Transcript _unedited_ - Securities and Exchange Commission

							WEBMASTER NOTE: This is the unedited transcript of the Inaugural
Public Roundtable for Financial Reporting Series on November 8, 2011
which we received directly from the transcriber. We are posting the
transcript in this form to make it available as soon as possible.

0001
 1              U.S. SECURITIES AND EXCHANGE COMMISSION
 2
 3
 4
 5
 6                 INAUGURAL PUBLIC ROUNDTABLE FOR
 7                    FINANCIAL REPORTING SERIES
 8
 9
10
11
12
13
14                     Tuesday, November 8, 2011
15                            10:00 a.m.
16
17
18
19
20
21
22
23              U.S. Securities and Exchange Commission
24               100 F Street, N.E., Washington, D.C.
25                 Station Place 1 Multipurpose Room
0002
 1     MODERATORS:
 2     James Kroeker, SEC Chief Accountants
 3     Mike Starr, Deputy Chief Accountant
 4
 5     PARTICIPANTS:
 6     Mary Schaprio
 7     Meredith Cross
 8     James Doty, Chairman, PCAOB
 9     Marc Siegel, Board Member FASB
10     Jay Hanson,
11     Loretta Cangialosi
12     Anna Dopkin
13     Gary Kabureck
14     Adam Litke
15     Jennifer Paquette
16     Stephen Penman
17     Scott Siefers
18     Pinto Suri
19     Christopher Begg
20     Terri Campbell
21     Steve Glover
22     Joseph Longino
23     Paul Munter
24     Mark Newsome
25     Gary Walsh
0003
 1     PARTICIPANTS (CONT'D):
 2     Dorsey Baskin
 3     Gerry Czarnecki
 4     Liz Gantnier
 5     Diann Gross
 6     Bradley Hunkler
 7     Janet Pegg
 8     Kevin Spataro
 9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
0004
 1                              C O N T E N T S
 2
 3                                                PAGE
 4     Call to Order and Opening Remarks            5
 5     Panel 1:                                    13
 6     Panel 2:                                    99
 7     Panel 3:                                   176
 8     Concluding Remarks                         230
 9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
0005
 1                       P R O C E E D I N G S
 2                 MS. SCHAPIRO: Good morning, everyone. Thank you
 3     all for coming.
 4                 It's a real pleasure to welcome you to the Inaugural
 5     Public Roundtable of the SEC's Financial Reporting Series.
 6                 You know, we created this series to provide a
 7     permanent forum for identification of risks related to and areas
 8     for potential improvements in the reliability and usefulness of
 9     financial information provided to investors. And it's designed
10     to bring all stakeholders together in a thorough and balanced
11     examination of these issues. So it will help the SEC in our
12     capacity as the oversight provider for the financial reporting
13     system to coordinate responses.
14                 This is an important series for the investors, whom
15     it is the SEC's mission to protect, for firms who value accuracy
16     and transparency in reporting and for the auditing professionals
17     on whom the financial system relies for verification of that
18     reporting.
19                 In recent years, we've seen repeatedly how important
20     it is that financial standards and regulations keep up with
21     changes in the way our economy works. This is especially true
22     of financial reporting, the production of information on which
23     millions of decisions are made and trillions of dollars of
24     capital are allocated every day.
25                 The ability for investors and others to assess an
0006
 1     understanding of uncertainties inherent in reporting economic
 2     events, it's fundamental to the functioning of a market economy.
 3                 Standards and rules must be as clear and
 4     understandable as possible in a complex business environment so
 5     that financial information is communicated accurately and
 6     transparently.
 7                 In addition, given the rate of change in today's
 8     financial world, it's important that we act aggressively to
 9     identify the issues in the financial reporting system today
10     before they become tomorrow's problems.
11                 I believe that this series of roundtables will
12     become a key part of this effort. Fostering discussion of
13     existing pressures and emerging issues within the financial
14     reporting system and pointing us towards their resolution.
15                 The composition of these roundtables reflects the
16     fundamental pillar of the financial reporting series. That
17     solutions to the reporting challenges uncovered in this process
18     must be arrived at holistically through a process that brings
19     all market participants together for a discussion.
20                 That is why I am so pleased to see a full spectrum
21     of participants today. Representatives, of course, from the
22     SEC, the PCA, will be in FASBI, but also representatives of the
23     accounting and auditing profession, academia, the investor
24     community and the businesses whose finances are being reported.
25                 Our efforts to reflect emerging issues and changes
0007
 1     in the business environment will only be effected if there is
 2     frank and detailed dialogue among all the affected stakeholders.
 3      And it's equally important that this dialogue be continued over
 4     the long term.
 5                 We intend for the financial reporting series to
 6     become a critical and ongoing part of the SEC's work to protect
 7     investors and enhance our capital markets. It will be a
 8     continuing series anticipated to be held three times a year to
 9     explore issues of significant importance to the financial
10     reporting system and for which there is no similar forum today.
11                 Uncertainty is an important and fascinating subject
12     for our first forum. But this subject is just the beginning.
13     Putting in place a mechanism for considering issues that need
14     immediate attention will benefit every individual and
15     institution that makes decisions based on financial information
16     that is disclosed by our public companies.
17                 Thank you once again for coming today and for making
18     the first in an ongoing series of roundtables a success.
19                 Before I turn the microphone over to the SEC's Chief
20     Accountant Jim Kroeker, I wanted to take a moment to acknowledge
21     my colleagues on the Commission who are here today. Their
22     presence I think speaks to the importance of this initiative. I
23     also especially want to welcome our newest commission, Dan
24     Gallagher, who joins us in this his first public forum since
25     returning to the Commission just yesterday.
0008
 1                And now Jim Kroeker has a few words to say.   Thank
 2     you.
 3                 MR. KROEKER: Thank you, Chairman Schapiro, and
 4     welcome to each of the participants. We have three panels today
 5     of out - outstanding individuals to provide a perspective at
 6     this inaugural financial reporting series.   And I want to thank
 7     each of you for taking the time out of your otherwise extremely
 8     busy schedules, I'm sure, to share with us your perspective and
 9     to share that with us in a coordinated fashion with the SEC, the
10     PSOB and the FASB.
11                 This SEC inaugural financial reporting series
12     roundtable is an important event. It shows our commitment to
13     continuing to make sure that we don't have gaps in a regulatory
14     process and that we tighten any perceived lack of coordination
15     and we enhance that coordination between the FASB, the PCOB and
16     the SEC as - as demonstrated by each of our commitment to the -
17     to the series.
18                 I want to also acknowledge the other staff at the
19     table. In this case, Meredith Cross, who is our Director of the
20     Division of Corporation Finances. We go forward. We will
21     continue to have a coordinated approach, not just with the FASB
22     and the PCOB but internally. So, Meredith, thanks for joining
23     us. This is squarely something that is of interest to all of us
24     when we talk about uncertainty, how we communicate that in
25     financial reports. I suspect we'll have a lively discussion.
0009
 1                At one of the spectrum you could think of this as
 2     an issue of what is really the role of financial reporting
 3     itself. Is financial reporting something that we might have
 4     thought of 50 or 100 years ago where you're simply reporting
 5     upon that which happened in the past? Has, or should, financial
 6     reporting continue to evolve to reporting that which is a little
 7     bit less certain? The unknown future events, where is - what
 8     are the tradeoffs? What is the desired outcome? Should
 9     accounting look more like financial analysis or the role that
10     analysts might have traditionally played?
11                 And, again, I don't think these are easy or black
12     and white questions. I don't think you could say, well,
13     financial reports should only have this or should only have
14     that. But that's why we're seeking the input of this group.
15                 I don't suspect that every financial reporting
16     series roundtable will be quite as weighty an issue. I think
17     they'll be equally as important but this really is I think at
18     the heart of what do investors want from financial reports and
19     how can those charged with executing deliver on that? How can
20     accountants internally deliver and then what is the impact to
21     auditors?
22                 So I think it's particularly important that we have
23     such a wonderful group together.
24                 The first two panels really will focus on the
25     investor perspective; what are investors looking for from
0010
 1     financial reports. We have a combination of capital market
 2     participants but that really is the focus of the first two
 3     panels. With the third panel focusing on the interaction of
 4     then how can we deliver; what are the implications to auditors,
 5     what are the implications to those providing the information.
 6                 We will take the input that we hear today, both
 7     internally as the SEC staff, determine any appropriate courses
 8     of action. We'll also continue to coordinate closely with the
 9     FASB and the PCOB.
10                 Many of you know that we have quarterly liaison
11     meetings at senior level between the organizations. I suspect
12     that the input from these series will be top of mind on our
13     agendas as we go forward in those types of coordinated responses
14     to the financial reporting system.
15                 With that, I'll turn it over to the Chairman of the
16     PCOB, Chairman Doty, for any - any -- any introductory remarks
17     that he might want to provide.
18                 MR. DOTY: Thank you, Jim.
19                 First, I want to thank Michael Starr and Jim Kroeker
20     for their vision in thinking of this series. I had been at the
21     PCAOB only a few weeks when they began to discuss this. I know
22     the kind of effort and thought that's gone into it.    I
23     especially want to thank Chairman Schapiro for including us in
24     this important and landmark series.
25                 It is in my mind an exemplary of - case of
0011
 1     inter-agency cooperation and it is going to expand and make more
 2     effective the ability of the PCAOB to do what we are supposed to
 3     do, which is to provide rules that enable auditors to audit
 4     effectively.
 5                 Here as I am with my colleague and board member, Jay
 6     Hanson, and our Chief Auditor Martin Bauman. We feel privileged
 7     to have the benefit of this SEC initiated outreach. We're going
 8     to be listening carefully to determine how we can work more
 9     effectively with both the SEC and the FASB to do that.
10                 With that, I will thank you again, and sit back.
11                 MR. KROEKER: And I'd also like to turn it over to
12     FASB Board Member Mark Siegel for any introductory remarks that
13     you might have.
14                 MR. SIEGEL: Thank you, Jim. It's really great to
15     be here.
16                 I guess, first, I wanted to convey my regrets from
17     Chairman Leslie Sideman who would very much liked to have been
18     here today. Unfortunately, she had a long standing commitment
19     to attend and chair our small business advisory committee
20     meeting today. And - and - and it's at a time now when there's
21     a very, very healthy dialogue going on about what should
22     standard setting look like for non-public entities. And she
23     felt that she had to be there rather than today.
24                 At the same time, I'll just convey my understanding
25     that, I, you know, having - knowing Leslie, that no one has been
0012
 1     a stronger supporter of the idea of the vision of this series
 2     than Leslie. And I know she's dedicated to helping it succeed.
 3     She believes that it's critical. That the issues that transcend
 4     the organizations, the PCAOB, the FASB and the SEC, get
 5     addressed in a coordinated way and she looks forward to
 6     continuing her involvement with the financial reporting series.
 7     And she thanks everybody here for attending and participating in
 8     this event. And I know that she will look forward to hearing
 9     what happened today. And - and - and with the progress that
10     we've made will be.
11                 From my perspective, I think it's absolutely
12     fantastic to have all three organizations here today working
13     together. In my former career as a user of financial
14     statements, my - the conclusions that I drew, I drew upon the
15     entirety of the financial reporting package, whether it's the
16     audited financial statements, whether it's the MD&A, whether
17     it's supplemental information that's provided outside of -
18     either of those. I had to look at all three pieces of
19     information. And - and so having either redundancies or gaps in
20     that was certainly not helpful. And so having a coordinated way
21     is just critical for all of us to work together on solutions to
22     improve the information set that's out there to - to allocate
23     capital. Kudos to the SEC, and particularly Jim and Mike and
24     Chairman Schapiro for in the midst of all the rule making that
25     this organization has to do day in and day out, to find the time
0013
 1     to - to put together this - this inaugural roundtable today and
 2     put the whole series together. So thank you very much for that.
 3                 Measurement uncertainty is a great topic to start
 4     with. We have so many ongoing projects now where measure
 5     uncertainty is - is - is inherent in the - is the accounting
 6     that's potentially going to be proposed. The classification and
 7     measurement of financial instruments in the balance sheet, it's
 8     critical there. Hedging, is something that we need to work
 9     together with the ISB to propose moving forward. Accounting for
10     credit impairments at financial institutions, it's critical.
11     Insurance contracts, lease accounting and revenue recognition.
12                 As we look to improve the accounting and the
13     reporting in all these areas, how we and are colleagues at the
14     SEC and auditors at the PCAOB, how we think about and deal with
15     measurement uncertainty in a cost beneficial way, it's going to
16     be a critical success factor to - to - to those standards that
17     we put out.
18                 So with that, I -- again, thanks to all of you for
19     participating today and I look forward to a very informative and
20     instructive day. Thanks.
21                 MR. KROEKER: I won't go through the backgrounds of
22     each of the panelists. Their bios are available online so we
23     have a wonderful mix of participants today. For those want to
24     be recognized, I would suggest that either just raise your hand
25     or turn your tent card on its side. We'll certainly try and
0014
 1     make sure that we hear from anyone who wants to provide us a
 2     perspective on any question that we pursue today.
 3                 And for those in the public that want to provide a
 4     perspective, we have a background paper that is available. We
 5     have a link on our website that you will be able to track the
 6     financial reporting series. That paper is out there. There are
 7     a number of questions that we would appreciate any input.
 8                 Likewise, for those who have recommendations of
 9     topics that you think would be important to address in the
10     future, I do want to highlight that as well. That this is
11     intended to address important topics before they become of
12     crisis level.
13                 So let us know about those. And there's an open
14     link on our website to do that.
15                 With that, I'll jump right in to the discussion.
16     And I thought I might tee up a question that hopefully gets some
17     response. It's pretty broad in its scope. And that really is,
18     what are investors looking for from financial reports,
19     particularly as it relates to the role of uncertain things that
20     may happen in the future?
21                 And if we can't get a dialogue going on that, we
22     could drill down to some more specific questions. But I don't
23     think we'll have an issue with that. And I'll turn the table
24     over to really anyone that wants to respond to that question.
25                 MR. SIEFERS: I'd be happy to start. Scott Siefers
0015
 1     with Sandlar and Ells.
 2                 I think just broadly three topics I think investors
 3     look for. My own background, by the way, I'm a bank analyst so
 4     fairly specific, but nonetheless, the question you pose is, as
 5     you said, very broad. So I'd say three things at the outset;
 6     transparency, comparability, and objectivity.
 7                 I think one of the main criticisms that I hear from
 8     the investment community just with - with accounting reporting
 9     generally is that it's simply very difficult to compare, you
10     know, for example, one bank to another. Try as we might, you
11     know, a lot of banks to - to - to take a step back, you know,
12     one of the main criticisms of banks is that they don't have
13     transparent balance sheets or income statements to begin with.
14                 So virtually whatever we do, is a bit of an uphill
15     climb. But nonetheless I think to - to the extent that we can
16     look - try to focus on those three things, those are by far the
17     overriding themes I think investors are most interested in.
18                 MR. KROEKER: Yes.
19                 MS. DOPKIN: Anna Dopkin with T. Rowe Price. Thanks
20     for giving us a chance to voice our opinions. At T. Rowe we
21     really also are looking for transparency and comparability. As
22     someone who used to run a financial services fund and it's more
23     diversified at this point, we find that, you know, there's lots
24     of disclosures that are out there but the application is so
25     broad at times it becomes meaningless. You know, a current
0016
 1     topic today is, you know, DVA adjustments arm the banks and the
 2     bankers and there's just not a lot of consistency from one
 3     company to another. One company will discredit the measurement.
 4      Another company will endorse it but they'll use different
 5     assumptions behind it.
 6                 The general lack of comparability becomes very
 7     frustrating for an investors and the companies because of the
 8     lack of guidance they can sometimes hide behind trying to
 9     provide the useful information until they feel that they have,
10     perhaps, a gun at their head if their stock price is going down,
11     then you find a little bit more information. And we're starting
12     to see a little bit of distinguishment between the individual
13     reportings of the companies this quarter.
14                 So we're really looking for just more guidelines to
15     the companies and some investors, like energy and some others,
16     there's specific guidelines; what discount rates to use, how to
17     come up with the methodology to analyze the reserves in oil and
18     gas companies but in banks, which are just so big and full of
19     lot of what-ifs, there's just not - not that same kind of
20     comparability.
21                 MR. LITKE: Adam Litke. I think one thing to think
22     about especially on the comparability front when we talked about
23     banks is how do we look at even just classification of assets.
24     I think somebody mentioned the issue of level one, level two and
25     level three assets, or at least alluded to it.
0017
 1     And nobody wants to have a level three asset. On the - on the
 2     banking side when you do loans, if you have national loans, you
 3     have something called shared national credits. But - but you
 4     don't have something called shared national level three assets.
 5     So banks don't want to call things level three. They - they do
 6     this - they jump through tremendous hoops to make everything a
 7     level two asset.
 8                 And in a sense if there was some guidance to say,
 9     look, this is level three, now give us your best estimate as
10     opposed to everyone being allowed to make their own rules about
11     it, in the sense if you can't do what you'd like the auditors to
12     sign off on, they have to sign off on the process. Right there
13     for the level three asset, they're not going to sign off on the
14     numbers. At least if we had agreement about what was level
15     three, I think that would go a long way towards helping things.
16                 MR. SURI: Pinto Suri from Friday and Crumbline.
17     We're investors mainly in preferreds and covering basically
18     financial institutions.
19                 Yeah, I think I would qualify the transparency issue
20     by saying that it's not so much transparency as consistency of
21     application of the same particular accounting model. And in
22     looking at insurance companies, that becomes even more
23     pronounced for a variety of reasons. Not only do you have items
24     like DVA, showing up off of liabilities that really are
25     insurance liabilities, they're not derivatives, but are being
0018
 1     treated as derivatives. And what that does is when you see this
 2     kind of volatility quarter to quarter and you know that this
 3     can't be cash settled, it can't be net settled, it can't be
 4     traded. Is an insurance product. It's priced as an insurance
 5     product. And then you see liabilities rising by several billion
 6     dollars one quarter, declining to a few billion the next
 7     quarter. It reduces confidence.
 8                 So if we're talking about financial institutions
 9     that are confidence sensitive entities, having this kind of
10     issue show up repeatedly, it reduces investor confidence in the
11     numbers that are being presented to us and forces us to then go
12     back to management and say, we need more operating numbers,
13     which are non-gap.
14                 And that's something I think is a bigger concern,
15     particularly when we look at insurance companies.
16                 MS. PAQUETTE: Jennifer Paquette with Colorado Para.
17      We manage a fair amount of our assets internally and when
18     visiting with our equity and fixed income analysts and portfolio
19     managers many of the points that have already been made I'm
20     hearing from them as well.
21                 Whenever we're discussing about this - discussing
22     the measurement uncertainty issue the focus really from them is
23     on receiving more of the input drivers on how these measurements
24     are being determined.
25                 While we recognize that corporations may be hesitant
0019
 1     to provide some of these inputs, we're aware that they've got to
 2     use something. And some of the better disclosure statements
 3     will talk about what sort of - of matrix they consider when
 4     coming up with their measurements. But they stop short of
 5     sharing what any of - of the ranges of those matrix might be and
 6     simply give a very high level description of what those inputs
 7     are.
 8                 We're not looking for financial statements to do our
 9     financial analysis for us. We would prefer that disclosures
10     would progress to a level where - at a higher level of
11     understanding the measurement uncertainties, we have some of the
12     inputs that entities are considering when they come up with
13     those numbers. So we can assess whether we find those valuable
14     numbers or would prefer to do our own sensitivity analysis.
15                 MR. KROEKER: Others or from a preparer's
16     perspective. Certainly you hear both Gary and Loretta from
17     investors all the time. What are they looking for when you talk
18     to them?
19                 MS. CANGIALOSI: So amazingly the comments around
20     transparency, comparability, and objectivity, those will be the
21     things that people are looking for. It's how we arrive at these
22     same answers seems to be the interpretation of what we - we
23     think is transparent or comparable. I think the difficulty in
24     comparability sometimes - and I'm not from the banking
25     institutions so I really can't figure out what your issues are
0020
 1     with them - but from - for our own selves is in trying to
 2     measure things like intangibles, which are clearly more level
 3     three when you do a business combination, then they are any kind
 4     of level one or level two. It is quite difficult to do because
 5     you have to make a lot of assumptions about when you're working
 6     with in process R&D you've got to look at things like, okay,
 7     what would - what's the indication for this? If I have a
 8     medicine, what's the indication? What would the - what's the
 9     future potential market? So that would make a lot of very broad
10     sweeping assumptions on this. And I have to figure out what's
11     the possibility of success.
12                 And, you know, quite honestly, it's a guess. Nobody
13     knows for sure. We've all followed the press. We know how
14     things work at the FDA. Sometimes things come out right.
15     Sometimes you wind up with a bump in the road, a bad clinical
16     trial. You need to go back and do it again. These - these
17     things are expected in the industry.
18                 And trying to project that forward in a model, you
19     know, may lead to very different views by companies. I mean,
20     you try to use a hypothetical market participant but let's face
21     it, that's difficult to do. Not everyone thinks alike. I think
22     uncertainty itself is something that we - we have. We have to
23     get used to. We live it every day in business. And it's - I
24     always like to think of it as points on a line and there are
25     many points that are valid. It's a matter of what you're
0021
 1     choosing. I mean we, again, have spent a lot of time in our
 2     disclosure saying, "Hey, here's what we did, these are the kinds
 3     of inputs that we used and, by the way, we may not be right,"
 4     because we don't know how else to convey it.
 5                 MR. KABKORECK: Thanks, Jim. A few thoughts.
 6                 I think all the investors here, every concern or
 7     question they raise is valid and appropriate if you're an
 8     investor, regardless of equity investor, credit investor,
 9     whatever.   I think from a preparer's point of view I'll take
10     the three items investors want. If I take transparency and
11     objectivity separate from comparability. I think - I think
12     they're a little bit different because transparency, I think, is
13     very much internally controlled by companies. And I think the
14     same is true for objectivity.
15                 I think comparability to compare between companies
16     in an industry or even between industries is, I think, most
17     companies probably think their financial reporting is
18     appropriate for their circumstance, for their book of business,
19     for their management culture and whatever. So I think to
20     improve comparability is probably more a regulatory action from
21     your organization, from elsewhere, but I think objectivity and
22     transparency, I think, are more internally controllable.
23                 And whatever way your tools or devices in the market
24     place the regulators can do to push towards improving there, I
25     think I'm very receptive to it personally.
0022
 1                 I do think it's important to keep in mind that
 2     virtually everything on a balance sheet is loaded with
 3     estimates. I mean, even the - Loretta and I were talking
 4     before. Even cash, I think, is pretty objective but if it's a
 5     country that's got blocked currency, it's not readily available,
 6     if you've got something else where it's readily available but a
 7     high tollgate tax and you don't need it for operational purposes
 8     in that country, is it really equal cash to what's in your U.S.
 9     Main depository account and so on.
10                 So with everything loaded with various estimates of
11     uncertainties, I think it would be important for, you know, this
12     camel, this group over time to - well, what are the critical
13     one, two or three things. Because, I think, you don't want to
14     have a statements and the footnotes so long that you get the
15     buried facts doctrine and you just can't find it.
16                 So I think it's important to narrow down to the
17     couple. And whether it's uncertainties of future cash flows, I
18     think is, perhaps, more important that uncertainties of future
19     income or amortization rate is wrong. That's at some cost
20     already.
21                 MS. CANGIALOSI: Just to build on that.
22                 I think when I look at this, I agree with Gary. I
23     mean, I think we have to - we have to figure out what are the
24     biggest issues that we want to target because it really goes by
25     the nature of the asset. That - that is critical to
0023
 1     understanding how we can achieve comparability or transparency
 2     if that's the issue.
 3                 But you have to focus on what is the asset or
 4     liability that you're trying to really deal with because the
 5     answer is likely to be different based on that.
 6                 So I do think that it's - it's not only that but it
 7     really is helpful to understand exactly, kind of, how are you
 8     using that number. Are you using it to tie into short-term cash
 9     needs or are you using it to, you know, value the company based
10     on a - on a future prospects? I'm not exactly sure in some of
11     these. Again, it's really the nature of it that you need to
12     look at; how it's being used. Because that could also tell us
13     what disclosures might be more useful for you.
14                 MR. KABURECK: The risks if you take an identical
15     security, U.S. Treasury Bonds, I mean, one company gets held to
16     maturity and they value it one way. Because they really are
17     traders. The exact same instrument it might be valued
18     differently and so on and likewise. I mean, it's held to
19     maturity and it's - you've got the OCI element, so even
20     identical things are not necessarily getting measured
21     identically. So the business model starts to get to play a role
22     in here, too.
23                 I'm not suggesting I mean how to deal with that at
24     the moment, but, I mean, I think it's important, I think, of
25     investors to have a good understanding of the company's business
0024
 1     models they're following. Now, whether that's a disclosable
 2     event or sort of their business to deal with. I actually don't
 3     know that answer.
 4                 MR. KROEKER: Go ahead.
 5                 MR. PENMAN: Just an interesting point when you
 6     talked about assets being valued differently at different
 7     companies. Sometimes they're actually valued differently in the
 8     same company even when they have the same accounting treatment.
 9                 So, for example, I happen to go through the
10     Wachovia-Wells Fargo merger and one of the interesting things
11     was when Wells Fargo bought Wachovia. Sometimes they owned the
12     same assets. And all in the Held for Sale book and in the
13     purchasing accounting the Wachovia assets were held at what
14     Wells Fargo deemed to be the market value of those assets and
15     acquired on that day whereas if they owned the same asset in
16     their Held for Sale book they could keep it at their original
17     purchase price. So they had the same asset, even the Held for
18     Sale portfolio had two different prices.
19                 MR. KABURECK: That sort of points out some of the
20     ultimate limits of financial accounting and reporting what it
21     does.
22                 MR. KROEKER: And I think that's a wonderful example
23     of the one measure probably incorporates more uncertainties is
24     the allocation of purchase price to estimate a market for a held
25     for sale or a held available for sale asset versus a historical
0025
 1     cost value. And obviously in those - I mean, you have to
 2     determine fair value and disclose it for both whether it's
 3     recorded or not.
 4                 But a couple other examples, and I think getting
 5     back to the "what do investors want and how do they use it."
 6     Take an example like goodwill and the impairment of goodwill.
 7     If you look back historically where goodwill was at a cost model
 8     subject to amortization over an estimated useful life, certainly
 9     subject to impairment testing but probably occurred less
10     frequently because the number is being amortized. We're now in
11     a model where we put goodwill on the balance sheet and only
12     write that down subject to impairment, which is really, in most
13     cases, looking to the future prospects of the entity as a whole.
14      So now we're taking very uncertain things; estimated revenue
15     over the next 40 years; estimated costs or expense over the next
16     40 years and bringing that back to a number that we compare to
17     the value of goodwill.
18                 That's inherently, I think, more uncertain than what
19     we had done historically.
20                 What is it that investors are looking to when they
21     see that impairment of goodwill? You know, I've heard some say
22     that they get a lot of meaningful information about future
23     prospects, but, of course, that's only then limited to
24     situations in which goodwill is impaired. So that when the
25     value of the entity might be going up, you don't see the same
0026
 1     measures going through the income statement or, in that case,
 2     and the value of goodwill.
 3                 Or take maybe even a more controversial topic,
 4     because I think we might as well get them on the table if we're
 5     going to have a discussion. Let's get the controversial topics
 6     on the table. Take something like the measure of an enterprises
 7     own debt. A lot of press recently about the requirements, in
 8     some cases, either regulatory requirements or the option to mark
 9     your own debt; to estimate it fair value.
10                 Certainly inherently more uncertain than the
11     contractual amount of debt that you owe. People are doing that
12     to provide, presumably, meaningful information to investors.
13     What is it that investors benefit from that? Is that something
14     investors are looking for? Particularly when you talk about
15     enhancing comparability. Those trade-offs of providing more
16     forward-looking or results of analyses of future transactions
17     seemed to hit upon what accountants used to call the - the
18     trade-off between relevance and reliability. So something might
19     be more reliable if I put it on the books at cost but is that
20     more relevant?
21                 I think getting to the heart of those issues would
22     be - would be very helpful for us.
23                 MR. PENMAN: Stephen Penman, Columbia University.
24                 I manage money, a very small amount of money. But
25     we - we have a lot to do with fundamental investors at Columbia
0027
 1     because we're in the Benjamin Graham tradition.
 2                 I'd say one criterion - you brought a high level
 3     question here is I think investors look for certainty in the
 4     accounts. Okay? And it's all a question about handling your
 5     uncertainty but in the - I think in the fundamental tradition,
 6     Benjamin Graham would say, hey, listen, understand what you
 7     know, and separate from speculation. And when your accountants
 8     do your work, don't mix speculation with what you know. Because
 9     I need an anchor in the financial statements to - to build on.
10     Okay? Leave the speculation to me.
11                 So, for example, do I want a fair value core
12     deposit? Okay. Because I want to have a balanced book with the
13     mortgage loans. Well, that's a lot of speculation. Okay? And
14     it gives me an income statement which is just changes and
15     estimates and I lose my anchor.
16                 I'm trying to get something in terms of information,
17     the fair value of the core deposits, but I'm going to destroy
18     the information that I - I can anchor on.
19                 I think this is probably our objectivity aspect of
20     it. Okay? Just elaboration of that. And, of course, this is
21     the issue of the day to the extent in which you want to put
22     "deal with uncertainty" in the accounts versus in disclosures
23     and footnotes and so on and where you draw that line.
24                 MR. SURI: If I may?
25                 MR. KROEKER: No. Go ahead, please.
0028
 1                 MR. SURI: I think - I think that is the issue of
 2     the day. And I think when we look across the financials
 3     landscape so you've got two major industries, banks and
 4     insurance companies. And you see in one where you've got still
 5     a measure of amortized costs and you've got a level of stability
 6     in the accounts.
 7                 And I think as an investor what is most useful is to
 8     be able to have a contrast. It's the asymmetry of information
 9     that drives an investment decision.
10                 So you have a management view of a base case of what
11     they think it takes to remain a going concern. That's
12     important.
13                 What we're seeing in the new, upcoming proposals,
14     particularly for insurance contracts, as well as, I think, to an
15     extent even for financial instruments, challenges that very
16     proposition. And I think this asset liability view in our view
17     is far from settled, eradicaly. And practically speaking, I
18     think it leaves us at a - at a grave disadvantage. Not only
19     because of volatility but because you get marks like, own
20     credit.
21                 So my liability fair value has dropped. Why has it
22     dropped? It dropped because market thinks the value of my
23     assets has dropped. So I'm about to go bankrupt but I book a
24     four billion dollar gain?
25                 It - it - I think it defies credibility to have
0029
 1     accounting like that float through. And it's not a question of
 2     adjusting it out. When you see accounting like that and then
 3     you can't trace it through the financial statements in the
 4     footnotes, that really reduces confidence. And it's that
 5     confidence that then shows up in higher cost of capital, in
 6     reallocation out of particular sectors. And I think that's
 7     something that should be given some thought to.
 8                 I think standard setting and accounting should be
 9     evidence-based. That - that really is a fundamental. And the
10     only other point I'd make is business model is paramount.
11                 For a broker-dealer, absolutely everything should be
12     marked at market. But even there, their own marks are leading
13     already in third quarter '11. You're already seeing for broker
14     leaders core EPS. What the heck is core EPS? For a
15     broker-dealer, excluding one credit marks. That's not - that's
16     a slippery slope. And I think putting on a facade of
17     mathematical precision, whether it's probability weighted
18     estimates or, you know, confidence intervals or anything like
19     that, I'm reminded of Lotfi Zadeh, founder of fuzzy logic and
20     the principal of incompatibility.
21                 As the systems complexity increases, meaningful
22     statements lose precision and precise statements lose meaning.
23     I think it would be instructive to keep that in mind, because as
24     we start putting on all kinds of mathematical constructs on
25     things that are inherently uncertain, you will just open up to
0030
 1     more lack of confidence down the road.
 2                 MR. SIEFERS: Just a couple of additional
 3     statements.
 4                 I think to a certain extent along the lines of
 5     Pinto's comments, but I just wanted to react to a couple of the
 6     exam - examples that you had used; goodwill and evaluation
 7     adjustments.
 8                 I think more and more within the investment
 9     community I see people just saying something to the effect of,
10     "I can't figure it out, I'll assume it's bad and I'll move on."
11     But, you know, just to - to react to - to the examples that -
12     that you had used. One, goodwill, you know, at least in the
13     banking space, you know, I'm finding more and more investors
14     simply tune it out, you know.
15                 goodwill really does - does two things. One, the
16     addition of a lot of it has simply hurt your tangible capital
17     ratios. And then, two, the addition of a lot of it puts a cap
18     on what you can do or what can happen to your stock prices just
19     by virtue of more goodwill equals, you know, presumably a higher
20     price to tangible book valuation.
21                 So, you know, from that standpoint, I think in many
22     cases the market has - has simply taken goodwill, removed it
23     from the equation almost entirely. And devaluation adjustments,
24     DVA's, that's - that's obviously a much more esoteric concern.
25     But I'm afraid the media has really turned that into a little
0031
 1     bit of a circus of - in a lot of ways, you know, appropriately
 2     so because I think that - kind of the humor in the investment
 3     community is - is you can book your biggest gain when you have
 4     the least likelihood of being a going concern, you know, so -
 5                 I think largely, you know, the more certainty that
 6     we can introduce in the financial statements, the better. You
 7     know, particularly when you go through a crisis like we had in
 8     the past couple of years; at least in the financial space, i.e.,
 9     banks, you know, confidence is key. So to the extent that, you
10     know, you're going to go through a key or a kay, you have to
11     weight through, you know, a thousand pages of estimates that I
12     may or may not be able to figure out in a timely manner or in a
13     comprehensible manner, the certainty aspect to things is - is
14     incomparably significant.
15                 MS. DOPKIN: I was just going to add, I mean, today
16     over 60 percent of the S&P 500 financials x the rates are
17     trading well under book value. That's a very high percentage,
18     so, I mean, I think it speaks to the fact that people don't
19     understand some of the adjustments that are being made.
20                 You know, if we're going to have to live with the
21     DVA, then the company should have to give us the balances, give
22     us the duration. Something that we can try and estimate how
23     they're even getting to these calculations. But at the end of
24     the day, it really, you know, as Pinto and Scott said, it just
25     doesn't make sense why we are giving a company credit as they're
0032
 1     about to be on their death bed.
 2     So I think it either needs to be fixed or a lot more disclosures
 3     need to happen.
