[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
PROMOTION OF INTERNATIONAL CAPITAL FLOW THROUGH ACCOUNTING STANDARDS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
CAPITAL MARKETS, INSURANCE, AND
GOVERNMENT SPONSORED ENTERPRISES
OF THE
COMMITTEE ON
FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
JUNE 7, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-22
U.S. GOVERNMENT PRINTING OFFICE
73-219 PS WASHINGTON : 2001
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone (202) 512�091800 Fax: (202) 512�092250
Mail: Stop SSOP, Washington, DC 20402�090001
_______________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing
Office
Internet: bookstore.gpo.gov Phone: (202) 512-1800 Fax: (202) 512-2550
Mail: Stop SSOP, Washington DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Ohio JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD, Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missiouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
Subcommittee on Capital Markets, Insurance, and
Government Sponsored Enterprises
RICHARD H. BAKER, Louisiana, Chairman
ROBERT W. NEY, Ohio, Vice Chairman PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York
CHRISTOPHER COX, California NYDIA M. VELAZQUEZ, New York
PAUL E. GILLMOR, Ohio KEN BENTSEN, Texas
RON PAUL, Texas MAX SANDLIN, Texas
SPENCER BACHUS, Alabama JAMES H. MALONEY, Connecticut
MICHAEL N. CASTLE, Delaware DARLENE HOOLEY, Oregon
EDWARD R. ROYCE, California FRANK MASCARA, Pennsylvania
FRANK D. LUCAS, Oklahoma STEPHANIE TUBBS JONES, Ohio
BOB BARR, Georgia MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, North Carolina BRAD SHERMAN, California
STEVEN C. LaTOURETTE, Ohio GREGORY W. MEEKS, New York
JOHN B. SHADEGG, Arizona JAY INSLEE, Washington
DAVE WELDON, Florida DENNIS MOORE, Kansas
JIM RYUN, Kansas CHARLES A. GONZALEZ, Texas
BOB RILEY, Alabama HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
GARY G. MILLER, California RONNIE SHOWS, Mississippi
DOUG OSE, California JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania STEVE ISRAEL, New York
MIKE FERGUSON, New Jersey MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
MIKE ROGERS, Michigan
C O N T E N T S
----------
Page
Hearing held on:
June 7, 2001................................................. 1
Appendix:
June 7, 2001................................................. 41
WITNESSES
Thursday, June 7, 2001
Ameen, Philip D., Vice President and Comptroller, General
Electric Company; Chairman, Committee on Corporate Reporting,
Financial Executives
International.................................................. 22
Elliott, Robert K., Partner, KPMG Peat Marwick, LLP; representing
the American Institute of Certified Public Accountants......... 24
Volcker, Hon. Paul A., Chairman, International Accounting
Standards
Trustees....................................................... 7
APPENDIX
Prepared statements:
Baker, Hon. Richard H........................................ 42
Oxley, Hon. Michael G........................................ 65
Kanjorski, Hon. Paul E....................................... 60
LaFalce, Hon. John J......................................... 62
Mascara, Hon. Frank.......................................... 64
Ameen, Philip D.............................................. 79
Elliott, Robert K............................................ 86
Volcker, Hon. Paul A......................................... 66
Additional Material Submitted for the Record
Baker, Hon. Richard H.:
Association for Investment Management and Research letter to
the SEC, June 5, 2001...................................... 43
London Stock Exchange letter, June 8, 2001................... 56
Volcker, Hon. Paul A.:
International Accounting Standards Board: The Restructuring
in Brief................................................... 74
Written response to a question from Hon. Frank Mascara....... 78
Financial Accounting Standards Board letters to the SEC, June 5,
2001........................................................... 94
PROMOTION OF INTERNATIONAL CAPITAL FLOW THROUGH ACCOUNTING STANDARDS
----------
THURSDAY, JUNE 7, 2001
U.S. House of Representatives,
Subcommittee on Capital Markets, Insurance,
and Government Sponsored Enterprises,
Committee on Financial Services,
Washington, DC.
The subcommittee met, at 10:00 a.m., in room 2128, Rayburn
House Office Building, Hon. Richard H. Baker, [chairman of the
subcommittee], presiding.
Present: Chairman Baker; Representatives Shays, Cox,
Gillmor, Royce, Oxley, Ose, Kanjorski, Bentsen, J. Maloney of
Connecticut, Hooley, Mascara, LaFalce, Sherman, Inslee, Moore,
Lucas, Shows, Israel, and Ross.
Chairman Baker. I'd like to call this hearing of the
Capital Markets Subcommittee to order. I am informed that we
will have a journal vote or a vote at approximately 10:30. Mr.
Kanjorski, the Ranking Member, is on his way, but I thought we
would convene the hearing this morning in an effort to get the
opening statements on the record prior to breaking for whatever
vote is required on the floor.
With that advisory, I do expect Mr. Kanjorski's arrival
momentarily.
Today, we have under consideration accounting issues which
are new to this Committee's jurisdiction this year. Financial
accounting and transparency are vitally important for all
investors, practitioners, regulators and others who have
interest in the market's conduct.
We begin today by reviewing the efforts to harmonize
international accounting standards, given the nature of the
changing world economy.
Transparency regarding the financial condition of a company
is a key component in an investment decision. Accounting
standards are intended to serve investors by imposing a
framework for financial reporting so that all investors may
evaluate and compare on a common platform.
The United States capital markets are the deepest and most
complex in the world. And while there are very legitimate
concerns about the rules, the markets consider the Generally
Accepted Accounting Principles, or GAAP, the most comprehensive
standards in the world.
Of course, these standards are only used by companies
filing financial statements domestically. The globalization of
markets and new technology now more than ever allow investors
to diversify portfolios and seek opportunities both here and
abroad.
Additionally, U.S. companies are able now to find capital
in growing sources from those outside the country. However,
without harmonization of accounting standards, investors face
uncertainties. We must carefully scrutinize this process so
that the field is made level across national borders and that
standards are effective and meaningful to the investors whether
here or abroad.
This does not merely mean reconciliation of foreign
standards to GAAP. There is the hope that the international
effort to harmonize will take the best ideas of all national
standards and do away with those principles which unduly burden
issuers or do not provide meaningful information to investors.
Most importantly, this effort should be responsive to the
needs of investors worldwide and should consider the types and
manner of disclosure most appropriate.
It is a pleasure today to welcome Chairman Volcker here. I
will have a formal introduction at a later moment. But to have
his prestige brought to bear on this important matter in his
new capacity is indeed an important addition to this process.
[The prepared statement of Hon. Richard H. Baker can be
found on page 42 in the appendix.]
With that opening statement, I'd like to turn to Mr.
LaFalce for his words.
Mr. LaFalce.
Mr. LaFalce. Thank you very much, Mr. Chairman. Chairman
Volcker, it is always a pleasure to have you before us. We can
always learn treasures and gems when you come. And Mr. Chairman
Baker, I can't tell you how very pleased I am that you are
having this hearing. We had a dialogue in your office about a
month or two ago about the importance of accounting, and I'm
glad you're chairing this Committee, and I know you're going to
be looking into this issue the way it should be.
I believe it's very important to harmonize international
accounting standards. Yet I'm also concerned that in the
process we do not undercut the generally strong standards we
have in the United States. These standards and the strength of
our accounting and auditing professions play a fundamental role
in protecting investors and maintaining the integrity of our
capital markets.
I'd also like to take the opportunity to thank Chairman
Volcker for his efforts to improve the international accounting
standard-setting process. I believe these efforts will make an
important contribution to the integrity and transparency of
both our markets and those abroad.
Accounting issues have recently begun to catch the
attention of the media, and I'm delighted at that. It's
difficult now not to notice daily reports of financial fraud
and restatements of financials by major corporations, not just
small corporations, but major corporations. And I'm extremely
concerned about this. In fact, ``outraged'' may be a much
better word.
The SEC, particularly its Chief Accountant, has also been
expressing concerns about various accounting issues and
practices involving the accounting profession and corporate
management. And I hope they will step up their enforcement
efforts. But most importantly, I hope we give them the
resources necessary to do that. That ball is in our court.
Today's hearing obligates me to express my strong
conviction that our Committee and the Congress must not take
the strength and integrity of our own accounting system for
granted. And most importantly, we have to make it clear that
harmonizing international accounting is not an excuse to lower
U.S. accounting standards.
In other words, standardizing accounting practices around
the globe cannot be a race to the bottom. Investors,
shareholders and increasingly global capital markets all
benefit from access to the highest quality information.
Now this aspect of accounting on which we're having a
hearing today should be only the beginning of a tremendous
Committee focus on domestic accounting issues and how the
application of accounting standards is affecting the integrity
of our capital markets. It's certainly an area that I
personally shall be pursuing with the greatest aggressive
effort I can muster.
This is particularly important in view of the tremendous
growth in stock ownership throughout the country. Estimates for
the most recent survey data indicate that approximately half
the households in the United States now own corporate stock,
either directly or indirectly, through a mutual fund,
retirement account or defined contribution pension plan.
This represents over a 60 percent increase in the number of
individual shareholders over just the last decade. This trend,
combined with the decreasing availability of defined benefit
pension plans, means that more Americans than ever are relying
on the performance of their stock investments for their savings
and retirement.
Twenty years ago, two-thirds of all pension plan
participants were in defined benefits plans. Today, more than
two-thirds are in defined contributions plans. Now, that change
is profound in its implications and profound in the obligations
it imposes upon us, the SEC, and so forth.
High quality accounting standards and financial reporting
are essential for sound investment choices to be made. At the
same time that Americans have become more reliant on the
performance of their stock investments, the pressures on firms
to manipulate their financial results have grown tremendously.
Executive compensation is increasingly tied to market valuation
of corporate stock, creating ever more pressure to meet
earnings estimates to the penny. Fourteen cents rather than 15
cents could result in the stock price and market valuation of a
company being pummeled.
Judging by the numbers of companies that have had to
restate their financial statements after they were released,
many companies have succumbed to the temptation to manipulate
their results. According to the SEC, the number of restatements
has more than trebled from the early 1990s, from an average of
less than 50 per year to 156 last year.
More than half of the companies accused of financial fraud
and shareholder class action lawsuits last year have already
been forced to restate their earnings. These figures are very
troubling when one notes that these are restatements of
financials that had been signed off on by the firm's auditors.
Regrettably, there is increasing and disturbing evidence
that the problem is widespread. An article this month by a
senior editor of that ultra-liberal Harvard Business Review
describes the insidious effects of the so-called earnings
management, saying that: ``the earnings game is now so
commonplace that it can sometimes seem like a collective
agreement to believe the unbelievable.''
While many of the techniques used may be technically legal,
they are economically indefensible. And the conduct of many
companies may well cross the line into fraud on investors in
the markets.
Further, while I would like to think that the conduct of
these companies is an aberration, what may look like an ice
cube is much more likely to be the tip of the iceberg, as the
Chief Accountant of the SEC noted only last week. I suspect
that iceberg may be gigantic.
Our Committee needs to focus seriously on the importance of
accounting standards and their proper application to our
capital markets. High quality financial reporting is essential
to protecting investors and maintaining investor confidence. We
need to ensure the high quality of financial information from
all firms that compete for capital in our markets, whether they
are U.S. companies or foreign corporations.
Today's hearing is a start, but only a small start in that
effort. Looking forward, it's imperative that we look at all
issues affecting investor protection in a balanced, objective
way. This Subcommittee under the leadership of Chairman Baker
and Mr. Kanjorski will be having a hearing next week on analyst
independence, which we certainly should do. But if we are to do
a serious analysis of the problem, the regulators must also be
invited to be part of that dialogue.
And, Mr. Chairman, I understand that full Committee staff
may be very reluctant to that, and I ask that you make the
decision as to who should testify rather than staff. I thank
the Chairman.
[The prepared statement of Hon. John J. LaFalce can be
found on page 62 in the appendix.]
Chairman Baker. Thank you, Mr. LaFalce. And for the record,
you'll note substantial time was allocated to your remarks in
deference to your evident strong feelings on the matter, and I
assure you the hearing next week is only a minor beginning to
our Committee work on the subject, and we look forward to your
continued interest. Thank you, sir.
Chairman Oxley.
Mr. Oxley. Thank you, Mr. Chairman. And today our
subcommittee begins its consideration of significant issues in
public accounting and investor disclosure. I want to
congratulate you, Mr. Chairman, for taking the initiative in
holding this hearing. And I also want to welcome the
distinguished former Chairman of the Federal Reserve, Paul
Volcker, who once again is playing a leading role in
international finance and welcome Chairman Volcker back to the
Committee.
