financial content is still reported in formats that are

little more than electronic versions of paper. Today companies can also report the information using

a new Internet-based platform called Extensible Business Reporting Language --XBRL. XBRL willplay an essential role in achieving the corporate transparency embodied in the Three-Tier Model

because of its ability to tag any individual piece of information with a precise contextual

description.

XBRL will also improve investor access and dramatically increase the speed at which users can

obtain information. Stakeholders can make a request from within their analytical software and inseconds the data they want will be incorporated into their analysis -- for example, immediately

uncovering a companys revenue recognition policy buried in the footnotes of a 100-page annual

report. By reducing the time and costs, XBRL will also help to level the playing field for all

investors and stakeholders.


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In the spirit of transparency, accountability and integrity, a fresh look at auditing standards that will

accompany the Three-Tier Model of Corporate Reporting is in order. As we see it, in the futureworld of Tier-One financial statements, management would prepare information with six objectives

in mind.

The first of these objectives is Completeness that the information reported in the financialstatements is presented in a forthright and balanced manner.

Second -- that the information reported is in Compliance with the spirit of principles-based GlobalGAAP.

Third, Consistency. That there is Consistency in the application of accounting principles betweenperiods -- to make the information more useful for extrapolating future results.

The fourth objective, that the information includes supporting Commentary on risks anduncertainties, including the full disclosure of significant estimates used by management and the

quality of accounting and management controls.

Fifth -- Clarity -- in how the Company reports to stakeholders particularly in terms of how all ofthe elements of the Three-Tier Model relate to each other.

and sixth, Communicating that information in plain language and reporting formats that make thefinancial statements as useful as possible.

The role of the auditing firm would then be to work with the Audit Committee to judge compliancewith these "Six C" objectives, since issuing an audit opinion would require that these objectives be

met to some standard. In contrast to the pass/fail audit opinion model employed today, perhapsthe opinion could be issued on various levels or grades.

These "grades" could be for all of the Six Cs taken together, or even for each category in turn. Thereis no question that the audit opinion can be a much more relevant statement in assessing the health of

a business. The overall role of independent auditors needs to be refocused to give investors

assurance on a much broader range of information as embodied in the Three-Tier Model of

Corporate Transparency. Auditors do not insure the well-being of an enterprise.

Business Risks exist, and an auditor plays one role, a very important role, in the Reporting Supply

Chain. But the pass-fail model may have outlasted its usefulness. Lets look for better alternatives.

Today, few if any companies provide the full disclosure contemplated by the Three-Tier Model. But

companies cannot wait to start practicing greater transparency until it has been thoroughly field-tested in a simulated capital market. They have to start practicing it now, in the real world, in real

time.

The investing public must continue to exert pressure on every member of the Corporate ReportingSupply Chain to act and to change.


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We accept that challenge at PricewaterhouseCoopers. The public outcry directed towards

accounting practitioners has struck at the very heart of our professional values: objectivity,independence, and integrity.

Like other well-established members of the Corporate Reporting Supply Chain, we may been slow

to act. The promise of improving future audits has been constrained by antiquated laws, rigid rules,punitive legal systems that chill innovation in corporate reporting.

We must look to the future, where, rather than just managing investors expectations about the auditopinion, the auditing profession, with the support of standard setters and market regulators, must

step forward with other members of the Corporate Reporting Supply Chain and take on a greater

responsibility.

We have to measure ourselves by higher standards. At stake is nothing less than the trust of the

public and the future of corporate reporting.

Leadership and vision are required.

I hope today we have presented somewhat of a blueprint of where corporate reporting needs to go it will take more informed and committed leaders will be needed to make it a reality.

Investing will always mean taking risks.

Even in a Three-Tier world of corporate reporting complying with the six Cs, risk exist.

But investors and other stakeholders will more readily accept their responsibility when they know

that the information on which their decisions are based is prepared, approved, and audited in a truespirit of transparency by people of integrity. The ultimate goal to build a shared culture of

accountability.

This is the future of corporate reporting.

and.This is how we will reclaim the public trust.

Thank you.

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20020617 Building Public Trust