 4                 And, you know, in terms of just general transparency
 5     and, you know, take away, you know, financials highly complex,
 6     you know, move to something like the food companies.
 7                 You know, we took a look at the top ten food
 8     companies over the last ten years to just kind of come up with a
 9     concept of clean or not clean earnings and what's above the line
10     and below the line. Very simple: plant closures. Companies
11     have to rationalize all the times lines that they're running
12     whether it's, you know, Pfizer or, you know, it's a restaurant.
13     People - regular things have to happen over and over. Maybe
14     it's for a different product or a different location, but you
15     have 75 percent of the companies are probably trying to sneak
16     things below the line.
17                 And you have 25 percent of the companies, maybe,
18     that are - that are good and are reporting clean numbers. But
19     only two out of ten companies over the last ten years have not
20     tried to sneak things below the line. And then some are better
21     at pulling it out and telling investors, we don't want perfect
22     certainty otherwise there's not going to be anomalies in the
23     market and there's not going to be, you know, a chance to, you
24     know, try to buy stock a and b and see which goes up more or
25     goes down faster.
0033
 1                 But there just doesn't seem to be the consistency
 2     across industries on very simple items, too.
 3                 MR. KROEKER: I'm enamored of the idea of reporting
 4     clean, know what you know and then talk about the un -
 5     uncertainty whether that's in the financials or otherwise. But
 6     as - as Stephen described them, at least when I hear that - that
 7     - that initially rings something with me, but I think putting
 8     myself in the - in the position of - of somebody trying to set
 9     accounting standards, if you think of one of the issues in the
10     financial crisis was not just comparability but transparency
11     around lending activities and the credit that you've extended.
12     And in any model, uncertainty seems inherent in that unless
13     we're just going to go to a strict cost model. I think that's
14     really where the rubber starts to hit the road is
15     what is it and then how, if we have an anchor, how do we convey
16     that certainly not everyone looks the same. Not everyone's
17     loan is at 100 cents on the dollar. How do we do that? Of
18     course we're trying to project that which we think would default
19     either at a fair value basis or otherwise. So I'm really
20     interested in, you know, you hear words like mixed-attribute
21     model and you wonder why people sometimes say that as if it's a
22     bad thing. In any other context you might want to know multiple
23     attributes before you bought an asset.
24                 And so how you can provide more information about
25     here's the cost but here's what I expect. I - I don't know if
0034
 1     there's a way to think about operationalizing that.
 2                 MR. PENMAN: I think that's a very good situation to
 3     look at. You know, the proposals from - I think the big
 4     conceptual issue is whether you want an asset liability, balance
 5     sheet focus or an income statement focus. And what sort of
 6     business one is good for and what sort of business one's not
 7     very good for.
 8                 Those try to sort out their conceptual framework.
 9     And they've tried initially taken a balance sheet. Okay. So on
10     mortgages, on loans, the idea is now that you try to get them at
11     value. Okay? So what do you do? You mark them to market,
12     level one. And then you bring the bubbles into the financial
13     statements. Thank heavens we didn't have that in 2007 or things
14     could be far worse. If everything had been marked to market.
15                 The bubbles come in the financial statements.
16     Fortunately the gains would go through to OCI rather than to
17     income.
18                 If you got level three, of course, you've got
19     estimates. And that's - that's additional problems and
20     essentially your income statement just becomes changes in
21     estimates. In a business way, you're basically borrowing - your
22     arbitraging, borrowing lending rates, an income statement
23     business.
24                 If you amortized historical costs, it's level three,
25     okay. We do some sort of perspective, reserving. And the
0035
 1     question is, how - how would you get out of this dilemma? And
 2     here's the solution. It's historical costs but it's
 3     conservative historical costs.
 4                 A bank makes a loan and it - it's - what's it doing?
 5      It's taking on credit risk. When we account for a merge sign
 6     concern, we say, look, we're not going to be back you until we
 7     get the spot sale and the customers delivered. Okay. With high
 8     degree of uncertainty.
 9                 When the bank makes a loan, a bank is to take on
10     credit risks. So that's the question. In my mind, you want to
11     bring in accounts when you're fairly certain that you're
12     actually getting the pay back of the credit risk.
13                 So here's an accounting. Book the loan at the loan
14     amount for a few years, whatever it takes, record interest on
15     the loan at the risk free rate. That's the time value of
16     money. And - until quote "Credit worthiness," has been
17     established. That may be at origination. Okay. And not for
18     subprime line.
19                 And then recognize this credit spread between the
20     risk free rate and the - and the foreign rate. It may be
21     amortized out a few years. I think that's very good accounting
22     because it's actually - you just want to know the customer can
23     pay. Okay? And it gives me an earnings I can really attach to.
24
25                Yes, we can have disclosures of fair values, if you
0036
 1     wish, in the financial statements.   Understand that they could
 2     be bubbled they could be bubble prices on the loans. But - and
 3     the problem with fair market accounting, for the mortgage loans,
 4     which is a proposal, is, of course, you've got to match the book
 5     on the other side. And that's a real problem of matching your
 6     core deposits. The original price was to actually try and build
 7     in the goodwill on the core deposits by - by projecting what
 8     your customers are going to be in the future, which is very,
 9     very, in my mind, very against the way we do - we do accounting
10     for a manufacturing concern. We don't book for future revenues.
11                 When someone does that, you guys here put them in
12     jail. And the proposal is to get the - get the goodwill on the
13     core deposits, you know, you actually sort of reject that. And
14     then of course your income statement, then, just becomes changes
15     in these estimates. And you lose the quality of your income
16     statement.
17                 So that's - I think that's a good example of a way
18     of sort of getting - getting certainty into the statements.
19     Okay?
20                 You know, I got the feeling, if - if we had that
21     sort of accounting, yes, we would have had that - we would have
22     had that financial crisis. But, you know, maybe it wouldn't
23     have been as bad. Because banks would not -- up until it's
24     reasonably, reasonably assured that you're really got it.
25     Because prices and estimates suggest speculation on the
0037
 1     financial statements. And prices - prices can be informative,
 2     but they're also speculative.
 3                 MS. CANGIALOSI: So I'm finding this conversation
 4     very interesting. And I guess when I look at the financial
 5     statements, to me, uncertainty's all of the place in the
 6     financial statements. In particular, we've gone to fair value
 7     for a lot of things in the financial statements and the balance
 8     sheet, in particular. So, you know, when you say you - you
 9     don't book revenues, well, when I have to figure out the value
10     of an intangible, I actually have to sit there and try to figure
11     out what the cash flows on this will be for the next 20 years.
12     Okay?
13                 So in - in fact, they're making these, you know,
14     ten, fifteen, twenty year estimates of cash flows in the future
15     for a potential product. There couldn't be more speculation in
16     there if I tried.
17                 MR. PERMAN: But I think that's a specific
18     transaction, right? When I'm buying -
19                 MS. CANGIALOSI: No, no. That's not a specific
20     transaction. That's just a measurement of something I've
21     bought. So when I do a business combination, I've bought that
22     asset, I've got to measure it now. But I'm - it's highly
23     speculative, obviously. It's got lots of assumptions built in.
24     You know, if somebody can - can actually come up with a, you
25     know, 15 year forecast for a product that hasn't been invented,
0038
 1     you know, that's - that's what we try to do.
 2                 So it's an interesting concept. The goodwill's also
 3     a very interesting concept to me because we've talked about
 4     enterprise goodwill, we haven't talked about segment goodwill.
 5     And segment goodwill is an even more interesting concept because
 6     when you get down to the segments, you may have bought a company
 7     and you've segmented the goodwill. And then as the company goes
 8     on and evolves, you may decide to not invest as much in one
 9     segment as another segment. Because the goodwill is actually
10     covered by the future.
11     When you do that, you potentially have an impairment.
12                 So it's very interesting to see how this all works.
13     And I can understand because even when I look at that and I say,
14     but that doesn't make any sense because as an enterprise you're
15     - you're building the enterprise, but somehow I have a goodwill
16     impairment on a segment. So does - does that - you know, it
17     doesn't ring true to me.
18                 So even as a preparer, it doesn't ring true to me
19     but that's the accounting rules that are out there and that's
20     what we have to live with.
21                 MR. PENMAN: I guess the empirical question is where
22     the allocation of purchase price, the goodwill purchase
23     intangible fair value, actually means anything actually; whether
24     we're doing anything. Particularly between purchase intangibles
25     and the goodwill.
0039
 1                 MR. KABURECK: Let me just share a conversation I
 2     had with a private banker about a month or so ago. She was a
 3     major money center bank but did private lending, you know, as
 4     opposed to comm - public company lending. We had a four-hour
 5     layover with flight delays. And so I'm reading something from
 6     FSAC or ATF or something and she starts talking to me.
 7                 So we got into - and this went on for an hour almost
 8     about the most important things to her is an investor where
 9     understanding the company's business model, understanding how
10     well management understood it's business model and how much
11     confidence they have in management as being quality management.
12     She says, everything else is minor. At least in this person's
13     mind.
14                 I'm just sharing that with you for what it's worth.
15                 The other thing, I think - and this probably more
16     impact to the FASB and - for as long as I can remember, it was
17     -- good disclosure is not a substitute for recognition. And
18     I'm wondering is it time, perhaps, to revisit that? Because
19     there's a lot of things valued at fair value that you're never
20     going to get the fair value.
21                 I remember the very first financial instruments
22     roundtable we had here in this building five years ago and how
23     Schroeder, FASBI and I were on the same panel. We had something
24     of a spirited debate: should company's long term debt be marked
25     market or not. It said, it makes no sense. We - you know,
0040
 1     these are - I mean, this is a capitalization of company. It is
 2     intended to be held to maturity. I don't mind a footnote
 3     disclosure and we went back and forth on it. But it got me
 4     thinking, this was almost five years ago. Is the - should
 5     disclosure actually be a substitute for recognition at some
 6     point?
 7                 Should we revisit that, I'll call it "conventional
 8     wisdom," or as long as I can remember, founding thing, because
 9     going back to what Professor Penman said, people want
10     consistency. They want objectivity. And leave - and leave the
11     speculation to us. Well, that would seem more - maybe something
12     should be perhaps more in the footnotes going forward then
13     actually recognized and measured on the face of the statements.
14                 So its sort of a long-term, you know, thought I'm
15     putting on the table. Obviously, that's not something we can
16     operationalize quickly.
17                 MR. SURI: Absolutely. Couldn't agree with you
18     more.
19                 I think one of the things that we need is truth in
20     labeling. Fair value is neither fair nor a value. That's the
21     first thing.
22                 (Laughter)
23                 MR. SURI: So, you know, we need to get that on the
24     table. Get comfortable with that. The earth's not going to
25     shatter. And these items should be moved into disclosure.
0041
 1     These are additional add-ons that are useful to assess what
 2     management is viewing.
 3                 The most important thing - I cover insurance
 4     companies - I am hard pressed to think of an industry where
 5     there's more estimates thrown in that are long tailed and highly
 6     uncertain, fully exposed to macro-economic variables. And it's
 7     a bit like driving in a car without any doors, windows or walls.
 8      You wouldn't do that. And when you put the statement's primary
 9     measurements of an insurance companies exposed to the market
10     vicissitudes all you're doing is forcing investors to go back
11     and unwind that. And I guarantee you none of us can ever do it
12     right.
13                 We're - we're not equipped. And to look today at
14     evidence as to where insurance companies and how they're being
15     valued, the fair value is what's being excluded; EPS estimates;
16     price to book estimates. I look at equity valuation models.
17     Show me an equity valuation model that doesn't require clean
18     surplus. This concept of OCI has been one of -- I think it has
19     become a dumping ground. And as we hear more and more about the
20     new proposals that are coming in, there's more fair more value
21     inserted. And then the offset of that is, well, it will be an
22     income statement so lets dump it in OCI. No. Because there are
23     many of us that do look at the balance sheet. And when you look
24     at the balance sheet and you look at OCI, that just beginning to
25     look more and more like a crash dump.
0042
 1                 I think that's something that needs to change. If
 2     it doesn't belong in earnings, it doesn't belong in OCI. It
 3     should go into the footnotes, and it's very useful as an add-on
 4     to see here's what management is viewing. Are they credible?
 5     And here's what the market is viewing. You know. Market is not
 6     always right. And I think we need to stop giving too much
 7     credit to these concepts.
 8                 And level three versus level one, it's irrelevant.
 9     And if you look at insurance companies, everything they have on
10     their balance sheet is level three. I mean you're - you're -
11     you're paying management to deploy capital as a financial
12     institution. So that's what you're buying into; their ability
13     to deploy capital better than anybody else. So level one,
14     two or three, I think it was a helpful idea between FAS
15     157 and 159 but - and when we look at the disclosures today,
16     20, 30, 40, 50 pages, and I can't reconcile any of those tables
17     to what's in the balance sheet, it's just - and it's more
18     quantity and no quality. And I think that's something that, you
19     know, we need to be cognizant of as well. Because people start
20     chewing things out.
21                 MR. SIEFERS: If I can take a quick second. Pinto
22     brought up some really good points. I just wanted to shift it a
23     little to the - to the bank side just as an example. And we got
24     this notion of fair value comment. And, you know, to a certain
25     extent there's a push to increase fair value accounting in bank
0043
 1     income statements, for example; a loan portfolio, which is by
 2     far the largest asset class. You know, if I look at the
 3     introduction of greater fair value into a bank income statement,
 4     you know, what it would suggest is every 90 days we'd have these
 5     enormous swings in bank income statements simply because, you
 6     know, we'd effectively be having to manage two 90-day swings in
 7     interest rates.
 8                 Just take the last month or so, the tenure has moved
 9     about forty basis points or so. I can guarantee no bank
10     management is managing it's own balance sheet for that - that 90
11     day swing in rates. But, I know if it were to start getting to
12     be incorporated into income statements, all we would really do
13     is, you know, introduce a heck of a lot more volatility and
14     probably a lot less confidence into - you know, it's kind of the
15     integrity of those statements as well.
16                 So I thought Pinto made some really - really good
17     points there.
18                 MR. SURI: I would actually submit that if you look
19     at the insurance industry today, you're already seeing that.
20     You're already seeing what banks will look like. And just think
21     about the fact that if we think about financial intermediation,
22     the two main segments are insurance and banks. You know, I
23     think if - if we start - and both of these tend to be longer
24     term. So you know inherently that you're not writing a loan to
25     go sell it in the market tomorrow.
0044
 1                 And we've already had FAS 107, fair value
 2     disclosures. Nobody uses them, because they're not important
 3     for investment purposes. We're not concerned about what the
 4     value is today alone. It is where do we think this will land up
 5     three years, four years, five years down the road?
 6                 I think as you're looking at standard setting, as
 7     you're looking at regulation, it's really critical that you also
 8     give some thought to what the implications are and what the
 9     consequences will be for capital allocation. Because if you
10     move to, for example, where the ISB sets today for insurance
11     contract proposal, the sector, I think, has already been set by
12     others before me, is uninvestable. It's simply uninvestible. I
13     think that should be, you know, a big wake-up call. The largest
14     bond buyer globally in corporate credit, capital moves away from
15     that, what does that mean for the rest of the capital markets?
16                 MR. LITKE: I think to some extent we're over
17     simplifying a little. Investors want as much, I think - and you
18     said it - as much certainly in the numbers that get reported as
19     possible. But sometimes the numbers really aren't certain.
20                 So when you take the insurance example, if
21     somebody's issuing variable annuity contracts, very long tail
22     liabilities, the fact of the matter is, if insurance company A
23     and insurance company B issue a comparable contract, it should
24     have the same value on both person's balance sheets.
25     Essentially, they're exposed to whatever the long term interest
0045
 1     rates are and the long-term volatility.
 2                 But you - you can't put the risk disclosure into the
 3     numbers. You might put some sensitivities into the numbers, but
 4     ultimately you've got to get some risk disclosure around these
 5     numbers. I think your question about DVA was a - DVA came in as
 6     an attempt to impose a false consistency. You know, you wanted
 7     somebody who issued a bond and somebody who bought a bond. You
 8     wanted it to add up to the value of the bond.
 9                 But it's - it's - it's not. That's only true in -
10     it's not two different people's balance sheets. So the sum of
11     all the balance sheets doesn't necessarily add. And we're
12     trying to make things add up that don't always add.
13                 MR. SURI: I think increasingly what accounting is
14     doing is, you know - it appears to be - I'll put it candidly -
15     naive application of basic theory. And it ignores certain basic
16     tenants from economic theory to justify how these things show up
17     in primary measurements.
18                 And the issue is not that there shouldn't be fair
19     value. The issue is, where does it belong. It does not belong
20     in primary measurements. That's the bottom line.
21                 MR. KROEKER: I heard you say earlier it does in
22     some cases, at least, you thought that for investment - you
23     know, where you're trading - you know, as you're trading -
24                 MR. SURI: Sorry. I just want -
25                 MR. KROEKER: - spent a lot of time in the crisis
0046
 1     dealing with -
 2                 MR. SURI: Absolutely.
 3                 MR. KROEKER: - with the role of fair value. I
 4     heard from an awful lot of investors is, well, they took
 5     confidence when you've got trading activities, things like
 6     derivatives where there's not an anchor absent. Some type of
 7     estimate. If you went to a cost model for derivatives, you'd
 8     have something that was zero at inception and swung wildly in
 9     terms of its economics.
10                 MR. SURI: But I think what is also important is,
11     how - how do we define what a derivative is. If I take a
12     guaranteed living benefit and define that as a derivative, you
13     know, that creates a whole lot of problems for investors. And
14     what it does is, at the end of the day, it imposes an
15     exceptional discount on insurance companies that issue that
16     product.
17                 So if as standard setters and regulators we decide
18     that, you know, you're - you're - you want to take things in a
19     different direction, you can, but at the end of the day, if
20     you're changing - you're forcing a company to change the
21     business model because of the regulation or the reporting of it,
22     I think somehow that - that doesn't quite sit right.
23                 I think - I think the business model should be
24     prominent in how these standards are developed.
25                 MR. PENMAN: Yes, that's correct on fair value.
0047
 1     It's talking business. I mean, if - I don't think we'd disagree
 2     that a hedge fund should be fair value, okay. The holding - the
 3     holding - the holding assets -- that the outcome's dependent on
 4     the fluctuation of market prices. Okay? It's just investment
 5     fund. And that seems a very clear case of fair value
 6     accounting. It's the one to one principle, okay. The price
 7     goes up five dollar, your wealth goes up five dollar.
 8                 For an organization whose wealth comes from trading
 9     with customers, it doesn't seem right. I mean, if - if - if it
10     comes from customer relations, your productive technology, it's
11     any - any business where the top line is revenues to pretend
12     that you're going to actually get the accounting right by
13     marking the balance sheet to market, doesn't seem - it's not -
14     it's - if you're - you're a speculator holding coal, you
15     speculate in coal, okay, and you just - the price goes up and
16     down, you bought it market to market because you're trading
17     coal. You're a commodity trader. But if you don't got a pile
18     of coal sitting - a pile of coal that's sitting there to go in a
19     vast furnace to make steal. The fact the price has gone up,
20     it's not - it's not appropriate to have fair value accounting
21     there.
22                 I think that's - that's sort of an important
23     principle; to separate the trading portfolio from the bank's -
24     the bank's business portfolio.
25                 MR. KROEKER: Marc and Chairman Doty, feel free to
0048
 1     moderate and step in whenever you want. You don't need to look
 2     to be called upon.
 3                 (Laughter)
 4                 MR. SIEGEL: Jim, can I ask one question? No.
 5     Well, I will.
 6                 I guess - I guess - it's interesting the
 7     conversation has - has become one, not surprisingly, of fair
 8     value versus cost. And I want to get back to a little bit of
 9     even in the cost environment there is certainly management
10     uncertainty. And - and I really want to get at what are some of
11     the thoughts around there. Because, you know, the - I - I -
12     some of us have a little bit of a problem with business model
13     being the sole determinant because, as - as Adam pointed out
14     earlier when he was looking at Wells and Wachovia, the same
15     asset in the portfolio is - is being marked - is - is being held
16     at two different measurement attributes. And that doesn't make
17     sense.
18                 But yet when I hear Stephen talk, he was saying that
19     if a hedge fund held a, you know -- a loan book that should be -
20     that should be marked, but at the same - if a bank held the same
21     asset, that should be at cost because that's the business model.
22                  And that's - seems like it's a tough trade-off when
23     you're talking about the same asset should it always be. And I
24     understand.
25                 The FASB has in 2009 proposed more fair value for -
0049
 1     for loans since then and - and we got lots of feedback similar
 2     to today and the FASB is no longer looking to mark loans on the
 3     balance sheets so that should be off the table.
 4                 The FASB is not looking to mark deposits to the - on
 5     the balance sheet, and that should be off the table. It was
 6     actually never trying to - correct something that was said
 7     earlier -- it was never trying to book a customer deposit
 8     intangible on the balance sheet. That was actually explicitly
 9     excluded.
10                 But in a cost measurement so today loans are at
11     cost. And you have to estimate a credit impairment for those
12     loans. That is an uncertainty. That's a measurement
13     uncertainty. It's a cost you have to have a -- what's going to
14     be the loan impairment.
15                 The FASBs rules about the incurred loss model,
16     waiting until it's certain that you have not gotten a default -
17     you have gotten a default on a loan, that's when a loss is
18     incurred. And the - and the FASB was criticized soundly for not
19     booking losses in a timely basis.
20                 And the FASB is now trying to understand when to
21     book those credit losses. And I'd love to get some feedback on
22     that, because that is not a fair value. That's a cost
23     environment. What is the information set that we should be
24     looking at? What are the uncertainties and what information do
25     you need as investors to try to get your arms around that
0050
 1     measurement uncertainty?
 2                 MS. DOPKIN: I think it goes to, like, okay, so how
 3     much rainy day reserves are you going to let, you know, an
 4     individual company build up? I mean, the problem - the problem
 5     reserving for banks and even reserving for insurance companies
 6     is that in the good times they constantly under - hold back and
 7     then in bad times, they're - they're playing this catch-up game.
 8      Then when they need to go raise capital, they can't raise -
 9     they can't raise capital. I think in the standards that were
10     trying to be laid out, because it was like a year ago, you know,
11     to the extent that, you know - and even with our firm there was
12     various opinions as to, like, how much provisioning should a
13     company be able to do. And is it - should they be able to
14     provisions for around the corner versus around two years because
15     you know cyclically loans are going to have a certain type of
16     charge rate and, again, our firm has various opinions.
17                 But today it just seems that there isn't enough
18     flexibility to reserve enough up front. And it kind of goes
19     back to when Suntrust, like years ago, they got sued for - or
20     whatever, had to do a settlement. And that's what banks use all
21     the time. I can't - I can't put up enough reserves because they
22     go back to, it's not - I don't know whether there's going to be
23     a loss. I don't see a loss six months from now.
24                 But you know cyclically if you go back and you look
25     at what your book is and how much your losses are on average, I
0051
 1     think there should be a better ability to smooth the provisions
 2     over time.
 3                 MR. SIEFERS: Excellent point. I mean, as somebody
 4     who's covered bank stocks for the last 10 to 15 years, that
 5     SunTrust example that you brought up, which was, I think, from
 6     '98, that reeked enormous havoc on both the bank earnings and
 7     capital - capital dynamics in that I think SunTrust for the last
 8     - or that decision, I should say, for now the better part of the
 9     last 15 years has been used as the backstop for why - why we
10     have this pro-cyclicality in the banking space at least.
11                 You know, basically, we went through call it '03 to
12     '07, we went into the financial crisis with the least amount of
13     reserves that we had had in history, basically. So what that
14     lead to was everybody needed to be - felt their reserves at a
15     time when the stocks were decimated. Couldn't get capital and
16     they needed it.
17                 So, you know, that is - is one area where I would
18     love to see a little more flexibility in terms of reserving. I
19     think probably the best thing I ever heard is completely
20     unrealistic, but, you know, get rid of reserves altogether and
21     add 200 basis points to bank capital ratios. Now, to a certain
22     extent, actually, Basal three has taken care of that for us.
23     But, you know, just to the extent that we could maybe keep a
24     little more flexibility in reservement policies, that would be
25     great.
0052
 1                 And I wanted to quickly tie this into something that
 2     Adam had said earlier just on valuing assets differently within
 3     - within a bank.
 4                 I'm not sure if you meant to, but that fair value
 5     argument and taking credit impairments at the time of a merger
 6     had - you know, there have been some really significant
 7     ramifications. I guess the way I think about things, for
 8     example, a loan is generally pretty liquid. So, you know, from
 9     the investors standpoint, the last thing that you have to go on
10     is the last mark.
11                 So what that encourages in bank M&A activity is a
12     bit of a vicious cycle in that, you know, a second mark, for
13     example, if there's been deal a, deal's b mark is not considered
14     credible unless it's at least as conservative or punitive as -
15     as the first mark.
16                 So I'd - I'd point to at least - this is sort of an
17     extreme set of example, but it - it had ramifications in the
18     financial crisis.
19                 For example, when J.P. Morgan bought WAMU out of
20     receivership they took big marks on that WAMU portfolio. The
21     first thing people did the next morning was take those - put
22     those same marks onto Wachovia's balance sheet. You know, then
23     Citi and Wells Fargo both -- both, you know, made bids for
24     Wachovia, after it was effectively run on that bank and were
25     even bigger than the WAMU marks. And, you know, a month later
0053
 1     there was no National City, which PNC gobbled up.
 2                 So it can be really, really tough and have real
 3     ramifications, particularly during times of crisis. So just an
 4     additional thought.
 5                 MR. PENMAN: But - but I think back to my earlier
 6     point, there's two ways. The loan loss reserving is a big
 7     problem. And one way of handling it is - is to book the revenue
 8     and then say, well, maybe I'm not going to get it. Okay. And
 9     sort of write it down.
10                 The alternative would be, don't book them til you're
11     really sure you got it. Okay? Which should be the conservative
12     way of doing it.
13                 So really when - when the customers got -- when the
14     mortgage - let me back up -- equity in their home, credit
15     worthiness has been established, then - then I book it and then
16     I amortize it in and I amortize it in slowly. That's another
17     way of handling it.
18                 So the onus is not - not on the presuming they're
19     going to - you've got it and then worrying you haven't got it,
20     but actually making sure you got it.
21                 MR. KROEKER: So that's a really difficult one when
22     I think about it, because there might be some loans where even
23     that isn't enough if it becomes evident at some point that the
24     individual isn't going to pay so now you have an asset at
25     hundred and if it becomes apparent, you know, and then you -
0054
 1     you've picked a level of uncertainty, around apparent that the
 2     person is not going to pay. Since we would hear vocally from
 3     investors if we continued to carry those at a hundred. And I
 4     think that's the challenge that FASB's facing right now with
 5     saying we should be more forward-looking on provisioning, which
 6     sounds like incorporate some increase level of uncertainty as
 7     opposed to waiting, as we do today, until a loan loss is
 8     probable.
 9                 MR. LITKE: One thing you might do if you're looking
10     at provision loans, look at the way people do insurance but
11     don't copy it exactly, which is to say, when I make the loan, I
12     have a pretty good idea what the expected losses are, not on the
13     individual loan but on my loan portfolio, even if it's a bunch
14     of consumer loans or a bunch of small business loans. Have a
15     good idea what they're going to be over the life of the loans.
16     That's going to move up and down.
17                 There's no particular reason not to allow reserves
18     when I believe that the losses over the remaining life of the
19     portfolio are going to be higher than the income over the
20     remaining life of the portfolio. You're not being aggressive in
21     allowing extra income but now you've allowed some long term
22     estimate of future losses to come into your provisioning before
23     you actually have to wait until the loss happens. And nothing
24     wrong with that.
25                 MR. SURI: You know, the existence of a loan loss
0055
 1     reserve, what that's saying to me as an investor is, there's
 2     uncertainty in the revenue stream. I mean, that's - and the
 3     degree of uncertainty you can measure because you've got the
 4     disclosures, you've got the loan stats.
 5                 I think it all comes back to how much disclosure and
 6     then - specifically, I think Marc your question about incurred
 7     versus expected. It should be expected. When you issue a loan,
 8     you have some expectation that there may be a loss. Perhaps
 9     maybe you have some expectation there's no loss. That's fine.
10     But as long as there's some disclosure around either that loan
11     book, portfolio, or by specific categories of loans, I think
12     that allows us to then dig deeper and have that discussion and
13     be able to make those adjustments.
14                 I think that definitely is more helpful than the
15     current incurred loss model. I think the PNC insurance, you
16     know, certainly more so than life, would be - would be
17     instructive.
18                 MR. KROEKER: This certainly doesn't have to just be
19     - it wasn't intended to be necessarily about loan accounting. I
20     think it's demonstrative of - of the issue but we see it in
21     other places where I think it's equally as challenging really on
22     both sides. The FASB issued guidance on accounting for
23     uncertain tax positions, so those are things that there is some
24     inherent level of estimate in the future as to what the ultimate
25     outcome might be on a tax uncertainty.
0056
 1                 And, of course, they responded there because absent
 2     that guidance, I think people were defaulting to a more general
 3     level of reserving that wasn't necessarily meeting, I guess, the
 4     three criteria I heard at the outset of transparency,
 5     objectivity and comparability. But that's another area where
 6     now people are being asked to take things that could really
 7     range the spectrum from those things that I could estimate with
 8     some degree of precision to those that might be fairly
 9     speculative until - in terms of the final outcome.
10                 So I think it isn't just necessarily about loans.
11                 MR. PENMAN: In the write-up you sent us you
12     referred FAS 5, okay. They only book them as probable and can
13     be reasonably estimated. And the other model, of course, is the
14     fair value model you estimate. Okay. And that's a good
15     intention, which way you want to go. I tend to like the FAS 5
16     model myself. I need a balance sheet when, you know, I actually
17     got some hard numbers there. I had to put an estimate on of a
18     low probability law suit, okay. And then change that estimated
19     period, you really screw up my income statement because all this
20     has changed the estimates.
21                 That doesn't mean - of course, you don't want
22     disclosure with it if possible or remotely possible, whatever it
23     is.
24                 But I think that's a good - that's a good - that's a
25     good - good intention there. Whether you want FAS 5 criteria or
0057
 1     you want to do estimates of probabilities.
 2                 MR. KABURECK: Jim, I would think one of the ways to
 3     wrestle the question is, when is a bad estimate being disclosed?
 4      Recognize or disclosed, this case would be better than - I
 5     mean, is - there's - there's degrees of reliability, you know,
 6     which eventually become degrees of unreliability as you try to
 7     deal with the unknown or contingencies or uncertainties. And I
 8     think there's a general view that within some pretty wide
 9     tolerable limits, and bad estimates are the no estimate.
10                 I think that sort of conventional wisdom and maybe
11     it's not a hundred percent shared, but I think it's broadly out
12     there. And you might want to revisit the question; what are the
13     tolerable limits of disclosing estimates when you have
14     management, or whoever the preparer is, has zero confidence in
15     them as having any degree of probability in them.
16                 And, again, I'm not suggesting how you answer the
17     question. I think it's a fair question about the limits of
18     disclosed estimates.
19                 And the only other point I would make on that is -
20     and I think this is true a couple of times - you might have
21     very sophisticated financial models, actuaries predict 60 years
22     to the penny, but ultimately they're probably premised on a
23     couple of very simple, high-level assumptions, whether it's a
24     goodwill recovery. You know, earnings will go three percent.
25     That's a high level assumption projected out ad nauseum but most
0058
 1     estimates are probably are grounded on two or three very simple
 2     high-level assumptions. And let's not pretend facts on the
 3     company spreadsheet that it actually is really precise.
 4                 MR. KROEKER: I take it when you say, "bad
 5     estimate," you mean imprecise not -
 6                 (Laughter)
 7                 MR. KABURECK: A well-intended, highly imprecise
 8     where many experts could widely differ on what it is on the
 9     various estimate.
10                 MS. CANGIALOSI: Yeah, I mean I would - I would echo
11     that and I think, again, here what I'm hearing from - from a lot
12     of the people, if I'm interpreting it correctly, is when you're
13     dealing with things that have a shorter term horizon, estimates
14     seem more appropriate, because you can get much more precision,
15     if not precision, you have a better view or a better window into
16     the future.
17                 When you come up with very long-term things or
18     things that have maybe 20 variables in them, it gets a lot
19     harder to come up with an estimate. And it certainly would be a
20     lot harder for the - the folks in the investing community to
21     figure out an estimate because you'd have to know how to deal
22     with all those things.
23                 I - I do think, you know - and I loathe to say
24     contingencies, in particularly litigation is one of those areas
25     where we see that all the time where you've got human elements
0059
 1     that are unpredictable. You have judges. You have plaintiffs.
 2     You might have hundreds of cases or thousands of cases. And
 3     they're in different jurisdictions. They're with different
 4     judges. They come up with different outcomes. You know, Bell
 5     Weather cases are - may or may not really be Bell Weather
 6     cases. They're hand-picked, supposedly to show something, but
 7     people disagree on that.
 8                 So it's very difficult, even with time, because you
 9     get to things like discovery. Does everybody understand what
10     discovery is? How - how quickly does it happen? Why does it
11     take so long? What are the - the facts - are there real facts
12     behind it? Is it a novel theory that somebody's trying to try?
13                 So how do you take all these elements and come up
14     with an estimate and I think how would you audit them, because
15     it's as equally as difficult to come up with the estimate as it
16     is to audit those kinds of things.
17                 So I think, you know, where we have less
18     speculation, estimates are a good thing. Where they're highly
19     speculative, I think that's where, you know, it's - it becomes a
20     lot more difficult as to - certainly putting them in the
21     financial statements, to me doesn't make a lot of sense.
22                 Whether or not you can disclose them - I mean, I
23     would be loathe to disclose an estimate, as Gary said, that I
24     had no confidence in just because I had to do it. So -
25                 MR. KABORECK: I think however you bring this -
0060
 1     however you and your colleagues bring this forward, litigation
 2     would not be the subject of choice I would pick. There's a lot
 3     of lawyers in the room and, I mean, you got all the
 4     attorney-client plus you put a back - the very highest out
 5     there, might become self-fulfilling. I would focus on the
 6     operational assets and operational liabilities that management
 7     sort of works with day to day. And that's sort of a special
 8     case the litigation.
 9                 MR. DOTY: I've been sitting here, as a lawyer
10     should, keeping accounting principles and auditing separate -
11     trying to keep that separate in my mind. And whenever I start
12     talking about this, I know that the stomach begins to turn from
13     Martin Bauman and Jay Hanson because they're not sure that I can
14     actually keep it straight.