I appreciate the work of the AICPA and the Financial
Executives Institute and the willingness of their
representatives from KPMG, Peat Marwick and General Electric,
to testify today.
We live in a time of growing interdependence in world
financial markets. However, financial reports on publicly
traded companies upon which investors and regulators depend on
based on accounting practices that can vary widely by country.
These differences result in a lack of comparability and
reliability in financial disclosure.
Harmonizing accounting standards will benefit preparers and
users of financial statements, promote international trade and
investment and reduce costs for multinational companies.
Investors will be better able to make informed investment
decisions.
With integrated financial markets, economic crises are not
deterred by national borders. By streamlining international
accounting standards, we're improving our changes of detecting
and preventing financial problems before they reach global
proportions.
Businesses, regulators and the markets must be able to
compare apples with apples when it comes to financial report.
Mr. Chairman, I look forward to hearing about the work that the
International Accounting Standards Board and others are doing
to harmonize global rules and the benefits for investors in the
capital markets.
I encourage you in further efforts to set a new benchmark
for the highest quality financial reporting, and I thank the
Chair and yield back the balance of my time.
[The prepared statement of Hon. Michael Oxley can be found
on page 65 in the appendix.]
Chairman Baker. Thank you, Mr. Chairman, not only for your
attendance here today, but for your significant interest in
this whole subject matter. It's most appreciated, Mr. Chairman.
Thank you.
Ranking Member Kanjorski.
Mr. Kanjorski. Thank you, Mr. Chairman.
First of all, Mr. Chairman, I want to congratulate you for
bringing about this hearing. I look forward to Mr. Volcker's
testimony. I'm going to ask unanimous consent to introduce into
the record my full statement.
[The prepared statement of Hon. Paul Kanjorski can be found
on page 60 in the appendix.]
Chairman Baker. Without objection.
Mr. Kanjorski. But, I just wanted to make one or two
points. One, can the Federal Government assist financially in
moving this process along faster? I think that perhaps staff
and funding of expenses may be helpful. If there is something
we can do, like using some of the excess funds at the SEC that
can be guided toward this effort, I would like to know.
Second, I am interested to know whether or not we are
developing any concept of a stick-and-carrot for those
corporations and countries internationally that are hesitating
or perhaps taking too long in adopting these standards. We have
the IMF, the World Bank, and other institutions that, on the
one hand, could be utilized to look more favorably upon those
nations and those corporations that move faster in adjusting
their standards, and on the other hand, have some penalty if
they do not comport with the need for international standards.
But, at a meeting I had last week, I learned that there may
be 10 or 15 years before world standards are able to be
implemented. I am not sure that is speedy enough. With those
few questions in mind, I look forward to Mr. Volcker's
statement and yield back my time.
Chairman Baker. Thank you very much, Mr. Kanjorski.
Mr. Mascara, did you have a statement?
Mr. Mascara. Mr. Chairman, I ask unanimous consent to have
an opening statement prepared later and introduced.
Chairman Baker. Without objection.
[The prepared statement of Hon. Frank Mascara can be found
on page 64 in the appendix.]
Mr. Mascara. Thank you.
Chairman Baker. Mr. Maloney.
Mr. Maloney. No thank you.
Chairman Baker. Ms. Hooley.
Ms. Hooley. Thank you, Mr. Chair, and Ranking Member
Kanjorski for convening this hearing today and for the
witnesses that have been asked to testify. I'm constantly
telling the people back home that you can't turn back the hands
of time, that globalization is here to stay. And it seems to me
each passing day our economy is more intertwined with the
global economy than ever before.
And more and more investors from the United States are
dipping their toes into the foreign markets, and more and more
foreign markets and companies are listed here. I think if
international markets are going to function properly, a single
set of high quality international accounting standards must
exist. As Mr. Kanjorski has stated, stocks aren't lottery
tickets. And to make sure investors are protected, we need to
create an independent system that is not only high in quality,
but high in consistency. I'm looking forward to your testimony
and I'm looking forward to seeing how quickly this can be done.
Thank you.
Chairman Baker. Thank you, Ms. Hooley.
Mr. Volcker, it's apparent that we'll have a vote. It may
be, however, I'm advised, slightly later than 10:30. It would
be at least a 15-minute vote, which would mean Members would
likely be here 5- or 10-minutes after it goes off.
Given that and to use time effectively, I'd like to proceed
with your introduction and request that you proceed with your
remarks.
Mr. Volcker was the Chairman of the Board of Governors of
the Federal Reserve from August of 1979 to August of 1987.
Initially appointed to the position by President Carter, he was
reappointed in 1983 by President Reagan. He worked for the
Federal Government for almost 30 years, serving under five
Presidents, he retired as Chairman and Chief Executive Officer
of Wolfensohn and Company in 1996.
However, in a review of your resume, Mr. Volcker, I thought
the most outstanding line of its entire content, all of which
is distinguished in achievement, is the fact that you claim
``four brilliant grandchildren,'' which I quote.
We indeed welcome you back, sir, and have great regard for
your insight and abilities. Welcome.
STATEMENT OF HON. PAUL VOLCKER, CHAIRMAN, INTERNATIONAL
ACCOUNTING STANDARDS TRUSTEES
Mr. Volcker. Thank you very much, Mr. Chairman. And I might
say that the oldest of those brilliant grandchildren just
graduated from school here in Washington on Saturday. So we've
got him through one hurdle, anyway.
I really appreciate being here. This is the first time I've
been before the Committee in its new guise and enlarged guise.
But it gives me an opportunity to congratulate you and the
Congress, I think, on this reorganization that from my
experience makes a great deal of sense. Back in the days when I
had to testify before the Banking Committee and the Securities
Committee on issues that obviously, overlapped.
Chairman Baker. And could you pull the mike just a bit
closer so we can hear you a little better? Just pull the whole
mike to you.
Mr. Volcker. You have a copy of my statement, and I won't
read it. It's a rather comprehensive statement on the origin of
this work.
We have also distributed, I will just bring to your
attention, a brief description of the new International
Accounting Standards Board and Committee, notably, particularly
because it's got the names of the various trustees and Board
members on it and where they come from and where their
background is. So you may find that of some interest.
[The information referred to can be found on page 74 in the
appendix.]
Let me just make a few points here in the time that we have
before the vote. I really do appreciate your initiative in
these hearings, as some of your associates have said. This is
not, I realize, a subject that makes for big headlines, and it
doesn't make the political blood run, but I do think it's a
very important subject that we need to be better informed about
and understand what both the advantages are, the potential is,
and what the problems are. I am greatly encouraged by the
interest that Members here have expressed.
The fact of the matter is that the need for international
accounting standards is one reflection of what is really the
inexorable, inevitable globalization of finance that Ms. Hooley
just referred to. I think the internationalization of finance
has great potential benefits, but there have been enough events
recently to show that it's also filled with very considerable
hazards and uncertainties.
And in a most general sense, it seems to me the venture
that we have launched here to create some high quality and
internationally accepted standards is a response to what's
going on in the world. And I want to emphasize both parts of
that, because we won't have done our job if they're not, a: of
high quality; but, b: internationally accepted. So we have to
combine those two criteria if we are indeed to maximize the
benefits of international finance and minimize the hazards. It
is just simply a building block for an efficient international
financial system, and obviously of great significance to the
United States in that respect.
Now let me just make a very few points. The idea of an
international accounting standards committee is not new. A
Committee has been around for a long time, but the effort that
I chair as trustee or Chairman of the trustees of the Committee
really reflects a ground-up revision and restructuring of the
old international committee, which it basically abolished. They
adopted a new constitution. That's what we're talking about.
And this was really done as a result of an international
effort by regulators, by professionals, and by affected
businesspeople working together in something called a Strategy
Working Party to develop a new framework.
And you will recognize that this administrative framework
in many ways follows the FASB precedent, because it was
important to maintain the professional objectivity and
competence of this group, and that was the great emphasis
certainly that the American participants and others had in this
effort.
What we have is a committee of trustees that I chair. The
trustees are responsible for general oversight. We're, not
incidentally, responsible for raising the money to finance it.
And we appoint the Board members. The Board is the body that
makes the standards, not the trustees. That is all delegated to
the independent Board which has been appointed, and it has now
begun work. It is a group of high-level professionals drawn
from around the world which is reflected on the sheet of paper
you have.
We have been concerned as trustees, and Sir David Tweedie,
who chairs the Board is equally concerned, that we get input
from all the relevant and interested parties in the best way we
can do it. There is a provision for an Advisory Council, which
we are in the process of appointing. It is an interesting fact
that to get all the various points of view reflected, that
Advisory Council has grown to considerable size. It will have
close to 50 members, and it is a broadly representative body
that, I think, you will find will indeed be able to provide
input from a wide variety of points of view.
I am here today really somewhat to my surprise, not being a
close follower of these things in the past. I am here because I
was invited by the Chairman of the SEC, who chaired the effort
to find a new committee and a new framework, to become the
Chairman. I was surprised, because I think traditionally the
United States has taken the attitude we have the best
standards. That's good enough. The rest of the world can come
and join us if they're interested in approaching the big
American markets. And indeed, that approach has had some
influence on the world.
But, I think, it is also true and it's come to be
understood, I think, by the American regulators, by FASB
itself, that this is a big world and the rest of the world
isn't necessarily willing to agree that all wisdom lies in
Norwalk, Connecticut with the FASB. We may have--and indeed, do
have--the best developed standards--I think most people would
agree internationally, the highest set of standards--but they
still can reflect input from the rest of the world. We want a
truly international standard and an improvement on the American
standards, not a diminution. That's certainly our objective.
And second, I think there has been a clear recognition as I
look at the picture in recent years, a recognition by the SEC
and FASB itself that these are very contentious matters that in
some cases have attracted political interest, and that indeed,
advancing the platform to an international level may provide a
more appropriate perspective than a purely national level.
So far as other attitudes are concerned, the European
Commission, the European Union, has had a particular interest.
They are in the process of passing European legislation that
they say will demand by 2005 that European countries report
according to international standards.
Now they've also reserved the right, and will appoint a
body to review the international standards, or particular
standards to see whether they will be acceptable in Europe.
Just how that works, I don't know. But in principle, they're
looking forward to international standards just as other
countries are. And, I think, there is broad support in industry
around the world. We have been reasonably successful in raising
money to support this industry effort, and I would say rather
unusually, we have had contributions from international
organizations, from central banks, from regulatory bodies
around the world individually, not in huge amounts, but
symbolically very important to show the official support for
this effort right around the world.
The second point I would make, I've already touched upon.
We are dealing with inherently controversial and difficult
matters upon which there are contrasting views between industry
groups, very strongly contrasting views in some cases, and
there are different approaches and attitudes out of national
traditions, a certain amount of suspicion among various
national bodies whether this is an American takeover on the
part of the United States, whether this is dilution of high
standards. We have to deal with those suspicions and get
everybody working together.
Now I won't go over all those controversies today. Let me
just mention two of them to give you some sense of it. One,
it's not really a matter of substance, but of approach. I think
the American approach historically has been to state a standard
and then write several hundred pages explaining how to apply
the standard. Some of the other countries feel it's very
important to get the standard right, but the particular
application will evolve in more common law tradition, a case-
by-case application, putting very heavy weight on the auditing
profession itself to develop. And, obviously, there will have
to be some oversight of that process. But how those two
different approaches get reconciled will be an interesting
thing to watch.
The other point of substance, a real point of substance to
which the accounting profession, I think, all around the world
has to become sensitized to, is the increasing importance of
intangibles in accounting statements and in balance sheet
statements. And good-will just dominates in the new economy.
But even companies in the old economy so-called, you look at
their equity and you look at their balance sheet and most of
their equity is reflected in something called good-will. How do
you evaluate good-will? It is a very large problem that has
arisen in recent FASB discussions which I don't think anybody
feels satisfied is fully resolved.
Now I could go on and on with other issues, but I just want
to give you a flavor of what we're grappling with.
The final point I would make is really a point that touches
upon Mr. LaFalce's great emphasis. Standard setting is one
thing. It's very important. It's a beginning point in
developing a high quality set of accounts by individual
companies. But at least as important is how those standards are
enforced.
Setting them out and stating them is one thing, but
individual companies are applying them, and they're applying
them under the surveillance of auditors, and, I think, if we're
going to have good accounting standards internationally, we
have to recognize there is a very great burden on the auditing
profession itself in developing its standards for enforcing the
accounting standard itself.
Having said that, I think it is also clear that having a
common set of standards around the world will greatly ease that
job of the accounting profession itself and the auditing
profession and companies in enforcing the standard. When
they're not dealing with many standards, they're dealing with
one. So I think the enforcement and the standard work together,
but I just want to emphasize that our work is primarily on
developing the standards. The enforcement will remain national.
So it's an important point.
Just a word about the outlook. I am conscious of my own
age, so I'm not looking forward to a 25-year project here. Let
me set out a target. I hope it's not totally unrealistic. But
we've had some discussion with David Tweedie, who I might say,
is a Scotsman, who will lead this effort. I think that's got
some symbolic value, having a nice, dour Scotsman raised in the
Calvinist tradition to lead this international effort.
But, we can foresee that, say within a period of 3 years or
so, we get enough commonality between the international
standard and let's say GAAP so that reconciliation will become
a lot easier. And, reconciliation might become easy enough so
that it's easier for foreign companies to do the reconciliation
and get access to American markets or vice versa.
But, you've got to think at least in a 5-year time
perspective to have a complete set of international accounting
standards that we and other countries and the European
community with their 2005 deadline will say, OK, this is the
basis for using internationally in a fairly complete way.
That may be a very optimistic outlook, but I think that's
the kind of framework in which we should be thinking.
With that much, I will cease and desist and welcome your
questions.
[The prepared statement of Hon. Paul Volcker can be found
on page 66 in the appendix.]
Chairman Baker. Thank you very much, sir. I very much
appreciate your skill and determination being brought to this
most difficult subject. I certainly recognize the difficulty of
it even in the treatment of our own domestic reporting
requirements and the rules that FASB has promulgated in recent
years have brought about considerable discussions with
derivatives treatment and other controversial matters.
So I can only imagine what it must be like internationally
where nationalism enters the picture and one assumes that all
intellect does not reside in the United States. So I come at
this with something less than a nationalistic view, I hope with
an understanding that there are perhaps different ways of
achieving the same goal.
Of recent interest to me was a publication called Value
Reporting, written by Eccles & Hertz, which got into a
discussion of the adequacy of the current reporting
methodologies and what investors in the market really are
looking for.
There was some discussion, for example, along the lines of
Mr. LaFalce's comments, of--I hate to use the word
``manipulation''. ``Management'' perhaps is a better word, to
perhaps beat the street expectations by a penny and what takes
place immediately prior to that quarterly report.
The quarterly report, though, is really a historical
perspective, not a forward-looking statement. Given the impact
of Reg FD of recent vintage, it appears that those forward-
looking statements may all too often result in litigation if
the forecast is not extremely accurate.
But, the current standard as you, I think appropriately,
note with regard to the calculation of good-will is only one
element of the problem. For example, a customer satisfaction
survey may well be a much better indicator of future sales than
the last quarter with old technology which may now be brought
about, in this fast-moving world, to be obsolete.
The short life of a computer: by the time I buy one and get
it home, the first service call is ``where did you get this old
thing?'' So, the world is changing so fast it seems to me that
if we're taking this on, it ought not to be just a rehash of
GAAP, but it ought to be with recognition that the information
informed investors need is more a roadmap of the future than a
historic report of past conduct.
And I think that publication, I would recommend it to
Members. It's only been out now 4 or 5 months. It's with the
international foundation, several prominent CPAs, domestic are
involved. And it's rather a comprehensive view of the market
needs and what the market currently receives.
My most important question, Mr. Volcker, is how do you see
the role of this Committee being most helpful to you in your
organizational responsibilities in proceeding with this topic?
Would you like to see this Committee engage in some regular
interchange with you and other members of the Commission to
have a platform in which points of concern could be reflected
on? I know you have one rather large Advisory Committee
already. I don't know that you need another one. But how can we
be helpful?
Mr. Volcker. Well, I think you have already, from my point
of view, performed a very considerable service by having this
hearing. And in your comments, the interest that exists and the
sympathy that I hear expressed about the idea of an
international standard is a very important contribution you can
make. There is a danger that this gets bogged down in
particular nationalistic interests, even though I don't think
the substantive issues fall easily into national differences.
When you talk to industrialists, when you talk to bankers,
when you talk to other people, the bankers tend to see things
alike, the industrial preparers, chief financial officers tend
to see things alike. Some of the users tend to see things alike
internationally. And they may disagree among themselves, but it
doesn't typically necessarily fall on national lines.
So I think we have to keep that understanding, and anything
you can do to understand the importance of an international
standard of high quality and effective enforcement is
important.
Now it gets a little tricky, I think, because the Americans
who participated in reorganizing this process were particularly
those that wanted to be sure that these rules were made by
professionals, and that they be insulated as far as possible
from political pressures. And I think we want to preserve that
kind of professional decisionmaking.
But, in my experience, I would say, even in my experience
in the Federal Reserve, it's good for professionals to hear
outside thinking once in a while as they go about their task.
So I think having an occasional hearing and kind of assessing
where we are and prodding us a bit would be helpful. But I
don't think you want to get too much into the specifics of
particular accounting issues.
Chairman Baker. Thank you very much.
Mr. Kanjorski.
Mr. Kanjorski. Thank you very much.
Mr. Volcker, let me address this subcommittee to something
in which you did participate in a very big way by establishing
the predicate for the solution of the S&L process. As we look
now at Japan, isn't part of their economic difficulty related
to banking and the failure for adopting acceptable banking
standards? Therefore, can we really evaluate the value of their
banks?
Mr. Volcker. It was certainly true in the S&L crisis in the
United States. But as you indicate, I had some occasion to be
rather closely involved with that at one point.
And I think it is also true in Japan, where there are
substantial changes now going on in Japanese accounting
practices.
But, you see it on two sides and it again reflects the
complementarity between the standard and its enforcement. But
the Japanese banks have had large equity positions which were
not brought to market and accounted for in a way that lent any
precision to the process historically. Now that's changing.
Their standards in evaluating loans, I think it's fair to
say, were not adequately disciplined, to be kind about it. Now
that's a matter of enforcement. The official enforcement of
some kind of standard counts as much as the standard itself,
but I think it's a combination of both.
So, yes, I think there were lapses that have led to real
problems of a profound nature in Japan, and a considerable
nature even in the United States, where the S&Ls had their own
accounting system, which was not very adequate.
Mr. Kanjorski. When we made those adjustments in the early
1980s, we used a concept in the United States, which I suspect
was governmentally-imposed, called ``supervisory good-will.''
Will a world accounting system deny governments the ability to
take those extraordinary positions and qualify good-will as an
asset in a different way because of a particular domestic
difficulty?
Mr. Volcker. Well, you're going to exhaust my technical
knowledge of accounting pretty quickly. But I do know enough to
know that international practice, in a combination maybe of
government and private accounting practices, treated good-will
very differently in the case of mergers and acquisitions.
And that raises a question apart from what is right or
wrong in some sense, which is very difficult in this area. When
it's different in different jurisdictions, particular companies
find themselves at a relative advantage or disadvantage in
making mergers or acquisitions. And American companies in
particular have complained that accounting rules in other
countries have made it possible for other companies, foreign-
based companies, to make acquisitions that they could not make
because of the accounting treatment and the effect that it
therefore had on their published earnings and so forth.
So one of the benefits, the benefits very clearly seen by
some of the companies I've talked to, is leveling the playing
field with respect to the treatment of good-will in mergers and
acquisitions.
Mr. Kanjorski. Whenever we have a standard imposed, whether
it be by government or in the private sector, there is a cost
factor. Are you conducting an economic analysis of what the
international cost factor would be to the various corporations
and countries to impose this new international standard?
Mr. Volcker. I think the fair answer to that is, I don't
know of any clear study that's been made of that. We are
operating on the assumption that the most important benefit is
a very general benefit that is very hard to quantify: having
more efficient international capital markets. Now, how do you
measure that benefit?
Now the fact is there are also direct benefits that are
measurable in terms of the expenses of a multinational company
in conforming to accounting practices and laws in, you know,
numerous jurisdictions. And, depending upon a particular
company, what kind of business it's in, how long he's been in
business, if you have to install that system, it's very
expensive.
Some companies tell me, well, they've had them in operation
for a long time, so it's a lesser expense now than it used to
be, but it's an expense. It's just honest-to-goodness money in
hiring accountants and bookkeepers and all that goes with
keeping separate sets of accounts.
Mr. Kanjorski. A cynic would say it is an accounting relief
act?
Mr. Volcker. Pardon me?
Mr. Kanjorski. A cynic would say it is an accounting relief
act?
Mr. Volcker. Yes. This is the opposite, I guess. The
existing situation is full employment for accountants. We want
to divert their energies to more productive uses.
Chairman Baker. Thank you, Mr. Kanjorski. I read somewhere
that to convert from the international standard for a
sophisticated corporation to GAAP, the estimated cost of
conversion today is about $10 million for a large corporation,
which I find extraordinary.
Chairman Oxley, please proceed as you choose if you would
like to take your time now, or we'll recess and come back at
your judgment.
Mr. Oxley. I'd be glad to take 5 minutes, Mr. Chairman.
Thank you.
Chairman Baker. Certainly. Go right ahead.
Mr. Oxley. Mr. Volcker, you had indicated in your comments
that in the past at the SEC and FASB it generally historically
considered our GAAP standards to be superior to the rest of the
world. And you indicated, I think, in your statement that that
appears to be changing, that the internationalization of
finance and the like is such, and I would heartily agree.
Is there still some feeling out abroad that perhaps we are
still being too aggressive in trying to put our stamp of
approval on some of these standards?
Mr. Volcker. I think without question. Let me make clear, I
think there is truth to the proposition that we have the best
and most comprehensive standards. That doesn't mean that they
can't be improved and that we cannot benefit from this
international effort, which I believe is the case.
But there is a feeling historically that we were rather
imperialistic about this, and the carryover of that is, I
think, reflected in some of this feeling in the European Union,
for instance, that they want to reserve judgment. While they
want international standards, will put that in community law
and regulation, they also want to reserve the right to look
them over on an individual basis, because there is some feeling
this should not be an American takeover. There's a certain
amount of emotion in that.
The counterpart is, of course, the concern in the United
States that it not be a weakening of high quality. So we've got
to bridge that.
I might mention one of the encouraging things to me in
getting involved in this was to see the interest that FASB
people themselves expressed in a most direct way of wanting to
participate in the international effort--be on the
International Board, to be on the advisory committees.
And we've had people who have been either current Board
members or past Board members of FASB on our International
Board, because they wanted to be there. Now, let me also make
sure there are Europeans on the Advisory Board in some size.
There are Europeans, of course, and Japanese and Australians
and Canadians and so forth on the Board. So, we're going to get
a variety of points of view. But we have to overcome those
residual suspicions.
Mr. Oxley. Could you explain to me how this would work,
given the European Union structure? That is, once the
international accounting standards were to be adopted, would
that be done by the European Commission?
Mr. Volcker. Yes. As I understand it, this is a matter of
the European Commission in this area. It's in their
jurisdiction, and they are exerting that jurisdiction.
Mr. Oxley. So, it would not be--the individual member
states then would not necessarily----
Mr. Volcker. Well, I said the European Commission. I think
this is something that would actually be approved by the
European Parliament, too. I'm not sure about that. But it is a
European matter, not a national matter. They will assert
European jurisdiction, as I understand it.
Mr. Oxley. And would it be your guess that that would be
the first breakthrough? That is in Europe as opposed to perhaps
Asia? Or do you see this entire thing coming together
simultaneously?
Mr. Volcker. I think it all has to come together
simultaneously. Given my impression, because I'm not a deep
expert in this, Japan accounting in the past--as we mentioned--
has been further removed from what we consider acceptable
standards. But they are in the process of moving pretty fast by
their standards. But still, there are going to be big problems
there in bringing them up to the international standard and
international enforcement.
Mr. Oxley. Well, is it safe to say that historically and
culturally, our standards would tend to be closer to the
European Union member states as opposed to Japan, for example,
or some of the other Asian countries?
Mr. Volcker. Oh, I think that's true, yes. I used to see
this just as a personal experience. I used to be a director of
Nestle, a big international company headquartered in Europe.
And, I hope it's true that they had reasonable accounting
standards and approached it honestly and straightforwardly.
But the management of that company felt very strongly that
they shouldn't be subject to U.S. GAAP. They were a European
company, and while they have a big operation in the United
States, they didn't agree with some of the GAAP approaches, and
I think there was a certain national feeling about it. Why
should they have to conform in every respect to GAAP when they
were perfectly capable of following what they thought is a
reasonable Swiss standard and a more general European standard?
Now, through the years, they were following the old
international standard, and they have come closer together
before this effort started. But there's still a lot to get
over.
Mr. Oxley. Thank you.