15                       But we, of course, are interested in what
16     investors want to know in terms of considering the audit
17     reporting model and considering other transparency and
18     objectivity initiatives we have.
19                  I was particularly struck by what Jennifer Paquette
20     said in this regard, because I suppose we recognize - we're
21     recognizing it inherently in the discussion the distinction
22     between the disclosure and attestation. I'm not sure, though,
23     that Pinto and others are really trying to rollback the "C" on
24     fair market value or whether that's practical in the area of
25     inclusion of - of amounts in the balance sheet.
0061
 1                 Therefore, it seems to me, we -- we would be
 2     particularly interested in knowing how investors react to the -
 3     to the emphasis we have put on it, which is trying to make sure
 4     that auditors understand and get behind the variances in terms
 5     of valuations that are placed on intangible estimates.
 6                 We have a task force going to look at - at
 7     valuation. How much can be said in the audit report about the
 8     range -- recognizing, in other words, that the audit is not
 9     exact. How much can and should be said in the audit report to
10     recognize the range of of possible estimates and how the
11     estimate or how the valuation that management puts on a
12     financial instrument was arrived at. And if, in fact, more is
13     done in that regard, are you - are you more comfortable with the
14     uncertainty if you know how - more about how the management got
15     there; if you know more about that from the management and/or
16     the auditor. And does that reduce - it may not effect the
17     volatility. The volatility may - may still be there. But does
18     that change your view about the ability to live with
19     non-comparability?
20                 MS. PAQUETTE: I think enhancements to what we hear
21     from auditors in financial reporting are worthy of pursuit.
22                 When I listen to challenges in how to account for
23     things that are uncertain, I'm in an area that I'm not an expert
24     in. I'm - I'm an investor as opposed to an auditor or an
25     accountant, and I'm respectful of what those challenges are as I
0062
 1     hear them here this morning.
 2                 From - from my perspective, I imagine that we're
 3     looking for things that are of significance and material. And
 4     I'm not using that in an precise sense. But executive teams of
 5     corporations will assess their businesses and they will assess
 6     estimations and they will make decisions on what they pursue for
 7     their businesses in the future.
 8                 I think what investors are looking for is a better
 9     understanding of what those assessments are and what variables
10     were used to make judgements when it comes to valuation.
11                 Colorado Para along with other investors have
12     expressed support for this notion of hearing from auditors on
13     where were significant estimates made that perhaps they were
14     allowable by gap accounting, but they weren't, perhaps, the most
15     used or best practices. And understanding -- and having a
16     discussion of what those measures were. And perhaps they're
17     very good justifiable reasons why a different model and numbers
18     were used, but understanding what they - they were.
19                 I'd like to think that from an investor perspective,
20     we're trying to be pragmatic and not ask for the world and ask
21     for the data that we can't use. That isn't going to help us
22     analyze how a company may perform in the future.
23                 But I do get a little frustrated if - if the
24     response after 2008 is we can't, it's hard, it may not be
25     relevant, it may not be helpful. I think if we try and get some
0063
 1     of the larger categories that influence results of companies and
 2     get better disclosures in those areas, I think we would all be
 3     well served.
 4                 MR. SURI: The only thing I would add to that - I'd
 5     agree. I think something along the lines of an exception
 6     report, if you will, where you have some disagreements. There
 7     has been some gray areas. You know, there's - there's a recent
 8     case in the last few weeks alone where something like that from
 9     the auditing side perhaps could have been - could have led to
10     some questions.
11                 You know, if we go back having kind of survived
12     through the crisis, I'd say an auditor expanded DNA as cold
13     comfort when things go wrong. I can't that to an investment
14     committee and say, well, you know, the auditor said this. It
15     doesn't work.
16                 So at the end of the day, the financial statements
17     are already being certified by the management team. And the
18     question then becomes, how many more people need to certify
19     these statements. And are we going to have longer lists of
20     signatures than we do statements?
21                 At some point we have to cut that. I think an
22     exception report, a brief bullet point, even, of issues would be
23     helpful.
24                 MR. SIEFERS: I think just to - to react to to your
25     initial question here.
0064
 1                 I think to the extent that the companies we're
 2     discussing, the market will ultimately determine how aggressive
 3     or conservative it believes any individual management team is.
 4     You know, I think Gary had noted earlier just the concept of
 5     business model. When I heard some of his comments, you know, I
 6     took - I took that to sort of mean, you know, differentiated
 7     factors that - that people will look for in individual
 8     companies.
 9                 You know, I think over time, you know, if you get
10     the background of, you know, items that went into any individual
11     assumption, I think that's fine. Over time, the market will -
12     will judge whether those are - are conservative or aggressive
13     and, you know, rationalize those companies that it - it deems to
14     be too aggressive.
15                 You know, I think it's practically something like 90
16     percent of the S&P 500 rolls over every 50 years, right. So,
17     you know, at the end of the day, that's - that's kind of how the
18     market and capitalism ultimately works.
19                 So, yeah, you know, to get a sense for better
20     background of, hey, here's - here are the x, y, and z reasons
21     that are making a certain decision or a certain assumption, you
22     know, is certainly helpful and then ultimately the market will -
23     will - will judge it.
24                 MS. CROSS: So listening to this conversation I
25     can't - since I'm not an accountant - the current rules require
0065
 1     MD&A disclosure about known trend events on certainties that are
 2     reasonably likely to make future results and the financial
 3     condition not look like what you have today. And we have the
 4     critical accounting estimates disclosures. We had the
 5     prescriptive rule proposal, which was not adopted, but we
 6     continue to have the disclosures about critical accounting
 7     estimates. And in my prior life, I helped companies craft
 8     those.
 9                 It feels a bit like we're trying to solve for
10     something where we already have requirements for these
11     disclosures where, because of the accounting decisions are so
12     difficult, we default to more disclosures. And so we end up
13     with just redundant disclosures all over the place. You know,
14     the risk factors have one level of disclosures. MB&A has one
15     level of disclosures, critical accounting estimates and then you
16     get into the footnotes and they become completely unmanageable
17     in length and duplicative of the filing.
18                 And I'm struggling very much with the complaint I
19     hear constantly from the corporate community, which is we just
20     keep adding requirements for more and more and more disclosure.
21     And there's - life is simply uncertain. There - there are - we
22     can't measure everything and we can't provide certainty about
23     everything.
24                 So is there - is there something to be done where
25     you can marry up all these different requirements in a way that
0066
 1     doesn't result - are the critical requirements in MB&A and
 2     elsewhere just not worthwhile and so people are not - they're
 3     not written right or people don't provide the right disclosures
 4     because they're not subject to audit? Or - I'm struggling a bit
 5     with how - how do we - how do we address that problem without
 6     just adding more disclosures and recognizing that - that we
 7     can't make things certain that are uncertain?
 8                 MR. SURI: If I may. You know, there's a recent
 9     transaction that has lead to some serious problems for a
10     broker-dealer. And when you look at the transaction, getting
11     sale classification was perfectly within limits under the gap.
12     But when you look at the substance in the transaction, clearly
13     it was not a sale. And I think in instances like that where an
14     auditor presumably is already
15     having those discussions with management, at least having some
16     sort of a hint or a question of saying, this is where we
17     disagree. It doesn't have to have details on that transaction,
18     but at least it gives investors an idea. Because when we're
19     looking at the financial statements, there was no evidence that
20     such an - you know, of such an assumption had been made.
21                 And having some sort of insight, okay, that there -
22     there are some concerns or there's been some more discussion
23     around this, that - that's really - I think that's more the
24     exception than across all aspects.
25                 MR. PENMAN: Yeah. Mr. Doty, what about the
0067
 1     requirement from your Board when the auditors actually see a
 2     firm conforming to GAAP but it's formed of substance? They
 3     actually have to have a conversation with the audit committee
 4     and point it out to them. You know, this is transaction
 5     retrievals. And it's - so it would be good if the auditor would
 6     - actually were required to have a conversation with the audit
 7     committee saying, look, yes, it's consistent with GAAP. I mean,
 8     there's all sorts of screens in the structural engineering
 9     business to to get around GAAP, to get a presentation. The
10     auditor is required to actually make a judgement as to whether
11     this is formed of substance and then have a discussion with the
12     chair of the audit committee.
13                 MR. DOTY: Well, without commenting on any case that
14     may be in the news now and having regard for Meredith's valid
15     question of when do the actual textual non-financial disclosures
16     become so overwhelming. The statute clearly does require
17     conversations with the audit committee when there are preferred
18     principles of accounting.
19                 We have a proposal out, which I think will be,
20     again, refreshed, on communications with audit committees. One
21     of the things the Board is very concerned about is that we
22     enhance and foster better communication with audit committees on
23     a range of subjects without - without taking away from or
24     sapping the ability of the audit committee to maintain the
25     effectiveness of that dialogue in the board room.
0068
 1                 It's a very real issue. And one of the lessons that
 2     came out of the financial crisis, I think, loud and clear for
 3     us, in addition to the difficulty of dealing with the
 4     estimations, was that investors felt that there should have been
 5     a lot of robust discussion with the audit committee.
 6                 In some cases, probably clear that happened. And in
 7     some cases, not so clear. There's a range of talent and of
 8     activity level on audit committees. So all of that is, I think,
 9     very much in the mind of - of the Public Accounting Oversight
10     Board right now and it will be - it's something we'll be wanting
11     comment on from all of you.
12                 MS. DOPKIN: You know, I think it - you know, the
13     things that we're looking for are the hidden leverage rate. In
14     that particular case, there was much more leverage than was
15     stated. When it comes to, you know, the operating leases that's
16     taken kind of forever to maybe fix the accounting. The
17     information is there to investors to back it up. The rating
18     agency is - it's really transparent as to what's happening, you
19     know, with potential leverage from the operating leases.
20                 So in this case whether it's a sale or not a sale,
21     it's the spirit - form over substance.   And if it's really a -
22     if it's not really a sale, then something in there, you know, to
23     investors, "Hey, the leverage really isn't 5x it's 35x," is
24     quite important.
25                 And then the second thing that is frustrating for
0069
 1     investors is misguided comfort when companies disclose much
 2     smaller net numbers. And they don't really - you know, there's
 3     a lot of - you know, too big analysis to - why do we need to
 4     show all this, you know, all this - all these big gross numbers,
 5     what you really care about investor is net. Well, two net
 6     numbers are not necessarily identical if one of them came from
 7     coverage from a better credit party than another. And that
 8     information at this point is just not transparent to the
 9     investor.
10                 And given what we went through in the last crisis, I
11     don't really think it's that unreasonable to give information to
12     investors with a little more clarity, how you're getting to the
13     net number. It's not giving every single number, but enough
14     information that you have a sense for, are there credit-worthy
15     counter-parties behind the gross to get to the net. And that
16     information is just not there. And it's just as bad as hitting
17     leverage of things that are really not a sale when they're
18     deemed a sale.
19                 MR. SURI: I couldn't support that more. I think
20     the gross versus net had been - if I go back to 2007 through
21     2010, it was worse than pulling teeth without anesthesia. They
22     just - they would not disclose it. And I think, you know,
23     what's a Greek CDS worth today? You know. If you just report
24     me net numbers, it says nothing. If we look even today, it's
25     net numbers being reported and then
0070
 1     you're having these, you know, contentious arguments.
 2                 MR. KROEKER: So to be clear, in the gross versus
 3     net, are we talking about derivative - principle derivative
 4     exposure where you have derivative assets and derivative
 5     liabilities and they're being combined because they might be
 6     settled under master netting arrangements? Is that -
 7                 MR. SURI: Yes. Absolutely.
 8                 MR. KROEKER: Okay. I just wanted to make sure when
 9     you say, "net exposures," that - that's - that's what we were
10     focusing on.
11                 MR. SURI: But even - even, for example, with a lot
12     of MBS holdings for financial institutions, a lot of them were
13     reporting them net. We've got hedges against us. Well, hedges
14     from who? Right. And from entities that we already have
15     concerns about, as you find out after.
16                 I think those are the concerns that the gross
17     numbers breaking out of who the counter parties are.
18                 MR. LITKE: I think there's - I mean, having -
19     having sat through having to prepare some of these numbers and
20     even get risk committees and Forbes to understand them, you're -
21     you can have that kind of disclosure when you're in the middle
22     of the crisis because you know what you're worried about. But
23     if you talk about somebody's entire counter-party book and they
24     have thousands of counter parts, you don't know which particular
25     asset class is going to be the one that's a problem two years
0071
 1     from now.
 2                 And, you know, you mentioned hedge funds. Most
 3     hedge fund transactions are collateralized. So, in fact,
 4     they're not really the worse the counter-parties in the world.
 5     The worst counter-parties in the world are the people who don't
 6     post collateral.
 7                 And - and - and the problem becomes how do you
 8     distill it? So I think that's something - it - it can be very
 9     hard - gross versus net is something reasonable to put in the
10     financial statement because it is an indication of the total
11     amount of risk but if you want to start disclosing the
12     counter-parties or the types of counter-parties and whether you
13     have wrong way risks, I think that's something that has to be in
14     the discussion. I don't know how you'd put that in the
15     statements in a way that was consistent from quarter to quarter.
16                 MS. SURI: Actually, it's not a question of in the
17     primary. I think this is about disclosure. And I wouldn't see
18     why that would be an issue because insurance companies provide
19     that under the insurance side.
20                 So, you know, you can see the top 20 counter-parties
21     on the insurance book. I mean, that's pretty much standard
22     disclosure on the P&C side. So being able to disclose
23     counter-parties, I think, particularly ones that are
24     significant, you know, maybe that's there. Some thresholds.
25     But there should be some added disclosure on - at least in the
0072
 1     footnotes.
 2                 MS. DOPKIN: And, you know, and while there might be
 3     some collateral behind the hedge fund in the - in the posting, I
 4     mean, it's not a regulated industry in the same extent as other
 5     industries. And I would want to know, you know, where - where
 6     this counter-party -- who is on the other side of the trade and
 7     be able to deem, okay, well, I - I felt more comfortable about
 8     this particular entity over another.
 9                 MR. SURI: And, you know, what is the collateral?
10     If you go back to Enron, is it your own stock? We don't know.
11     Just saying it's collateral (1:38:28)
12                 MR. KROEKER: One of the things I think I'm hearing
13     is we don't want less information about uncertainty we want
14     more. And it kind of emphasizes the importance of -- footnotes
15     are integral to financial reporting. I'm not sure how - again,
16     how this takes us to resolve the issue of what uncertainty we
17     want to capture in financial reports, but it emphasizes to me
18     that we need to continue to emphasize footnotes as an important
19     tool combined with MDNA other financial disclosure.
20                 MR. SIEGEL: But I also agree with Meredith that
21     it's - it's - it's disclosure that's efficient and effective
22     disclosure and not just more for the sake of quantity. Right?
23     It's - it's don't get lost - don't get the good disclosure lost
24     in - in that - that it might be everywhere.
25                 So we have a project that - that's the Disclosure
0073
 1     Framework Project to try to address what I hear about from -
 2     from every kind of constituent which is disclosure overload and
 3     that's something that we're trying to think about. But I think
 4     that's actually another cross-cutting topic for - for, you know,
 5     the three organizations that are here to - because if - if -
 6     it's only going to be successful if people get the right
 7     disclosures in the right places and not redundancies in
 8     disclosures.
 9                 We're all going to have to deal with that
10     eventually; what's inside the financial statements, what's
11     outside the financial statements. Having the same thing
12     disclosed in the footnotes in MDNA and in critical accounting.
13     It doesn't - it's - it's not helpful. In fact, it's - it's - it
14     probably serves to turn people away rather than inform.
15                 I have a question, though, going - on - on
16     disclosures. And it goes back to something that we started with
17     at the beginning, which was comparability. And so Pinto you -
18     you just using the loan example and then you were walking me
19     through what you would want to understand about loans and by by
20     type of loan or by type of geo - or - or whatever the right
21     level of dis-segregation is.
22                 And I have a general question, because this
23     sometimes a tradeoff that we try to - try to have to think
24     through, which is to get comparability we often hear from
25     investors, we want the same type of information, call it a
0074
 1     tabular disclosure. We want a table in the same format for
 2     every company to do the same way so that - it makes it easier to
 3     do comparability.
 4                 The preparer community often will say, but that
 5     doesn't allow me to tell the story and inform you about my
 6     business model in in the way that I'm doing business if we do
 7     it in the same way for everybody because invariably we have to
 8     cut corners to make it comparable. How do we how should we
 9     think about that trade-off?
10                 Are you comfortable having a little bit of
11     difference of the credit quality disclosures we did earlier this
12     year? For example, we said, however management defines the
13     level of detail that they do their reserving, that's the level
14     of detail that you should use for your disclosures. Now, it's
15     not the same bank to bank to bank. But - but we did that to
16     allow for - to not introduce new complexity into the financial
17     statements, and the footnotes, I should say, and allows
18     management to tell the story about how they're coming up with
19     their reserve numbers.
20                 Have those - have those disclosures been helpful for
21     investors or should we rely more on an objective table that's
22     the same from one - one institution for another? And its the
23     same thing when we get to management uncertainty, disclosures
24     and other forms; interest rate sensitivity, et cetera, market
25     risk.
0075
 1                 MR. SURI: I think they are. I think it depends on
 2     inform. So if we're talking about loan stats, for example,
 3     right, I think that tabular disclosure - and there's text
 4     underneath it to give you color as to what went on and what
 5     drove the numbers and what's behind the numbers.
 6                 But I do - I do think that that's helpful. And if
 7     I, you know, translate that not just to banks but also to
 8     insurance companies, the recent advancements that have - you
 9     know, we've seen come out where, you know, the investment
10     portfolio, which is 70-80 percent of the balance sheet, you can
11     now see very clearly what is amortized cost, fair value
12     impairments. And then what you get to the end number. Right?
13                 I think that is very helpful because it pulls it out
14     in one place and it makes it easy to follow and then read
15     through to get the color behind it. That's -
16                 MR. SIEFERS: All right. I'd say from my own
17     experience in looking at financial statements dealing with
18     customers and dealing with bank managements, I think what people
19     are looking for, you know, from people like you is - there are
20     just a number of different constituents out there, so I am fine
21     with some differences between individual companies, you know, as
22     long as - I think people are looking for you guys to come back
23     and act as a leader on one of the standard barriers in the
24     industry.
25                 So, you know, just to take an example in the - in
0076
 1     the banking space, you know, construction portfolios prior to,
 2     say, 2007, there was - you didn't know anything about what you
 3     saw. But the market imposes that discipline by demanding more -
 4     more disclosure. Those banks that are more conservative, more
 5     transparent, tend to be rewarded with a higher valuation and
 6     others follow suit.
 7                 So, you know, to the extent that you're - you're
 8     able to help be that standard bearer, you know, make sure there
 9     are minimal levels of disclosure out there. I think that -
10     that's really what investors are looking for.
11                 MS. DOPKIN: I don't know. I mean, Scott, how much
12     are you using on the call reports? I mean, basically, the bank
13     call reports are trying to make it apples to apples and a lot of
14     investors are using the call reports to try and do the exercise
15     that you're saying.
16                 I think, you know, in that industry, that works. I
17     mean, does it work comparing, you know - trying to put in a neat
18     box Pfizer versus Lilly? No. But, you know, in some industries
19     having some standardization there's lots of flexibility, you
20     know. Just even in charge-offs, how you account for
21     charge-offs. You know, what type of interest income you might
22     get, where you put the individual in the line item, you know.
23     If you then go to a foreclosure and you get some recovery, you
24     know, where - where it goes on the income statement.
25                 There's differences in the GAAP accounting but when
0077
 1     you go to the call reports, it's - they're the same. And,
 2     again, it's the transparency there and in the individual bank
 3     reports for GAAP, not really.
 4                 MR. STARR: It's been a good discussion. I'd like
 5     to go back to two things and just ask for views.
 6                 One is, we talked about the auditor's role and
 7     responsibility. And as the level of uncertainty increases, how
 8     does your expectation of the auditor change and what would you
 9     have the auditor do?
10                 MR. SIEFERS: I think from my own standpoint, just
11     the one thing that I've noticed both personally and in
12     conversations with investors is the one thing that's most
13     important is uniformity throughout, say, the country, you know,
14     by policy, for example, within an individual auditor. So, you
15     know, for example, if - if an auditor is having, you know, nine
16     out of ten banks mark a certain asset to a - to a certain level,
17     there probably shouldn't be an exception somewhere else. I
18     think people are just looking for, you know, a standard and
19     consistent policy at the individual auditor level.
20                 MR. STARR: You said, "country," I would assume -
21                 MR. SIEFERS: Excuse me. No, actually, I meant
22     country within, you know - I guess - I guess what I was
23     referring to is, you know, if the New York office is doing one
24     thing the L.A. Office should be doing the same thing. Sorry.
25     Didn't meant to slip up a little there.
0078
 1                 MR. STARR: Anyone else?
 2                 MR. PENMAN: I was just thinking about true and fair
 3     view versus compliance with GAAP. And maybe there's some
 4     bridging there that you actually - again, this discussion with
 5     the audit committee is to form a substance. And we have this
 6     every time we have a crisis, some acronym comes back and hits
 7     you, doesn't it? It's very well for City to put BSIBs on the
 8     balance sheet after the stock price goes to 99 cents.
 9                 So what is giving some - some indication, yes, this
10     is compliance with GAAP. You should note that GAAP has a lot of
11     trouble dealing with uncertainty. Okay? And this is a problem
12     here. And we - so this - another opinion expressed, okay. To
13     the extent that clients are handling uncertainty. I don't know
14     what that would be. I'm not recommending a true and fair view
15     in the audit statement. But this struc - this financial
16     engineering, this structuring, really is annoying.
17                 (Laughter.)
18                 MS. WALTER: I must say, Jim, I'm - that's my
19     take-away from today.
20                 (Laughter.)
21                 MR. DOTY: I am hearing a message that comparability
22     can suffer a little bit. There's not - comparability is not the
23     holy grail of financial presentation in the minds of investors
24     that, perhaps, it once was. It's important. It's important,
25     but, in fact, you could deal with a little lack of comparability
0079
 1     across - between or among preparers in a certain industry if you
 2     had the assurance that there was uniformity and that there was a
 3     uniform high standard of audit across the country and in the
 4     interpretation of the accounting standards by the firms. And if
 5     you had confidence in the fundamental audit itself. And that
 6     the that the information that we're getting was good
 7     information. That someone had looked hard at management's
 8     process whereby it reached its critical accounting policies and
 9     estimates.
10                 Am I wrong? I mean, that's what I'm hearing.
11                 In other words, transparency and objectivity,
12     perhaps a little more important after the financial crisis than
13     they might have been in that (1:49:22)
14                 MR. SURI: I think it seems transparency is, by may
15     of us on the investing side, overused. You know, we're not
16     looking for transparency as in just complete look through the
17     financials. But at least having an idea that it's been
18     consistently applied. So, you know, we don't want them to be
19     comparable, particularly in financial institutions. I mean,
20     each management is going to have their own view of risk. And
21     that's what we're looking to allocate capital to different user
22     risk. So I think consistency of objection.
23                 MR. DOTY: I mean, your remarks have tended to
24     indicate you're mainly concerned that the auditor simply stop
25     short of thinking critically about how management is managing
0080
 1     its business model.
 2                 MR. SURI:   Yeah. Basically --
 3                 MR. DOTY: You said that earlier
 4                 MR. SURI: Based on that one-page letter, yeah or
 5     nay.
 6                 MR. KROEKER: I wonder if, you know - is that a
 7     consistent - speaking of consistent, is that a consistent view
 8     across the uncertainty - the level of uncertainty that might
 9     exist because of course at one end of the spectrum of
10     uncertainty it's very difficult to have even consistency, you
11     know, to - it's management's financial reporting. Obviously the
12     auditor ought to be skeptical and objective but at high degrees
13     of uncertainty.
14                 If we are going to have thresholds in terms of
15     recording, it's going to be difficult for an auditor to drive
16     even within their own practice uniformity of views of outcomes.
17
18                 The interesting question, then, is if there were
19     answers driven by auditors, it wouldn't just be within an audit
20     firm. It seemingly would have to exist for each firm because as
21     companies change auditors, then, that view would then need to be
22     - if there was one consistent view that needed to be imposed, or
23     it really has to be driven at the company level first if you ask
24     me. And I think that becomes more challenging the more
25     uncertainty you incorporate into financial reports.
0081
 1                 But I don't know if that's - because I heard, again
 2     - not that comparability was third as it was listed, initially.
 3     I don't know if it was third, but I think that - that's the
 4     tension.
 5                 MS. DOPKIN: You know, and this might be a little
 6     off point to the question but take something just as basic as
 7     like pension accounting. Right. And you've got companies that
 8     have similar pensions but are using very different rates for
 9     their rate of return. Some are using different assumptions with
10     the smoothing methodology. Right? And you have half the
11     companies S&P 500 still using a pension return rate above 775.
12     It's pretty hard in a low rate environment, right now, with many
13     of these portfolios to generate that.
14                 So, you know, auditors across the board are -- you
15     know, some companies are putting down one number and others are
16     putting down other - other numbers but there's no perfect number
17     but there shouldn't be that wide of a gap, right? And so why -
18     why is that, you know, that we still have a lot of companies
19     using pretty high numbers? So as an investor, okay, what would
20     be useful to me, you know? If they still want to use silly,
21     unrealistic numbers, you know, what is my pension expense for
22     the next two to three years going to be if you use the same
23     interest rate -- you know, same current interest rate
24     assumption, same kind of, like, plan return. And, you know,
25     tell me what the contribution needs to be for the next two
0082
 1     years.
 2                 So the expense and the actual contribution kind of
 3     all else, market returns, interest rates staying stable rates,
 4     so if you're going to have different - different numbers, at
 5     least give us what you think you're going to have and then maybe
 6     a little bit of sensitivity around what if it's a little bit
 7     lower.
 8                 MR. KROEKER: I'm beaming as you say that because
 9     it's a perfect example of uncertainty. The company has asked to
10     project the expected rate of return on assets for presumably the
11     next 30 years. And an auditor, in driving - so - said, company
12     you come up with the estimate. And it's a pretty uncertain
13     measure. And can an auditor objectively - you could certainly
14     look at the past to see how past assets have performed and you
15     can look at the present to see how they're performing, but the
16     question they're faced with is, how do we think assets will
17     perform for the next thirty. That's a pretty difficulty area of
18     uncertainty to figure out, you know, what is the best way to
19     handle that.
20                 MR. KABURECK: Just a couple thoughts on that, I
21     mean, Jim, that came up. I actually was a benefits accounting
22     expert. In fact, two weeks after I started, FAS 87 came out.
23     They said, "Here it is, go do it." Twenty-five years later I
24     still have it.
25                 But on pensions, the discount rate is vastly more
0083
 1     important to future expense than the asset return. You can
 2     adjust the term one percentage point and multiply the portfolio
 3     and you can get your number. You can't do the same mathematics
 4     offline as an analyst on the discount rate. So deemed - just
 5     put that.
 6                  But going back to where we were a few minutes ago
 7     about the auditors and what would we expect to be different in
 8     the role of uncertainty, and I'll just make the same comments I
 9     did at the Auditor's Reporting Roundtable several weeks ago. Is
10     the auditors got a place but they're not financial analysts and
11     it would be, I think, a disservice, probably, to a lot of the
12     users to assume the auditors actually knew more about what the
13     company's financial affairs than management's itself does.
14                 I think the information really needs to come from
15     management through either rule making, through Marc's rule
16     making or PCOB's rule making, as the case may be, but really its
17     management's job to deliver the stuff. And maybe the more
18     uncertainty that there's a number, I think, personally audit
19     procedures and management inspection procedures, personally
20     move, you know, directly proportion to what one would hope.
21                 MR. KROEKER: One of the reasons that's a good
22     example, though, is I think what I hears is, even if the number
23     is uncertain, then desirability of saying, what would my outcome
24     be on, you know - if I neutralized, if you will, some of that
25     uncertainty, I think it's just part of the case. And I suspect
0084
 1     people saying, if I'm not getting it from the company, I want it
 2     from the auditor.
 3                 MR. LITKE: Yeah, I think with pensions you have
 4     you have two very interesting things going on. First of all,
 5     you said the auditor shouldn't be second guessing management
 6     because management knows how to run their business. With the
 7     exception of a couple of old line industrial companies, running
 8     a pension fund is not management's business. Management is in
 9     the business of operating a company. So that's an interesting
10     area.
11                 Or, in fact, management doesn't you know, is often
12     farming it out. They don't know it - how to manage it. It's
13     not what they were hired to do. They're not a financial
14     institution yet they've got this pension fund which is now
15     driving their earnings.
16                 I actually quite like your suggestion of saying,
17     well, give it to me on a standardized basis and then you go do
18     what you want. And if you can agree with your actuary that
19     you're solvent, that's one thing. But for earnings, everybody's
20     got to report a single number. I think that's a wonderful
21     suggestion.
22                 MR. PENMAN: But on the expected return on the plan
23     assets, I mean, it's a dirty secret in academia, the top fifty
24     years of asset pricing in the calculated pricing model, we have
25     no idea how to calculate the expected return for risk. Okay?
0085
 1     Which is a lot of our fair value calculation, a lot of our
 2     accounting. And, you know, so we move to actual gains and
 3     losses. Okay? So you get rid of that.
 4                 But, please, don't that the customer sold. You have
 5     it coming out on the income statement, way down, as a return
 6     from another part of your business. So that's clarity, right,
 7     actual gains and losses with in the fair - it's marker to
 8     marker.
 9                 Pertaining to that, we know what the expected return
10     on our portfolio assets, which means stocks, bonds, hedge funds,
11     and so on, private equity, is sort of ridiculous. And we should
12     recognize that.
13                 But isn't the second stage supposed to be doing
14     that, on pensions?
15                 (Laughter.)
16                 MR. SIEGEL: We have so many projects going on right
17     now. We have not added stage two of the pension project to our
18     current front burner projects.
19                 But this one's a good one, because this is a great
20     example of - of the dichotomy of long duration-type stuff versus
21     short duration-type stuff. So a pension expense is pension
22     liability is supposed to be a thirty year, say, type liability
23     and therefore to have the big reason - because of the market
24     moving up and down and having that go through the income
25     statement at the time - and from what I'm hearing today, from
0086
 1     some people here is, that doesn't make sense to go through the
 2     income statements, so let's come up with a mechanism to smooth
 3     it out over that thirty year time line. And - and there are
 4     problems with that too.
 5                 So it's - it's - it's a very interesting area and
 6     I'm glad it came up because it's a perfect example of what, I
 7     think, you know, you were trying to do here with what's the
 8     right level of measurement uncertainty disclosures and what
 9     should we be reflecting.
10                 MR. KROEKER: So I think we have about ten minutes
11     left. It may be a good time to go back to where we started. If
12     there was - because it is your opportunity to give us input on
13     what we should do. You know, if there are changes to be made.
14     If - if we're responding, what is it that investors are asking
15     with respect to uncertainty? Are there changes we ought to be
16     contemplating? Is there a direction we should be headed in
17     financial reporting?
18                 Probably your last ten minutes, maybe we could use,
19     you know, what concretely can we take away?
20                 MS. DOPKIN: I'll just throw more back on here. And
21     we talked about it before - I think it was Gary - on the cash on
22     the balance sheet.   And I think Pinto brought this up, too.
23                 We really would like to see how much can be deployed
24     without triggering tax to bring it back. And if you do have to
25     trigger a tax, what would be that liability to bring it back to
0087
 1     kind of get a sense for the quality of cash that's available?
 2                 So just something simple but something I'd like to
 3     register a voice on?
 4                 MS. CANGIALOSI: So I just have to respond to that
 5     because it's not as simple as you think is the issue.
 6                 Because the issue is when you repatriate, you can do
 7     it in multiple ways. So - and it depends on the circumstances
 8     under which you choose to repatriate. So, you know, how you
 9     bring that cash back, when you bring it back, which
10     jurisdictions you bring it back from, which which planning
11     techniques you employee, will all determine what the answer is
12     to the liability question. And for us there's just a tremendous
13     amount of uncertainty.   We can do it - you can do it multiple
14     ways. So which one - which one do we show? And to do it means
15     doing a lot of research trying to figure out, maybe, the best
16     way to do it. So that's part of the question.
17                 I'll just stop there saying, it is a much more
18     complex exercise than coming up with a number.
19                 MR. KROEKER: I wonder if the investors even benefit
20     from just that discussion? You know, a plain English, it is
21     more - it is more complex; it depends, but it isn't necessarily
22     - you don't get the only view by just looking at the balance
23     sheet; you need to understand if it was repatriated, if it was
24     under these circumstances. Would even that language be helpful?
25                 MS. DOPKIN I think just a little bit more clarity
0088
 1     because we would have to think that a management would want to
 2     know the answer to that question themselves. What is the most
 3     likely course that we would pursue to be able to take advantage
 4     of that cash, perhaps, to do various things with that cash?
 5                 MR. KROEKER: And, of course, that's something that
 6     Meredith's division has painstakingly taking an interest in.
 7                 MR. GALLAGHER: Jim, I tried to keep quiet but I
 8     only have a few minutes left. We've now, I guess, talked about
 9     litigation reserves without expressly talking about litigation
10     reserves. And this is an issue that sort of impacts me from the
11     outside. I thought I would try to clarify.
12                 I haven't heard yet really what the impetus was on
13     that issue. I haven't heard investors say, that there's
14     something lacking or, you know, that the uncertainty can be
15     pierced there. You know, given my background, having had to
16     prepare litigation reserves for a broker-dealer sub of a public
17     company, I'll tell you, there's nothing less certain than those
18     calculations. I'm not exactly sure, you know, if aggregate
19     level disclosures aren't enough. But I can't imagine, you know
20     - it's so, you know, idiosyncratic as to any management team and
21     any general counsel.
22                 You know, I was fairly confident in how I was going
23     to handle litigation. You could zero-out a lot of it but in
24     reality, you know, life and juries and judges don't let you do
25     that.
0089
 1                 So, you know, on that specific issue, I just thought
 2     we kind of abruptly ended there and I was wondering if there was
 3     any more conversation from the investor side on that?
 4                 MR. SURI: Have you ever looked at an insurance
 5     company or a broker-dealer, that's just, you know, 30-40 pages
 6     right there. And, you know, you look at recent estimates. A
 7     mid-size broker-dealer as an example provided a recent estimate
 8     for a case at 900, settled at 180, you know. And that's
 9     quote-unquote, "an egregious case," that could have been
10     classified that way.