Thank you, Mr. Chairman.
Chairman Baker. Thank you, Chairman Oxley. It would be my
intention, Mr. Volcker, Mr. Shays has fortunately been able to
make it over for a vote and can take the chair on our
departure. Mr. LaFalce will be recognized for his question or
comment, and then we would excuse ourselves for the vote. But
there should be Members coming back just momentarily. We won't
have to recess the hearing.
Mr. LaFalce.
Mr. LaFalce. Chairman Volcker, I think I've got about 4- or
5-minutes to go over for a vote, so I'll be very, very brief. A
couple of bumper sticker slogans. The second bumper sticker is
Harmonize Up Rather Than Harmonize Down. And the first bumper
sticker slogan is Enforce First. And I was so pleased that your
comments supported the concept that, you know, standards are
super important.
We've got some pretty good standards in the United States.
Let's enforce those standards. And I'm most concerned that we
are not adequately enforcing those standards, and I am also
concerned that we do not have the regulatory resources to bring
about the type of enforcement that the investor deserves.
Mr. Volcker. Well, I absolutely agree with that, and in
relation to Mr. Baker's question earlier. And for the United
States, that's within your jurisdiction.
Mr. LaFalce. That's why I said the ball is in our court.
Mr. Volcker. You've got the SEC that enforces, and the SEC
reports to you. So we can set the standards, but then the ball
goes in your court.
Mr. LaFalce. As I've said, the ball is in our court. And
the first thing we're doing is saying let's reduce the fees.
Mr. Volcker. Right.
Mr. LaFalce. The third thing is, one thing we can do, too,
is make sure that before any company is listed on any U.S.
exchange, they can do whatever they want overseas, but before
they're listed on a U.S. exchange, let's adopt and apply and
insist upon U.S. standards.
Mr. Volcker. Excuse me. I didn't hear the first part of
that.
Mr. LaFalce. I apologize. I just said that before any
company is listed on the U.S. exchange, we ensure that they
adopt----
Mr. Volcker. U.S. standards.
Mr. LaFalce. Enforce the application of U.S. standards. And
now I've got to go vote.
Mr. Volcker. Well, that's, of course, the current posture.
But I would hope when we get an international standard, the
international standard will be good enough.
Mr. Shays. [Presiding]. Thank you. Mr. Volcker, other
Members are going to be coming back, so we're not going to go
to the next panel. So I have some questions and maybe other
Members will come back and we can kind of filibuster together
if you want to.
Would you just tell me, the IAST founded in 1973, has it
had much clout over the years, or has it been pretty much an
advisory group?
Mr. Volcker. Well, I think it has had some. Now, again,
you'll have to direct that question to somebody who has more
historical exposure than I have. But as I have observed it a
little bit, for instance, as the director of Nestle, it has had
some influence.
But there's a general feeling that it was a large body, it
was a part-time body. There was from our perspective anyway too
much of a tendency to seek compromise for compromise sake, that
the issues were not posed as sharply as they might have been,
and it simply didn't have the standing or the intellectual
integrity the GAAP, for instance, had.
So, yes, I think it made some progress.
Mr. Shays. So, now it's a smaller body, and now it's full
time?
Mr. Volcker. Well, it's predominantly full time. Two
members are part-time. The people who set this out, the
authority now lies with trustees. In the constitution that we
inherited, established the general framework and they decided
to include two part-time, two half-time members in effect,
because you might want to get somebody with particular
expertise or an academic who could participate on a part-time
basis, but not a full-time basis. But essentially, it's meant
to be a full-time, active professional body.
Mr. Shays. It still needs to exert more authority over
time. It still needs to become a greater force internationally.
Mr. Volcker. No question.
Mr. Shays. What would be the thorniest issues that you need
to address?
Mr. Volcker. What?
Mr. Shays. The thorniest issues? What are the most
difficult issues that you need to address?
Mr. Volcker. Well, I mentioned this one of intangibles,
good-will, which goes over a lot of different companies,
different issues, mergers and acquisitions and so forth. The
issue of derivatives has been one to tear people's hair out for
a long time, and I'm told that FASB has 600 pages of
explanation which nobody fully understands. It's an inherently
complex area, which has, you know, grown like Topsy in recent
years. And, I am told, nobody is particularly happy with the
present standards and their application.
An issue, which indeed from my earlier life I was very much
aware of, is the general move toward mark-to-market accounting,
which I find is rather euphemistically described as ``fair
market accounting.'' I guess it has a lot of logic to it, but a
lot of people question whether it is applicable to all
situations in all circumstances. And people feel very strongly
on both sides of that issue. And it's an issue that's
particularly important to the commercial banking world, to the
insurance world, and some other worlds.
And stock options are another. I might say that the
Congress has been rather familiar with a very specific issue,
how do you account for stock options and other forms of
remuneration of that sort?
Mr. Shays. So, some of the same things we're having to
address here we're having to address internationally as well?
Mr. Volcker. Yes. All these issues have been addressed
here, but some of them have been kind of left in limbo. There
was a retreat on stock options from what FASB initially was
thinking about, as you know. There's been a shift of thinking,
as I understand it, on FASB on the good-will, intangibles
question. They now have changed their position, but not defined
just what to do.
It's a very, by the very nature of it, intangible, a little
hard to evaluate.
Mr. Shays. The primary message that I heard from you was
that politics has to stay out of the----
Mr. Volcker. That is the whole intent of this structure.
Politics stay out of it so far as setting the standard is
concerned.
Mr. Shays. What I don't fully understand is we're talking
about an extraordinary number of different countries that have
to buy in. And, so, some countries are going to buy in, some
countries aren't. But you're not going to see a compromise to
get a country to participate?
Mr. Volcker. No. The aim of this structure was to delegate
the decisionmaking to a body that was some insulation from
politics and that definitely could bring different points of
view to bear so far as experience is concerned. It was set out
rather carefully that some of these members should have
auditing experience, some should have preparer's experience.
They should have experience within companies. Some of them
should be analysts and users of accounting information. Some
should be academic.
The purpose is to make sure a variety of different
professional points of view are brought to bear. But they
should not be picked on the basis of nationality. Now, in fact,
we have a spreading of nationalities. There are a number of
Americans, a number of Europeans. There is, I guess, one
Japanese, one or two from emerging countries, a Canadian and an
Australian. So the countries that have been most active in this
area are certainly fully represented. A relatively small number
of countries have active accounting standard boards of our
type.
Mr. Shays. Now, the International Accounting Standards
Board is basically, what they determine, in my understanding,
is basically going to be enforced by the national regulators in
each country?
Mr. Volcker. Yes. Well, first of all, they presume they
will be enforced by auditors themselves.
Mr. Shays. OK. I just said it in reverse. I was going to
say national regulators and the audit firms. You want me to say
audit firms and national regulators.
Mr. Volcker. Right.
Mr. Shays. OK. Do you see this working effectively?
Mr. Volcker. There is an effort going on as I understand in
the auditing profession itself to exchange views and develop
approaches and processes to add to the confidence in the
auditing process itself, which, I think, is fair to say has
been damaged by the kind of thing that Congressman LaFalce was
talking about. The auditing firms themselves have something to
worry about in terms of the integrity of their processes, and I
think they're at work on them.
Mr. Shays. I'm new to the Committee, frankly, and I don't
have a comprehension of whether audit firms around the world
are similar in their approach.
Mr. Volcker. Well, there are five auditing firms around the
world that account for a big portion of the business all over
the world.
Mr. Shays. OK. So the auditing firms here are the major
players.
Mr. Volcker. Well, the auditing firms here, you think of
the big five American auditing firms, they're all international
and pretty much all over the world in different organizational
structures. Some of them are more uniform than others. Some of
them are, I guess, a collection of existing firms that retain
some degree of independence. Others are more centrally
operated.
Mr. Shays. In that case, though, given that they're
international in nature, if the national regulatory body of a
country seems not to be as eager to comply, does the market in
a sense force them to, because the auditing firms, the
international firms are simply going to have a consistent
standard around the world?
Mr. Volcker. That's the aim.
Mr. Shays. So the question, though, I'm saying is, so even
if the national regulatory body isn't as aggressive as it
should be, the hope is that the auditing firms will still set
the standard?
Mr. Volcker. That is my understanding with the exception
that if a particular country said companies domiciled in our
borders has to follow a different standard, obviously, they
have to follow the law. But as I said, in Europe, a big
important area, they say they will adopt international
standards. I think the presumption is Japan will do that. The
hope is eventually the United States will do that. And it could
be done either by adopting GAAP or adopting the international
standard, that's good enough. That may be hypothetical out in
the future, but you could say the international standard
correctly audited is good enough for entry into our market.
Mr. Shays. Are we dealing with the European Union as a
body, or do we have to deal with each specific country?
Mr. Volcker. I think in this area we're getting them as a
body.
Mr. Shays. So they have, for the most part, have uniformity
within the Union?
Mr. Volcker. They don't now, I don't think, but they are
aiming for it. That's what they're saying.
Mr. Shays. And is it more difficult to get compliance among
the more economically powerful countries as opposed to those
that are trying to become players?
Mr. Volcker. Well, I would guess. You could talk to people
who have had practical experience, but I would assume that
those nations that have more effective governments generally,
tradition of rule of law and due process and transparency and
so forth, are going to have more effective enforcement than
countries that don't have any of those, that basic
infrastructure.
Mr. Shays. We have our Members here, so we'll continue. The
gentleman from Texas can have the floor if he would like. Thank
you very much, Mr. Volcker, for responding to my questions.
Mr. Volcker. Thank you.
Mr. Shays. The gentleman from Texas has the floor.
Mr. Bentsen. Thank you, Mr. Chairman.
Mr. Volcker, always good to see you.
Mr. Volcker. Thank you.
Mr. Bentsen. With respect to the international standards,
how much do you think--you talked about in your testimony that
standards are one thing, enforcement is another thing, which is
sort of stating the obvious, but----
Mr. Volcker. We had quite a bit of discussion about that
this morning.
Mr. Bentsen. Right. How much do you believe that as the
markets become more interdependent, how much do you believe
that the more sophisticated capital markets and institutional
investors will drive to the highest standard? Do you think
that's a simplistic view of things? Or do you think that
institutional investors will be more inclined to seek safety in
high standards?
Mr. Volcker. Well, I wish the answer was as unambiguous as
it could be. Obviously, the investor ought to go to the higher
standard and be very interested in the higher standard.
The reason I waffle a little bit in my answer--I don't want
to make too much of this--but, one of my mild disappointments
in this effort has been to somehow see what I perceive, maybe
wrongly, as less strong interest among the analysis community,
among the investment community than in the preparer community
or the auditing community. And I puzzle over why that is the
case. And maybe I'm misreading it. But that seems to be
curious.
Mr. Bentsen. So you're not optimistic, I guess, that it
would move in that direction? I ask that because we have had
recently a situation where there's been an attempt--and this is
a little bit like apples to oranges--but this whole concept of
tax harmonization through the OECD, and the Administration, in
particular Secretary O'Neill, have come out opposed to this.
And it's a fairly controversial issue.
Mr. Volcker. Right.
Mr. Bentsen. Some view it as an approach toward purer tax
harmonization. Others see it as an approach for more income
reporting harmonization. It seems to me that ultimately--and I
don't think this is a bad idea--but ultimately, we're moving
toward some form of accounting harmonization. If the European
Union moves forward with it, then I think the U.S. may find
itself having to follow suit.
And, I mean, I gather from your statement you don't view
this as a bad thing. That ultimately we should have this
harmonization.
Mr. Volcker. No. I think that if we can make progress in
international standards that a failure to follow international
standards will be noted. Let's assume we make progress toward
high quality international standards and it's accepted that
these are good standards, that they're internationally
applicable. The momentum among investors will be to insist that
people use them more commonly than is now the case when there's
a lot of confusion over what the best standard is. The
Europeans will argue that their standard is better than the
American standard. The Americans argue our standard is better.
So, you know, it's a little harder to insist upon the
correct standard when you don't have agreement on what the
correct standard is or the best standard or uniform standard.
Whether it's the best or not, it's uniform. I think you will
get more discipline. I would think you would get more
discipline in the investment community, because it will stand
out more if you're not following the international standard.
Mr. Bentsen. From a practical matter, if I understand
correctly now, a foreign-based corporation that sells shares in
United States markets can use their home-based accounting
standards, but there are certain GAAP standards that they have
to comply with supplemental to whatever their audit is.
Do you believe that even if we go toward--if we don't get
to a full harmonized standard, but the international standards
are set forth and there's a variation between that and GAAP, do
you think that we can continue with sort of a bifurcated
capital market system between the United States and the
European markets, or do you think the capital markets
themselves will force this?