11                 We just count them. I mean, that's what you have
12     capital for. And for a financial entity, that's what you want
13     to look for. Again, it goes back to management, you know. How
14     has management managed through the rest of the business? And
15     that is what is going to be translated on to how they're
16     addressing these issues. And if they haven't addressed it,
17     there will be penalties. And some of that is ex-post; can't be
18     expanding that's -
19                 MR. SIEFERS: Only a couple of things that come to
20     mind for me as a bank analyst. Historically, litigation
21     reserves haven't been a big deal. Obviously that's changed
22     enormously in the last couple of years. But my own my own
23     sense is that - has been that now that we're providing ranges of
24     disclosures and, you know, the maximum number, for example, it -
25     you really, I think, it's become nothing more than kind of a
0090
 1     fodder for criticism.   Because I think there is pretty public
 2     criticism for some of the largest banks out there,
 3     unfortunately. Because I think there are examples of pretty
 4     large names out there who have put a dollar value in their cue
 5     and then been several billion dollars off twelve days later, you
 6     know.
 7                 So that's not saying I know what the answer is at
 8     all but I think it's been kind of a well-intentioned disclosure
 9     that has been contorted, unfortunately.
10                 MR. KROEKER: One of the - I'll paraphrase it wrong,
11     Stephen, but I come back to what I think you said earlier is, if
12     there's a anchor where we can tell people, we know what we know,
13     but I don't think we can stop there. And we need to tell
14     people, and here's what - and here's the uncertainty and what we
15     don't know. And I think that - that I'm left with -- I'm
16     thinking about how can we foster that, or should we do that in
17     financial reporting?
18                 MR. PENMAN: Yeah, I think, to deal with uncertainty
19     by putting uncertainty in the financial statements - I mean, in
20     the balance sheet - in above the line is probably not the way to
21     go. You need something pretty hard. A pretty hard balanced
22     sheet that's, as Benjamin Graham would say, there's no order on
23     the balance sheet. Okay? Which is where the SEC came into
24     existence after all that order on the balance sheet in the
25     1920s. Give me an income statement. And I've sort of got - if
0091
 1     sales are the same as in the future, this is probably the income
 2     I'm going to get. Some very hard numbers. But then understand
 3     there's a level of uncertainty to be dealt with. And that goes
 4     along the line.   That's sort of the way I think about it.
 5                 And the elaboration of that was, the disclosure
 6     without being becoming cumbersome is a challenge.
 7
 8                 MR. KROEKER: I'd heard a lot during the financial
 9     crisis of pre - you know, pre-SEC existence, financial reporting
10     was in many respects a complete fair value model. People were
11     taking intangibles and other things, very uncertain things, and
12     running them through financial statements. And people would
13     say, well, fair value accounting was outlawed at some point.
14     I'm not sure. We did a lot of research. We couldn't find that.
15      It certainly has a very important role in financial reporting.
16     But taking to its extreme of incorporating absolute uncertainty
17     in financial measures, doesn't seem -
18                 MR. PENMAN: It's all relevant. And of course
19     there's going to be gray areas. Everything outside cash
20     accounting is estimates. Okay? So it's a question of the
21     quality of the gray.
22                 MR. KROEKER: Any parting comments by folks?
23                 Five minutes if nothing
24                 MR. SURI: I have one. I think for the financial
25     institutions phase we really ought to rethink whether we're
0092
 1     accounting for the markets or from the markets. And I think
 2     this is that is the one issue that permeates every single
 3     sector within financial institutions, to varying degrees, but
 4     it's really a big concern for us as investors because all of the
 5     burden for getting to those hard numbers then falls on us.
 6                 And I don't think that's the right place for it to
 7     fall.
 8                 MR. LITKE: Just to add a little bit to what Pinto
 9     said.
10                 I think you need to make a distinction with the
11     financial institutions, especially, is your accounting a going
12     concern value or a gone concern value? And they're two very
13     different things. You know, the banking regulators recognize
14     this with different forms of capital. But I think you may have
15     to think about that with the accounting as well. To say, what's
16     the value of my firm assuming I'm still around? Your goodwill
17     is in there if you're still around. Your other intangibles, a
18     lot of that goes away, if you're gone.
19                 MR. SIEFERS: I guess, you know, to kind of pile on
20     the financial institutions bandwagon, one thing I would love to
21     see - and it's more a plea than anything else - just a more
22     active dialogue between the SEC and bank regulators. You know,
23     we commented about the loan loss reserve issue. But, you know,
24     that's been a huge issue for investors for the better part of 15
25     years now. I would love to see things like that get
0093
 1     rationalized.
 2                 You know, the fair value issues, the same kind of
 3     thing. You know, they come into really full view at times when
 4     it's least opportune for them to do.
 5                 So I'd love to see, you know, an active coordination
 6     there.
 7                 MR. KROEKER: Just to respond, it's something we do
 8     coordinate very closely on day to day basis but we also have
 9     quarterly meetings with the bank regulators. But I think a good
10     piece of advice that even an event like today, thinking about
11     should there be, you know, role of uncertainty in financial
12     reporting, and is there a financial institution regulator's
13     perspective, helpful advice.
14                 MR. KABURECK: A non-financial institution comment,
15     I think, in the wrap-up is, you know, the pendulum swings over
16     time and for the longest time things were swinging towards
17     accrual basis accounting. Maybe for the last ten years it's
18     been towards fair value accounting. I might suggest perhaps a
19     little bit more focus on - I'll just call it "cash liquidity
20     claims to cash," statutory contracts that are off book that
21     might cause cash inflows or outflows. Because accrual basis
22     accounting is fine. GAAP base is equity is fine. But
23     ultimately cash pays the bills and it pays the dividends.
24     Ultimately your share price is a discount of future cash flows
25     not future income flows.
0094
 1                 So, again, I mean, everything's got a role. There
 2     is a cash flow statement but it's been in the third or fourth
 3     statement, not the first statement. So perhaps a subtle shift
 4     towards more of an emphasis on the cash content of items or the
 5     potential future cash content items.
 6                 MS. CANGIALOSI: Just as a wrap-up, as a preparer,
 7     I'm very interested in what, you know, users are really looking
 8     for because we want to provide them with information that's
 9     useful to them. Not just provide them with lots of information.
10
11                 And one of my concerns is always, providing lots and
12     lots of detail tends to bury anything important. We tend to
13     make a lot of disclosures that seem obvious to me; things like
14     in risk factors, well, if we can't sell our product, so we won't
15     have any revenues. You know, those are very obvious things.
16                 I just would say, you know, most preparers want to
17     do the right thing. We just don't want to do kind of things
18     redundantly or just over the top. So, you know, things that are
19     really useful and - and as somebody pointed out, the market
20     generally gets those things in the financial statements because
21     that's what comes out to management is, it would be really
22     helpful if we had this information. And you do see that, the
23     users can really have an impact there.
24                 MR. KABURECK: Well, the users, I think, are not a
25     homogenous group. And Lorretta and our colleagues we fret about
0095
 1     that all the time. Users - what they're called, users and
 2     investors, there's a wide variety of them. And the people in
 3     the room know better than I, they've got different needs and
 4     interest. But if collectively they're all viewed as equal,
 5     you're going to have disclosures that are good for one segment
 6     and not another. And what you'll end up with is a huge bulk of
 7     disclosures.
 8                 I don't know if it's practical or even appropriate
 9     to say, is there a pecking order of users that appreciates your
10     mission as investors but there's a lot of other users as well.
11     And their needs and interests are very different from each
12     other. And ultimately you solve it by giving it all there
13     because - and there's an awful lot of information in there that
14     I don't have an answer to it, but I suspect there's no easy
15     answer.
16                 MR. KROEKER: Meredith, Marc, Chairman Doty,
17     anything in closing?
18                 MR. DOTY: I'm left with the question, how much
19     uncertainty we can take in financial reporting? And with the
20     question of, given the fact that there's inherent uncertainty,
21     is it our job as audit regulators to be sure that the public
22     understands the uncertainty that lies behind an audit report?
23     And what, if anything, can we or should we be doing to make the
24     parameters of the things that describe that uncertainty, that
25     fix that uncertainty, clear to investors? And I think we have
0096
 1     the rest of the day to hear more about that.
 2                 MS. CROSS: I'll just mention that my division's
 3     role is to use the rules that we have and try to enhance
 4     company's disclosures through the comment process. We're always
 5     a little bit behind where you want us to be. Maybe way behind.
 6     But we're always aiming to get the meaningful disclosures.
 7                 And the companies, for the most part, are
 8     surprisingly cooperative when we go about a new disclosure goal
 9     such as, you know, additional information about repatriating
10     cash or any of these other topics. It's helpful to us if we -
11     if we can use the rules as sort of living, breathing, flexible
12     rules so that we can then seek information like that. It helps
13     us when the companies are cooperative, when they're auditors are
14     cooperative. It also helps us to know what information
15     investors actually want.
16                 You know, my staff reviews analyst reports now. We
17     review - we listen to the earnings calls. We hear the questions
18     analysts are asking. We do everything we can to try to get at
19     that but it would really help us to know in any industry or even
20     particular company what information you think would be useful.
21                 I really do think a lot of these uncertainty
22     questions can be solved with supplemental disclosures rather
23     than trying to measure things that are really inherently not
24     measurable.
25                 And we don't - I think it's better if the
0097
 1     information can be fluid so that companies are comfortable
 2     dropping it off after a year or two when it's no longer that
 3     interesting to investors and instead now do something else. I
 4     think companies are very afraid to take something out once
 5     they've put it in. And I think showing some flexibility that
 6     it's okay, you know, that's not today's issue anymore, let's
 7     look at this issue.
 8                 But we would love to hear from investors about what
 9     would be useful information in our filing reviews.
10                 We look at the largest company's 10ks very shortly
11     after they're filed in March. We pick them up and start looking
12     at them. So if there are things you want us to be focusing on
13     in those 10K reviews, let us know.
14                 MR. KROEKER: With that, thanks to each of the
15     panelists. I suspect that this will be an interesting topic
16     even for, you know, a more focused follow-up of the financial
17     reporting series. We may be calling on some of the same folks
18     around the table to assist us if you're willing.
19                 Thank you. Let's reconvene the second panel at 1:15.
20     (Off the record.)
21                 MR. KROEKER: Well, let's go ahead and start the
22     discussion with the second panel.
23                 Once again, I want to thank each of the panelist for
24     agreeing to participate. We appreciate, in advance, the input
25     and particularly the fact that you're willing to go out of your
0098
 1     way to take time out of your schedules and your lives to provide
 2     us the input.
 3                 So with that, again, each panelist's, background
 4     information is available online.
 5                 I'd like to maybe start with a similar question to
 6     this panel as we did the first, which is, the whole objective
 7     here is to provide information that is useful to investors and
 8     users of financial statements. Of course, it's particularly
 9     interesting and a struggle to figure out what is it that
10     investors are looking for as it relates to uncertainty.
11                 Maybe to drill down a level if you have suggestions
12     as to are there, for example - is there a framework that you
13     look at? What types of uncertain measures should be captured in
14     measurement on the balance sheet? Are there situations in which
15     you go beyond the threshold that you would say, no disclosure is
16     really what we need either as a substitution to recognition or
17     to supplement recognition.
18                 I think we start, with again, the same broad
19     discussion but very interested in are there characteristics that
20     would be helpful in sorting through the types of information
21     that would be useful to investors and then how to best present a
22     comprehensive package?
23                 I'll just turn it over to the group and moderate
24     much like we did before. The PCAOB Chair and FASB should feel
25     free at any point to jump in, as I'm sure they will.
0099
 1                 MR. NEWSON: If I could just make, I guess, a high
 2     level statement of how I look at financial statements in
 3     companies.
 4                 In each case and each case is a little different,
 5     you know, from company to company, even within the same
 6     business. And so I try to get down to understanding the
 7     economics of the company. And financial reporting standards are
 8     a lens in our pathway that hopefully gets me there, but in most
 9     cases, you know, the financial statements themselves don't give
10     me what I'm looking for.
11                 And so I usually ask lots of questions or I look for
12     other information, like statutory statements for insurance
13     companies. You know, banks have their own reporting system as
14     well. And then service companies, you know, tend to have, you
15     know, management reporting or other, you know, advisory type
16     reports. Especially in a purchase type situation. You know,
17     accounting due diligence and so forth.
18                 The financial reporting standards are never perfect
19     and there's always a navigation that takes place, you know, from
20     gaining ten.
21                 MR. LONGINO: Let me just say on behalf of all of
22     us, Jim, how grateful we are to be here. It's a pleasure and a
23     privilege. We appreciate your reaching out and taking an
24     interest in what investors and other uses and preparers of
25     financial statements think on the topic.
0100
 1                 I'd like to echo a sentiment that was expressed, I
 2     think, by Jennifer Paquette of the first panel this morning when
 3     she said that we're not looking to financial statements to do
 4     the analysis for us. And we're not expecting that. And it
 5     really ties in with another observation that was made which was
 6     that of the three of the triumvirate of things that Scott Siefer
 7     started off by saying investors are looking for, transparency,
 8     comparability, and objectivity, perhaps the hardest of these is
 9     comparability.
10                 And that really is something that the analysts, I
11     think, is responsible for doing. I think what analysts in
12     general want is the best information possible. And they then -
13     it's their job to take that information and to - to adjust for
14     comparability in order to make decisions about allocating
15     capital.
16                 So I think that a lot of concern that some of the
17     accounting profession goes through about what needs to be
18     provided and where it needs to be provided is, to a certain
19     extent, unnecessary. The information needs to be there.
20     Whether it's in the financial statements or in the disclosure,
21     but it needs to be there. And then it's the job of the analysts
22     to take and do that what his abilities and likes suggest.
23                 I also think that insofar as what goes into the
24     financial statements, the business strategy, the business model,
25     of a particular reporting entity and sectors of reporting
0101
 1     entities are the gatekeeper, or should be the gatekeeper, of
 2     what goes into the financial statements and what doesn't go into
 3     those financial statements and what's disclosed otherwise.
 4                 The example that came up this morning was a fair
 5     value for broker-dealers in their operations in carrying all of
 6     those assets and securities at fair value is appropriate for
 7     them because that's their business model, but it's not
 8     appropriate for banks, which are not mutual funds and which are
 9     not hedge funds.
10                 And so I think that's one way in a general sense to
11     respond to your question.
12                 MS. CAMPBELL: And to echo that in both in thanking
13     you to have these panel discussions which I find quite
14     encouraging that you're getting direct investor feedback and
15     also to just comments kind of giving more context about what
16     analysts are really looking for.
17                 Most analysts are not accounting specialists, you
18     know. We've learned accounting by using the statements. And
19     most of the time is spent on making sure that we understand both
20     the industry of what the companies themselves are doing. We
21     spent time on the valuations so we know whether or not, you
22     know, it's fairly priced. Understanding that as investors we
23     all have different opinions about that. That's what makes the
24     market.
25                 And using - financial statements are our tool. I
0102
 1     can't ever recall a time when we - when investors have sat
 2     around really debating about some obscure part of an accounting
 3     standard. We have opinions about, you know, fair value and good
 4     will and things of that nature, but it's - it really comes down
 5     to are the financial statements reflecting what the economic
 6     realities are of the business. How can we get a better
 7     understanding of what management's decisions are and what
 8     they're looking at. And then it's our own judgement of how that
 9     fits in with what we're trying to accomplish with our
10     investments themselves in that allocation of capital.
11                 And, you know, it certainly seems that over the last
12     several years that there's been somewhat of a departure or a lot
13     of a departure from the standards side of away from
14     concentrating on what can be known and trying to turn both
15     preparers and auditors, to some extent, into analysts. And that
16     makes it less clear for us.
17                 So this uncertainty focus that, you know, I
18     appreciate that you're all concerned about and trying to get a
19     better understanding of, to me has been magnified by the fact
20     that you're trying to make auditors and preparers doing more of
21     our job.
22                 And personally I'd like to see more concentration on
23     what we can know and also a better understanding of how
24     management's themselves are using estimates that are necessary
25     to do their jobs so that when - when we're trying to make a
0103
 1     decision, we can say, "Well, we either agree with that
 2     management's assumptions or we don't." But it's not - it's not
 3     necessarily a right or wrong issue, it's more of, okay, well, if
 4     man - this reflects what management thinks. The business is
 5     going in "x" direction, well I don't happen to agree with that.
 6     I think it's going in a "y" direction and then being able to
 7     back that out.
 8                 MR. STARR: Terri, I want to ask a follow-up
 9     question. And actually anyone can jump in and answer this.
10                 But you said that you wanted to know more about
11     what's known. Can you give me examples of current accounting
12     where there's measurement uncertainty introduced into the basis
13     for the accounting and that's not useful to you?
14                 MS. CAMPBELL: I think it's a couple of things. A
15     lot was talked about in the prior panel. One is, is aspects of
16     fair value whether or not - I mean, to Joe's point. Whether or
17     not the managements are managing their businesses that way. I
18     mean, it is different for a broker-dealer versus a bank.
19                 The other piece of it is goodwill. And, you know,
20     no one can tell me that you can take goodwill that's shown up on
21     an asset -- on a balance sheet as an asset that you can actually
22     do anything with that. You can't liquidate it. You can't sell
23     it to somebody else. You can't draw cash out of it. It's this
24     accounting creating that from a management standpoint has not
25     other role than to try to kind of minimize the impact to the
0104
 1     bottom line.
 2                 But it doesn't have any kind of impact in whether
 3     they're making a decision of necessarily - well, it could be on
 4     exiting a business, but of whether or not they're going to be
 5     able to access that for any cash needs.
 6                 And, you know, one of the things that's kind of a
 7     follow on from this morning's discussion of, you know,
 8     materiality and how do you make a decision about what's
 9     important or not important, of kind of stepping back from that,
10     because it's so easy to get just bogged down in all the details
11     of it and saying, well, what is the - what is the cash impact on
12     it? Because managements are looking at running their business
13     from a cash - I mean, really from a cash standpoint of what cash
14     is coming in. What cash is going out? What am I going to be
15     using my excess cash for? Is it going to be acquisitions? Is
16     it going to be returned to shareholders? And kind of
17     understanding that that's how you need to run your business
18     because if you're not paying attention to cash, you're not going
19     to be in business for very long.
20                 So we would like to see more disclosure of that.
21     And even though we have a cash flow statement, it's - it's done
22     in an indirect way. It's hard to - it's hard not to do that
23     from an indirect way, but because of that, it makes it a little
24     bit useless, you know. To a certain extent, yes, I mean, you
25     kind of come up with this cash flow from operating number,
0105
 1     investing number, a finance number. But, you know, whenever we
 2     look at it - or whenever I look at it, you know, I have to
 3     really question, well, how much does this really reflect their
 4     reality of the decisions that they make?
 5                 I followed energy companies and tech companies
 6     before, not financial services. And, you know, it's - it's -
 7     it's something that I spent a lot of time looking at of what are
 8     - how much cash do they really have; what are their assets and
 9     how are they going to make decisions of getting a better return
10     on what they have.
11                 And I would take out good will, because what are you
12     going - what are you going to do with that? And I'm going to
13     look at, well, what's the cash flow for their core businesses.
14                 So it's kind of always coming back to, what are the
15     economic uses of this and where are the - where are the, you
16     know, gaps in the GAAP accounting? No pun intended. Where am I
17     going to have to get additional information from the management
18     for greater clarity on it, which is always going to be the case.
19      They don't - I don't think anybody expects that accounting is
20     going to be a perfect reflection of what happens in the
21     business. You can't. You've got too many industries. It's
22     going to be more of do we understand those flaws are for this
23     particular business and we can make adjustments for that.
24                 MR. STARR: Just so I'm clear. If I summarize that,
25     what I would say - what I heard was, that you'd like less
0106
 1     uncertainty in the financial statements, in the recognition of
 2     assets and liabilities, and you'd like more disclosure about
 3     those uncertainties that impact future cash flows?
 4                 MS. CAMPBELL Yes.
 5                 MR STARR: Okay.
 6                 MS. CAMPBELL: Yes.
 7                 MR. MUNTER: One of the things, again, Jim, I think
 8     it was inherent in the way you teed up the question is, we
 9     sometimes have a tendency to think of uncertainty as an on-off
10     switch that we ascribe almost an aura of precision to certain
11     measurement attributes. Cost, we somehow think of as being a
12     precise measurement attribute. A level one fair value measure,
13     we think of as being a precise measurement attribute and I think
14     that over simplifies it. And the reality is, there's
15     uncertainty inherent in virtually every measure in the financial
16     statements. There's certainly more uncertainty in a level three
17     fair value measure than there is in a level one fair value
18     measure. But in a level one fair value measurement, we took an
19     observation of a single trade, it happens to be the last one on
20     a particular day, as the basis for measuring it. And had we
21     taken a different trade on the same day, we could well have
22     gotten a number that's different by a significant amount.
23                 So I think it's really a question of thinking about
24     gradations, which is in reality kind of how we think about it
25     from an audit perspective. We think about the kinds of things
0107
 1     we need to do around controls. The kinds of things we need to
 2     do to understand management's processes. The other information
 3     we try to look at is as we get more and more down the spectrum
 4     of a greater degree of uncertainty, there's obviously more work
 5     that has to be done around that to - to have sufficient evidence
 6     to support it both from management's perspective and from an
 7     audit perspective.
 8                 I think when we - when we talk about, you know, the
 9     transparency, another thing that we sometimes equate with
10     transparency is more information. I think part of transparency
11     has to be trying to get at these distinctions of where within
12     the spectrum of measurement uncertainty are we? I mean, as I
13     think about some of the things that Marc and his colleagues at
14     the FASB are working on with the disclosure framework project, I
15     think that has the potential to be a very important project
16     because it can provide some kind of a framework or thought
17     process for trying to differentiate those uncertainty
18     measurements.
19                 Now, I also appreciate that's an extremely difficult
20     undertaking that they're embarking on. But I think that -
21     that's inherent in the process. Now, even if we go back to
22     something like historical costs, I mean, we don't have a
23     standard measure of historical costs. Sometimes we use direct
24     incremental costs. Sometimes it's direct incremental costs plus
25     allocable employee costs. Sometimes it's that plus allocable
0108
 1     overhead.
 2                 So even within that spectrum of historical costs,
 3     there are gradations of precision to less precision imbedded in
 4     that.
 5                 MR. STARR: I think we would agree with the fact
 6     that there's a lot of uncertainty. I think the question is,
 7     where is it too much?
 8                 Mar, you were going to jump in. Did I -
 9                 MR. NEWSOME: Yeah, I was going to - well, first of
10     all, your question was interesting because I don't think, you
11     know, in those terms. So I guess a couple of examples related to
12     your question where things are not useful. Before I give you a
13     couple of examples, I usually think about each piece of
14     information and what I can get out of it.
15                 In a lot of cases I skip right by it or I just have
16     a mental checklist, like, goodwill, for example. If there's an
17     impairment, then I think, okay, did they mess up on an
18     acquisition. That's kind of, you know, what I get out of
19     goodwill. And then what are the cash flow implications going
20     forward?
21                 One example that I came across a few years back was
22     a company went essentially from cash accounting in its service
23     contracts to a differed revenue model because the auditors said,
24     all of your peers do it this way so you should do it this way.
25                 And the problem I had with it is, you know, there
0109
 1     was a huge balance sheet implication measurement and so forth,
 2     and under the contracts, the legal contract, the company had no
 3     obligation to return any money under this performance
 4     obligation. So in my mind that didn't reflect the economics.
 5                 So and I think legally it didn't reflect the
 6     economics. But the accountant said, this is the way it's got to
 7     be done.
 8                 And so I would turn the question back to, when does
 9     accounting not reflect the economics of a situation? And there
10     are probably a myriad of examples.
11                 Another one that I run across most of the time is
12     deferred taxes. You know, I've yet to understand, you know, how
13     that works especially when you have a deferred tax on an
14     intangible asset that's not worth anything.
15                 So I asked the CFOs all the time and they say, well,
16     we've got to do it that way.
17                 And - and so to your subsequent comment, Mike, about
18     uncertainty, you know, I believe that management deals with
19     uncertainty for a living. That's their job. Right. All the
20     way down to the budget for the next year or the medium term
21     forecast or the actuarial loss reserves or the loan loss
22     provisions, or, you know, accounts receivable, and debt reserve.
23                 And so what I want to know is, you know, what are
24     the range of possibilities? And what do they think's going to
25     happen? And then I'm going to measure them against what
0110
 1     actually happens versus what they thought would happen. Right?
 2     And by definition, if they're pretty close, then they're
 3     probably doing a decent job. Right? They're good at managing
 4     that uncertainty. And if they're off materially, well, why?
 5     And sometimes it's out of their control and sometimes, you know,
 6     they just didn't manage the process correctly.
 7                 MS. CAMPBELL: And, Mark, I have a question on that,
 8     too. Is that - do you need to see that on financial statements
 9     or is it okay to get that from MDNA and from the discussions,
10     you know, during quarterly calls? I mean -
11                 MR. NEWSOME: I think it would be hard to put
12     everything in the financial statement itself. Right? Then
13     you'd have a balance sheet with ranges, you know. You know,
14     from minimum to maximum, you know, with a selected target. You
15     know, kind of like what an actual report gives you.
16                 So it doesn't have to be on the face. But there are
17     cases where I suggested in the past that maybe you should put
18     fair value and the cost value on the balance sheet, you know,
19     juxtaposed or parenthetically or what have you. You know, pick
20     a format so that somebody like me can easily see, oh, fair value
21     is 30 percent different from cost. Well, why is that?
22                 And I've asked these questions of management,
23     especially those managing assets. And what I'm expecting to
24     hear is that they have a particular view; it's under valued or
25     we can wait it out. It's temporary market imbalance. Whatever
0111
 1     the reason, I'm looking for a reason, and then I'll measure them
 2     on that. Right? A year later. Did it come to fruition or two
 3     or whatever their advice is. So -
 4                 MS. CAMPBELL: Okay.
 5                 MR. BEGG:    Like Mark, we think a lot about
 6     business economics when we're going through financial
 7     statements. I'm Chief Investment Officer so we're looking at
 8     equity and credit. So right away I'm - I start at a level of
 9     trust. If it's a new company -- if it's a company we've had,
10     it's a deserved trust. I look at ways they're taking that trust
11     away by not being forthright in maybe something that's complex
12     or something that could be described better through disclosures.
13                 So I was mentioning to Mark, you know, one of the
14     things that sometimes when you see complexity enter a system
15     like we have today with, you know, the situation in 2008,
16     instead of trying to figure out ways to fix problems, the way I
17     think about it is, look at something that's working well. I
18     think a model firm that we use - we're a shareholder in, which
19     we think the financial statements are perfect or quite as close
20     as they can be to perfect is Bircher Hathaway. And it's a very
21     complex business. It's an insurance company. It's a holding
22     company. A lot of underlying company.
23                 The way that I think that - the way that I think the
24     disclosures and the way the narratives read through that
25     financial statement is if someone who had a moderate background
0112
 1     in financial statements in accounting could figure that out.
 2     And the more complex the situation, the more description that I
 3     think they go through.
 4                 So that's what I like to see. And as a standard
 5     setter, it's hard. How do you create those standards so that
 6     more people take up those - those things?
 7                 But I think the incentive I think for management is
 8     if you spend a lot of time upfront with your financial
 9     statements in disclosures, in narratives, are you answering
10     those same questions every quarter, every month, to Mark, to me
11     on all the things that are missing like the estimates they use
12     to figure out a pension liability or whatever the situation is.
13     But every time I talk to the IR team up at - what are the top
14     five questions you're getting. And they're getting all the same
15     questions. So if they could spend more time in, I think, the
16     narratives and the disclosures, I think there's an incentive
17     there to save their own time.
18                 So just as a high level I'd just add that.
19                 MR. SIEGEL: I'm going to jump in there. I think
20     what I hear you - when I hear you go through that example, what
21     occurs to me is - is - is almost a different mindset of the
22     financial reporting disclosures than what other people sometimes
23     think of.
24                 I mean, the disclosures we often hear from many is
25     that it becomes almost a checklist mentality. We have to make
0113
 1     sure we have all the disclosures that are in the required - that
 2     are required by GAAP.
 3                 What you're describing is let's think of the
 4     disclosures less as a checklist. Let's think of it more as a
 5     communication vehicle on some of the things the SEC does with
 6     the Plain English Initiative, et cetera.
 7                 MR. BEGG: Absolutely.
 8                 MR. SIEGEL: Let's think about how to use these
 9     these these required disclosures under the framework of let's
10     communicate what's going on in the business as opposed to just a
11     set of things that are required.
12                 MR. BEGG: Correct. Yeah.
13                 MR. SIEGEL: That's something that we should think
14     about at FASB when we're talking - when we're designing our
15     disclosure framework and trying to devise a means of useful of
16     communications.
17                 Thanks for that.
18                 MR. GLOVER: As we talk about - thank you, again,
19     for having us. This is a very useful exchange.
20                 As we talk about formats of financial statements, I
21     think it's useful to kind of think of what's happened over the
22     last three or four decades.
23                 So we went from financial statements that had
24     footnote disclosure that was maybe two pages. Into the nineties
25     where it was maybe 18 to 20 pages. On the PCAOB roundtable last
0114
 1     month, on the auditor's report, there was a statistic that the
 2     average in some industries is 276 pages of footnotes, some up to
 3     480 and there's MDNA.
 4                 So as we've gone from historical costs, which has
 5     estimation uncertainty, more to fair value, we've had this
 6     trade-off. I think someone earlier said the trade-off of
 7     somewhat more reliable, more verifiable, to more relevant.
 8     Because historical costs over time becomes less relevant.
 9                 But Terri used the term that the financial
10     statements are a tool. And there's that old saying if the only
11     tool I have is a hammer, then every problem's a nail. And it
12     seems to me that the solution to the changing in moving more to
13     estimates, judgements, fair value, in that same PCAOB transcript
14     the chief auditor happens to be here - so I'll see if I quote
15     you right, Marty - said financial statements are nothing but a
16     mass amount of estimates and judgements and they're anything but
17     accurate. They're based on the assumptions and estimates used
18     by a company.
19                 In that roundtable the users said, we'd like a
20     roadmap. We got 300 and 400 pages of footnotes. It would be
21     nice if the auditor would identify four or five risks.
22                 So I think the SEC and the FASB can think of is
23     there - is it time to rethink the format of the financial
24     statements?
25                 Right now there is, as the background reading said,
0115
 1     a brittle illusion of exactitude. All the numbers show up as a
 2     point estimate.
 3                 Paul said there's this range of uncertainty. Mark
 4     said it would be nice to know what the uncertainty is. The
 5     research question we had in a recent paper is, how big is the
 6     uncertainty? So we took public company financial statements and
 7     looked at the hypersensitivity of changing some of these inputs.
 8      You think about pension accounting, mortgage-backed securities.
 9      What we found was very, very small changes in those inputs had
10     a highly material, in fact, multitudes of materiality.
11                 So we have estimates that are pretty precise that
12     are maybe within what we would consider materiality on the
13     financial statements. We also have estimates that are plus or
14     minus many times materiality and they're reported on the face of
15     the financial statements.
16                 So one formatting option might be to say, here's a
17     column of numbers that are fairly precise. Here's a column of
18     numbers that are not so precise. And then that's a roadmap to
19     say, why not. And where does the footnote take me on those?
20                 So I think there are different ways. Someone
21     earlier said, maybe we need financial reporting on, I think the
22     term was core business versus changes in values. I think
23     instead of adding more disclosure, more MDNDA, there might be a
24     clever way to provide a better roadmap on the face of the
25     financial statements.
0116
 1                 MR. WALSH: I just wanted to thank everyone for
 2     coordinating these roundtables. I do think it's encouraging
 3     that you're listening to the investors and trying to get our
 4     insight on what's going on.
 5                 I do question the value of any roundtable that would
 6     have me as a participant, but I do appreciate being included.
 7                 In terms of uncertainty, I guess going back to what
 8     Terri had to say. I too would like to eliminate every bit of
 9     uncertainty. However, I do recognize that - the - the - we tend
10     to be very long term investors in our shop. And I do recognize
11     that sometimes the most attractive entry points are when stocks
12     are at the maximum point of uncertainty.   So I guess what I'd
13     really like is uncertainty with all of the stocks that we don't
14     own and known uncertainty with things that we own.
15                 We - we tend to use financial statements in concert
16     with a lot of other pieces of information. Part of it is to
17     value the businesses that we invest in. But also uncertainty
18     plays a big role there. And we recognize that the - that there
19     is uncertainty into that valuation equation.
20                 The other thing is we like to assess management in
21     the decision-making ability of management. And you can get a
22     pretty good insight as to how strong a management team is based
23     on their ability to assess a situation and provide a point
24     estimate or a range of estimates.
25                 So - so we recognize that there are a lot of changes
0117
 1     that take place.   And every estimate is going to be wrong.   It's
 2     just a matter of was it wrong because the world changed or was
 3     it wrong because management didn't incorporate all of the right
 4     variables.
 5                 And so - and both of those tell the investors
 6     something about the company they're investing in.
 7                 MR. GLOVER: So Gary and Mark you both mentioned
 8     estimates and ranges. Do you have a sense now from the
 9     footnotes that you can determine what would be considered a
10     likely range, a reasonable range? And if not, would you like to
11     see a likely or a reasonable range? So point estimate and then
12     here's our best estimate of what the reasonable range?
13                 So two valuation experts don't agree but they agree
14     on a reasonable range, perhaps.
15                 MR. WALSH: I'll take a shot at it first.
16                 I don't think there is an ability to have a precise
17     - give you any - any comfortable range that's appropriate. In
18     certain circumstances the range will be much broader.
19                 I think what's important for us is to be able to
20     look into the assumptions that underlie those estimates. And
21     that way the pension example last round was really - was really
22     good because everyone can have a different view of what the
23     world's going to look like but if you have a sense of what the -
24     of what their assumptions are, you can - you can do sensitivity
25     analysis on your own by coming up with your own - your own
0118
 1     estimates.
 2                 So I think an ability to go into the underlying
 3     assumptions is an important component. More important than any
 4     percentage range.
 5                 MR. NEWSON: I typically have to ask management, I
 6     have to have a conversation to get at that information you're
 7     asking about.
 8                 MS. CAMPBELL: Yeah. And my concern on having the
 9     range is that the ranges aren't any better than the point
10     estimates are. And that if - and then you come into the
11     question of, well, what happens with liability? What happens
12     when the reality goes outside of what those ranges are and what
13     are the ramifications of that?
14                 It's - to Gary's point, it - what gets disclosed is
15     information in itself. What managements choose to share with
16     you, has value. And there are certainly investor friendly
17     companies and managements versus not. And that will play into
18     the valuation that we assign an investment because it gives us
19     either confidence or not.
20                 So that's - you know, I've seen proposals before
21     about changing the financial presentation and having estimates
22     in it. A d, you know, as I look at how we value things, I don't
23     see how that adds anything. In some ways it further clouds it
24     because we already know that there's a lot of uncertainty with
25     it.
0119
 1                 MR. GLOVER: Would it not be helpful, though, to
 2     say, you know, Paul gave the example, some things have more or
 3     less of a range. At least for some users it might be useful to
 4     say, well, how big of a range is there associated with certain
 5     estimates.
 6                 Some numbers, you know, we talked about cash this
 7     morning. It turns out it's not as precise as we thought. But
 8     at some companies, it probably is. And at others, it isn't.
 9                 And as you go down to accounts receivable, there's
10     uncertainty there but that range might be fairly predictable.
11                 Once we get to something that's more or a level
12     three, it is a big range. I think the information's not that
13     they're saying, this is the exact range. I think the
14     information is, how big is the range. Some of these are pretty
15     tight. Some are big.
16                 And if we provide a reasonable range of the inputs,
17     like you said, then you can see what the math is on the pension
18     accounting. If it changes by a hundred basis points, what
19     happens?
20                 So I don't think you would ask management to say,
21     this is - reasonable I don't think conveys the actual range.
22     But I think their monies in their business by understanding the
23     risks. They're making decisions to acquire companies.
24                 We heard this morning that we acquire company, we
25     have to take the difficult accounting for the intangibles. They
0120
 1     had done something to decide to go into that business to start
 2     with. It made sense to them to take the risks.
 3                 So as we talk about how better to convey, there
 4     might be expertise here where you sort of say, if you give me
 5     the right pieces of the puzzle, I'm smart enough to put the rest
 6     of the puzzle together. I don't know if that is all of the
 7     users of financial statements.
 8                 MS. CAMPBELL: And certainly having the assumptions
 9     would go a long way to that, but the thing that is popping into
10     my mind as we were talking about this, an example would be the
11     liabilities right now that many banks are faced with on their
12     mortgage business. And how much of a put back they're going to
13     have to deal with and then what are the - what are the
14     investment lawsuits that are going to be coming out of this?
15     What are the actual losses that they're going to have on their
16     portfolios? And the ranges that you see from that, from the
17     street, not from management, have a tremendous range from, you
18     know, twenty billion dollars to, you know, two hundred billion
19     dollars for a single company.
20                 And, you know, because it kind of goes back to what
21     Paul's saying. These are all unknowns. We can't. Management
22     can't know. You just have to wait. You have to kind of wait it
23     out. See how some of those lawsuits play out. See what kind of
24     gets - the negotiated settlements are.
25                 But, again, I kind of go back to, yeah, I'd like to
0121
 1     see what management's thinking about that. I think that they're
 2     going to be a little bit cautious. They don't want to scare the
 3     market by having too big of a number. But they're going to have
 4     to balance that out because if they have an un - if they give a
 5     too small of a number that's unrealistic, everybody's going to
 6     discount it anyway. And it kind of falls back onto the investor
 7     to make that assumption themselves.
 8                 But if we had a better understanding of, okay, what
 9     are all the different areas that you're going to be effected by,
10     you know, we'll put a value to it. And - but it is helpful to
11     know what managements looking at and where the pressure points
12     are going to be.
13                 MR. SIEGEL: So, Terri, on - can I ask you on that
14     question. The litigation contingencies, right. And this is the
15     question of when you measure - this was Mike's question earlier
16     - when should the uncertainty go from a disclosure - go from
17     nowhere to a disclosure to a - on the balance sheet? So
18     litigation, the put back issue that you mentioned today,
19     wouldn't be reflected on the balance sheet until management
20     believes that it's probable that you're going to incur the loss.
21      And you can reasonably estimate - I'm simplifying - but you can
22     reasonably estimate what that - what that's going to be.
23                 If it's - if you don't hit that hurdle, you would
24     disclose information about it. Is that an appropriate threshold
25     to get some of that uncertainty onto the balance sheet or would
0122
 1     you prefer not to have any of that uncertainty on the balance
 2     sheet and just have disclosures?
 3                 MS. CAMPBELL: Depending on the timing of it, how -
 4     how much - how much management really thinks that they know
 5     about that. I want to see it - I want to see it in the
 6     disclosure. I don't necessarily want to see it on the balance
 7     sheet until they actually have to pay it out.
 8                 But how I've used disclosures in the past has been
 9     not because I have a lot of confidence that they know what the
10     final number is, especially if there's jury awards or, you know,
11     I mean, it can be a humungous range. It's an identifying factor
12     to what - what are management - what's the management worried
13     about.
14                 So if they have - if they're identifying particular
15     lawsuit and they said, well, it's - and it's an energy company,
16     for example. Lots of lawsuits there on lots of different
17     levels. You know, whether it's environmental or employee or
18     whatever. And they'll say, you know, this is not going to be
19     material to the outcome.
20                 But then there will be something that's big.
21     They'll be Valdez or Exxon and the managements will kind of try
22     to give an estimate of what they think that - the clean-up costs
23     are going to be and what - there might be any penalties and
24     they'll start to reserve for that.
25                 I still - I want to see that more in the notes than
0123
 1     I do on the balance sheet. This is a personal opinion and how I
 2     use it. And if - if it's still so far out in the future, it's
 3     going to be a long time before we know what all the liabilities
 4     for Bank of America are going to be.
 5                 It's - to me it makes the - if you had all that
 6     flowing through on the balance sheet or within income statements
 7     below the line, it doesn't really give me any information. I'm
 8     going to back all that stuff out anyway, because it just - they
 9     can't know. I mean, and I recognize that.
10                 So it doesn't really give me any additional
11     information by having that flow through the financial
12     statements. I already know that it's going to be a big number
13     by looking at the disclosure. I know that I can't get an exact
14     number because that's not really going to play into it anyway.
15     And that's where I do a scenario analysis of saying, okay, if
16     it's "x," then here's an evaluation it would be and this is what
17     the hit's going to be. And if it's "y," then it's going to be
18     this. And we make that judgement call.
19                 I don't know if that helps address that.
20                 MR. DOTY: He asked about standards. We've been on
21     standards. I want to switch you to audit and the relationship
22     of audit to standards. Because what both you and Mr. Longino
23     said raises the question of what you want from the audit.
24                 If you want - and I agree - you want the risk of
25     material litigation to be discussed. You don't want to not know
0124
 1     that there is a material claim but you're not interested in
 2     having management guess what they may have to pay out to resolve
 3     that claim. And I think that - that makes sense.
 4                 MS. CAMPBELL: Well, I'd like to know some - I mean,
 5     I'd like to have an idea. I know that anything that they say is
 6     going to be a guess.
 7                 MR. DOTY: Well, what do you want from the audit in
 8     terms of what you all set forth as sort of the marker? That you
 9     don't want the - you don't want the financial statements
10     performing the work of the analysts. What are you looking for
11     from the audit and the audit report that you don't now have?
12     What do you get from it that you need and that you like? And is
13     just after the fact retrospective irrelevant or is it something
14     that you would - you would what to have in order to make the
15     judgements even if you have more information directed from the
16     preparer?
17                 MS. CAMPBELL: Joe, do you want to address that?
18                 MR. LONGINO: It occurs to me just sitting here, and
19     people can add to this list if they want to because this is
20     just kind of of the top of my head, that there are about three
21     sources of uncertainty that I can think of with respect to these
22     questions about where does it go, the financial statement or
23     disclosures, what do you want from the audit and so forth and so
24     on.
25                 The first source of uncertainty, I think, is the
0125
 1     assets and liabilities themselves. And implicitly that's a lot
 2     of what we've been discussing so far this morning and how you
 3     value those. Whether you try to put a precise number on
 4     something or give a range or just discuss it and disclosure,
 5     rather than quantifying it in the financial statements.
 6                 The second source we've recently introduced in
 7     talking about the contingent liabilities of litigation exposure,
 8     and that is exogenous events. How is that going to effect
 9     things.
10                 If we go back to the first one for a minute, assets
11     and liabilities, for example, life insurance companies on the
12     whole would probably prefer to invest in long term assets that
13     have very little optionality. And the reason for that is, it
14     makes it easier for the to match those assets to the liabilities
15     that they're funding.
16                 So that's the sort of question you get with respect
17     to the valuation of asset and liability items.
18                 On the second, litigation exogenous events, I know
19     what's going to hap - we've seen what's happened to credit
20     spreads, for example, as a result of the whole question of
21     whether or not Greece is going to fall. Whether or not Italy is
22     going to be the second domino to fall. If it does, and we've
23     seen those sorts of things effect balance sheet items and
24     operations as well. And you've got the results of operations in
25     this mix also.
0126
 1                 And then the third thing is management. Management
 2     is a source of uncertainty. We have better and we have less -
 3     less good management teams. And companies are going to be
 4     affected by how competent and present management teams are.
 5     Ultimately what an analyst is passing a judgement on is not the
 6     value of assets and liabilities, not even in a hedge fund or a
 7     mutual fund, what you're passing judgement on is the
 8     capabilities of management to negotiate the uncertainty of the
 9     operating environment in order to enhance shareholder value.
10                 And so, you know, I would view - I would view the
11     audit report as a - as a helpful check on - on - on what
12     management is - is saying in terms of inclusiveness in terms of
13     comparability insofar as that can be achieved. But much more
14     important than that is what the company discloses, how it sees
15     risks, how it manages risk. And the point of a lot of
16     disclosure is not comparability, the point of a lot of
17     disclosure is differentiation of management in its ability to
18     see risks in the way it approaches the management of risks.
19                 And so I think where a lot of analysts find real
20     value in disclosures is differentiation among management teams
21     insofar as their capabilities are concerned; in foreseeing
22     events, in coping with them and rolling with the punches.
23                 And so, you know, my expectations of an audit report
24     are relatively limited and modest compared to the substance of
25     what I'd like to see coming from management about it's view of
0127
 1     all these things.
 2                 And I'll just see if Terri agrees.
 3                 MS. CAMPBELL: Yeah. You know I think that auditors
 4     are in a really tough spot. You know, it's - to be in a
 5     position where they need to second guess management is difficult
 6     for, you know, management knowing that businesses better than
 7     anyone else.
 8                 I'm also concerned about the liability aspects that
 9     auditors take on with that because it's - it definitely impacts
10     behavior either of losing their business because they're - from
11     their client or lawsuits afterwards if - if things go wrong.
12                 So I'm reluctant to want auditors to take on too
13     much responsibility beyond reflecting what is happening in that
14     company. Does that - do the assumptions that management - that
15     management are making is that reasonable - I mean, certainly,
16     you know, you look at it in practice, you've got the most junior
17     people are the ones that are on the ground doing doing the
18     grunt work on the auditing side.
19                 And then you've got the - hopefully key issues that
20     come up, and let's say litigation is one of them, where it's
21     going to float to the top. You're going to have managing
22     directors looking at that and signing off on that after having a
23     discussion with the managements of those companies.
24                 I'm reluctant to have their role go too far beyond
25     that. You know, it's - I don't think it's a clear answer,
0128
 1     either, unfortunately, of then what do they disclose to the
 2     marketplace. Because, again, I know that the liability just
 3     gets blown way out of proportion if they show any doubt of the
 4     numbers that's happening on the management side.
 5                 And Paul can solicit KPMG's view on that in terms of
 6     being able to have commentary on how comfortable you feel with
 7     the numbers
 8                 MR. MUNTER: Well, as you know, currently our
 9     responsibility is to gather evidence to evaluate whether or not
10     the company is reporting its financial position, results of
11     operations and cash flows in accordance with generally accepted
12     accounting principles. And whether it has sufficient disclosure
13     about that information. And we have professional
14     responsibility.
15                 We also have a responsibility to engage in
16     communications both with management and the audit committee on
17     the judgements that are most significant and where there is -
18     where different conclusions could be reached.
19                 So we have - we have that process in play. I think
20     the question that Chairman Doty is asking is, what external
21     communication beyond what is done now should the auditor be
22     doing and should it be based on the information we've already
23     gathered or should it be based on some additional
24     responsibility. And I think that's a question far better
25     answered by investors than it is by auditors. But it is -
0129
 1                 MS. CAMPBELL: We'll take everything we can get.
 2     Not that everybody wants to disclose that.
 3                 MR. MUNTER: Yeah. As you say, there are trade-offs
 4     in terms of risk. There are trade-offs in terms of the
 5     relationships that the auditor has with the audit committee, for
 6     example, and the ability to engage in - in frank and candid
 7     discussions with the audit committee.
 8                 So there are tension points and pros and cons to
 9     those kinds of selections of audit reporting mechanisms.
10                 MR. KROEKER: I think that poses a real interesting
11     issue. If you take something like goodwill. The enterprise
12     level of goodwill typically is, you know, some discounted cash
13     flow future revenues on a cash basis, future expenses, present
14     value based on a risk factor and you determine whether your
15     goodwill's impaired or not.
16                 If you turn that around and ask an auditor to opine
17     on projections of the next 30 years of revenue and opine on the
18     next 30 years projected expenses, I think you'd maybe have a
19     different dialogue about whether auditors are really to the same
20     level of assurance comfortable doing that. But somehow we call
21     that the test for goodwill impairment.
22                 And I think that's a tension we ought to continue to
23     explore. How is it we can get comfortable with that level of
24     uncertainty but if we did it directly -- which seems like it
25     would be much more useful to an investor. If really what we
0130
 1     want to know is what is management's guess of the next 30 years
 2     revenue, it seems much more direct to have a table that spells
 3     that out as opposed to a goodwill impairment test that does it
 4     indirectly.
 5                 I suspect that's why we want to know about goodwill
 6     impairment because we want to know, is there a change to
 7     projected future profitability, prospects of the enterprise. So
 8     we do it indirectly as opposed to providing the direct
 9     calculation. Because if you did the direct one, we'd be, well,
10     we can't audit that.
11                 Again, it's probably an overstatement, but that's
12     part of the tension here.
13                 MR. WALSH: I think what I expect of the auditors is
14     there's an ongoing dialogue with management as to the
15     sufficiency of your disclosures. And to the extent that that -
16     the disclosures aren't - aren't sufficient in order to describe
17     the financial statements or there's a contingency out there that
18     is - that is material enough to make the statements
19     misrepresented, I expect - well, I expect, first of all, the
20     auditor to convince management teams that they need to disclose
21     more. To the extent that they're unwilling or they can't
22     disclose enough or the uncertainty is so great that they're -
23     there is a serious question of going concern, then I expect to
24     see an additional paragraph.
25                 Given the huge amount of uncertainty that we've seen
0131
 1     over the last several of years, I would have expected there to
 2     be more additional paragraphs describing some of the
 3     circumstances that are out there.
 4                 MR. NEWSOME: So regarding the audit, you know, the
 5     first thing - I don't know if it was the first but somewhere
 6     along the way one of the things that came to my mind is, who is
 7     or who are the beneficiaries of the audit? Right. If it's the
 8     investors, then today's audit doesn't really do a whole lot in
 9     my opinion. Yes, it's conformity with GAAP. You have an
10     auditor's statement which, you know, I scan just to make sure
11     there weren't any material changes, usually the third paragraph.
12      Internal control again, you scan it, check the box.
13                 Now, if you compare an audit to an accounting due
14     diligence report, I will tell you that auditors are very capable
15     of opining on lots of things when they're paid to do that. I
16     look at those. And we're going to get one hopefully today, you
17     know. My team will start looking at a report. And so they have
18     a lot of capabilities, but, again, who are the beneficiaries of
19     the audit.
20                 And so when I think about an audit, you know,
21     whether it's a public or private company, some of the things
22     that come to mind are where the areas of sensitivity, you know.
23     Are there balance items that are very volatile? In other words,
24     you know, different every single day out of the quarter and, you
25     know, somebody stopped the spinning wheel and on the last day of
0132
 1     the quarter, here's the number. But it was never that number at
 2     any other point in time during the quarter. Well, that would be
 3     interesting to me.
 4                 You know, reliance on third-party estimates, you
 5     know, valuation, goodwill impairment, actuarial reserves,
 6     investment manager, third-party inputs into the balance sheet.
 7     Those are all things I typically try to get a hold of that
 8     auditors don't really opine on.
 9                 And then you go to the letter to the audit committee
10     or to the board of directors. I try to get that as well. And
11     there's interesting information there, right? Because then
12     they're reporting to the company, "Here's what we found in our
13     process," but you don't see that in the auditor's well. And so
14     if the investors are the beneficiaries, or the users, I guess
15     more broadly speaking, it would be helpful to think about the
16     audit in that light.
17                 If I could go back to, you know I have a bunch of
18     comments but I'll limit them. Litigation came up. Reserves
19     came up or I guess litigation liability came up. And so, you
20     know, I heard a couple of times, well, you know, the company
21     shouldn't have to report it 'til it's pretty sure.
22                 But I'll tell you, if I invested in the insurance
23     company that was on the hook, I'd want them to estimate it right
24     away and then I'd want to measure them against their ability to
25     estimate.
0133
 1                 So if you're a DNO writer, you know, and some large
 2     pharmacompany got sued and it's all over the papers, you know, I
 3     hear some people saying, oh, well, they shouldn't have to deal
 4     with that issue until they know what the litigation liability is
 5     or what they're going to pay. But what about the insurer and
 6     the people that invested in the insurer? Well, there's a
 7     different hurdle, I think, being, you know, weighed upon, you
 8     know, for the insurer versus the company itself.
 9                 So I do think companies should estimate. Now, I'm
10     fully aware that once they estimate than the plaintiffs say, ha,
11     they're guilty and now we know what their reserve is so they're
12     going to go after it. So there are issues that I'm aware of.
13                 MR. KROEKER: On that - just that one specifically,
14     is there a difference, and maybe there's not, in an investor's
15     view as to whether you've got a homogenous population so an
16     insurer taking on a broad population of similar arrangements
17     versus the, you know, idiosyncratic - you know, at least
18     potentially idiosyncratic litigation and obviously companies are
19     subject to both. They could be subject to, you know, ongoing,
20     you know, claims of warranty or other things versus more of a
21     lifetime event for a company. And maybe there isn't a
22     difference to investors.
23                 MR. NEWSOME: What comes to mind is, I guess, the
24     relevance. Right? So when would you see it as an investor in
25     an insurance company? If it were the Exxon Valdez oil spill,
0134
 1     you know, that's really, really big, right? And there are other
 2     cases that were really big. And so specialty insurer, an
 3     off-shore firm specialized in DNO, would have a significant
 4     impact from that type of event.
 5                 And so I guess it varies a bit but, you know,
 6     relevance, I think, is the - I guess one of the measuring tools
 7     that you would use.
 8                 MR. GLOVER: Terri used the comment, auditors are in
 9     a tough position. And I think, Chairman Doty, when you ask
10     about auditors, I think they're right in, square mack dab in
11     this - smack dab in this brittle illusion of exactitude. Why?
12     Because federally they're mandated to issue an opinion that
13     says, all the numbers in the financial statement are fairly
14     stated in all material or respects.
15                 And it turns out when you ask at least a certain
16     group of users, given the uncertainty in the financial
17     statements, how big of a margin for error would you put on
18     pre-tax income? They say 95 percent, about five percent; plus
19     or minus five percent. Now, this group might say, now, that
20     might not be realistic. And it turns out it's not realistic
21     because of these uncertainties in the financial statements. It
22     isn't plus or minus five percent.
23                 So even though some of these estimates are on the
24     balance sheet, the true ups - you think about the pension
25     accounting, end up flowing through OCI or net income.
0135
 1                 So technically we're asking the auditors to provide
 2     a service that they probably can't do. In other words, they're
 3     doing the best they can but there is not - there's a deficiency
 4     noted in the PCAOB inspection reports for 2010 that said, the
 5     auditor did not gather sufficient appropriate evidence because
 6     when they got done, the reasonable range was six times
 7     materiality.
 8                 Now, without knowing exactly what that was, what I
 9     can tell you is, there is no amount of auditing that can
10     eliminate irreducible, inherent, un - you know, risk or
11     uncertainty.
12                 And so you can't audit more to get, you know - if
13     you think about, again, pension accounting, you can change these
14     estimates by five, ten basis points when the experts would say,
15     the reasonable range is 50 basis points. And that's highly
16     material.
17                 So you might think about in addition to the format
18     of the financial statements is, what's the right place for
19     auditors on these highly uncertain estimates? Can they estimate
20     - can they audit the process? I think so. I think you'd say,
21     did they follow a good, rigorous process? And can they audit
22     the range? Perhaps. Can they attest to that - the numbers were
23     already stated in all material respects which most people
24     interpret to say, fairly precise margin for error. Even when
25     they're doing the best they possibly can.
0136
 1                 The example of the deficiency, like I said, I don't
 2     know. But for right now, today, in financial statements, there
 3     are estimates that have a reasonable range, reasonable people,
 4     experts would agree which are multiples of materiality. And no
 5     amount of auditing can reduce it.
 6                 MR. DOTY: Well, one might think that our standards
 7     should tell auditors how much work they should do to being to be
 8     comfortable if they have a reasonable assurance if what
 9     management has estimated is right.
10                 I think that's the way our standards go. Our
11     standards really speak to what kind of work has to underly the
12     auditors becoming comfortable that they have sufficient
13     competent evidence - to confirming evidence to be able to get to
14     the opinion.
15                 Beneath the question of how much investors expect of
16     an audit and what you want of an audit, is this lurking question
17     of whether you actually - since, as you say, it's a brittle
18     illusion of exactitude as the assembly found, do you want to
19     exclude that information from the fin - do you want the auditors
20     to put it aside and not report on it along with other areas of
21     uncertainty? Or do you want to rest with the assurance that the
22     auditors, unless there's a deficiency found in our inspection,
23     of course, that the auditors have done enough work to satisfy an
24     auditing and a test standard that they have a reasonable basis
25     for their assurance? I think that's a hard question
0137
 1                  So what's happened, though, is incrementally things
 2     have changed because the PCAOB defined reasonable as high. And
 3     then - yeah. That tends to be interpreted by the profession as
 4     90 to 95 percent confidence. So we put the auditors in a spot
 5     to say, technically we're attesting to something that is plus or
 6     minus a very tight margin.
 7                 So I don't think we want to put auditors in an
 8     impossible situation. What we say, is, what's the right amount
 9     of evidence that would support a point estimate and what's the
10     reasonable range? Or right now when you read the standards, the
11     current PCAOB standards have been modified somewhat but they're
12     the legacy interim standards. The International Auditing
13     Assurance Standards Board and the ASB have convergence clarity
14     project. And they have just by one measure of comparison, twice
15     the guidance on auditing fair values. And they recognize that
16     there might be some estimates of things that we're talking about
17     that have a range of uncertainty that's greater than
18     materiality.
19                 They say normally the auditors should be able to get
20     the range of uncertainty plus or minus materiality.
21                 If - if you - I don't want this color group to bog
22     us down but if you will stipulate with me that there can be an
23     amount of work that can be done that will give them sufficient
24     competent evidential matter to have a reasonable basis, and they
25     can do it, the question that is interesting for us is, how
0138
 1     valuable is that for investors and what are you willing to pay?
 2     In other words, how much of the - how much of the resources of
 3     the company are you willing to invest or do you think should be
 4     invested in an audit to provide reasonable assurance on areas
 5     that are inherently uncertain?
 6                 MR. GLOVER: Yeah. And I think we would agree that
 7     as long as it's conveyed and the user can understand the
 8     magnitude of the uncertainty and the auditor is able to assure
 9     or attest to that, then I think we're on the same page.
10                 Because I would guess if you were to ask this group,
11     and we ought to ask them, given that it's an impossible task,
12     how much do you want to pay the auditors to try to remove
13     uncertainty if it's not removable? Right? So if they can't
14     remove it, like you said, there's a reasonable range in which
15     they need to audit, but then stand back and say, some of the
16     numbers on the financial statements have extreme uncertainty and
17     maybe we provide the estimates and the inputs and we let the
18     experts determine what that looks like.
19                 But this illusion of exactitude suggests that
20     they're not there.
21                 MR. LONGINO: Let me just call attention to the
22     elephant in the room that we're - I think we're all aware of but
23     no one has specifically mentioned yet. And that's the trial
24     bar. This is a litigious country and society of sort unknown in
25     human history. And things that go on here are partly explained
0139
 1     by that. The rules that we operate under here are such that
 2     they're not necessary in other jurisdictions.
 3                 But a lot of what goes on out there by way of what
 4     goes into the statements and what doesn't, what's disclosed. The
 5     multiplication that Steve alluded to earlier of hundreds and
 6     hundreds of footnotes and hundreds and hundreds of pages are
 7     nearly a reflection of the fact that everyone is scared to death
 8     and justifiably so of plaintiff's litigation.
 9                 And so I think that we can't - it's at least worth
10     mentioning that. It's not the subject or the topic of this
11     roundtable, but I feel almost obliged to trot that forward at
12     least to say, "There it is," because it's a factor. And it's a
13     very significant factor.
14                 And I think related to that is a very interesting
15     transformation in the role of accounting and auditing that
16     probably began with the thrift crisis in the 1980s in this
17     country. Because if you think about accounting for a moment,
18     the basis of accounting, really, is bookkeeping. And
19     bookkeeping consists of transactions. And those transactions,
20     those payments, those receipts, gave certitude of a sort, at
21     least for a brief moment, as to what went into the financial
22     statements.
23                 And what happened at the end of the thrift crisis,
24     as we got into the early '90s and the rubber was being cleared,
25     was that people looked back and some concluded that the problem
0140
 1     with the thrift crisis was gains trading in securities
 2     portfolio. That is to say, keeping the winners or selling the
 3     winners, they had gains in them. And "portfolioing" losers.
 4     Well, that was never anything more than a minor hiccup in the
 5     history of - of - or the analogues of historical cost
 6     accounting. The real problem was goodwill and supervisory
 7     goodwill in the thrift crisis.
 8     But that's a topic for another discussion.
 9                 The point here is that what FAS 115 did was to
10     severe the relationship between transactions and putting a value
11     on securities in the available for sale portfolio. And that at
12     least was tolerable because the securities involved were
13     securities that were traded in very deep and liquid markets and
14     really had market values. But since then, of course, you know,
15     we don't even have that.
16                 Not only have we severed the basis to transactions,
17     but we also now don't even have liquid indeed markets for
18     valuing things like level three assets and liabilities.
19                 It occurs to me that all this has come about because
20     consciously or unconsciously the accounting profession has been
21     pushed in the direction of becoming a shadow form of supervision
22     for banks, specifically, for financial companies generally and
23     it's ill-suited to be that. And I think that is a fundamental
24     problem that we're grappling with here.
25                 It's a shadow form of supervision that tries to
0141
 1     regulate financial institutions through the balance sheet and
 2     the income statement, and more specifically, through the
 3     calculation of shareholders, equity and profits.
 4                 And I think that's part - kind of the brief history,
 5     if you will, of having gotten here. And this litigious
 6     environment that we operate in this country doesn't help any of
 7     that any.
 8                 MR. KROEKER: I think you left us speechless.
 9                 (Laughter)
10                 MR. LONGINO:   Is that an agreement?
11                 MR. KROEKER: No. You know, I don't think that we
12     were intending to get into the trial bar or those aspects, but
13     what is it about, you know - certainly when you take things that
14     are more difficult to measure, to get to the economics of
15     substance. I think we'll start with, what is that investors
16     really need? And let's leave alone for a second whether or not
17     there are impediments to do that. I think this was really a
18     more simple question. And I don't mean to say that to be
19     unaware of other environmental factors, but I think we were
20     starting at - take something like a loan, there isn't just one
21     economic view. We heard that coming out of - loud and clear
22     coming out of the financial crisis that there are groups of
23     investors that say if a company can hold that and collects the
24     cash flows, and from their perspective things are no better or
25     no worse nor changes in interest rates. I'm going to collect my
0142
 1     cash flows even though the market has placed a different price
 2     on it.
 3                 Some saying, why wouldn't we focus on not showing,
 4     you know show no change to the income statement? I don't feel
 5     any different than I did the day before. And a whole group of
 6     investors saying, it's not particularly helpful to them because
 7     they do want to know what the market is pricing that at if for
 8     no other reason than if the company is wrong and it's either in
 9     its intent or its ability to collect those cash flows, say it
10     has to liquidate the assets.
11                 So I'm trying to more modestly figure out what it is
12     investors are looking for as opposed to solving -
13                 MR. LONGINO: Let me pick up something that came up
14     this morning on the part of one of the panelists. I'm having
15     trouble remembering which one but I don't think it matters.
16                 The question was - or the suggestion was made that
17     different kinds of users have different needs. And I'm not sure
18     that's true. And I say that based upon my experience as a bank
19     supervisor here I Washington, D.C. In my distant past. And what
20     was important than in - really in the depths of the thrift
21     crisis was when I was in that job. And my recent experience for
22     about three years at Sandler as an equity analyst of banks.
23                 And I really found that there was - there was not -
24     you almost couldn't see daylight between what had been important
25     to me as a bank supervisor and what was important to me as an
0143
 1     equity analyst. I mean, the same sorts of things were
 2     important; what's the operating environment like, what's the
 3     capability of management; how faithful and accurate are the
 4     financial statements; where does the company seem to be going;
 5     is it going to wind up at the tender mercies of the FDIC or not.
 6      Is it a going concern
 7           So I would - if I understood the panelist correctly, I
 8     take issue with that. And I think that there's a large
 9     commonality of interests of various types of users of financial
10     statements. I just throw it out. I'm curious to know what
11     other people think as to whether you think that there are
12     significant differences or maybe any differences at all between
13     what some classes of users, supervisors, for example, investors,
14     need and expect out of financial reporting or not?
15                 MR. WALSH: Yeah. Let me take a shot at that. As an
16     equity investor we're the lowest on the totem pole in terms of
17     our - we have the residual claim on the cash flows of the
18     company. And so I think to the extent that we get satisfied
19     with the level disclosure in the financial statements, I think
20     everyone else with a superior position should be happy.
21                 So, if that helps.
22                 MR. KROEKER: One of the issues, Gary, that you
23     brought up, and it was a part of Joseph's discussion as well,
24     was going concern. It's an area of interest, I think, to all
25     three organizations of what is the role of accountants, what is
0144
 1     the role of financial reporting as it relates to going concerns.
 2      I mean, it's clear today that the auditors have an obligation
 3     when there's substantial doubt. I think the point earlier was,
 4     you know, is that occurring frequently enough.
 5                 But I think this is another area of uncertainty in
 6     financial reporting and what ought to be the role of financial
 7     reporting in providing early warning? And then in particular,
 8     is the accounting profession well suited to do that if we're
 9     going to make projections about the viability of companies at
10     varying degrees? So, maybe, as opposed to substantial doubt,
11     some doubt, possible doubt. When you start to grade the
12     alternatives there, is that an area where financial reporting
13     ought to be doing more?
14                 MR. NEWSOME: Well, one, investors differ so the
15     information that they use differs. I tend to like cash more
16     than GAAP earnings, for example, book values good from a
17     measurement or a relative evaluation standpoint, but at the end
18     of the day, whether you're getting equity dividends or, you
19     know, interest on your debt investment, cash is king. And so I
20     care a whole lot about where the firm, in my case mostly
21     financial services firms, are going to get the cash to pay
22     interest dividends and so forth; pay the bills, electric and
23     that sort of thing.
24                 And so, you know, one example came to mind when you
25     were talking and so I will tell you I've been in, unfortunately,
0145
 1     a few cases where there was a contentious negotiation, you know,
 2     around year-end or shortly after year-end where creditors were
 3     unhappy or there was a long, drawn out negotiation over an
 4     amendment. And I think most people here know or should know
 5     that an order will not give an unqualified opinion if there's a
 6     heavily negotiated amendment that's incomplete. Right? Because
 7     of the going concern risk.
 8                 I can't think of one case where that audit writer
 9     said, unqualified but, hey, there's this long negotiation that
10     took place and we waited three weeks to issue our opinion. And
11     I'm not suggesting that they always necessarily should, but, you
12     know, think about the information that auditors have and who the
13     beneficiaries are of those statements. And then it becomes
14     quite interesting when you see the behind the scenes stuff that
15     goes on.
16                 MS. CAMPBELL: I'm kind of adding to Mark's point.
17     I thought it might be - I don't know if you're all are aware of
18     this but if you look at kind of what has worked in stock picking
19     over time. You know, for a long period of time, '80s, '90s, it
20     was earnings revisions. So if a company came out and had this
21     price earnings beat, you saw - you saw out performance for that
22     for some period of time.
23                 There started to be departure from that about ten
24     years ago where going off of earnings revisions as a way of
25     picking stocks became inefficient. It didn't work anymore.
0146
 1                 And what - what replaced it was basically free cash
 2     flow yield. If you had a company that was increasing it's free
 3     cash flow yield where there yield was higher than what people
 4     were expecting that has been a good way to pick stocks over the
 5     last ten years.
 6                 So, you know, kind of looking at the implications of
 7     that is that, okay, then that means that investors have stopped
 8     looking or valuing the earnings of the companies to such an
 9     extent that it's not really working for stock picking anymore.
10     The uncertainty that has come of that is not where we're
11     spending our time.
12                 I think that you can have a - you can take a lot of
13     - imply a lot of things from that without really knowing if
14     there's certainty to that. Does that mean that investors don't
15     have confidence in the net income number? Do they think that
16     it's - you know, it's arbitraged a way ahead of time? There's
17     all kinds of things that you can point to to say, well, what is
18     the problem. But regardless, the reality is, is that people are
19     concentrating on cash and that's been working for awhile.
20                 And then it becomes, okay, well, if that's working,
21     then how much confidence do we have in this final numbers and
22     then that's where we all start to concentrate of, okay, if they
23     do have liabilities come up, do they have enough cash to meet
24     those liabilities. Where could things come from that aren't
25     expected that could potentially hit those companies? And if
0147
 1     they have to start selling assets, where is that going to come
 2     from?
 3                 So I'm just bringing this up because it's kind of
 4     reflective of the change that's happened over the last ten
 5     years. Again, it's just my personal opinion, but I think a lot
 6     of it has to do with the uncertainty that's behind some of the
 7     numbers that are being published now is the reason why we're
 8     focused so much more on cash flow than we had in the past.