Mr. Volcker. Well, I think you can continue with a
bifurcated, but in a different situation than exists at
present. You could exist, not as good as with a clear
international standard, but you could exist if it's easier to
reconcile. I don't think it's easy to reconcile now, from what
I'm told. So it's theoretically possible, but in practice,
difficult.
If there was enough consensus, but there were two or three
points upon which there was a difference that were pretty clear
cut and fairly simple, you could present accounts that
reconciled the two, you would have made a very big step
forward.
Mr. Bentsen. Thank you. Thank you, Mr. Chairman.
Mr. Shays. Thank you, Mr. Bentsen. Mr. Cox, did you have a
question?
Mr. Cox. Well, I apologize for having been down at the
signing ceremony on the floor, and so I have just now
confronted your written testimony and I'm not really prepared
to address to you any complicated questions. But I want to----
Mr. Volcker. I'm not prepared to answer too complicated a
question. So we're in the----
[Laughter.]
Mr. Cox. But I want to wish you Godspeed in your role as
Chairman and just emphasize what I know you take to be the
importance of what you're doing. Because rather rapidly, more
rapidly than most of us have been able to absorb, the world has
changed around us, and the things that we were all accustomed
to and the ways of doing business that we were accustomed to
simply won't serve for the future, and we've got to do
precisely what it is that you are focused upon. So I want to
thank you for it. And beyond that, if I feel compelled, I'll
have to send you a written question at some point.
Mr. Volcker. You know, I really appreciate your interest
and the other Members of the Committee, because I think it is
important. And I think the end result will be something, I'm
inclined to say different than GAAP. I don't know how different
it's going to be, but something that has international support
instead of pure American support, and I think that's important
in the world that you're talking about.
Mr. Cox. If I may, Mr. Chairman. Apart from standard-
setting, which is a difficult intellectual task, there is the
matter of examination and enforcement, because it's easy enough
for people to say or to claim that they are adhering to an
international standard or to a uniform standard. But our system
in the United States is superior not just because innately our
standards are the right ones, but perhaps even more so because
there is what we'd like to call transparency and there is a
rule of law. There are consequences for failing to do what you
said you did.
Mr. Volcker. Absolutely.
Mr. Cox. What, if anything, in your role as Chairman can
you do about that aspect, perhaps the larger aspect of the
problem?
Mr. Volcker. Our mandate is confined to the standards. But,
I think in reality, the uniform international standard will
create pressures for better enforcement. And, I think, there's
bound to be some interaction between the standard-setter and
the enforcers in practice, at least I hope that will be the
case.
But, we don't have any authority for enforcement. That's up
to the auditors themselves in the first instance and then the
national bodies to back that up or direct it. You're absolutely
right in, I think, emphasizing the importance of enforcement.
Mr. Cox. Thank you. Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Cox.
Mr. Israel, did you have a question?
Mr. Israel. Mr. Chairman, I was at a Science Committee
markup and then on the floor, so at the risk of asking a
question already asked, I will hold off except to thank the
Chairman for leading this Subcommittee into the important issue
of accounting.
Chairman Baker. Thank you very much, Mr. Israel.
Mr. Volcker, I think you have responded to all the
questions of the Committee this morning. We certainly
appreciate your continued leadership in this matter, and as you
feel we may be of further assistance in your task, we want to
offer the Committee's services in any way you deem appropriate.
Mr. Volcker. I might say that we are intending to have a
meeting of the trustees and the Board in Washington. I don't
remember the exact dates, but you will certainly get
invitations to some meetings so we can explore these issues
further to the extent that you care.
Chairman Baker. I certainly think that it would be a
welcome opportunity, and I think one appearance would probably
cure the Committee's interest in hearing from us again. Thank
you very much, Mr. Volcker.
[Laughter.]
Chairman Baker. At this time I'd like to invite our two
participants on our next panel to come forward. Thank you.
I'm pleased this morning to have two distinguished
participants in our hearing that will bring, I think, important
perspectives to the necessity for an international standard.
The first is Mr. Phil Ameen, Vice President and Comptroller of
General Electric Company and Chairman of the Committee on
Corporate Reporting of Financial Executives International,
known as FEI.
We also have with us this morning Mr. Robert Elliott, who
is the Immediate Past Chairman of the Board of Directors of the
American Institute of Certified Public Accountants, a partner
today in KPMG LLP in New York.
Gentlemen, I welcome both of you here this morning and we
will make both your statements part of our official record. And
welcome you here, Mr. Ameen, to begin the remarks, sir.
STATEMENT OF PHILIP AMEEN, VICE PRESIDENT AND COMPTROLLER,
GENERAL ELECTRIC COMPANY; CHAIRMAN, COMMITTEE ON CORPORATE
REPORTING OF FINANCIAL EXECUTIVES INTERNATIONAL, REPRESENTING
THE FINANCIAL EXECUTIVES INSTITUTE
Mr. Ameen. Thank you, Mr. Chairman. On behalf of FEI it is
indeed an honor and a privilege to be here today. My official
comments have been submitted to you in writing earlier, and I
shall confine my remarks this morning to a brief summary of
what I've already submitted, with your permission.
Three broad summary points. First of all, we believe that
international accounting standards are inevitable and a good
thing.
Second, I'd like to spend a moment thinking about the
extreme difficulty which has already been hinted at this
morning of developing accounting standards at all.
And, finally, spend a moment thinking about the status of
the United States and particularly U.S. reporting companies, in
a world of international standards.
First of all, the inevitability. Within the international
world in which we deal, currency flows, capital flows are rapid
and have no respect for borders. Thus, we already live in what
is very much a global environment, both in the investment world
and in the mergers and acquisitions world more pointedly.
Earlier this week, I was with one of our Italian
affiliates. We were talking about some U.S. application of
revenue recognition principles, and it was necessary for me to
describe pretty quickly which of the seven ledgers that they
are required to maintain I was interested in, that being, of
course, the one necessary for reporting in the United States.
The change necessary for international companies to adopt
international standards when they're issued will be dramatic,
but it is also an ordinary course of events for them.
We believe at FEI that the faster we move to a high
standard set of global accounting standards, the better the
world is going to be, and that we should not think of this
strictly from the standpoint of international companies being
required to adhere to these standards, but we should think as
quickly as possible about moving all reporting companies,
including U.S. registrants, to these standards so that everyone
trading in the U.S. markets will be talking the same language.
Second, on the issue of the difficulty of setting
accounting standards, I respect your ability to talk about this
issue with Chairman Volcker without getting into specifics.
Accounting standards are very much like theology. Those who
have a view, and it's just about everyone involved in them,
believe that their view is right to the exclusion of just about
every other view.
This creates an enormous amount of strain during the
debates surrounding accounting standards. Oftentimes, you will
see reports from preparers and reviews by analysts that dismiss
an entry or an accounting result as just the accounting. My
view is that we have to view that as a failure of the
standards, that the responsibility of standards is to
communicate the financial results, the financial position, in a
clear, unambiguous fashion, and not introduce bias.
Oftentimes, the accounting standards themselves can be
viewed as more or less just a deadweight tax levied on the
system, and the proceeds that that tax extracts are simply a
drain on the system.
Accounting standards are often set by the theologians who
have a view that their answer is the one that will solve the
problems in the accounting standards world. Many examples of
that. Mark-to-market, or as Chairman Volcker said, fair value
accounting, stock option accounting, the recent instability in
consolidation of affiliates. All of these rules have changed
dramatically. And our view would be that the faster we reach
stability in the accounting standards, the better off we are
from a reporting and from a usability of financial statements
standpoint.
Finally, I think it's necessary for us to think about the
diminished status of U.S. companies as international accounting
standards come into being. We simply have fewer votes at the
table in what has been the most complex application of
standards. If standards work in the U.S., they'll work just
about anywhere is a fair view from the U.S. standpoint. But, I
think, we have to understand and respect that that isn't
necessarily going to carry the day internationally and will not
necessarily influence these standards.
Finally, just a word about what we view as the reliability
of U.S. financial reporting. FEI recently published a study of
restatements from 1977 through the year 2000, and it's
interesting, I think, that the level of restatements indicating
the reliability of financial statements is under half a
percent, and on a market cap weighted basis, under a tenth of a
percent of registrants during the period. We don't know what we
don't know. We don't know those misstatements that haven't yet
been discovered. But all in, I think we would all conclude that
we have a very reliable and excellent set of reporting,
enforcement and auditing in the United States.
Thank you.
[The prepared statement of Philip Ameen can be found on
page 79 in the appendix.]
Chairman Baker. Thank you very much, Mr. Ameen.
Mr. Elliott, welcome, sir.
STATEMENT OF ROBERT ELLIOTT, PARTNER, KPMG PEAT MARWICK LLP;
REPRESENTING THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC
ACCOUNTANTS
Mr. Elliott. Thank you, Mr. Chairman and Members of the
Subcommittee for giving us the opportunity this morning to talk
about such an important issue as international accounting
standards and their effect on global capital flows.
I also have submitted my statement for the record, and I
will not repeat that. But, I want to emphasize a few high
points.
First, I want to start by saying that accounting is a
language. It's a language devised in order to describe business
enterprises. And accounting standards, in effect, represent the
vocabulary and the grammar of that language. Historically, each
country has developed its own language. And these languages
differ one from the other, and it's for good and proper reasons
in the past. It depends on what the objectives have been.
In some countries, the objective has been to facilitate
central control of the economy. In some countries, it's been to
facilitate the banking system financing companies. In some
countries, it has been to facilitate tax collection. In a few
countries, mainly the United States, the United Kingdom and
other advanced capital markets, it has been developed in order
to serve investors in public companies.
So, naturally, the language would have developed
differently along all of these lines. Now, we have these global
markets that everyone in attendance here is well aware of, and
the International Accounting Standards Committee has been in
place for quite a while to attempt to develop a common language
that could serve investors across this whole waterfront.
And, I would say, that over the period that they've been in
existence, they have done a fine job of developing accounting
standards. And international accounting standards are better
than the local accounting standards in most countries. And if
companies in those countries would use international standards,
investors would be better served.
But, international accounting standards are not better than
the accounting standards in every country; in particular, the
United States, the United Kingdom and Canada arguably have more
rigorous standards. And, therefore, to adopt at this time
international accounting standards would actually result in a
reduction of the quality of information available to United
States investors.
In time, as Chairman Volcker put it, we hope that
international accounting standards will rise to be the best in
the world. But in the meantime, it's important for U.S.
investors to have the benefit of the best standards in the
world.
But there's a more important issue, and that is that
accounting, like any language, can be either primitive and
rudimentary like the language that the Neanderthals would have
used, or it can be a rich, sophisticated, descriptive language
like modern English.
Today's accounting language in virtually all countries was
developed in order to describe industrial era enterprises,
companies like the B&O Railroad, like the Packard Motor Car
Company, like the National Cash Register Company, and like
Montgomery Ward. These accounting principles were not developed
to describe modern post-industrial companies, and they
therefore do not well describe them, companies like Amazon and
Cisco and Intel and Microsoft.
So it's very difficult to describe these companies given
our accounting standards, just as it would be very difficult
for a Neanderthal with his limited vocabulary to describe a
steam engine let alone a computer.
So it's not just uniformity of accounting that's important,
desirable as that is. We also have to be concerned about
modernizing accounting so that it is more descriptive of the
types of post-industrial enterprises that are leading the way
into the development of our economy for the 21st century.
There is an element here of suppression of innovation at
work. The regulators generally are very concerned with
preventing and suppressing fraud, which is certainly something
much to be desired. But it does leave the regulatory agencies,
generally speaking, in a position of suppressing innovation and
change in the way in which these things are done.
And one role that the SEC could do is to encourage
innovation and let the private marketplace develop a richer
language, a richer vocabulary to describe these post-industrial
enterprises.
So basically, my points are that while uniformity around
the world would be a good thing, it would not be a good thing
if it were at the expense of having American investors deprived
of the best possible information about the investments that
they're making, and it would not be necessarily a good thing if
it were at the expense of modernizing the accounting language
to better describe modern companies, and that our regulators,
including the SEC, have a role to play in encouraging the
modernization of accounting.
Mr. Chairman, that completes my informal remarks. And thank
you very much.
[The prepared statement of Robert Elliott can be found on
page 86 in the appendix.]
Chairman Baker. Thank you, gentlemen, both for your
appearance here, and your formal statements both were very
instructive and very helpful.
In coming at this, describing the accounting reporting
language in whatever style we wish--richer, boring--it would
seem that we have to be careful even within the English
language whether it's English brogue or Southern drawl or rap
music in Los Angeles, that there tends to be an inability to
communicate even on that platform.
More important than that, perhaps, is the intended use of
the reporting data. And I have concerns, perhaps not well
founded, that much of the reporting today is based on standards
developed over the past 50 years that tend to be more brick-
and-mortar traditionalist views of the market participation and
activity.
It would seem, for example, in the case of a concept stock,
where there are few assets at all other than perhaps a patent,
a new drug being developed, how does one look at that in the
old style of evaluation and come up with anything that's
relative to the real dollar value or any economic potential
since it is for the purpose of the investor that this
information is generated?
I would presume that management within a corporation will
use this data, but management generally feels they have more
insight into the activities and direction of the corporation
than the mere financials and metrics can indicate.
So if it is for the purpose of the investor to understand
the real risk and potential return or potential loss associated
with the investment, if that's the goal, should we while we
have this opportunity to reconfigure without a nationalistic
bias, I would add, isn't it time, given the changing nature of
the dynamic of the economic system, more appropriate to have
forward-looking analysis as to corporate strategies? Where do
you intend to invest?
Even social and environmental sensitivities. If you're
going to build a nuclear power plant and sell shares in that
activity and you're going to do it in a region which has some
political sensitivity to that, those disclosures might well
change the investor's view, even though management appears
competent, the plan seems sound, and they have a track record
of doing it well in another country.
Finally, my last observation is, I think, I understand the
cost for the international firm to go from IAS back to GAAP, to
come to the United States to get on the big board. What is the
cost, if there is such a thing as an average, for a domestic
corporation to go abroad and participate in European markets in
light of the IAS standard? The figure I had gotten for a large
corporate transfer from IAS to GAAP was $10 million. Is it that
expensive for us to do likewise? And, if that's the case,
doesn't that add some sense of urgency to simplification and
unification? And, I'm going to quit, because that's just sort
of a statement more than anything else. Either gentleman.
Mr. Ameen. If I could address the last point first. For the
most part when my company, General Electric, trades in European
exchanges, we do so based on U.S. financial statements without
translation to local financial statements. There are very few
exceptions to that.
Until recently, in order to trade on the Tokyo exchange,
one had to translate one's financial statements into Japanese
accounting principles and into Japanese in fact. But for the
most part, U.S. standards are accepted as the trading
vocabulary for European markets.
Mr. Elliott. Mr. Chairman, I agree with your comments about
the forward-looking information. Sometimes people think that
it's going to be very difficult to take these soft assets of
the types you were describing--a patent or knowhow or the
capacity to innovate--and put it into dollars and cents and put
it into the financial statements.
But that's not the only way to address the problem. There
could be supplemental disclosure about these matters that would
be very informative to investors without necessarily clouding
the financial statements with such soft types of numbers.
Several years ago, the AICPA had a committee known as the
Jenkins Committee. Mr. Jenkins is now the Chairman of the FASB.
They suggested a more forward-looking business reporting model
for American companies, and that's under consideration by the
FASB now, and I'm sure it will be by the new IASB.
But it talked about more in the way of leading indicators,
risks and opportunities for the company, and the types of
things that you were talking about. Those would be substantial
improvements in corporate reporting that would help investors.
But there is a counter to this, and that is that the more
that companies reveal to investors, the more they accidentally
reveal to their competitors, and there's a balance point. On
one hand, the more they reveal, the lower their cost of
capital, because the information risk to investors is lower.
But, on the other hand, there are competitive costs. And
companies must seek a balance in that, and that is really a
fundamental part of the job of any accounting standard-setter--
to make those balances in such a way that we have the maximum
economic benefit.
Chairman Baker. But one might also well argue that the more
you disclose, the lower your cost of capital, the less you
disclose, the higher the cost. And the tradeoff is competitive
pressures verse the cost of capital to expand your business
enterprises. Is that a fair statement?
Mr. Elliott. That is precisely correct.
Chairman Baker. Well, I think in the long haul, given the
nature of the economy being an information-based economy and
that change in values occurs so dramatically and quickly, I can
only imagine if one had a disclosure of Bill Gates's original
travel meter, which was his first product that he actually
sold, and you were an investor in the travel meter corporation,
what his valuations might have looked like as opposed to
Microsoft.
Mr. Ameen. Mr. Chairman, I'd just like to add an
observation to what's already been said. I think it's important
from a financial reporting standpoint to permit financial
statements to do what they do well. What has happened, in my
view, in the last--perhaps 20 years, as we've moved into a
technology age, is that the pipeline of data is vastly greater
than what's contained in financial statements.
The amount of data that comes from my company through the
investor relations community, through the press relations
community so far exceeds what's in financial statements that
that becomes the principal trading information. What one would
say about a company with no sales and a billion dollar market
cap within the financial statements quite escapes me. However,
there is a story to be told and there are unofficial,
unaudited, non-financial statement means of communicating that
story that seem to work reasonably well, and we should respect
that communication mechanism.
Chairman Baker. I am continually amazed that when a brick-
and-mortar corporation fails to meet a seven cents earning
expectation and only makes six, gets treated more harshly than
a dot.com who only loses a nickel instead of ten. You can't
explain that rationale to me, I don't think. Mr. Kanjorski?
Mr. Kanjorski. The receptiveness of international
standards, how culturally driven is that? It is my
understanding that there are many foreign companies that really
do not like to have transparency or disclosure, because they
consider their business their own business, and they may find
it difficult to adopt. Is this a cultural problem or a national
problem? Or is the world global market just overcoming this
with abandonment?
Mr. Elliott. As I had indicated, Congressman Kanjorski, a
lot depends on the history in a country and why things are the
way they are today. So, for example, many countries, including
those in Europe, do not have a tradition of allocating capital
through open capital markets, but rather through the banking
system and other ways.
The systems of accountability there are developed for other
purposes rather than informing investors. They might be to make
the most conservative type of statements to shareholders and
the banks, rather than to be transparent and so forth. And it's
difficult to overcome those because those are deeply seated
historical situations.
But as these companies get to the point where they need
public money and they need to come to the capital markets for
money, then they must step up to world class standards of
transparency and accountability. So, absolutely, there is a
cultural issue. And to a large extent, it comes at a national
level because of the national history of each of the accounting
systems.
Mr. Kanjorski. Is this going to be a process where the
large corporations and the international corporations first
adopt these principles, and then the intermediate-sized
companies, and then ultimately in the long term, the small
businesses will adopt the standard? Is that what is going to
occur, because the drive is to get into the public markets?
Mr. Elliott. That is a very likely scenario, yes. I mean,
to some degree, that's already happened, as one looks at the
large German companies that have come into the U.S. markets by
adopting U.S. standards and vastly increasing their
transparency. The effect on what's disclosed by Daimler Benz
when they became a U.S. registrant, the difference in their
reported earnings, German principles versus U.S. principles,
and the amount of transparency in that registration was quite
enlightening to those who were providing capital for that
company. And, I think, that's a trend that's got to continue.
Mr. Kanjorski. In my opening statement I asked Mr. Volcker
to give me some stick-and-carrot type considerations that the
United States Government or the American economy could lend to
this effort. Do you see any need for the United States
Government to act in order to help facilitate this transition,
or are we doing just what we should do in staying out of it?
Or, is there a need for something that we can provide to
encourage the transition?
Mr. Ameen. In an oversight capacity with responsibility for
the U.S. capital markets, I think oversight is the right
approach at this point. I think that Chairman Volcker is right.
The standard setters need to be left to operate independent of
political pressures lest we bring political pressures from the
rest of the world to bear, and that would not be the right
standard-setting environment, in my view.
Mr. Elliott. We should also point out that Chairman Levitt
of the SEC was instrumental in the design of this system, so
it's not that the United States has had little or no influence
on how it has been designed.
Mr. Kanjorski. Very good. Mr. Chairman, I yield back the
remainder of my time.
Chairman Baker. Thank you, Mr. Kanjorski.
Mr. Cox.
Mr. Cox. Thank you very much, Mr. Chairman.
Mr. Ameen, I want to ask you about one part of your written
testimony that is especially frightening, I think, if you
consider the implications of it. You have said that--I think
you've said very politely that the due process of international
standard-setting is more nuanced than its U.S. counterpart, by
which I infer you mean that we don't know exactly how it's
going to work.
There is, you go on, a very real risk that the economic
interests of the United States, and that's something about
which, if nothing else, the Congress must concern itself, will
get lost in the avalanche of feedback that the new
International Accounting Standards Board will face. So, in
addition to not knowing precisely how the due process is going
to work, one of the issues that the International Accounting
Standards Board is going to face is just an enormous volume of
information, and how they're going to process it and what
weight they're going to give to it is anybody's guess.
Lastly, you say in this passage that it's already clear
that the United States leads the way with the most innovative
transactions and structures that the world has ever seen, but
that the U.S. concerns will carry relatively modest weight with
members of the new IASB. And, if we missed the point, you have
said also it seems to me with remarkable diplomacy,
``inevitably, representatives from simpler environments will be
hard pressed to cast knowledgeable votes''.
Do you want to tell us why we shouldn't be scared to death
of what you're saying here?
Mr. Ameen. I expressed those as concerns, not as the
inevitable outcome. I think it will require particular energy
on the part of the IASB members to understand transactions and
economic environments with which they are not individually
familiar. These are all professionals. They have been dealing
in a professional environment their entire careers, and I am
hopeful that they will meet the test. But, I think it's
something that we need to watch very carefully. That contrasts,
I think, with standard-setting in the U.S. where the substance
of all feedback is coming from a very similar economic
environment.
Part of what, I think, we need to be cautious of is that
the complex transactions in the U.S. are presented fairly,
however the standards are ultimately developed.
It is in the best interest of the international community
to look at where the markets and the transactions in the U.S.
are because inevitably, they will follow, given some time lag.
Mr. Cox. I suppose that one of the inferences that one
might draw from the concerns that you've raised is that
inasmuch as the United States is the leading capital market in
the world, among other things, it has the most capital, and
inasmuch as we're talking about international economics and
international business, which is in the end competitive, that
U.S. leadership and U.S. modeling, which is then emulated by
the rest of the world, is another way to achieve similar
results, or at least another, if you're an academic, potential
way, another route to achieving the same end. Should we be
thinking about ways to capitalize, if you will, on the U.S.
native advantage here at the same time that we think about
international bureaucratic political structures to accomplish
the same result?
Mr. Ameen. I think so. I think that the structure that
Chairman Volcker has designed and his associates have designed
is meant to be responsive to input from a wide variety of
constituents and certainly constituents in the U.S. will have
the obligation to communicate clearly with the Board potential
perils of the path they're exposing and selecting.
And we will attempt to keep the calories behind that
effort, both as FEI and as individual registrants in the U.S.
That's our principal means of applying influence.
Congressman Cox, the----
Mr. Cox. Mr. Elliott, I wanted to invite your comments on
this. I simply started with Mr. Ameen because it was the
passage from his testimony that I was quoting. Thank you.
Mr. Ameen. Thank you. I just wanted to add that we could
hypothesize that the International Accounting Standards Board
goes in either of two directions, either they have the good
structure and the quality of the accounting standards that they
develop goes up, or we could also hypothesize that politics
results in a sort of least common denominator, and they go
down.
If they go up, then they will at some point be as good as,
and better than, U.S. standards, and everybody around the world
will be better off.
If they go down, our SEC is not going to permit companies
to file under those lower standards. They will still be
required to give United States investors the benefit of the
higher United States standards.
So, if they go down, we're protected, and if they go up,
we'll be better off. I, for one, believe that the structure
that's been put in place deserves a good chance to operate, and
I'm optimistic that it will result in improvements.
Mr. Cox. Implicit in your comment is that the Congress
should not cede any turf legislatively from the SEC to this or
other international standard-setting bodies so that as a
failsafe always, U.S. standards can be implemented from our own
vantage point.
Mr. Ameen. I think the status quo as it exists right now
provides the level of protection necessary. The SEC is doing
what it needs to do in the interest of American investors and
the Congress is overseeing the SEC, and I think it's working to
the advantage of our investors.
Mr. Cox. That's very helpful. Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Cox.
Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman. Let me say first off,
in following up on what the Chairman had talked about of how as
we move forward, how you'd value assets. I want to compliment
Mr. Ameen. I agree with you.
Much to my dismay, the older I get, the more old-fashioned
I find myself. And, I think that we ought to be cautious in not
trying to assign values to intangible assets that may or may
not have value and should be cautious about certain exuberance
that might exist in the current times.