 9                 MR. KROEKER: It seems to be, and I don't know if
10     there's any disagreement, but one of the things that's been a
11     common theme is the linkage between earnings and cash. I think
12     Mark was it your earlier example where a company changed its
13     accounting on the revenue side to move further away from the
14     cash.   So I don't know if - but one of my take-aways is, as we
15     think about accounting standards, the linkage between that
16     standard and how cash flow is generated. I think FASB - I don't
17     want to speak for anyone there. I see Marc can speak for him or
18     for them.
19                 MR. SIEGEL:   I can't speak for them.
20                 MR. KROEKER: But we saw this, I think, in the lease
21     - on the revenue side of the lease project where, you know, if
22     you're going to say the obligation you incur in a lease is a
23     liability upfront, you know, one, if you thought the balance
24     sheets of the world should match, you might say, well, the other
25     side has the entity proportionally sold that piece of the asset
0148
 1     under lease and recognized a revenue for that sale upfront. I
 2     mean, that's one potential model. And I think some have heard
 3     that maybe that separates earnings from cash flows and creates
 4     uncertainty that might not be warranted in financial reporting
 5     particularly if you're projecting lease renewals. And maybe
 6     we're good enough reporting lease income as you receive it over
 7     time. So that's one of the take-aways.
 8                 Maybe I'm missing that. That people are comfortable
 9     in a number of areas where earnings reflect cash flow.
10                 MR. SIEGEL: Actually, the lessee side is probably
11     even more of a stark contrast, right. If you have straight
12     rentals, straight rental payments going out, if a lessee model
13     that assumes that all leases are financings and has front loaded
14     interest rate - interest expense, would get further away from
15     cash, right? Because you'd have the amortization of the right
16     to use asset coming straight line. You'd have a mortgage -
17     mortgage amortization interest expense on this new lease
18     liability that would front load some of the interest expense.
19     So you'd get further away from cash.
20                 But the boards, the majority of the boards, have
21     decided that that's more reflective of the economic in that the
22     decision between lease and buy should not drive an accounting
23     difference or a reporting difference. But it does get further
24     away from cash and that's something that's ben very contentious
25     for both boards for some time.
0149
 1                 MR. GLOVER: One follow-up to this conversation,
 2     Joe. You said all the users want different information. It
 3     seems like from this morning and today maybe, and maybe they're
 4     different industries that don't feel like they're reflected as
 5     well by one model or the other. So it could be as you're
 6     thinking about - Marc used the example of should we provide
 7     tables where everybody discloses things the same. I think you
 8     can think of the financial statements as a form of table right
 9     now. And maybe, you say, there are some other snapshots. And I
10     don't know if it was Terri's. What was the cash flow; the free?
11                 MS. CAMPBELL: It's free cash flow, yield.
12                 MR. GLOVER: So as you look at the different users
13     in industries, maybe there's no one model that best reflects
14     all. But we're trying to put everybody into a similar box.
15     Maybe everybody has to be in similar boxes and there's different
16     snapshots. One that reflects uncertainty. One that reflects
17     changes in assets. One that's more about cash. So maybe that's
18     part of it.
19                 Some users might have different focus. Some
20     industries don't feel like they're well reflected. We heard a
21     lot about insurance this morning. So maybe not everyone is best
22     reflected by the current table form or the current form of
23     financial statements.
24                 MR. KROEKER: You've done a lot of work on -
25                 MR. SIEGEL: Financial statement presentation?
0150
 1                 MR. GLOVER: Yeah. Financial statement presentation
 2     is a project that's been a long standing project from the board.
 3      And right now it's - it's not as high a priority project as our
 4     probably the four biggest priority ones between both boards.
 5     But it is something that from a personal my view standpoint it's
 6     something that I hear over and over again from investors that
 7     thinking about the means of communications between management
 8     and investors is - is something that we should be doing and a
 9     high priority.
10                 MR. KROEKER: And I think there was a lot of work
11     done in that project to think of how can you report that which
12     is maybe a great not - you know, not absent to all estimate, but
13     maybe on more solid ground separate from then accruals with a
14     separate column of mark - to market adjustment and a final
15     column that puts that all in and -
16                 MR. SIEGEL: We've - we've done a lot of the - the
17     staff has done a lot of work on that, as Jim has described.
18                 If you ever listen to former Chairman Hertz, he
19     would describe it as changes in flows, cash flows. Is something
20     that he felt was critical to the investor and sort of drives
21     that core earnings repeatable, this stuff that deserves a
22     multiple, if you will, as opposed to changes in stocks. Things
23     that maybe don't deserve a multiple.
24                 Part of this, though, is that the boards don't have
25     an anchor, a common anchor today, on what the performance
0151
 1     statement is supposed to look like. The FASB Concept Statement
 2     5 is sort of a start. But I think some people, some board
 3     members, think of the performance statement as just what are
 4     these - this period's changes in flows, right? Just this
 5     period's earnings, this period's things that are controllable by
 6     management. And that's all that should be in the performance
 7     statement.
 8                 Other people think of the performance statement as a
 9     role forward from the beginning balance sheet to the ending
10     balance sheet. And maybe you have a net income number and a
11     comprehensive income number below it. But until both boards
12     sort of settle on whether they think the performance statement
13     is supposed to be in its entirety, it's hard to reconcile the
14     issues.
15                 MR. GLOVER: And this is easy to make a suggestion
16     because I'm not there, but one thing that strikes me is, if
17     you're trying to get everybody to agree on one form, that's
18     really difficult. But if you're to say, there are different
19     constituents, different views, what if we had multiple views,
20     and then maybe you can get people to say, well, I don't like
21     view one but I do like view two. If you force me to only get to
22     view one, it's going to take us forever to get there.
23                 So maybe part of the constraint is, we currently
24     think of a performance as this one form. Maybe there are
25     multiple forms.
0152
 1                 MR. WALSH: Yeah, this morning we talked about their
 2     being an average of 250 pages, or so, in the financial
 3     statements. If we just had one footnote that said, sources of
 4     uncertainty, and we talked about any - anything that could cause
 5     a materiality threshold to be violated, I think that would be
 6     one footnote that I would read every time.
 7                 And I think some of those will be obvious, but I
 8     think to know about the sensitivity to commodity price changes
 9     or interest rate changes, systemic risks, some of those things
10     that - that as an investor you could go through and say, okay,
11     I'm comfortable with this risk. I'm comfortable with this
12     uncertainty.   This one I'm really having some trouble with.
13     Maybe it would allow you to engage management in a useful
14     conversations as to how they get around or comfortable with some
15     of the risks they're taking.
16                 Rather than having little bits and pieces scattered
17     throughout the financial statements, so that the attorneys can
18     say, well, yeah, you - it was right here. You didn't read page
19     whatever. I think that would be an improvement.
20                 MS. CAMPBELL: So on the financial statements in
21     themselves, I mean, alarm bells go off in my head when I think
22     about major changes to the format. And this goes back to the
23     comparability issue that was talked about in the first panel,
24     because comparability is not just being able to look companies
25     within the same industry or across industries or across
0153
 1     geographies. It's also about being able to see a company's
 2     change over time itself.
 3                 And the number of changes that have happened so far
 4     and the number of future changes that are being discussed,
 5     should be recognized that that - you lose comparability every
 6     time you have one of those changes. That it's, you know - if
 7     you're looking at how a management behaves over a business
 8     cycle, it takes a long time to go through a business cycle. And
 9     you lose all of that information whenever you change things.
10                 And I think that that's - that brings a full new
11     level of uncertainty to the process that's going to force
12     investors to go back to cash measures. Because when it comes
13     right down to it, if you don't know how it's - what's really
14     happening on it, then you start demanding to know what's
15     happening with the cash; what's coming in, what's going out, how
16     are they - how are they handling it.
17                 And it's a big concern because it feels like there's
18     so many changes going on it's as if there's a belief out there
19     that if we just had the right number of changes that we'd get a
20     perfect system. And we all recognize, there is no perfect
21     answer to this. And there never will be because you have lots
22     of different companies and lots of different industries and an
23     environment that constantly changes.
24                 So how do we better reflect those changes as they go
25     on, you know? It's concerning that there's big changes that are
0154
 1     happening that I'm not sure they're addressing problems that
 2     really exist to the level of the magnitude that it's going to
 3     have in the longer term where people just lose confidence in the
 4     numbers.
 5                 And I think that's reflected in both pro forma
 6     numbers, the use of tangible book value. It's - you can pick
 7     also different examples from different industries but it's a
 8     real concern that we're kind of losing sight of what we're
 9     trying to - what we're trying to really get to. I'm really not
10     sure where the impetus for changing the full format of the
11     financial statements came from. It's not any investors that
12     I've ever talked to.
13                 MR. KROEKER: It came from investors.
14                 MS. CAMPBELL: I know. I hear that. But I don't
15     know any of those investors.
16                 MR. KROEKER: The CFIA Institute polled thousands of
17     its investors.
18                 MR. SIEGEL: I'm one of them.
19                 MR. KROEKER: Mark is one of them.
20                 MS. CAMPBELL: Oh, you are. So you want to have the
21     change?
22                 MR. SIEGEL: But - but - but - but -- just think of
23     this, Terri. You mentioned the cash flow statement and the
24     importance of the cash flow statement. One thing that as a
25     former investor, I mean, I obviously, I totally agree with that.
0155
 1                 The cash flow statement is all organized in terms of
 2     sort of what Jim was alluding to earlier, right? A section that
 3     deals with here's operating stuff and here's investing stuff and
 4     here's financing stuff.
 5                 So one change that is - that is - that was on the
 6     table is to disclose either on the face of the financial
 7     statements or even change the format radically, but even absent
 8     that, would you be opposed to just saying keeping the format of
 9     the financial statements the same but putting underneath the
10     balance sheet, operating assets, investing assets, financing
11     assets? So you could do ratios, like, operating cash flow to
12     operating income to operating assets. Operate, you know,
13     investing to investing to investing. It's just to get some
14     cohesion so that you could actually do return calculations that
15     made sense.
16                 And that - so from a radical change standpoint, I'm
17     not seeing it as such a a radical change. I'm saying, to take
18     something from the cash flow statement that everybody seems to
19     think is relevant, and applying it to the old statements.
20                 MS. CAMPBELL: I'm curious, I mean - it's - I think
21     that, you know, it would be very interesting. But I'm also very
22     curious to see what the preparers think about that. Are they
23     looking at their own businesses that way currently? Are they
24     running their businesses that way currently? I don't think so.
25                 And what do they have to do to change their process
0156
 1     in order to provide that because I've become very concerned when
 2     you start to have accounting departments within companies become
 3     so large that it's overshadows what the underlying business is.
 4
 5                 You know, I can say that somewhat from experience
 6     with, you know, working for an insurance company. That you
 7     spend so much time preparing these statements that are not
 8     necessarily reflective of how companies are managing their
 9     business. And I don't know what - what do the preparers say
10     about that?
11                 MR. SIEGEL: The preparers more - the - the feedback
12     that we got from the preparers was more on the other issue which
13     it sounded like before you were in favor of which is a direct
14     cash flow statement. Because the other part of that proposal
15     was a direct cash flow statement.
16                 MS. CAMPBELL: They were in favor of that?
17                 MR. SIEGEL: No.
18                 MS. CAMPBELL: Oh, they were not in favor of that?
19                 MR. SIEGEL: No. Very much not in favor of that.
20                 And we got less negative feedback about the cohesive
21     part of it, which is to say the idea of breaking it out. There
22     was some. There was some, especially around, you know,
23     completely changing the format of the financial statements, yes,
24     we did hear from preparers saying that's not the problem.
25     You're solving a problem that doesn't need to be solved right
0157
 1     now with doing that. So, yes, we did hear that feedback.
 2                 MS. CAMPBELL: The only other - the other thing that
 3     kind of pops to mind on putting either an income statement or a
 4     balance sheet into terms of how the cash flow statement is
 5     operating and investing in finance is that, is that the best way
 6     to look at things? Is the cash flow statement itself reflective
 7     - how reflective is it of the business, you know, when you're
 8     adding back in the intangibles and - you know, there's a few
 9     lines that we'll pay particular attention to and it's going to
10     be, okay, what is - what's the income less these non-cash
11     expenses. And the what are they spending capital - what are the
12     capital spent? And, you know, what are the big projects that
13     they're using money for.
14                 But, you know, the cash flow statement is more than
15     a little imperfect.
16                 MR. SIEGEL: So and one - maybe not directly related
17     to uncertainty but to the extent you're trying to follow cash
18     flow, one thing that would help avoid that, but there's been
19     tremendous push back in terms of it's cost, would be a direct
20     cash flow statement. I think it would be hard to say that
21     that's anything other than reflecting the actual cash flows.
22                 So one of the problems now as you're backing out a
23     bunch of non-cash stuff to get to cash flows and invest - you
24     know, some investors have said it would be much more useful to
25     know cash collected from customers, cash paid to vendors. And
0158
 1     so you don't have to deal then with the noise of - if you think
 2     it's noise, the noise of non-cash expenses. Now, obviously, you
 3     can hold back payments in the short term to make cash flows look
 4     one way or the other or have a big press to collect on
 5     receivables over short periods of time. But, you know, it's
 6     pretty hard to say it's anything other than the cash going in
 7     and cash going out.
 8                 MS. CAMPBELL: And I don't want to imply that it's
 9     perfect either. I mean, I think you're looking at energy
10     companies as a prime example of that. Because they have huge
11     cash flows, variation on a quarterly - a quarter to quarter
12     basis. And they have problems with, you know, a point date as
13     well. It's going to depend on what the commodity underlying
14     price is and, you know, did that - did that tanker shipment get
15     delivered or not.
16                 So I mean, again, I just want to bring this up, that
17     it's - I'm not sure that there's - there's not a perfect answer
18     to it. And it goes back to can we as investors have a good
19     understanding by what is delivered now of what managements are
20     doing and why and what's happening with the company underlying
21     and what can we do to improve on that, which is exactly the
22     whole point of all of this.
23                 But it's - it does come down to, I mean, cash does
24     matter. And I don't think we've got a good way of tracking that
25     now as imperfect as it is.
0159
 1                 MR. NEWSOME: If I could give you a couple of
 2     examples, which I know Mark you've heard me say before, but when
 3     you talk about comparability -- and what I said earlier, some
 4     investors look for different things, I'd proposed and advocated
 5     the, you know, I guess deconsolidation of an income statement
 6     between cash and accrual items. Right? Because some people
 7     care about GAAP earnings per share whereas others care about
 8     cash.
 9                 And you know that it does become wildly popular but
10     that is not a cash earnings figure either because it is accrual
11     and some of those accruals should be backed out and others are
12     reasonable because you're going to pay salaries in the next few
13     weeks or something like that.
14                 And so I think that helps. And I guess the
15     background that I think about is, what, I guess, is what a
16     school professor called "the accounting continuum." At one end
17     you have cash. At the other end you have complete accruals but
18     over time all those accruals should reflect or convert to cash.
19     Right? And so what I care about is what do you have today to
20     pay that dividend or interest or bills and what are you going to
21     have tomorrow. Right? And then you get those ranges of
22     uncertainties. And so if you deconsolidate that income
23     statement, then people can kind of get both and it's never
24     perfect. I agree with you. But cash flow from operations has
25     all of these balance sheet effects which I don't find very
0160
 1     useful personally whether it's financial services or a
 2     manufacturing company.
 3                 And then the other thought that I had was almost
 4     every company I've seen, so I presume almost every company has
 5     its own internal management financial statements. And I can
 6     tell you my experience is that companies that in my opinion are
 7     in the same business have different management financial
 8     statements and that's because, in my opinion, they manage the
 9     company differently.
10                 And so that's really where I get at with financial
11     statements is how are you managing it and how do you think about
12     it. And then as an investor I will make an opinion as to
13     whether or not you do a good job. At the end of the day, I
14     think that's the role of the statement is to help me understand
15     how management runs their business and what the financial
16     implications are.
17                 MR. KROEKER: It struck me as you were talking about
18     accruals ultimately converting to cash. And I think that might
19     be at the heart of some of this discussion is the greater the
20     level of uncertainty you incorporate into accruals, the less
21     likelihood those accruals end up resulting in any impact in - on
22     cash.
23                 So the more uncertainty, the less likely earnings
24     will over short periods of time reflect cash.
25                 MR. MUNTER: Jim, I agree with that, but I don't
0161
 1     think that means that the information is necessarily
 2     uninformative. Right?
 3                 MR. KROEKER: I didn't suggest that.
 4                 MR. MUNTER: I mean, the example that comes to my
 5     mind is accounting for post employment health care benefits.
 6     For years and years and years our accounting model was pay as
 7     you go. So obviously none of those costs were reflected in the
 8     cash flows. The obligation wasn't reflected anywhere in the
 9     financial statements and acknowledging that there's a lot of
10     uncertainty that goes into that measurement that ends up in the
11     financial statements. There are companies for which that is far
12     and away the largest obligation that they have. And is, I would
13     expect, pretty important information
14     for investors to at least have an idea about relatively how
15     significant that is.
16                 MR. KROEKER: So I wasn't trying to suggest that
17     uncertainty is an excuse for not recognizing assets for
18     liabilities. And, of course, in that one probably less
19     uncertainty about whether they're going to pay or at least
20     continue to pay assuming they're a going concern. Maybe some
21     uncertainty as to the level, although there might be a very
22     clear and reasonable, you know - with high degrees of certainty
23     that the reasonable floor is, you'll pay at least as much as
24     today's health care rates. And, you know, things FASB struggled
25     with then is how much do you want to incorporate future
0162
 1     assumptions as to whether, you know, the rate will look like
 2     today's rate versus some future rate. And then if you're going
 3     to present value that. There are even aspects of that that you
 4     would say, things that are more certain than other aspects of
 5     post employment benefits. But certainly not a reason not to
 6     either capture or otherwise disclose including the assumptions
 7     that go into it.
 8                 MR. STARR: Yeah. I'm going to take us back to the
 9     beginning, if you don't mind.
10                 When we started this initiative, when we started
11     thinking about what we wanted to talk about, we started looking
12     for things that we think put pressure on the final reporting
13     system; things that might be difficult for investors to
14     understand. Things that are difficult for - or challenges for
15     preparers and certainly for auditors.
16                 And we looked at what we see as an increased extent
17     of measurement uncertainty in financial reporting. So as we
18     wrap up what I'd like to hear from this group is is there
19     concern on the part of investors about the extent of measurement
20     uncertainty in the financial statements in financial reporting?
21                 How much should be recognized? In other words, have
22     we started recognizing too much and that's not useful? Are we
23     not recognizing enough and we need to be even have it be more
24     relevant? And what's the best way to communicate the extent of
25     the uncertainty in the financial statements?
0163
 1                 MR. LONGINO: Let me take a crack at that.
 2                 I think - and people can jump in even before I
 3     finish talking if you want to. I think most investors are
 4     probably not troubled by uncertainty in financial reporting and
 5     disclosure. I'm using that comprehensively because I don't want
 6     to just focus on the financial statements.
 7                 There's a lot of information out there. I think
 8     that a lot of investors are concerned about, particularly in the
 9     financial services space, is the ability of accounting
10     conventions to distort business judgements and to make it harder
11     for companies to operate and harder for investors to invest in
12     those companies because they are dragging into the financial
13     statements themselves amounts and degrees of uncertainty that
14     don't belong there because they're not relevant to the business
15     model.
16                 In the joint project of the ISB and the FASB, for
17     example, to fair value 40-year insurance contracts, liabilities
18     through the earning statement on a quarterly basis, that doesn't
19     make it any easier to invest in good insurance companies.
20                 In the ongoing deliberations of the FASB right now
21     as to how as to how to entitle securities to amortized cost
22     accounting, and the focus seems to be shifting to the question
23     of does the security have individually negotiated credit terms
24     like a loan, in which case it's entitled to amortized cost
25     accounting or does it not, in which case the answer is fair
0164
 1     value. That doesn't really look at the businesses model of the
 2     banks that own those securities, because a lot of securities in
 3     the securities portfolio are like planting equipment. They're
 4     there to generate recurring income. And their day to day or
 5     quarter to quarter fluctuations of value are not terribly
 6     relevant to the way the business is run.
 7                 So I - I'd hazard a guess that most investors are
 8     not troubled by uncertainty and certainly most analysts I'm
 9     including. They expect it. They know that it's there. They
10     know it's unavoidable. But they want to see uncertainty in its
11     proper place in financial reporting broadly considered. And not
12     have things in the financial statements that don't properly
13     belong there because in the end it just makes it harder for them
14     to invest and make money.
15                 MR. NEWSOME: Maybe I can give you a couple of
16     examples instead of - and Starr wants just a high level thought.
17                 So if you take banks a few years ago and for some
18     banks in the current environment, one of the things that crosses
19     my mind is some banks are relying on money market investors to,
20     you know, fund their operations to a degree. And we know that
21     some European financial institutions are having a hard time
22     acquiring dollars right specifically U.S. money market funds are
23     invested somewhat heavily in European financial institutions.
24                 And so if that's the case, and have this pool of
25     illiquid loans which, may, in fact, collect as predicted, if
0165
 1     they can't get new money market funds to invest in new loans,
 2     choices have to be made. Right? And so they can say, well,
 3     stop making new loans, which has future cash flow implications.
 4     Right? Or they could sell some other stuff that they have to
 5     provide liquidity to keep doing their ongoing business.
 6                 Or what if certain depositors say, you know what,
 7     we're going to switch our money to somebody else because we
 8     hear, you know, things aren't so good. Then how do we fill that
 9     gap? Liquidity from some source, some other investor, or sell
10     stuff. Right?
11                 And so you get this, I guess, crossing of, I guess
12     conflicting interest. Right? What are you going to do? And as
13     an investor, I don't think you really see that. You might hear
14     a general statement, the dollar market is, you know, difficult
15     or something like that. But you don't hear a lot about the
16     choices that have to be made.
17                 For insurance companies, similarly, a lot of
18     insurers cash flow match where you have a liability that goes
19     out let's say 20 years and so you buy investments that go out
20     for effective duration matching. But if some of those
21     investments become illiquid along that continuum, then you have
22     to get the cash from somewhere else. Right? And so where are
23     they going to get it and what are the implications?
24                 And so those are some of the things that I think
25     about with financial statements that's not really bridging the
0166
 1     implications between one part of a financial statement and the
 2     other.
 3                 MR. GLOWER: The question was, is there too much or
 4     not enough uncertainty conveyed. And I think we can agree it's
 5     an uncertain world. I think we can agree there will be some
 6     uncertainties in financial statements. I think we might agree,
 7     it's not easy to navigate. There's not a clear roadmap of where
 8     the largest uncertainties are or how big those uncertainties
 9     are.
10                 So thinking about transparently conveying those.
11     One approach that's been suggested is different snapshots.
12     Instead of trying to find the perfect snapshot.
13
14                 So reconsidering where those uncertainties are,
15     whether it's a footnote, as Gary said, that says, here are the
16     four or five most significant and here's how big they are or
17     it's a different view of a - different columns in a financial
18     statement. A roadmap where the uncertainties are and then the
19     disclosure of bigger, what's the reasonable range, I think would
20     be helpful.
21                 MS. CAMPBELL: I'd echo a lot of what Steve said and
22     also what Gary said about having the uncertainties identified
23     and the concerns where they think they can have the biggest long
24     term impact.
25                 And having it in a consolidated space so that you
0167
 1     don't have to go through 200 pages and potentially miss it as
 2     you're falling asleep through the 40th.
 3                 And the other, you know, piece of that is going back
 4     to the transparency side of it is, you know, having historical
 5     costs, having what the fair value is and having either
 6     information of what that cash flow for those assets and the
 7     underlying assumptions goes along way towards investors having
 8     the tools that they need to kind of make a judgement call
 9     themselves on what those underlying assets are.
10                 Now, whether or not the preparers are going to be
11     able to do that or not is another issue. But, you know, for
12     myself I'd like to see what assumptions are being used, what the
13     cash flows are, so that then I can make my own judgement of
14     whether or not I agree with management. Realizing that we're
15     all dealing with uncertainty every day.
16                 MR. KROEKER: Chairman Doty, Marc, do you have
17     anything else? Otherwise I find the remarks -
18                 MR. DOTY: I took away four conclusions that I felt
19     were fairly startling. Not startling but influential.
20                 One is that investors don't want to see the auditors
21     moved into a role in which the auditors aren't competent to
22     perform what they're asked to do. That is to say, a general
23     supervisor of management conduct or as a financial analyst.
24                 On the other hand, investors would have thought the
25     public would have learned more from the auditors in the course
0168
 1     of the recent financial crisis, as Mark Newsome.
 2                 On the other hand, the more uncertainty there is
 3     injected in the financial statements and performance, the less
 4     likelihood there that the financials are going to reflect the
 5     cash of the company which just happens to be what people have
 6     used to pick stocks successfully over recent periods.
 7                 And then finally the more uncertainty the less
 8     precision, the more precision, the less relevance.
 9                 There's a lot to think about here. But I'm not sure
10     what the regulators do with it. I do think that some of the
11     things we were instructed to do as early as the assembly in
12     2005, which is to try to work together to see that we have
13     coherence and to be sure that we don't create in the public's
14     mind the notion that auditors are infallible or that the results
15     of financial statement is, you know, is certain.
16                 If I'm wrong, you'll have to correct my associates
17     if I was wrong in what I took away.
18                 MR. SIEGEL: The conversation has definitely opened
19     my mind to all the different aspects of uncertainty throughout
20     the financial statements irrespective of whether you have a
21     historical cost attribute or a fair value attribute. I mean, if
22     you just think about the asset side, and cash we talked about
23     this morning, having significant uncertainties potentially with
24     it. Inventory has a lower of cost of market threshold. And you
25     have inventory obsolescence for taxes. We talked about it. And
0169
 1     just going down the line, investments, et cetera. Even cost
 2     based investments have an impairment mechanism which is, you
 3     know, market based and has assumptions and uncertainties
 4     inherent in it.
 5                 And it gets back to something that Chris was talking
 6     about earlier. These - you don't know at any given point in
 7     time which is going to be the uncertainty that's going to drive
 8     an investment decision. Cash becomes critical at different
 9     points and an entity's business cycle.   I mean, I remember
10     looking at a particular company where they had - the - you know,
11     the loan that everybody felt was going to be fine, the debt that
12     was going to be fine, all of a sudden the bullet payment was
13     going to be due and then the cash was stuck in a foreign entity.
14      And the issue that we talked about this morning of repatriating
15     cash at what tax rate and all this other, that was the issue.
16     Nothing to do with fair value. Nothing to do with anything
17     other than what is the restricted amount, what is the cash that
18     they actually have available to it.
19                 And it gets to the ability to communicate those
20     kinds of uncertainties in the financial reporting package be it
21     in the financial statements themselves on the balance sheet, be
22     it in the footnotes or where MDNA has a lot of requirements
23     already for those kinds of things.
24                 And, you know, the disclosure framework and anything
25     that comes out of this, I'm just encouraged that at least the
0170
 1     three organizations are trying to think about this together
 2     because it's not going to be a one - it's not going to be a
 3     solution that's driven off of either - you know, one leg of the
 4     stool, if you will.
 5                 MR. NEWSOME: If I could just follow-up on that,
 6     Marc. One of the problems I've found over the years is the
 7     difference between where the SEC governs, the reporting package
 8     and the FASB governs it. And so, you know, I often flip back
 9     and forth and, you know, you wind up searching through those
10     100s of pages of footnotes, going back to the MDNA and then you
11     call the CFO, how do I link these numbers, and, so, to follow on
12     that thought, you know, working together would be very, very
13     helpful.
14                 MR. KROEKER: We're certainly committed to doing
15     that and particularly as FASB looks at their project on
16     disclosure framework, they already invited us to participate
17     both from an OCA perspective as well as a divisional corporation
18     finance who's spending every day looking at MDNA and filings.
19     So I think it's advice well taken.
20                 Any closing remarks?
21                 If not, we'll reconvene around - what was the plan?
22     3:45. Give you a last shot.
23                 Again, want to thank the panel. The advice is
24     appreciated and we will - we have your contact information if we
25     want to follow-up, and you have ours.
0171
 1     (Off the record)
 2                 MR. KROEKER: We'll go ahead and get started for the
 3     third panel of the day.
 4                 Once again, very thankful for the volunteers and the
 5     participants. I look forward to a discussion on the third panel
 6     that maybe we'll focus a little bit more on the challenges from
 7     the standpoint of, or the opportunities from the standpoint of
 8     accountants and auditors. But we certainly want to also, then
 9     as we have that discussion, a perspective of investors to say,
10     well, given those challenges or not withstanding those
11     opportunities we still think you ought to do this or to do that
12     to assist investors in their financial analysis.
13                 But I think a good opportunity to continue the
14     discussion.
15                 So I'd like to welcome Jay Hanson, a PCAOB Board
16     member who will, along with us, moderate this panel.
17                 And maybe given what we've heard, and for those who
18     haven't had the benefit of the discussion throughout the day, I
19     think there's been a robust discussion of the broad topic of
20     uncertainty and really trying to capture that in one or two
21     sentences, I think, is fairly difficult. Except that I think
22     it's clear to say that every one of the panelists have
23     recognized that uncertainty is not going to go away. And it is
24     something that is critical to investors analysis that I think as
25     a system we can do a better job of providing that information to
0172
 1     investors.
 2                 So I'd really be interested in the perspective of
 3     the group, how can we better - maybe the same question Mike -
 4     and I won't get the words right -
 5                 MR. STARR: I'll correct you.
 6                 MR. KROEKER: That you asked toward the end of the
 7     second panel is, not withstanding the opportunities and
 8     challenges are there thresholds that we ought to be looking for?
 9      I wouldn't say as a mutable thresholds but what are the types
10     of items where uncertainty is best captured in financial reports
11     and on the statements themselves. What are the types of
12     uncertainty or items where there needs to be additional
13     disclosure and/or uncertainty should be expanded upon or
14     captured in a company disclosure around financial statements.
15     I'll say for now whether that's best captured in footnotes or
16     it's best captured in MDNA.
17                 But I think that would be one of the things that I
18     think would be particularly useful to all of us would be are
19     there, sort of, guide posts that people ought to be looking to?
20     And then likewise, whether or not as we do that, should there be
21     differentiation? I think Chairman Doty brought up the idea of
22     differentiation in terms of expanded audit disclosure or
23     differentiation on the balance - I don't know if he brought this
24     up, but I think it came up - with differentiation on the balance
25     sheet or in financials of these things are more susceptible to
0173
 1     uncertainty than those things.
 2                 So really a broad discussion. And I would open it
 3     up with, can you help us define those things that are better
 4     captured in measurement and recognition and those things that
 5     are better captured in the footnotes or broadly in disclosure?
 6                 MR. GALLAGHER: Jim, to that point, I mean, it was -
 7     I found it interesting this morning on both panels, there seemed
 8     to be a consensus, you know, conceptually that obviously the
 9     more uncertain the less interested they were in having it being
10     captured in the primary financial statements.
11                 And while the information was valuable, you know, it
12     seemed like they'd rather - investors would rather see more of
13     that in the footnotes rather than in the primary financial
14     statements where you have the susceptibility of the movement
15     from period to period that was so subjective that they felt was
16     not helpful. They'd have to take out to come up with you know,
17     to fit their models so they could do their evaluations.
18                 You know, I guess intuitively that made sense to me
19     and I understood it. But it was just so clear in some of the
20     fair value discussions and some of the other ones.
21                 And I just go back to my experience, you know,
22     working with chemical companies that had asbestos exposures.
23     And why you would always come up with a number. The only thing
24     you knew for sure about that number is that it was wrong. And
25     that the value in the disclosures was so much more than whatever
0174
 1     you put into the financial statements.
 2                 Now, obviously if it tripped up debt covanance I
 3     mean, it could be very important when it went into the financial
 4     statements. But in terms of understanding the impact, cash
 5     flows, which we talked about a lot this morning, too.
 6                 Those footnote disclosures are just so important and
 7     whether you can capture a number, discounting the cash flows or
 8     discounting the numbers that are in the footnotes, just the
 9     qualitative disclosures in the footnotes, if it was done right,
10     was just incredibly valuable to investors.
11                 So, you know, I'm not sure that helps in terms of
12     saying, what should be in the footnotes versus, you know, the
13     financial statements. But clearly as you move along that
14     continuum of, you know, uncertainty and the fact that it could
15     fluctuate based upon things that were not observable in the
16     market. You know, obviously it gave investors great pause in
17     terms of whether that should be in, you know, the primary
18     financial statements. It seems like they thought it would be
19     much more valuable in the footnotes.
20                 MR. BASKIN: My concern with the panel has been that
21     the investors we've had on the panels are not typical investors.
22      I don't think they're the typical banker reviewing - who looks
23     at financial statements and tries to make a loan decision. I
24     don't think they're the typical personal investor. I - I am
25     concerned with their recommendation about just give us a table
0175
 1     in the footnotes and we'll make our own adjustments. That most
 2     people can't do that.
 3                 And don't find the table in the footnotes that list
 4     out each of the assumptions and the range of assumptions and the
 5     assumption used. They don't find that very useful information.
 6                 And so my concern is that the views we've heard so
 7     far on this roundtable are not necessarily representative of
 8     most users of the financial statements.
 9                 And that takes me to the concluding point, which
10     would be that I think the uncertainty that exists in all of the
11     financial statement balances and amounts needs to be reflected
12     in the balance sheet and in the income statement and in a
13     summary fashion so that it is visible. And I think it's not
14     known today. It's not known how one company's uncertainty
15     compares to another company's uncertainty. And the magnitude of
16     the uncertainty is not known today.
17                 And so my big concern is that the answer for most
18     people is not to give me pages and pages of tables in the
19     footnotes. It's put the information on the balance sheet and
20     the income statement.
21                 MR. KROEKER:   Just as a follow-up. Does that lead
22     you to some balance sheet that would then disaggregate between
23     more certain amounts and more uncertain amounts? Because those
24     investors, likewise, if you say -- would give an appreciation
25     for the difference in uncertainty between enterprise. A level
0176
 1     three asset that's on the balance sheet at a million dollars is
 2     going to look very similar to cash in the highest rated
 3     financial institution's deposit account. Of course, they both
 4     sit there at a million and that doesn't convey anything about
 5     the level of uncertainty inherent in the measure.
 6                 MR. BASKIN: Right. Or even worse than that, they
 7     don't sit there at a million. They sit there at a 1,387,432.
 8                 MR. KROEKER: Right.
 9                 MR. BASKIN: Which gives the appearance that they
10     are precise within a dollar, when they're absolutely not. And
11     that is even worse.
12                 I think that certainly there is a range of
13     uncertainties. I think there's - there should be a threshold
14     for making those uncertain - making those more uncertain amounts
15     known. Perhaps at the - around the materiality threshold. And
16     that - that those uncertainties need to be displayed and
17     reflected in the summary totals in the financial statements so
18     that you can see what that means to the uncertainty in the
19     bank's capital or what that means in the uncertainty in our
20     bank's per share.
21                 MR. KROEKER: Bradley and then Janet.
22                 MR. HUNKLER: Thanks, Jim.
23                 MR. KROEKER: We'll just go around the table.
24                 MR. HUNKLER: Everybody's got their pent up comments
25     from sitting through the earlier session.   So -
0177
 1                 I think if you look at uncertainty as sort of the
 2     enemy of objectivity and you say the objective of financial
 3     statements or the goal of financial reporting should be to have
 4     as much objectivity in the financial statements as possible.
 5     And then you start to look at that uncertainty on the continuum
 6     and you say, how far along that continuum do I go knowing that
 7     the further I go the less objective my financial reporting is
 8     going to be.
 9                 You know, the question becomes, what's the right
10     stopping point? I mean, I work in an industry, the insurance
11     industry, where we're already starting pretty far down that
12     continuum of uncertainty because generally that's our business
13     is we accept your uncertainty and you pay us a premium for that
14     as part of the risk model.
15                 But where we think the right stopping point is, is
16     very much of what I would call sort of the business model
17     analysis. We really look at the business model as sort of the
18     primary driver of where you determine - at what point do you
19     accept uncertainty in the financial statements and at what point
20     do you require objectivity in the financial statements.
21                 So if your business model is one that would require
22     what I call significant trading activities or - or - you know,
23     we generally know in our industry or we'll estimate, you know,
24     I'll cash value today and we estimate what a cash settlement
25     value's going to be in the future. And as we go down the time
0178
 1     continuum, you know, we may change an estimate based upon those
 2     expected cash flows. But there's lots of other variables that
 3     change during that period of time, including interest rates,
 4     discount rates, the values of our assets, liquidity in the
 5     market.
 6                 So, you know, I think it certainly makes sense to
 7     reflect changes in estimates around those cash flows but it does
 8     not make sense to reflect changes in estimates on things like
 9     the discount rate and potentially liquidity considerations if
10     it's not our business model to trade those liabilities.
11                 So that's where, I think, the business model has to
12     play a role because other institutions and other industries may,
13     as part of their business model, part of their strategy, may
14     revolve around trading those assets or trading those liabilities
15     and as such, you know, bringing in sort of the periodic
16     fluctuations that may occur and the market forces that may
17     impact those values. And the uncertainty around those market
18     forces may be more pertinent but in other industries it may not.
19                 So I do think business model needs to be part of
20     this discussion. It needs to be part of the solution. I know
21     it currently exists in certain FASB statements. And it has been
22     brought up during the discussion on the debate on insurance
23     contracts.
24                 So at any rate, I think that needs to be a big part
25     of the determining factor around how you move down that
0179
 1     continuum around uncertainty.
 2                 MS. PEGG: I feel like I should start off just with
 3     a comment that I'm not a typical analyst as an accounting
 4     analyst. I mostly focus on the accounting side of it, but in my
 5     25 years, I've probably worked with hundreds of analysts so I
 6     think I'm right next to them in a lot of this.
 7                 And with that, I think I agree with Bradley's
 8     comments, except I would change it just a little bit. Rather
 9     than business model, I think when you think about how much you
10     want to depend uncertain numbers, it really depends upon the
11     relevance of the information. That to the extent that you're
12     looking further up the income statement or on more important
13     items on the balance sheet, you would like more certainty in the
14     numbers. There's some understanding that that might not always
15     be available. So my belief is that at that point that's when
16     disclosure has to come in to try and fill in the void.
17                 I personally would never want to see any number not
18     appear on the income statement. I think that if we had a full
19     statement of comprehensive income there's a place for this
20     information. And in this day of proforma earnings and
21     reconciliations back to GAAP or whatever, there's a lot of
22     information there that people use in different ways.
23                 So once you put it in a footnote, it just doesn't
24     get the prevalence and the importance that it does when it's on
25     the primary financial statements.
0180
 1                 MR. KROEKER: Liz, then Kevin.
 2                 MR. GANTNIER: Gosh, I have so many thoughts from
 3     listening to the earlier panels.
 4                 I mean, some of the things that I've taken away from
 5     this is that really the investors and the auditors are all on
 6     the same side. And I wasn't sure of that coming in here today.
 7     But what we would have some very different views of things. And
 8     quite frankly, after the first two panels, I think, our views
 9     are very similar on a lot of stuff.
10                 As to the question at hand.   I think one of the
11     things that was loud and clear was that estimates are only
12     valuable when they're valuable. And that there are plenty of
13     places in the accounting literature that sort of demand
14     estimates that ultimately people think are irrelevant. And it's
15     sort of disconcerting to me that I've spent an awful lot of
16     audit time, budget and effort on auditing goodwill and goodwill
17     impairment to be told that we throw that number out.
18                 And I would be the PCAOB inspectors when they come
19     in, if I had said, "Gosh, we thought that was irrelevant and we
20     didn't pay attention to it," would disagree.
21                 So I think there needs to be some natural
22     understandings between all of the parties as to what's relevant
23     and why and that differing businesses will have differing pieces
24     of relevance.
25                 I also think one of the things that I heard was that
0181
 1     back in the day, depending upon how old you are is when that day
 2     was, but back in the day accounting was relatively simple. And
 3     that you knew what was wrong with the number. If it was at
 4     historical cost you knew that that may not be accurately
 5     reflecting fair value today and you understood that. And so you
 6     could make your own assessment as to how to change that number
 7     in your head.
 8                 I think accounting has spent a lot of effort over
 9     the last ten years to make the numbers more reflective of a
10     current day value as opposed to historical cost value. And at
11     some point you cease to know now what's wrong with the number.
12     So if goodwill is going to be rate-ably impaired over 40 years,
13     well, then, we know what's potentially wrong with that
14     assessment because it's being amortized. But if goodwill is
15     being adjusted due to the superiotic impairment tests that are
16     really very complicated and subject to a tend of estimate and
17     assumption, we now don't know what's wrong with that number
18     anymore because we don't potentially have enough disclosure
19     about the estimate and the assumption.
20           So without good disclosure, it don't really much matter
21     what's on the numbers themselves. Without good disclosure about
22     how you came up with that number, where in that number there is
23     sensitivity and, you know, a wide range. Without all that, the
24     numbers don't matter.
25                 MR. SPATARO: Thank you. And thank you for the
0182
 1     opportunity to participate.
 2                 I wanted to really make two comments here and
 3     observations.
 4                 The first that I wanted to - observation I wanted to
 5     make is that I think that the SEC both in Courtfin and OCEC, I
 6     think that you have it just about right in terms of where you
 7     are in terms of accounting requirements and disclosures.
 8                 If I look to what the requirements are in terms of
 9     risk factors, in terms of the critical accounting estimates, in
10     terms of the general MDNA requirements, and I look at my own set
11     of financial statements that I prepare and I look at the other
12     financial statements that as an investor that I review, I think
13     that the disclosures are very robust.
14                 I think that the individual that was here from
15     Courtfin earlier today, I think she was right on the mark
16     because she said something to the effect of, you know, we
17     operate in a dynamic environment and what tends to happen is
18     that we build up disclosures in reaction to events. For
19     example, the credit crisis. And so we had, you know, ten,
20     twenty, thirty pages, depending on the relative size of your
21     organization, in investment disclosures and then those just tend
22     to stay there. And they don't burn off, you know, any time -
23     any time quickly because once a disclosure is added, it
24     typically takes a long time for a company to determine that it's
25     no longer material information and then they take it out.
0183
 1                 So I think that - her point was a good one is that
 2     maybe what needs to be done maybe we're not in a bad place but
 3     maybe we do need to in this constant dynamic environment always
 4     redetermine what are the, you know, internal and external risks
 5     that were exposed to uncertainties and so forth and determine
 6     whether or not those types of risks are being adequately
 7     addressed and disclosed as opposed to some of the other, you
 8     know, time and effort that's being spent carrying forward
 9     disclosures that investors are no longer placing reliance on.
10                 So I think that in terms of, you know, where the SEC
11     is, I think that - again, I think that you about have it right.
12
13                And then we go back and I answer the other question.
14      In terms of uncertainty in the financial statements, from the
15     perspective of an insurance company, there are already - and
16     I'll link it back to the previous statement - there are already
17     items in the balance sheet that are subject to uncertainties.
18     So when we measure reserves, that is - that doesn't have, you
19     know, an exact amount that's associated with it that has a - you
20     know, that has a number of estimations and assumptions that go
21     into the development of that.
22                 And so what we do is we marry that up with a good
23     comprehensive disclosure within the critical accounting
24     estimates of how we come up with those disclosures. And we also
25     talk about if, in fact, you know, our estimates were different,
0184
 1     what impact would that have had on net income.
 2                 And so I think that, you know, in that respect I
 3     think, again, we have it about right. And I'll make one other
 4     comment and this is more of a forward-looking statement about
 5     where the insurance contracts project is going with the ISB.
 6                 Now, that's a totally different - you know, that's
 7     going down a different - a totally different path about bringing
 8     more uncertainty into the actual measurements. So one of the
 9     proposals there - and it's not been a proposal of -- at least
10     short duration contracts of the FASB, is to include risk
11     margins. And so then the question becomes, is that an element
12     of uncertainty I now want to incorporate into the balance sheet
13     measurement? And do I think that that ultimately will aid
14     investors?
15                 We in the U.S. have said, no, we don't think that it
16     will aid investors. We actually think it will, you know - it
17     will make financial statements less understandable, less
18     comparable and less transparent because just as one company
19     that's gone through the testing and attempted to apply those
20     risk margins, the multitude of judgements and assumptions that
21     are inherent in developing those risk margins and together with
22     the decision of the IASB, that they would not only give you
23     three different methodologies, but actually open up to any
24     different methodology one would potentially want to use for
25     calculating those risk margins. There's not enough pages in a
0185
 1     set of financial statements to provide the level of reasonable
 2     disclosure that a financial analyst would need to understand
 3     changes not only in a company's financials but to compare it
 4     even across the industry and across geographies.
 5                 So I think that that's one where if you ask the
 6     question about how much uncertainty do I want to incorporate,
 7     that probably crosses the line of that's an uncertainty that I
 8     don't think would be beneficial to preparers, investors or any
 9     other users of the financial statements.
10                 Thanks.
11                 MS. GROSS: I'll kind of go back to what I think
12     Janet and Liz commented on. I think it fundamentally gets back
13     to what's relevant. Given the business model, as Bradley was
14     talking about, and what's relevant to the users of the financial
15     statements.
16                 You know, from the panels we heard this morning, I
17     think there was a loud cry that we need some more robustness in
18     the disclosure. That that's the opportunity for management to
19     tell their story to, you know, add some more robustness around
20     methodologies and assumptions that the context within which they
21     made their decisions. And we heard a cry for a roadmap. So I
22     think there's a role, whether that's a single footnote or, you
23     know, auditors emphasis paragraphs or something that can help
24     direct the reader of the financial statements to what are those
25     most critical estimates that were made; the ones that were
0186
 1     highly subjective where it could have a significant impact.
 2     That it's relevant to the business model that they're operating
 3     under.
 4                 And then provide more robust disclosures, whether
 5     that's sensitivity ranges or more qualitative discussion. But
 6     direct the traffic to, you know, the few pages that are highly
 7     significant and important to that company versus, you know, the
 8     200 other pages of footnotes.
 9                 MS. GANTNIER: I'm sorry. I'd argue that that's
10     already there through either the critical accounting policies or
11     through the summary of significant accounting policies. And
12     that, perhaps, we're not doing a good enough job in fully
13     articulating the level of uncertainty as we go through either
14     the critical policies or the significant policies.
15                 But what concerned me about having one foot that
16     sort of covers all these basis is that you're not eliminating
17     any of the other footnotes that are already covering all these
18     bases.
19                 And so we're going to end up with, you know, a
20     multiple set of places either in the CAP or the summary
21     significant deposit or back in the actual footnotes themselves
22     where we're discussing the same thing.
23                 So I think we have a mechanism already to do what
24     they're asking to do. Perhaps we need to better articulate in
25     those policies the uncertainties and where to go look for either
0187
 1     the range analysis or the sensitivity analysis or the discussion
 2     of the assumptions themselves individually.
 3                 MS. GROSS: And I would agree with that. I mean, I
 4     there's an opportunity to rationalize the process and to
 5     eliminate some, you know, redundancy between footnotes and MDNA
 6     and to focus the attention where it's really important. But I
 7     kind of agree with what you said about, I think, the SEC
 8     observations earlier today. There's a lot of guidance there.
 9     And we have - you know, around critical accounting policies and
10     some flexibility to handle it in a way that's meaningful to the
11     operations of that company. We just need to take better
12     advantage of that.
13                 MR. KROEKER: One of the things I thought I heard
14     but if I didn't or if this group disagrees, while that's there,
15     better linkage between how that information then ties to
16     economic value or are these numbers that only an accountant
17     could love? How do these numbers - how does the uncertainty,
18     how does the disclosure about ranges of estimate then tie into
19     real world value that here's investor why you should care. And
20     I don't necessarily when you look at accounting policies and
21     critical accounting policies always see that translation to
22     here's investor why you should care.
23                 MR. CZARNECKI: As the corporate board member, odd
24     man out here on this panel and chairman of an audit committee, I
25     will tell you that everything that the investors want and need
0188
 1     are things that those audit committees and board members need.
 2                 And theoretically, we have more information than
 3     what's disclosed because theoretically we're getting information
 4     because we're supposed to have the governance oversight over
 5     what's going on. And quite candidly, the aspect of the
 6     commentary about the multitude of disclosures, some of which are
 7     mind bending and only an accountant could love, are, in fact, an
 8     important part of the challenge here is that, I think the reason
 9     we're hearing investors say, I want you to talk to me about
10     uncertainty in some kind of a pocketed location is because
11     they're not finding it in these other footnotes in a way that
12     they can as investors process. They're seeing it in accounting
13     jargon. They're seeing it in the accounting rules. But they're
14     not seeing it in the context of information they need to tear
15     the financials apart and look at the business model, as you
16     described.
17                 And candidly, I think that from our standpoint as
18     directors, our biggest challenge is, and frankly management's
19     biggest challenge, because I've spent a large part of my career
20     in that role as well, is then need information to be able to run
21     the business. And it's not necessarily the information that's
22     presented to the investors or presented to the investing public.
23      They all, every management everywhere, has its own internal
24     system for evaluating how its managing its business.
25                 And those kinds of information are actually the
0189
 1     information the investors are looking for. And what we've not
 2     been able to find is a way for that information to find its way
 3     into the investors so that the investors can understand it
 4     without compromising the confidentiality of the business model
 5     that somebody's trying to run.
 6                 So I think that this really is a significant issue
 7     is if we start talking about taking in increased uncertainty -
 8     an I'm chairman of an insurance company board of directors. The
 9     bottom line is, that there - when I first   about two or three
10     years into my chairmanship, all of a sudden I had this great big
11     gestalt. And all of a sudden the most important numbers on the
12     balance sheet were estimates. Except for the cash and
13     investments that we had, the most numbers that were on the
14     balance sheet were estimates. And all of a sudden I started
15     paying attention to those estimates in a very different way than
16     I did before. Shame on me for not figuring it out sooner, but
17     it became a really relevant part of my job as an audit committee
18     chair to make sure that I understood those numbers and
19     understood how they got there and how we communicate them.
20                 I suspect that the average investor, looking at
21     those numbers, really doesn't completely understand how those
22     estimates get there. And because they don't, that's what
23     they're crying out for; help me understand.
24                 MR. BASKIN: If I could, I think we, as accountants,
25     are really straining at this whole notion of disclosing
0190
 1     uncertainty. And we don't have a history and culture of doing
 2     it as exists in science and engineering and medicine and even
 3     sociology. Where disclosing measurement uncertainty, and the
 4     way to disclosure measurement uncertainty, is very clear. And
 5     the rules are very clear. And we are - we've been kind of
 6     dancing around this as a profession for a long time trying to
 7     avoid actually disclosing the actual measurement uncertainty by
 8     putting in narrative, by putting in discussion of how we do it
 9     rather than simply doing it.
10                 And I - in preparing for this, I went back to the
11     beginner's guide for uncertainty measurement put out by the
12     national physical laboratory. And I thin it's very interesting
13     that it says, every measurement is subject to some uncertainty.
14                 A measurement result is only complete, only
15     complete, if it is accompanied by statement of the uncertainty
16     in the measurement.
17                 And I think we're guilty for a long, long time of
18     producing financial statements that are simply incomplete in
19     that we put a point estimate in the financial statements and
20     say, that's the number. And it's an incomplete measurement. It
21     is simply incomplete information.
22                 And so we have - I think have to start at the first
23     point by saying if the trial lawyers are the first elephant in
24     the room, the second one is that we've been producing incomplete
25     information for a long time. And we're just comfortable with
0191
 1     it. Whereas if we were chemists or physicists or engineers, we
 2     would be freaking out at the methodology of precision that's in
 3     the financial statements.
 4                 MR. CZARNECKI: But in order to be able to do that
 5     you need probabilistic theoretical constructs. In order to make
 6     uncertainty actually work, that's what - is that what you're
 7     talking about? That you would actually start applying
 8     probability theory to the creation of the financial statement?
 9                 MR. BASKIN: Not probability theory but statistical
10     theory to it. Yes.
11                 MR. CZARNECKI: Same thing.
12                 MR. BASKIN: But there are other ways of evaluating
13     and describing the range of uncertainty than using statistical
14     theory. But you can do it through statistical theory. And the
15     way of doing it has been established in sciences for a long,
16     long time. We simply haven't picked it up.
17                 MR. HUNKLER: Just another thought on the where
18     question on uncertainty. I think sometimes we generate - we
19     associate uncertainty with things like fair value measurements
20     for level three assets and some of these things when - when, you
21     know, realistically, you know, for a marketable security, you
22     know, an equity security or for a a liquid corporate bond, you
23     know, there's more uncertainty in a cost measurement basis than
24     a - than a market value basis.
25                 And I guess, you know, what we - if you focus too
0192
 1     much on uncertainty as the decision point for a basis selection,
 2     you end up in a discussion that maybe doesn't make a whole lot
 3     of sense.
 4                 So, again, that's why I kind of turn back to the
 5     business model approach and say, you know, what is the business
 6     model and you select a cost basis if that is your business
 7     model. Or a fair value basis if that is your business model.
 8     And you assess the level of uncertainty in that measurement and
 9     determine if the value from the relevance that's created from
10     this selection that criteria outweighs the cost or the
11     sacrifice.
12                 As we think about the construct of the financial
13     statements, we tend to think about a single measurement basis as
14     being the ultimate basis for - the perfect basis for measuring
15     that asset or liability. Occasionally, we don't like that
16     answer and so we use OCI as this kind of dumping ground for the
17     parts of the measurement basis that we don't like. And, of
18     course, the ISB has kind of started to back off and say, we
19     don't like OCI, we can't define it.
20                 I guess what I would suggest as a concept is whether
21     or not the objective of the balance sheet and the objective of
22     the income statement are the same. You know, some would suggest
23     that the balance sheet is a measurement of management's
24     stewardship of its assets and liabilities. And the income
25     statement is a measurement of management's performance.
0193
 1           And if you assume that those things might not result in
 2     the selection of the same basis for an asset or liability,
 3     that's where OCI can play a role where fair value may provide
 4     balance sheet relevant information but cost may provide more
 5     performance based income statement information.
 6                 And so that hasn't been properly articulated and it
 7     doesn't really work through the standard setting process. And
 8     what you get as a result is sort of this dumping ground model
 9     where OCI really doesn't make a whole lot of sense and is
10     generally dismissed for purposes of analyzing a company's
11     financial statements.
12                 So, again, as it relates to uncertainty, you know, I
13     guess I would suggest what - what I'm trying to say is, it's
14     more around basis selection and the level of uncertainty that
15     might come with that. So -
16                 MR. GALLAGHER: So I would never challenge Dorsey,
17     who is obviously done the basic research that is far beyond what
18     I've ever dreamed of coming into today, but I - I - and I think
19     conceptually you're right about, you know, being incomplete.
20     The fact that there is uncertainty associated with far more than
21     we might be talking about today.
22                 But I think a lot of that, investors and other
23     players in the capital markets, have absorbed. They understand
24     it. They get it. And this is a continuum. And I think, you
25     know, as we move towards the continuum and where I would draw
0194
 1     the line, and I think Bradley had it right, is, you know, I
 2     think there's uncertainty in economics, there's uncertainty in
 3     the business and management, you know, through the business
 4     model deals with that every day. And to the extent that they're
 5     using uncertain measurements, you know, to the extent that the
 6     accounting reflects that so investors have a sense as to the
 7     measures that are important in running the business, I think is
 8     a great place to draw the line.
 9                 I think disclosures are really important as you move
10     along that continuum, you know, because I think that there is a
11     danger that Dorsey talked about. You've got these incredibly
12     precise numbers, if you look at them carried out to the n'th
13     digit, and they imply a degree of precision that's not there.
14     And so disclosure around, you know, as you move along that
15     continuum where you are in that uncertainty, recognizing it is a
16     continuum.
17                 I was very pleased to hear some of the investors
18     earlier today get that to a much greater extent than I thought
19     they did.
20                 And then I'll just go back to disclosure because
21     there was a discussion around, you know, do we have enough
22     disclosure. Is it in critical accounting estimates, other areas
23     of MDNA, or is there more that can be done. And can we do a
24     better job of plain English, were a few of the thoughts that I
25     heard.
0195
 1                 I think the answer is, yes, we can move - prepares
 2     and auditors can do a better job in term of plain - in terms of
 3     plain English in working on disclosures collaboratively. And
 4     what's going to be useful to investors.
 5                 I think the projects that the PCAOB is looking at in
 6     terms of auditors reporting model, and specifically the two that
 7     I would point out that the profession has gotten behind is, you
 8     know, association with MDNA or elements of MDNA to raise the
 9     level of compliance with some elements that we're talking about
10     today; management's judgements and estimates. It's right on the
11     money. And two, emphasis of matter paragraphs because the
12     financial statements have gotten so unwieldy.
13                 You know, just pointing out that you really need to
14     look at this disclosure or that disclosure and by doing that I
15     guarantee you the dialogue between the auditors, the audit
16     committee and management will go up, you know, relative to those
17     disclosures. If you're pointing them out in your report, an
18     auditors report, everybody's going to make darn sure that those
19     disclosures are best in class. So I think there's an
20     opportunity there.
21                 And, Mark, to your point earlier, you'd mentioned it
22     a couple of times, the disclosure framework could not be more
23     important in terms of, you know, high impact on the capital
24     markets and focusing on what is the framework as we think about
25     disclosure related to uncertainties and streamlining it rather
0196
 1     than having - you know, each of the standards have their own
 2     individual disclosure requirements that aren't necessarily
 3     synced up. So I think that's a great opportunity.
 4                 MR. HANSON: Well, I think I agree with about 57.275
 5     percent of what's been said here, just approximately.
 6                 One of the topics that came up in our auditor
 7     reporting model roundtable a few weeks ago, to your point,
 8     Dorsey, about who are the - who are the financial statements
 9     for? And are they written for, I'll call the proxy Aunt Mable,
10     or are they written for the most sophisticated investor that
11     really wants to know the details so they can deconstruct the
12     financial statements and reconstruct them using their own model.
13                 I think as one of the former Courtfin directors who
14     is reasonable for a lot of the rules, and make no mistake, I
15     think it's for the sophisticated investor. It's not for Aunt
16     Mable.
17                 But that's a fundamental question, I think. It's
18     important to put on the table of - of who are we trying to write
19     these disclosures and - and - both the MDA an the financial
20     statements for, because it's very different in terms of the
21     approach you might take.
22                 One of the things I reflect on from this morning.
23     I'm trying real hard to figure out, how do we give investors
24     what they need and ways that they can use it? Personally, I
25     don't think more disclosure requirements are the answer. I
0197
 1     think we got plenty of disclosure requirements. As Meredith
 2     pointed out, we got so many things at MBNA. So many things in
 3     the financial statements. The hundreds of pages. I think
 4     people want the clarity to simplify it down so they can
 5     understand it.
 6                 And one of the things I heard this morning was the
 7     concern about the uncertainties this whole thing is involved.
 8     I'm thinking, gee, if there's a way to construct a financial
 9     statement that instead of - I'll call it the industrial-age
10     balance sheet, ranked in order of liquidity from cash on down
11     through fixed assets for a commercial company, ranked in terms
12     of uncertainty. So it was some - some - almost like the buckets
13     of the fair value levels, some buckets of the uncertainty in the
14     entire balance sheet.
15                 And the other thing I heard is the volatility of
16     those numbers is very important. Is that number - the number
17     that's reported only that number on that data and it varies
18     widely? That if there was some way to rank the balance sheet in
19     terms of volatility that would provide meaningful information to
20     help the investors out. I don't know how we do that, but that's
21     - that's - that's something I think for - for you to think about
22     in the in the model for what the financial statement - mythical
23     financial statement in the future is going to - going to look -
24     look like and within the constraints today, though, of the - of
25     the disclosures. And I know it varies widely by company, by
0198
 1     auditor, that the exercise of filling out the 295 page
 2     disclosure checklist that Ernst and Young or PMBC or Grant
 3     Thorton puts out is - by necessity has to be a compliance
 4     exercise, but I think the best companies step back and reflect
 5     on, does the story that's told through these disclosures really
 6     reflect the best story in a concise way. I'm not sure that
 7     everyone is doing that consistently. And there's a wide range
 8     that can be fixed in that front without doing anything. And the
 9     same thing with tying that together with the MDNA.
10                 MR. SPATARO: I just wanted to say a couple of
11     things.
12                 I think that, you know, we do need to be careful in
13     terms of moving to measuring uncertainty and including it within
14     the balance sheet amounts. I say that in connection with the
15     project - the insurance project that the ISB is currently
16     working on. Because in essence what they've done is they've
17     come up with a building block approach where you use probability
18     weighted cash flows. You discount them and you add in a risk
19     margin.
20                 And it sounds great, but what I would say in that we
21     all need to take a step back is that all of the models that
22     anyone can construct over the last ten, twenty years, nobody's
23     cracked the code in terms of how to predict the future.
24                 So, you know, if you would have gone back in July or
25     August of 2008, you would have sat down with chief risk officers
0199
 1     for companies that are no longer with us that would have said
 2     that with a 95 - within a 95 percent confidence interval, that,
 3     you know, their capital could have withstood, you know, any type
 4     of, you know, potential - reasonably potential market event that
 5     could have occurred. Until, of course, the market event that
 6     they didn't model because they didn't know because it was
 7     uncertain and because it was un-knowable occurred.
 8                 So I think that, you know, we do need in some
 9     instances to take a step back, recognize our own failings our
10     own, you know, capabilities to predict the future and we also
11     need to consider how the existing tools that we have, how they
12     may be adequate combined with the appropriate amount of
13     disclosures.
14                 So you go back to, you know, some of the common
15     terms that have been used today in terms of the business model,
16     and then also in terms of, you know, what we disclosed in the
17     critical accounting estimates and then in the critical
18     accounting policies.
19                 And I think there is where we should focus our
20     attention. Is there information about uncertainty that we think
21     is deficient in how we talk about how certain of these items
22     when we even mentioned should we rank them. I think that if
23     you're looking at an insurance company, a property casualty
24     insurance company, you know, you would rank your reserves as
25     number one in terms of variability.
0200
 1                 And so if you rank that as number one in
 2     variability, then I would say you should also go back if you're
 3     a public - if it's a public company, go back, then, to the
 4     critical accounting estimates. And then - and confirm that that
 5     is the longest, you know, passage in the critical accounting
 6     estimates that there's a discussion about what all of the risks
 7     and uncertainties are in all of the estimates and judgements
 8     that underly the computation - the periodic computation of
 9     reserve balances.
10                  And if at the end of that, you know, analysis you
11     say, well, you know what, I think that that's still deficient,
12     then I would say that that's where we need to focus our
13     attention. Is that we need to build up, you know, more rigor
14     around the information that's disclosed around the estimates.
15                 I would also, as I said before, I would caution, in
16     terms of, you know, trying to introduce new methods of, you
17     know, of estimating uncertainty and including that in the
18     balance sheet, because I think that in many respects that's an
19     inexact science. And I'm not sure that it's better than what we
20     do today and I think that going back to what Brad and others
21     have said, it's also not consistent with the business model, you
22     know.
23                 In essence, what we've talked about before, even
24     internally, after having done a field test of the - of the
25     building block model, is that fundamentally it's just not the
0201
 1     way that we run our business.
 2                 So in essence what we would end up with, is we would
 3     end up with a - thousands of people at my company, All State
 4     Insurance Company, running the business like they've always run
 5     the business. And then a handful of accountants and finance
 6     people in the corporate office doing this financial overlay that
 7     would come up and compute the risk margins and would do that
 8     solely for financial statement reporting purposes but not for
 9     how we actually run the business. And the reality is, is
10     because of the way that that business is run, even after you
11     would compute all of your risk margins and do all of your
12     discounting, it would be impossible to then push it all the way
13     back down into the field into the people who are actually doing
14     the estimation so that they could use it on a regional basis to
15     actually do their job.
16                 So then the question is, is that who are then to
17     answer one of the questions that was asked before who are we
18     really then providing this information for and what is the
19     usefulness of it? If it's so, you know - if it's so divergent
20     from the way that you run your business and it can't even be
21     incorporated into the management of the running of your
22     business, what is the value of it?
23                 MS. PEGG: I'm going to do a bunch of, "I agrees."
24     We'll start off with the audit opinion. I really think
25     investors would benefit from an expanded audit opinion. I admit
0202
 1     it's a different topic but I think it would help investors
 2     understand the complexities and the uncertainties in a company's
 3     financial statements.
 4                 I also will agree that it would be wonderful if we
 5     could somehow tie all of the information in financial statements
 6     together. Right now I spend a lot of time looking at pensions
 7     and I have to look in the risk factors. And I have to look in
 8     the critical accounting policies. And I have to look at
 9     contractual obligations. And I have to look at summary of
10     significant accounting policies and then finally get to
11     pensions. So and try to pull that altogether.
12                 I also want to agree that investors are definitely
13     concerned about trying to look to the future. So with that, I
14     would also say that sometimes we get a little too conceptual in
15     trying to design things. And we come up with this beautiful
16     model that is so opaque that the information that people get
17     isn't very useful to anyone. And with that opaqueness, you
18     can't sit there and say, well, if interest rates do this, or if
19     there's a hurricane or if there's some other event, what's going
20     to impact, because I don't understand this beautiful model and
21     all of the pieces that go into it.
22                 So sometimes - I tell this to the analysts a lot
23     when they're trying to do models - is that, you know, you can
24     spend a lot of time coming up with a beautiful model that isn't
25     very useful.
0203
 1                 So sometimes we just need the information. And a
 2     lot of disclosures to understand 95 percent of what's going on
 3     there, but at least it's going to help us in trying to figure
 4     out what's happening tomorrow.
 5                 MR. KROEKER: So as you say that, I wonder - and I
 6     don't know that this has come up - but whether there's some
 7     skepticism, not that investors expect accountants to predict the
 8     future, but there's skepticism that accountants might know more
 9     about uncertainty than is being conveyed. So that there is, you
10     know, this veil of this is really uncertain but maybe it's not
11     and more can be provided.
12                 Or do you think investors are looking for - you
13     know, if it is a quest for tell me what's going to happen in the
14     future, it seems more likely to not see eye to eye.
15                 MS. PEGG: I don't think that's the case because I
16     think when investors think about accountants and the financial
17     statements, they're looking at it from the historical
18     standpoint. And they really are trying to focus on the next
19     period, the year after that, and not much further than that.
20                 So I think they really just want to understand the
21     inputs and the variables and the degree of variability I those
22     numbers in order to try and go forward.
23                 That said, they need a solid foundation to start
24     with. If it's a soft number to begin with, then they're not
25     going to be able to do much predicting as to what's going on in
0204
 1     the future.
 2                 So it goes back to my relevance that I think if you
 3     have an item that's maybe in operating income, we need a high
 4     level of certainty, preferably in that number, at least a lot of
 5     disclosure, to support the information.
 6                 MR. BASKIN: If I could, Jim, just react to a couple
 7     of things.
 8                 One, is I think we have to be very careful, and it's
 9     very difficult, to separate measurement uncertainty from
10     volatility in the amount we're measuring. And we typically
11     quite often confuse the two. And so what I'm talking about,
12     about measurement uncertainty has to do with - that as of that
13     measurement date, on whatever basis of accounting, whatever
14     basis of measurement is being used, that - that the number being
15     measured could be within a range that is reasonable.
16                 That's the measurement uncertainty. And that is
17     entirely different than what may happen in the future and what
18     that liability may turn out to be.
19                 The difference between what was measured and what it
20     turns out to be is not measurement uncertainty. Measurement
21     uncertainty is about the measurement date. What are the range
22     of values that might reasonably be measured at that date on
23     whatever basis it's being used at that date.
24                 But I like to come to the auditing, because I - I
25     wish that - that we had gotten further with Dr. Glover and Mr.
0205
 1     Doty on the last panel about this issue about whether the
 2     auditor is being asked to give assurances at a level that are
 3     not achievable.
 4                 I believe - I agree with Dr. Glover that we are.
 5     I'm not sure how to solve that. I - I don't think - personally
 6     don't think adding to the audit opinion to describe the
 7     uncertainty in the financial statements is necessarily the right
 8     thing. Right now, there is provision in the auditing standards
 9     that would say to me that I could identify an uncertainty that
10     is more than material and qualify the audit opinion for that.
11                 Now, I can't do that for the SEC. The opinion would
12     be rejected out of hand. But that is the only way, right now,
13     in the auditing standards that I'm allowed to deal with the
14     uncertainty that's greater than materiality. And, again, with
15     issuers I can't even do that.
16                 So I think we're not - we need to start with a
17     solution in the financial statements, but we need - we need an
18     answer in the auditing standards that doesn't currently exist.