I think I hear what both of you are saying, and
particularly, Mr. Elliott, that we should allow this to go
forward. But, let's be cautious that we might not come out with
the best structure. And I understand your concern or your
comment that even if the international standards were lesser
than what we would view as appropriate and what our current
laws and regulations provide for participation in American
capital markets, given the growing international structure of
the capital markets, there might appear to be some systemic
risk that could occur where you would have a race to the bottom
in other markets where larger companies, public companies would
be able to use lesser standards in other markets. And, I think,
we have to be concerned about that.
But I want to ask you, I'd ask Mr. Volcker this, and Mr.
Ameen, you may have a better viewpoint on this, coming from a
public company. Mr. Volcker was not particularly optimistic, I
think, that institutional investors would necessarily demand
the highest standards. That as the markets become more
intertwined and international that we couldn't necessarily rely
on market discipline to acquire the most appropriate or most
transparent standards. I would certainly hope that would be the
case. But I'd be curious of what your opinion is.
Mr. Ameen. It's an intriguing question.
The academic research that I'm familiar with has been
inconclusive at best. Where we stand now, I think, is an
interesting case study--that is, regardless of what your
domestic native economy's standards are, they may be used as a
basis for filing in the U.S. with reconciliation to U.S.
accounting principles.
Reconciliation, one can argue, is probably less than half
of a complete solution, because of the robust disclosures that
are required in U.S. financial statements. But at least it's a
start, and it calibrates something of the difference between
what you see in the financials and what they would have
presented had they been presented in the U.S. One would presume
that reconciled financial statements would carry with them,
because of the lack of transparency and the lack of total
comparability, some sort of risk premium.
I think if the markets could demonstrate clearly that the
higher standards carry a lower risk premium, then the rush to
U.S. or high-quality international standards would be
universal. Obviously, we haven't made that case with sufficient
compulsion that that's been the answer, and it's unclear to me
why.
Mr. Bentsen. I think you would excuse fraud. You're always
going to have some actors that are going to be fraudulent, and
those would be separate.
Mr. Ameen. I think one has to argue that errors in
financial reporting are more likely to occur in more complex
standards environments. It's an unfortunate result of the
complexity of the standards themselves.
We will see errors in application of derivatives accounting
just because the rules are so horrendously complicated.
Mr. Bentsen. You talk about Daimler-Benz and others, and
Mr. Elliott, you as well talked about the various forms of
allocation of capital.
But again, as we see the capital markets become more
international, at least in more industrialized countries, are
you seeing assimilation of the allocation of capital similar to
the United States model and away from the more bank-funded
model, or not?
Mr. Ameen. That certainly seems to be the case.
Mr. Bentsen. Do you think the standards might follow suit
as a result of that, or is there any empirical evidence of
that?
Mr. Ameen. I have not seen evidence that the standards are
necessarily following suit yet.
Mr. Elliott. The investors themselves, I think, are pretty
well aware of the risks that they're taking when they invest in
different economies and under different standards. And while
they might not, as Chairman Volcker suggested, demand to invest
only under United States or very high standards, nevertheless
when they invest in other places they demand a higher risk
premium, which results in a higher cost of capital for those
companies.
Why do overseas companies want to come to the United States
to raise capital? Well, one answer is there's more capital
here. But another answer is, the cost of capital is lower here.
But that's not an accident. It happens because of the high
standards of accounting and disclosure and enforcement in the
United States.
So you can say that there is a race to the top in that
sense, that companies anywhere in the world who want to tap our
capital markets have to step up to our standards. So while Mr.
Ameen, I think, is right that the academic evidence is not as
strong as we would like in order to be able to make policy
decisions, I think it's fairly clear that the more transparent
a company is, and is seen by its investors as being, the lower
the risk premium that they demand. And the more opaque they
are, the less they tell to investors, the higher the price of
capital that they pay.
Mr. Bentsen. Thank you, Mr. Chairman.
Chairman Baker. Mr. Bentsen, I wasn't suggesting that they
value dot coms based upon what they become. But my point in
making the statement was that there are significant intangibles
that often give someone a more clear understanding in
supporting your comment, the more transparency the better, up
to the point at which it becomes competitively disadvantageous.
That's my point.
Mr. Royce.
Mr. Royce. Yes.
Mr. Elliott, when you argue that it's a 50/50 proposition
whether the input of these new constituencies will frankly
increase the likelihood that the standards will be more useful,
beneficial worldwide, versus the proposition that it will be
the least common denominator that determines the outcome, I
would just reflect--Phil Ameen has made the point in his
written testimony. He used the word, inevitably.
He said, inevitably, representatives from simpler
environments--environments without the transactions that test
the limits of a proposed accounting standard--will be hard-
pressed to cast knowledgeable votes.
It seems to me that there was another course of action
here. Rather than attempt to democratize this process in a way
which those interests that already had lacked the impetus to
reform their own economies in a way to bring transparency, they
would be given a seat at the table. And it was reflected in the
testimony that I was not here for, but Chairman Volcker's
testimony, in which he alludes to the past and he said, the SEC
had considered U.S. GAAP to be the best in the world. In
effect, they had long taken the position other countries and
companies should conform if they wanted to access U.S. capital
markets.
In fact, it is seen that increasing numbers of global
corporations were accepting that verdict. They were conforming.
Then he went on to argue why we were going to change
course, why we were going to develop this concept of developing
international standards collectively. He puts it to the Asian
financial crisis, and that led him and others to a different
emphasis. They've made clear the importance of effective
auditing internationally.
See, I'm not sure that's true. I think what it has made
clear to us is that our own insistence on U.S. standards was
gaining ground. I think the Asian financial crisis is probably
a reflection of moral hazard, of what happened when you
basically have a situation where investors feel they're going
to be bailed out, and you have investment in a hot market.
And I think our rush to judgment here has led us to embrace
a strategy that perhaps is not the best. I think the SEC was
originally correct in their assumption. If we stuck to our guns
and recognized that ours was the most innovative system in
putting forward standards, that we would end up basically
having the world come along.
Now, Volcker went on to say the U.S. does not have all the
right answers. Well, I think we have more of the right answers
than anyone else in the game. Furthermore, developing de facto
global standards from Connecticut has seemed increasingly
unrealistic, both politically and economically in the age of
globalization. I just think he's come to the wrong conclusion.
But I'd ask for your consideration on that observation.
Mr. Elliott. I think it's a very interesting observation.
Before the new structure was put in place, and we were
working with the old volunteer basis in the International
Accounting Standards Committee, there was a competition going
on, and that competition was between international accounting
standards and U.S. accounting standards. In Germany, for
example, under the law it's permissible for public companies to
adopt either German GAAP or U.S. GAAP, and many German
companies were beginning to adopt U.S. GAAP, because it
resulted in their capital cost improvements.
But also, I would say parenthetically a lot of those
companies looked at Daimler-Benz, and they looked at the way
that that company's internal management processes were improved
once they had better accounting information at their disposal.
And these companies were thinking, maybe adopting U.S. GAAP
would not only give them the capital cost advantage, but would
also give them better internal management information to run
the company.
So, the direction seemed to be going that it was at least a
reasonable horse race that U.S. GAAP would win the day against
the old IASC. I think that with the restructuring of the old
IASB, which reflects Chairman Levitt's views of what would
constitute a high-quality system, and with getting full-time
members on there and with substantial funding and so forth, I
think the horse race needs to be handicapped in a different
way, and that while it's still possible that U.S. accounting
principles would dominate in the end, I think the smart money
would now go to the IASB as winning the game in the long run.
But it is not determined. You're absolutely right. There is
a marketplace at work here, and it will be determined by the
choices made by companies in different countries over the next
couple of years.
Mr. Royce. It was interesting, because if I were to graph
the capitalized value of our capital markets and then compare
it to the capitalized value of the European capital markets,
and then the Asian capital markets, and then Australian and
African capital markets--people are voting with their feet, in
a sense. I mean, the disparity is absolutely phenomenal.
Part of that is security with our laws relative to
transparency and reporting. But I was going to go lastly back
to Mr. Ameen. As you say in your written testimony, there is a
very real risk that the economic interests of the United States
will get lost in the avalanche of feedback that the new
International Accounting Standards Board will face.
Let me ask you, Phil, for your view of my tack on this, and
whether you think there is a possibility that, in the long run,
our standards would perhaps create enough leverage, if we stuck
to that position, that Asia and Europe would probably begin to
cede to those rules.
Chairman Baker. Mr. Royce, we'll have to make this your
wrap-up, too, as well.
Mr. Ameen. It's a very interesting question, and one that I
do not have a clear answer to.
We recite so often, as those who are influential in shaping
U.S. GAAP, that we are the best in the world, and the rest of
the world should follow along behind us. We forget that our
standards are far from perfect. There are many legitimate
criticisms that Europeans and Asians levy at our standards that
are levied internally within the U.S. at our standards.
What we have is an opportunity to work with the rest of the
world on a clean sheet of paper, and achieve in fact higher-
quality standards that will serve not only us, but the rest of
the world, exceptionally well. I think that's the opportunity
that we need to capitalize on and we need to take advantage of.
It would be almost impossible, I think, to achieve that
sort of end in the U.S. This is a very dynamic process.
Mr. Royce. I will wrap up. But if past experience had not
been that, on balance, we had been more innovative, we had been
more accurate, our costs of capital had not been so much lower,
then I would concur.
But I spent a lot of time in Asia and around the world. And
looking at the lack of transparency and the lack of emphasis
there from corporations or from governments in making the right
moves, that's why I lean toward the other.
Mr. Ameen. That's true. I think we have yet to see the
effect of the pool of Europe, all of that capital and all of
those resources which were separate countries heretofore. I
think that's an influence that's going to be very strong in the
near future.
Mr. Royce. Thank you. Thank you, Mr. Chairman.
Chairman Baker. Mr. Sherman.
Mr. Sherman. Thank you, Mr. Chairman.
Our capital markets and accounting system are indeed the
envy of the world. In large part, we got there by always
insisting that we make it better and asking the tough
questions, and inviting tough questions from the rest of the
world as to how we could make our accounting systems better.
And there is domestic criticism. It is said that we do an
outstanding job of reporting the irrelevant in a transparent
manner to investors. And I want to focus on something I've
studied over the years that has been ignored under generally
accepted accounting principles in this country, but is a large
portion of GAAP or its equivalent in Spanish, in Latin America
and other countries: that is, inflation adjustments to
accounting.
Now, inflation has been low enough in the United States,
except in the 1980s, so that you could claim that it was
ignorable. But even rates of 2 or 3 percent are relevant. And
then, unless you're marking everything to dollars, if you're
preparing accounting systems to be used in other currencies
they have much higher inflation rates.
I'd like our witnesses to comment on whether the very well-
established and detailed mechanisms for accounting for
inflation have been worked out as a matter of necessity in
countries that have often experienced 10, 20, 30 percent
inflation in a year--whether those should be part of our
domestic financial statements.
Mr. Elliott. There was a time when we had inflation
accounting on the books in the United States. And even with low
rates, as I'm sure you're aware, over time there could be a big
distortion in numbers. But those results were not highly
demanded by the investment community, and we did away with them
some years ago.
But when you get to the question of what are the valuable
assets of post-industrial companies, they are not, in general,
exceptions; the land that was bought 100 years ago, or the
factory that was built 50 years ago, or the machinery that was
bought 30 years ago and are most likely to be distorted by the
inflationary adjustment factor.
In fact, the important assets of companies today are things
like customer satisfaction, good relations with customers and
vendors, capacity for innovation, research and development, the
ability to leverage knowledge to create value. These are the
things that are missing from the financial statements.
So we could go back and adjust the trackbed of the railroad
to today's dollars, and we could spend an awful lot of
resources in doing that. But it might be less of an important
thing to focus on in getting better information to investors
than getting them more information about the knowledge assets,
the intangibles, the sort of post-industrial assets that drive
modern companies.
Mr. Sherman. If I could interrupt, I do think though that
the land and equipment is valuable, and especially on an
international basis. Yes, we'd like to think that our future is
all Silicon Valley. But certainly in many developing countries,
the most valuable company is the railroad or the real estate
holding company rather than, you know, the leading Paraguayan
software developer.
But, that does bring another issue. That is, I think the
last FASB that was published before I left full-time practice
of the profession was FASB 2. I'm not saying I disagreed with
it so much that I left, but if memory serves me correctly--and
I may have the number wrong--that was the one that said that
all research and development was written off.
Mr. Elliott. That was the number, right.
Mr. Sherman. That illustrates the problem that I see in
developing our accounting standards, and that is the tension
between reporting the relevant and reporting the verifiable,
given the fact that if you report the verifiable, then your
likelihood of being sued is considerably less, since you can go
out and do a competent job and verify the verifiable, and
defend any lawsuits.
We not only have the best capital markets. We have the
world's most robust tort law system. I'm not saying there's a
correlation.
So what I would ask is, should we revisit the idea of
writing off all research and development as an expense, and
producing financial statements that are identical for two
companies, one of which does a successful R&D program and one
of which does an unsuccessful R&D program?
Mr. Elliott. I think you may not have been here when
Chairman Volcker indicated that he felt that the new IASB was
going to have to address the question of intangibles. And so I
don't regard the write-off of research and development as a
settled issue for all time for the whole world, as I infer you
feel about this.
I don't believe that that was the right choice. But that
was a choice that was made in the middle 1970s. Things are very
different today, and they might not make that choice today.
Mr. Sherman. I'm sure that it was the right choice, so long
as I was with an accounting firm that could have been sued for
failing to correctly assess the very difficult-to-assess value
or success of a research program. Now that I no longer have a
stake in whether the unverifiable is part of what has to be
verified, and now that I'm an investor and a consumer of these
statements rather than a producer of them, I may have changed
my mind.
Mr. Elliott. You put your finger on a very important issue,
which is the disincentive to disclosing soft information and
forward-looking information because of the litigation risk.
Mr. Ameen. Just to use my company as an example, we don't
do inflation-adjusted statements. Our historical equity is
about $50 billion. If we were to capitalize R&D and amortize it
over, say, a 10-year period and adjust everything for
inflation, that might get as high as $70- to $75-billion.
Our market cap is about half-a-trillion dollars. So there's
a big gap between what we can reasonably achieve through
manipulating the old historical numbers and what the market
perceives our value to be. I hope the market is right.
Mr. Sherman. I would point out the market is going to be
based on your income statement, not your balance sheet. And I
would point out the things I'm talking about would affect not
only your balance sheet, which as you point out seems to be
irrelevant to your stock price, but would also affect your
earnings per share, which probably is relevant.
Thank you, Mr. Chairman.
Chairman Baker. Mr. Shays.
Mr. Shays. Thank you, Mr. Chairman.
Mr. Sherman, almost every hearing has someone from the
Fourth Congressional District or near it, and it just tells me
how important issues that come before this subcommittee are to
our district. I'm delighted that FASB is part of the Fourth
Congressional District, and extraordinarily proud that GE is.
I'm delighted to have both of our witnesses here today,
both FASB and GE, which I consider to be one of the greatest,
if not the greatest, company in the country and world is in our
district. Proud to have you.
I love the tension between what I see between the two of
you and FASB. I get the sense, Mr. Ameen, that you are
supportive of ISB, but a little more skeptical than you are,
Mr. Elliott.
I would love to have both of you mention the concept of
quality. You were, Mr. Elliott, describing the fact that it's
great that we have compatibility and so on, but the quality of
that matters a great deal. I'd like you to define quality, if
both of you would, to me.
Mr. Elliott. You raise, obviously, a very difficult and
esoteric question, Congressman Shays, as to how you would
define quality of accounting statements and accounting
standards.
I would define it in terms of the ability that it has to
permit investors to assess the potential returns on their
investments, and that the higher the correlation between what
the company discloses and their ability to make those
predictions, the higher the quality.
Specifically, that gets around two questions. One is the
range of information that's disclosed, and how relevant it is.
Congressman Sherman was talking about the tradeoffs between
reliability or auditability and relevance. But part of the
quality is to focus on relevance to investors, and part of it,
of course, is to focus on the reliability of the information--
that is, is it honest? Is it a fair statement of what it
purports to be?
So both reliability and relevance are components. But
another component you would have to bring up is timeliness.
Excellent information delivered 6 months late would not be high
quality, so you really have to balance relevance, reliability
and timeliness to get to the most high-quality information.
Mr. Shays. But you view that, obviously, as of greater
importance than just uniformity.
Mr. Elliott. Uniformity is important, but not at the
expense of quality. That's my position, yes.
Mr. Ameen. Mr. Shays, just to put another dimension on the
quality question: the measure of quality that we use in my
company and a number of companies throughout the U.S. is a 6-
sigma measure, which is a measure which quantifies the amount
of defects permitted by a particular system. 6-sigma is almost
unachievably precise.
One of the dimensions of accounting standards that has
become apparent to us in the last couple of years, and that is
increasingly of concern, is that it is clear that the higher
the complexity of an accounting standard, the less capable
systems are of applying that standard precisely. I mentioned
earlier the derivatives standard. I think there are other
examples of extraordinarily complex rule sets that we very much
would like to apply as they were intended. But the number of
decisions necessitated by those rule sets means that errors
will occur. I think that's very unfortunate.
Mr. Shays. Do companies like yours, and do you in
particular, tend to view FASB as almost being academicians? In
other words, a sense that you're out in the real world fighting
the battle, and they're out sitting on the sideline, kind of
seeing the world as they'd like it to be?
Mr. Ameen. I'm not sure academic is the characterization. I
think there is a certain insensitivity to costs of application
of complex standards. It's an interesting issue. It's an
interesting tension, yes.
Mr. Shays. When you say the so-called flight to quality can
ruin economies and companies, and lay waste to the best global
strategies, Mr. Elliott, I felt you had a very eloquent
statement; and, Mr. Ameen, you had a very provocative
statement. That's provocative to me. I don't understand it.
Mr. Ameen. The flight to quality----
Mr. Shays. Can ruin economies and companies; not cause them
problems, but ruin them. And the concept of going to quality
ruining something is an interesting concept.
Mr. Ameen. Capital flight would have that kind of
consequence. And I think that's the sort of thing that you need
to be very concerned about, absolutely.
Mr. Shays. Thank you, Mr. Chairman.
Chairman Baker. Thank you, Mr. Shays.
Gentlemen, I want to express our appreciation to both of
you for your responsiveness and your time today. It's been a
great help to the subcommittee.
I think everyone here is torn between wanting to have
international markets where capital flows freely, and not
creating regulatory circumstances which lead to 6-sigma events.
Given those two contrasting perspectives, we have a difficult
role--and also being advised by Chairman Volcker not to
politicize these activities, but members do have strongly held
opinions about what is in the investors' best interest.
We will--next week, for example--have a hearing on how
analysts are making their recommendations to investors in the
market, which directly relates to the question of the quality
of reporting that they get access to. These are indeed complex
issues, but have extraordinary impact potentially on the
formation of capital and the growth of business, not only here,
but internationally.
We thank you for your comments, and I'm certain there will
be Members who wish to follow up with written questions at a
later time. We will certainly make your written statements part
of the official record. We thank you for your participation.
I am also in receipt of a statement from the Association of
Investment Management and Research with regard to the SEC
concept release on international accounting standards. Without
objection, I would make that a part of the official record here
today.
[The information can be found on page 43 in the appendix.]
Chairman Baker. Unless there's further comment from anyone
else, our hearing stands adjourned. Thank you very much.
[Whereupon, at 12:15 p.m., the hearing was adjourned.]
A P P E N D I X
June 7, 2001
[GRAPHIC] [TIFF OMITTED] T3219.001
[GRAPHIC] [TIFF OMITTED] T3219.002
[GRAPHIC] [TIFF OMITTED] T3219.003
[GRAPHIC] [TIFF OMITTED] T3219.004
[GRAPHIC] [TIFF OMITTED] T3219.005
[GRAPHIC] [TIFF OMITTED] T3219.006
[GRAPHIC] [TIFF OMITTED] T3219.007
[GRAPHIC] [TIFF OMITTED] T3219.008
[GRAPHIC] [TIFF OMITTED] T3219.009
[GRAPHIC] [TIFF OMITTED] T3219.010
[GRAPHIC] [TIFF OMITTED] T3219.011
[GRAPHIC] [TIFF OMITTED] T3219.012
[GRAPHIC] [TIFF OMITTED] T3219.013
[GRAPHIC] [TIFF OMITTED] T3219.014
[GRAPHIC] [TIFF OMITTED] T3219.015
[GRAPHIC] [TIFF OMITTED] T3219.016
[GRAPHIC] [TIFF OMITTED] T3219.017
[GRAPHIC] [TIFF OMITTED] T3219.018
[GRAPHIC] [TIFF OMITTED] T3219.019
[GRAPHIC] [TIFF OMITTED] T3219.020
[GRAPHIC] [TIFF OMITTED] T3219.021
[GRAPHIC] [TIFF OMITTED] T3219.022
[GRAPHIC] [TIFF OMITTED] T3219.023
[GRAPHIC] [TIFF OMITTED] T3219.024
[GRAPHIC] [TIFF OMITTED] T3219.025
[GRAPHIC] [TIFF OMITTED] T3219.026
[GRAPHIC] [TIFF OMITTED] T3219.027
[GRAPHIC] [TIFF OMITTED] T3219.028
[GRAPHIC] [TIFF OMITTED] T3219.029
[GRAPHIC] [TIFF OMITTED] T3219.030
[GRAPHIC] [TIFF OMITTED] T3219.031
[GRAPHIC] [TIFF OMITTED] T3219.032
[GRAPHIC] [TIFF OMITTED] T3219.033
[GRAPHIC] [TIFF OMITTED] T3219.034
[GRAPHIC] [TIFF OMITTED] T3219.035
[GRAPHIC] [TIFF OMITTED] T3219.036
[GRAPHIC] [TIFF OMITTED] T3219.037
[GRAPHIC] [TIFF OMITTED] T3219.038
[GRAPHIC] [TIFF OMITTED] T3219.039
[GRAPHIC] [TIFF OMITTED] T3219.040
[GRAPHIC] [TIFF OMITTED] T3219.041
[GRAPHIC] [TIFF OMITTED] T3219.042
[GRAPHIC] [TIFF OMITTED] T3219.043
[GRAPHIC] [TIFF OMITTED] T3219.044
[GRAPHIC] [TIFF OMITTED] T3219.045
[GRAPHIC] [TIFF OMITTED] T3219.046
[GRAPHIC] [TIFF OMITTED] T3219.047
[GRAPHIC] [TIFF OMITTED] T3219.048
[GRAPHIC] [TIFF OMITTED] T3219.049
[GRAPHIC] [TIFF OMITTED] T3219.050
[GRAPHIC] [TIFF OMITTED] T3219.051
[GRAPHIC] [TIFF OMITTED] T3219.052
[GRAPHIC] [TIFF OMITTED] T3219.053
[GRAPHIC] [TIFF OMITTED] T3219.054
[GRAPHIC] [TIFF OMITTED] T3219.055
[GRAPHIC] [TIFF OMITTED] T3219.056
[GRAPHIC] [TIFF OMITTED] T3219.057
[GRAPHIC] [TIFF OMITTED] T3219.058
[GRAPHIC] [TIFF OMITTED] T3219.059
[GRAPHIC] [TIFF OMITTED] T3219.060
[GRAPHIC] [TIFF OMITTED] T3219.061
[GRAPHIC] [TIFF OMITTED] T3219.062
[GRAPHIC] [TIFF OMITTED] T3219.063
[GRAPHIC] [TIFF OMITTED] T3219.064
[GRAPHIC] [TIFF OMITTED] T3219.065
[GRAPHIC] [TIFF OMITTED] T3219.066
[GRAPHIC] [TIFF OMITTED] T3219.067
[GRAPHIC] [TIFF OMITTED] T3219.068
[GRAPHIC] [TIFF OMITTED] T3219.069
[GRAPHIC] [TIFF OMITTED] T3219.070
[GRAPHIC] [TIFF OMITTED] T3219.071
[GRAPHIC] [TIFF OMITTED] T3219.072
[GRAPHIC] [TIFF OMITTED] T3219.073
[GRAPHIC] [TIFF OMITTED] T3219.074
[GRAPHIC] [TIFF OMITTED] T3219.075
[GRAPHIC] [TIFF OMITTED] T3219.076
[GRAPHIC] [TIFF OMITTED] T3219.077
[GRAPHIC] [TIFF OMITTED] T3219.078
[GRAPHIC] [TIFF OMITTED] T3219.079
[GRAPHIC] [TIFF OMITTED] T3219.080
[GRAPHIC] [TIFF OMITTED] T3219.081
[GRAPHIC] [TIFF OMITTED] T3219.082
[GRAPHIC] [TIFF OMITTED] T3219.083
[GRAPHIC] [TIFF OMITTED] T3219.084
[GRAPHIC] [TIFF OMITTED] T3219.085
[GRAPHIC] [TIFF OMITTED] T3219.086
[GRAPHIC] [TIFF OMITTED] T3219.087