19                 MR. HANSON: And Dorsey, we do have a couple of
20     projects on our standard setting agenda to deal with some of the
21     fair value measurement issues. And most of you are aware that
22     we have this pricing source, this task force, which is dealing
23     with one slice of it related to financial instruments that are
24     mostly fitting into level two bucket of the unfair value
25     hierarchy.
0206
 1                 And one of the meetings that we had, we asked a
 2     couple of the pricing services, as well as another investment
 3     banker, to give us their values of a portfolio, just 20
 4     securities, ranging from those that we would expect to have very
 5     little variance in that value to ones that -- highly structured
 6     products, very little liquidity. And as expected, very small
 7     range within a couple basis points at the - with the actually
 8     traded - not actually traded but easy value to - to a very wide
 9     range. And we're trying to - figure out lessons learned from
10     that to give some better guidance.
11                 I full well appreciate that the exercise that the
12     preparers as well as auditors go through as often is not "is
13     this number right," but "am I okay that it's not wrong." And
14     personally, I don't sleep very well if not ever feeling like the
15     number's right. But just feeling kind of boxed in, know I'm not
16     wrong. In that - and finding a way to better communicate that
17     uncertainty through the financial statements so investors
18     understand that there is no single right answer to many of the
19     numbers. It's - It's what is the range of what it could be.
20     And I guess in a perfect world, showing what's the high, what's
21     the low and where's management? Theoretically somewhere in the
22     middle. But that would add far more complexity to add that to
23     even a single measurement, much less the hundreds of thousands
24     of individual securities held by some of the largest
25     institutions.
0207
 1                 MR. KROEKER: Mike then Liz.
 2                 MR. GALLAGHER: A couple of points. I agree with
 3     Dorsey's first point around the difference between volatility
 4     and measurement uncertainty. I think what frustrates investors,
 5     what I heard this morning, was when you have both together,
 6     where you have something that's extremely uncertain and it's
 7     volatile. You know, for example, litigation. Not that that is
 8     - you know, potentially could have, you know, marked to market
 9     on litigation. I think that would have frustrated people.    In
10     terms of going back to Bradley's point, no one would ever run
11     their business that way in terms of coming up with a precise
12     calculation. This is what my book of litigation is worth from a
13     conceptual standpoint, quarter to quarter, and mark on that and
14     potentially depending on how assumptions changed and how it
15     progressed, you know, having meaningful movements to your P&L
16     based on that.   I think, you know, if we're looking for a line
17     to draw, that would certainly be where, you know, one of the
18     things I'd put on the other side of the line.
19                 But just thinking about how measurement uncertainty
20     and volatility how they go together, I think is important in
21     figuring out where that line might be.
22                 The other point around Dorsey that you mentioned
23     that under the auditing standards, you don't have the ability
24     short of qualifying the opinion. I think you do under today's
25     standards even before the project that the PCAOB's working on,
0208
 1     you always have the ability to put an emphasis of a matter
 2     paragraph in today and say, if you don't do anything else, you
 3     know, make sure you read footnote "x." Right? You have the
 4     ability to do that, right?
 5                 MR. BASKIN: Well, you can put in the emphasis
 6     paragraph, but the problem with that is what you're doing is
 7     disagreeing with your own opinion, in effect. Because you're
 8     saying -- in this emphasis paragraph you're saying, although my
 9     opinion says that everything is materially correct, there are
10     these numbers in footnotes 5, 7 and 16 that very well may not be
11     within the balance of materiality of the number that's in the
12     financial statements.
13                 MR. GALLAGHER: I don't view it that way. I would
14     view it as, you know, the financial statements - the opinion
15     stands but there's - in terms of understanding the financial
16     statements, it's very important that you, you know - that this
17     footnotes is perhaps more important than others. So important
18     that you really need to look at it.
19                 MR. BASKIN: Well, but what we're really saying is
20     we're giving negative assurances on that information. We're
21     saying that not positively that number is within the bounds of
22     materiality. We're saying nothing has come to my attention to
23     cause me to believe that it is not -
24                 MR. GALLAGHER: I just don't agree with that --
25                 MR. BASKIN: - stated in -
0209
 1                 MR. GALLAGER: - interpretation of the literature.
 2                 MR. BASKIN: Well, if the number itself cannot be
 3     stated with is more uncertain than materiality, then how can
 4     the audit opinion -
 5                 MR. GALLAGHER: First of all, I don't think the
 6     opinion is an expression of value. I think it's an expression
 7     of compliance with - with GAAP. If it were an expression of
 8     value, then there are things that aren't recognized that would
 9     be equally as challenging. For example, unrecognized
10     intangibles.
11                 So I don't think the auditor's opinion is an
12     expression of value with respect to individual assets and
13     liabilities.
14                 I think it's, again, expression with fairly
15     presented inconformity with a standard that is generally
16     accepted accounting principles that within that has differing
17     outcomes or differing measuring - measurement basis for
18     different assets and liabilities.
19                 MR. BASKIN: Well, I don't think then, Jim, you've
20     ever been inspected by the PCAOB on any of your audits.
21                 (Laughter.)
22                 MR. CZARNECKI: I think one of the things that I
23     think we're that's important to keep in mind is, is that --
24     that we are talking about reports that go to investors but have
25     to go through management, the audit committee and a board of
0210
 1     directors before they get out there. And the points you're
 2     making about what's material and what's not and having an
 3     auditor opine, in essence -- the sound I'm hearing is the
 4     auditor will opine on the quality of the representations have
 5     been made, not that they're in compliance with, but we have an
 6     opinion about what - what you see here.
 7                 And I personally am uncomfortable with that. As a
 8     director, that's our job to make that judgement. And it's not
 9     the auditor's job. Now, I rely on the auditor to give me
10     guidance. And I ask the auditor a lot of questions about things
11     that I don't understand or that I think need to be pursued, but
12     it's my job as the chair of the audit committee and my job as
13     the director to be the one who makes those opinions about
14     management. To the extent that we bring in the auditor to make
15     opinions about the financial statements in the context that
16     you're - that I think I hear drifting, that basically changes
17     the role of the director and changes the role of the audit
18     committee.
19                 Now, I'm not saying that the investors can
20     necessarily be absolutely delighted with how every board and how
21     every audit committee has performed. But I actually believe
22     that we've substantially changed the process. And the audit
23     committees and directors, and everything else, that's wrapped
24     around it has changed the way audit committees and directors
25     behave.
0211
 1                 So I would not be comfortable, as a director, to be
 2     asking my auditor to give an opinion to the investors about how
 3     well we did. I'm not comfortable with that.
 4                 MS. GANTNIER: I'm going to go back a little bit in
 5     time to some of the things, Jay, that you talked about about
 6     perhaps reevaluating the statement of financial position and
 7     ordering it in order of precise to uncertain.
 8                 You know, I think all of these things are fair game.
 9      And that really the reporting ought to be based upon what the
10     user needs for that company, for that industry, as opposed to
11     everybody's got to fit the one mold. And the one mold works 90
12     percent of the time for everybody and doesn't work at all ten
13     percent of the time for anybody. That kind of scenario.
14                 But one of the gentleman this morning talked for a
15     long time about comparability. And so you're going to trade
16     usefulness for comparability when you do that. And so, you
17     know, perhaps, you know, we can all agree that there would be
18     one standard and then you're invited to use whatever mechanism
19     you want outside of the financial statement opinion. And you
20     can - you can create and present whatever is the most useful and
21     you're going to be rewarded for that because your investor in
22     Aunt Mable will understand it and really appreciate it and like
23     it. So I think we ought to allow some of that.
24                 But my second feeling about this is, we've got to
25     distinguish what's financial reporting and what's financial
0212
 1     analysis. And are we opining on financial reporting or are we
 2     opining on financial analysis? I would prefer, me personally,
 3     to have the financial statements and the footnotes be financial
 4     reporting and let the rest of the document be the financial
 5     analysis. And that we allow some latitude in the financial
 6     analysis so that people get the analysis they really want as
 7     opposed to the analysis you say they should have.
 8                 So let the market sort of reward a company for good
 9     financial analysis and good financial reporting at the same
10     time, but sort of let the market decide what is necessary and we
11     continue the discussions of non-GAAP and things like that, so
12     that the reader is not confused between what's reporting and
13     what's analysis.
14                 MR. KROEKER: That's one, I think, that strikes me
15     particularly when you're doing with good will. Is are we doing
16     financial reporting or where does financial reporting turn into
17     financial analysis when you're trying to figure out the
18     hypothetical value of either the enterprise or a segment that
19     incorporates, you know, what would this trade - particularly a
20     segment. What would the segment trade at if the segment was
21     separately trading. And then comparing that to recorded amounts
22     of goodwill.
23                 And I don't know that there's an easy answer to that
24     but it really strikes me that we're blending - we're blending
25     the two.
0213
 1                 MR. SPATARO: I think that you both made a couple of
 2     really good observations. I want to build on a couple of things
 3     that Liz said as well.
 4                 Is I think that we really do need to focus on what
 5     are the needs and what are the desires of investors. And so I'm
 6     going to just give you just a little bit on, you know - of an
 7     example just in terms of the insurance business.
 8                 And it also goes back to how does the company run
 9     its business and how does it make money.
10                 If we look at the business model of the typical P&C
11     insurance, it's all about underwriting. And all of that is done
12     on a gross, discounted basis. And so, in essence, if we look at
13     what's now being proposed as an accounting model by the IASB, is
14     that accounting model would have probability weighted cash flows
15     that we don't use. It would have discounting that we don't use.
16      And it would also add risk margins that we don't use.
17                 So these are things that they would impose even
18     though it's not used to manage the business. And the reason why
19     it's not used to manage the business is because in terms of risk
20     margins, we don't believe that we can predict the future. We
21     think that it makes much more sense, at least in terms of the
22     way we run our business, to, you know - to do the underwriting
23     on the front end. And then, you know, match up on, you know,
24     our reserves to patterns of pay outs of similar reserves over a
25     suitably long period of time. And we've built up, you know,
0214
 1     significant, you know, historical databases. And we present
 2     that information on a statutory basis right now.
 3                 I think one of the, you know - one of the people on
 4     the earlier panel said that they supplement their analysis of
 5     both banks as well as insurance companies with statutory
 6     financial reports.
 7                 And so there's ample statutory information to
 8     actually show or prove how good management's estimates have been
 9     over a fairly long period of time. And you can actually look at
10     what that variability is.
11                 In terms of discounting, we've had folks that have
12     said, well, you know, you ignore the time value of money. But
13     we do only for a base - a very basic fundamental reason is that
14     if you drag the investment results into the estimation of
15     reserves, you've now taken two fundamentally different
16     operations of the business, investing and underwriting, and
17     you've mashed them together. And from an investor's
18     perspective, going back to the views of investors, investors
19     have said, we don't want you to do that because when we look at
20     your company, we want to look at your underwriting results.
21     That's how we value you. We don't want to have this volatility
22     moving through your financial statements on a, you know - on a
23     periodic basis that's solely attributable to changes in interest
24     rates. We also don't want to have all the added complexity of
25     all of the additional judgements that you're now going to
0215
 1     include into the financial statements in terms of the amount and
 2     timing of the payment of claims.
 3                 We just want to have it in the most basic - we'd
 4     like to have it presented in the most basic terms.
 5                 And what they've suggested is that, that is the way
 6     it's most understandable. That is what's most transparent to
 7     us. And then when we get into the, you know, uncertainty, I
 8     think, then, that takes us back into the financial statement
 9     disclosures. That takes us back into the CAE. And that once
10     we've developed those measurements, if those happen to be gross
11     undiscounted measurements on the face of the balance sheet, then
12     the investors have said, well, we do want to have an
13     understanding, you know, of actually how you do your reserves
14     and what that potential variation is. And that takes you back
15     to the critical accounting estimates and that also brings you
16     back to the footnotes.
17                 So I would suggest that, you know, again, focusing
18     on the business model, focusing on what the needs and desires of
19     investors are. And in terms of providing information about risk
20     uncertainties, I think that there are ample places in the
21     financial statements to do that. I think that, you know, as one
22     preparer, I would say that it's adequately done today. And to
23     the extent that, you know, investors don't think it's adequately
24     done, then, you know, they'll punish you, you know, by no longer
25     investing in your stock.
0216
 1                 MR. HUNKLER: I just wanted to get back to the
 2     question that Jay had around Aunt Mable and who are the
 3     financial statements designed for.
 4                 And in my mind, it's very clear that you really have
 5     to design the financial statements around the sophisticated
 6     investor. I mean, companies, large companies are complicated.
 7     Accounting is complicated. I don't think you can take a full
 8     set of financial statements and put it in a format that would be
 9     necessarily readable to, you know, somebody that doesn't
10     understand the industry or the business. I don't think it
11     should be the objective to do that.
12                 That being said, though, if you produce something
13     that is so complicated or so counter-intuitive that you can't
14     make any sense out of it without deconstructing it and building
15     it back up, then you've failed. If I sit down with Aunt Mable
16     and I'm looking at two companies quarterly financial results and
17     one of them lost two billion and the other one made four
18     billion, and I ask her which company had the better quarter, she
19     might not realize the company that lost two billion actually had
20     the better quarter because the company that had the gain had a
21     two-notch credit downgrade and the value of the derivatives went
22     down, the liability derivatives went down. And that created a
23     gain. The company that actually lost money did so because there
24     was a 50 basis point shift in the yield curve and, you know - I
25     mean, if I've created something that is so counter-intuitive,
0217
 1     that somebody can't just make some logical sense out of what
 2     they see, then it's a failure of the system, in my opinion.
 3                 That doesn't necessarily mean we have to create a
 4     set of financial statements that somebody can pick up and read
 5     Sunday afternoon when they want to, you know, just do some
 6     casual reading.
 7                 So I think there needs to be a balance there. But,
 8     again, I would really stress that the counter-intuitiveness that
 9     can occur from the poorly constructed set of financial
10     statements presents a significant risk for customers. And as a
11     company that deals with policy holders, can be a threat to a
12     business in the event that we show losses that are non-economic.
13                 MS. GANTNIER: I think your point was discussed in
14     the earlier panels, which is why people have resorted to using
15     cash flow information. Because net income isn't necessarily net
16     income. And it isn't necessarily about whether they've
17     performed well or not.
18                 And so with the financial themselves don't give you
19     the information, you go to resort to a cash flow analysis. I
20     mean, it's telling us that there's something potentially wrong
21     with the accounting; potentially.
22                 MR. STARR: We were scheduled to end in about twenty
23     minutes. So what I'd like to do now is just go back, do the
24     same thing we did in the last panel and that's go back to the
25     beginning.
0218
 1                 We set out to look at this issue because we thought
 2     it was putting pressure on the system. We thought that
 3     increasing the amount of measurement uncertainty and the basis
 4     for measuring certain assets and liabilities was posing
 5     challenges to prepares, to auditors and was difficult for
 6     investors to understand.
 7                 There's been a lot of discussion in all three
 8     panels, actually, about the importance of the business model in
 9     driving how we measure assets and liabilities.
10                 So at the beginning was measure uncertainty, how
11     much do we recognize and how best to communicate it. So what
12     I'd like is your final thoughts on that.
13                 How much should we recognize and how best to
14     communicate it. So, the floor's open to whoever wants to start
15     off first.
16                 MS. GROSS: Well, I'll start. I think we heard, you
17     know, among all three panels actually a lot of agreement on a
18     variety of points. A lot of understanding that accounting is
19     uncertain. I mean, some of this is an art, not a science. A
20     lot of it is an art, not a science. And that there is really
21     recognition by preparers and auditors and investors of that
22     uncertainty.
23                 And, you know, where we need to focus is on helping
24     them understand how management views the business back to sort
25     of the business model, the operating model, what's relevant to
0219
 1     that particular business environment and how we can direct their
 2     attention there. And help eliminate some of the noise, whether
 3     it's in, you know, MDNA or footnotes that's just sort of the
 4     disclosure overload and focus on the things that are most
 5     relevant to the most significant estimates, the most significant
 6     judgements, the things that might have a material impact on that
 7     business. How we can provide some more robustness in the
 8     disclosures. Maybe there's a role for auditors through emphasis
 9     paragraphs or association with critical accounting estimates to
10     help direct that attention.
11                 But that's where I heard the investors talking about
12     what they'd like to see.
13                 There was a lot of concern expressed about whether
14     we're going too far in terms of, you know, getting some of this
15     stuff onto the balance sheets. So I think that was - seemed to
16     be a widely held view that we need to sort of slow down that
17     process and focus on, you know, keeping the relevant matters in
18     the balance sheet, adding the disclosure about the uncertainty
19     in the footnotes and critical accounting estimates.
20                 I actually was surprised that there was a lot of
21     agreement among panelists in all three of the sessions.
22                 MR. STARR: I just want some clarification. You
23     said - I may have misunderstood you, but I thought you said
24     putting the relevant amounts on the balance sheets. Did you
25     mean "relevant" or "reliable," because some people when they
0220
 1     hear "relevant" that really means trying to predict the future.
 2     Because that's absolutely the most useful.
 3                 MS. GROSS: Yeah. No. I mean, you know, more
 4     reliable in terms of sort of where we are now. I mean, there's
 5     a lot of concern over whether we're introducing too much
 6     volatility into the measures on the balance sheet.
 7                 MR. STARR: Right.
 8
 9                 MS. GROSS: You know, there's a lot of imprecision
10     there. And are we introducing some things that are better
11     handled with disclosure about - about the uncertainty.
12                 MR. STARR: Okay. Thank you.
13                 CZARNECKI: I would add I'd like to get on board
14     with this as observations about really taking a serious look at
15     this financial statement reporting versus analysis idea. I
16     think she's got a really good idea there that may be completely
17     out of the box for the SEC and for FASB and PCAOB as well, but
18     there is a need for that kind of analytical capability. That as
19     long as it doesn't compromise the company's ability to be able
20     to manage its business on a confidential basis, there is a need
21     for that kind of analysis. It's done inside the companies
22     today. If they're running their business, they're doing it
23     already.
24                 And to the extent that the investors have an
25     interest or a need in having that, I think the opportunity to be
0221
 1     able to have literally bifurcated report that takes financial
 2     reporting on one hand and analysis on the other and really
 3     separates the two into two useful pieces of information, I think
 4     that's a phenomenal idea.
 5                 MR. STARR: Yeah. I heard one other thing from Liz
 6     and that is that we were combining financial reporting and
 7     financial analysis and she really wanted to separate it.
 8                 MR. CZARNECKI: Yeah, that's what I want looked at.
 9                 MR. GALLGAGHER: Mike, if fundamentally, I mean the
10     financial statements should be reflecting the economics, right?
11     And the economics you can't do that without including a number
12     of measures. And I think Dorsey had it right, almost
13     everything. There's certain elements of uncertainty, so the
14     question, you know, where do you draw that line?
15                 I think a good discussion that we had and I think it
16     was, you know, similar to the prior groups, is that, you know, I
17     think it's natural on the part of standard setters, auditors,
18     and regulators who spend all of their time in this to sometimes
19     take things to a level of accounting purity or technical purity
20     that doesn't reflect the economics.
21                 And, again, I'll put myself in that boat as well.
22     If this is what you do all the time, you can always find
23     something that maybe is a little better and a little bit more
24     technically pure. I think the challenge is finding that sweet
25     spot. And I think that Bradley's point around business model,
0222
 1     you know, how would management, you know, what is their business
 2     model, how do they operate the business and how do they convey
 3     that. I mean, ultimately as a good benchmark in terms of where
 4     do you draw that line because it's a continuum. You can't say,
 5     this is in, this is out.
 6                 From a principle standpoint, how do you ultimately
 7     convey the economics and as a guidepost, what does management do
 8     in connection with the audit committee and the auditors in terms
 9     of, you know, how do they run that business. How does
10     management run that business.
11                 MS. GANTNIER: Yeah, I would say that the question
12     about how to measure the uncertainty and then how to - we've
13     talked a lot about how to disclose it. We talked about how to
14     measure it. To me there's two pieces to it.
15                 If measuring it produces something that doesn't
16     matter, i.e., it's not relevant because it's not part of the
17     business model, we shouldn't be measuring it.
18                 And the second piece would be if when we do measure
19     it there's such a high level of uncertainty to it that the range
20     is greater than the materiality, we shouldn't be measuring it
21     because then, I think we're going to be rendering an opinion
22     about something that is not fairly presenting because it's
23     either not relevant or it's so unhoned, what was the point. And
24     that leads us back, then to disclosure.
25                 So I think there's not one answer to it. I think
0223
 1     there's sort of multiple answers depending upon the circumstance
 2     and the type of uncertainty that we're talking about.
 3                 MS. PEGG: I would put myself in the camp that in 99
 4     percent of the circumstances, measurement uncertainty should not
 5     preclude a number from going into the financial statements.
 6     Leaving that one percent for something that I haven't thought
 7     of.
 8                 And with that, what I really think, as Jay had
 9     introduced, what we really have to do is go back to re-thinking
10     the financial statements; the income statement and the balance
11     sheet. And putting those in a form that then can take the
12     financial reporting to the financial analysis where it provides
13     more information, say, through the financial statement
14     presentation project. That's - just a format that highlights
15     this information and makes it useful to investors.
16                 MR. SPATARO: It looks like we're going around.
17                 Yeah, I would make the observation in terms of
18     measurement uncertainty is that, you know, from an insurer's
19     perspective and also from an investor's perspective, I think
20     that there's naturally certain balance sheet items that have
21     uncertainty in their measurement. And I think that, you know,
22     P&C claim reserves. I mean, those already have, you know,
23     uncertainty in them. And what I would suggest is that they're
24     already measured and so that's fine. And that, you know, how we
25     deal with the uncertainty is I think that it's best dealt with
0224
 1     through disclosure. I think that there are some ideas that are
 2     out there that are being floated by the IASB in terms of, you
 3     know, risk margins. I think that that's at least -- at this
 4     point in terms of financial if we were to incorporate it into
 5     financial reporting, I think that that's something that before
 6     it could be done, there would need to be a lot of work done and
 7     a lot of testing to determine whether or not it actually is, you
 8     know, something that is credible information; that is useful to
 9     investors. I think that, you know, to the extent that we
10     haven't even been able to fully test that, to field test that in
11     the U.S., that that's not a judgement that we could even
12     possibly render at this time. And I would think that even
13     before you could render it, you'd need several years under your
14     belt to look at, you know, how does it operate in different
15     business environments and different geographies, you know.   You
16     know, under different business cycles. And that's just
17     information that we just don't have yet.
18                 So I think that until we have that, I think that
19     there are mechanisms that exist today that we've talked about,
20     namely the critical accounting policies as well as the critical
21     accounting estimates. And then I think that we ought to focus
22     there and, you know, be certain that, you know, that we are
23     providing all of the relevant information about uncertainties
24     within those existing disclosures.
25                 MR. HUNKLER: I think that you have to start with an
0225
 1     analysis around what is the most relevant measurement basis. And
 2     that needs to be the first variable. To me, that's where I get
 3     back to the business model really should drive relevance.
 4                 You know, I've heard, you know, ISB staff and board
 5     members say in the insurance contracts project that, you know,
 6     we have to show asset liability duration mismatches in financial
 7     statements for insurance companies. And I don't understand that
 8     because it's not necessarily what investors are interested in
 9     seeing. I mean, I think it's an interesting point and maybe
10     belongs in a disclosure. But it's not the most pertinent
11     measurement basis. So when you start with relevance and you
12     say, okay, now I've selected my basis and it's fair value or its
13     cost, then you should seek to define that measurement basis in a
14     way that minimizes the amount of uncertainties and how it's
15     calculated.
16                 And that's where you kind of have to say,
17     uncertainty is the enemy of objectivity. Because you want
18     measurement bases and you want financial statements that have as
19     much objectivity and verifiability in them as possible.
20                 And so I think it has to be a two-step analysis,
21     though, to produce meaningful financial statements. So with the
22     first step being relevance and the second step being, once you
23     selected your basis, then you'd look to minimize uncertainty in
24     it.
25                 But we get sidetracked and we lose useability of
0226
 1     financial statements and meaningfulness of financial statements
 2     too often because we haven't selected the measurement basis that
 3     is most pertinent to how the business is being managed.
 4                 And that could be using fair value measurement
 5     basis, which may be more certain but more volatile and less
 6     meaningful because it's not consistent with how the business is
 7     managed.
 8                 So you start with the business management and the
 9     relevance question and then you look to minimize uncertainties
10     as much as possible without necessarily damaging the value of
11     that basis.
12                 MR. BASKIN: I think I would like to separate the
13     basis of measurement from the measurement uncertainty issue.
14     And so regardless of what you do - the poor insurance companies
15     on the basis of measurement, there will be uncertainty in the
16     measurement just as there is in other companies and other
17     measurements.
18                 So to me the issue is what do we do with it? And,
19     Mike, I don't know for sure how to do it. I have my own
20     personal preference how it should be presented. But I think
21     getting it out of the back room in a private discussion between
22     management and the auditor, and into the financial statements,
23     has two benefits. One is it allows the comparability that
24     everybody wants because it allows those looking at this company
25     and another company to compare the uncertainty in the net worth
0227
 1     and the earnings of those two companies.   And it allows within
 2     the financial statements the comparison of the uncertainty in
 3     one line item with another.
 4                 And so getting it out in the public, so to speak ,
 5     in the financial statements, I think has that benefit of
 6     providing users with very important information.
 7                 I think the other benefit for me as an auditor is
 8     that that it should shift the burden from deciding whether the
 9     uncertainty boundaries are close enough to - so the question is,
10     is the disclosure complete?
11                 And it takes me out of the realm of being the judge
12     and jury on whether the measurement technique is adequate and
13     whether those uncertainty bounds are close enough to addressing
14     whether or not the information disclosed in the financial
15     statements is fairly presented. I would like to get to that
16     point.
17                 So that would be my view is we need to get the
18     uncertainty described in the financial statements somehow so
19     that users have that information and so that I can focus my
20     auditing on the disclosure of that information rather than
21     trying to judge whether or not I can live with the uncertainty
22     around the point estimate that's all that's in the financial
23     statements now.
24                 MR. SIEGEL: You know, it strikes me that one of the
25     things that - that - I'll start with what Mike said, Gallagher,
0228
 1     that I totally agree with, which is that the accounting is
 2     supposed to reflect the economics. And unfortunately the
 3     uncertainty in the economic world is a lot greater today than it
 4     was four or five years ago. Four years ago we knew auction rate
 5     securities and CDOs were level one. Those were liquid. Those
 6     were trading all the time. We knew what the values were whether
 7     it's cost to fair value, we knew it. And now we don't.
 8                 In a world where the uncertainty in the economics
 9     has increased, what's the accounting supposed to do? You would
10     imagine that the uncertainty in the accounting would increase as
11     well. Whether it's, again, a cost measurement with an overlay
12     in impairment to market level, you know, true of, or whether
13     it's fair value.
14                 So what I get back to is, the dynamism of the
15     uncertainties from quarter to quarter from business model to
16     business model. I keep hearing about business models. The
17     quarterly supplements that insurance companies put out, just as
18     an example, since you two are at the table, 40 pages, you know,
19     et cetera. And some of that - so with an earnings release they
20     put out supplemental financial data, 40 what investors need to
21     know. Some of it is duplicative of what's in the accounting, a
22     lot of it's not, frankly. But those change every quarter to
23     some respect.
24                 The headlines of the earnings release change every
25     quarter in some respect. So - and then we're trying to set
0229
 1     accounting standards where measurement basis won't change. So
 2     it's to your point, Brad. It's pick a measurement basis. Pick
 3     a horse to ride and then you got to ride it, right? And then
 4     even if uncertainties are going to ebb and flow around that as
 5     the economic cycle does, you're going to have to deal with that.
 6                 So then it becomes a communication exercise. And
 7     all three panels said you have to be more efficient and
 8     effective in communicating the uncertainty in whatever the
 9     management measurement basis is that we've decided to ride.
10     Whether it's in don't be duplicative. Whether it's in MDNA.
11     Whether it's in the supplemental, you know, we've got to figure
12     out a way amongst the three organizations. Whether it's in part
13     of the audit report that opines on MDNA. What were the most
14     important things that the auditors were thinking about as they
15     were analyzing those things, whether it's in the financial
16     statement disclosures or whether it's in MDNA. That's where I
17     feel like what I'm hearing is what we're going to really have to
18     focus in on as we - as we go forward.
19                 But this has been extremely informative to me. And
20     I really appreciate the panelists views and insights and
21     especially the time given everything that's going on to take the
22     time and help us - help us through this. So thank you very
23     much.
24                 MR. HANSON: Mike, I just want to make one comment.
25     And that's something that Liz and I were talking about before
0230
 1     the panel started and she brought up that it is remarkable to me
 2     how the investors and the auditors and prepares, I think from
 3     today, I'm all hearing, we share the same frustrations, same
 4     concerns and same goals to have better information with more
 5     clarity and better disclosures so it's more meaningful to the
 6     investors. So I think we've all come - I think all come to a
 7     good understanding that we're kind of in the same plane and
 8     we're trying to do the same thing it's just the challenge of
 9     figuring out the path forward of how to best do it.
10                 MR. STARR: Well put. Before I turn it over to Jim
11     to close, I want to thank you for just an outstanding session.
12     I think all three panels did a very good job. And I'll
13     reiterate what Jay said at the end. One of the things that's
14     really been interesting for me is the common themes that run
15     throughout from preparers, investors and auditors.   So, again,
16     I thank you and I thank you for taking the time to be with us
17     today.
18                 And I turn it over to Jim.
19                 MR. KROEKER: Let me just echo Mike's thank you and
20     then also thank a number of people that were instrumental in
21     making sure that today's events actually occurred, not the least
22     of which is Mike Starr himself who was incredibly instrumental
23     in getting this vision to a reality. At the PCAOB, in addition
24     to those that were at the table, Chairman Doty and Jay, I'd also
25     want to thank Steve Richards and their chief auditor, Marty
0231
 1     Bauman, who also were instrumental in reviewing materials and
 2     preparing for today.
 3                 At the FASB, in addition to Marc and Leslie's
 4     extreme dedication to this idea and continuing to push us to
 5     say, how do we make this a reality. Also Sue Cosper who is here
 6     with us.
 7                 And on our staff, in addition to Mike, Eric West,
 8     who's somewhere also played - oh, right behind me - played a
 9     huge role in facilitating today's events. So I wanted to thank
10     them.
11                 One of the things we're looking for out of the
12     financial reporting series is actionable items. Of course, we
13     could have picked a narrower topic to think of ways to things
14     that were more immediately actionable but I did hear a number of
15     things. And I don't want to commit any of the three of us to
16     what the action might be. But I did hear things that are really
17     worth thinking about how do we execute on that.
18                 Janet, you summarized well, but I think others said
19     the same thing in terms of disclosure; the importance of a
20     disclosure framework including, why do investors have to look
21     here, here, here and then the footnotes. I think that's an
22     actionable item that permeates all three organizations.
23                 I also heard, holy cow, ideas like should we have
24     financial reports that are more historical in terms of their
25     report and an analysis or an analytical piece that is a separate
0232
 1     report. I think that's something we have to think about that's
 2     a fundamental shift to financial reporting. It's an actionable
 3     thing but how do we go about it. And ideas all the way in
 4     between.
 5                 And so one of the things that we're committed to is
 6     as the three organizations is having follow up and then figure
 7     out what do we take away from today's events. Not the least of
 8     which might be a future financial reporting series that takes
 9     what we heard today and tries to then summarize that and say,
10     are we hearing you correctly. If we head in a certain
11     direction, is that what is responsive to what we've heard.
12                 The financial reporting series isn't only going to
13     be about measurement uncertainty so if you have good ideas for
14     topics where the financial reporting system can be improved, or
15     you see emerging risks that isn't being addressed by financial
16     reporting, I'd encourage you to call any one of the people I
17     said at the three organizations who were instrumental and/or
18     send an email to the financial reporting series mailbox that's
19     on our website and suggest in as little or as much detail as you
20     have, suggestions for future meetings.
21                 With that, I think, unless I've missed something,
22     Mike.
23                 MR. STARR: No.
24                 MR. KROEKER: The First Financial Reporting Series
25     Roundtable is adjourned.
0233
 1                   (Whereupon, at 5:20, the meeting was
 2     adjourned.)
 3                               * * * * *
 4
 5
 6
 7
 8
 9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
0234
 1                    PROOFREADER'S CERTIFICATE
 2
 3     In the Matter of:   INAUGURAL PUBLIC ROUNDTABLE FOR
 4                         FINANCIAL REPORTING SERIES
 5     File Number:        OS-4-640
 6     Date:               Tuesday, November 8, 2011
 7     Location:           Washington, D.C.
 8
 9               This is to certify that I, Susan Davis,
10     (the undersigned), do hereby swear and affirm that the
11     attached proceedings before the U.S. Securities and
12     Exchange Commission were held according to the record and
13     that this is the original, complete, true and accurate
14     transcript that has been compared to the reporting or
15     recording accomplished at the hearing.
16
17     _______________________      _______________________
18     (Proofreader's Name)         (Date)
19
20
21
22
23
24
25
0235
 1                      REPORTER'S CERTIFICATE
 2
 3     I, Susan Jellen, reporter, hereby certify that the
 4     foregoing transcript of 233 pages is a complete, true and
 5     accurate transcript of the testimony indicated, held on
 6     November 8, 2011, at Washington, D.C. in the matter of:
 7     INAUGURAL ROUNDTABLE FOR FINANCIAL REPORTING SERIES.
 8
 9
10
11     I further certify that this proceeding was recorded by
12     me, and that the foregoing transcript has been prepared
13     under my direction.
14
15                         Date:____________________________
16            Official Reporter:________________________________
17            Diversified Reporting Services, Inc.
18
19
20
21
22
23
24
25
0236
 1
 2     Diversified Reporting Services, Inc.
 3     1101 Sixteenth Street, N.W.
 4     2nd Floor
 5     Washington, D.C. 20036
 6
 7
 8     In the Matter of:   INAUGURAL PUBLIC ROUNDTABLE FOR
 9                         FINANCIAL REPORTING SERIES
10     File Number:        OS-4-640
11     Date:               Tuesday, November 8, 2011
12     Location:           Washington, D.C.
13
14     This is a letter to inform you that we do not
15     release our tapes and notes. I do maintain
16     them for a period of one (1) year.
17
18     Sincerely,
19                         _________________________
20                         Susan Jellen
21
22
23
24
25