[House Report 109-565]
[From the U.S. Government Publishing Office]





109th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     109-565

======================================================================



 
       PROMOTING TRANSPARENCY IN FINANCIAL REPORTING ACT OF 2006

                                _______
                                

 July 17, 2006.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

  Mr. Oxley, from the Committee on Financial Services, submitted the 
                               following

                              R E P O R T

                        [To accompany H.R. 5024]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Financial Services, to whom was referred the 
bill (H.R. 5024) to require annual oral testimony before the 
Financial Services Committee of the Chairperson or a designee 
of the Chairperson of the Securities and Exchange Commission, 
the Financial Accounting Standards Board, and the Public 
Company Accounting Oversight Board, relating to their efforts 
to promote transparency in financial reporting, having 
considered the same, report favorably thereon with an amendment 
and recommend that the bill as amended do pass.

                                CONTENTS

                                                                   Page
Amendment........................................................     2
Purpose and Summary..............................................     2
Background and Need for Legislation..............................     2
Hearings.........................................................     4
Committee Consideration..........................................     5
Committee Votes..................................................     5
Committee Oversight Findings.....................................     5
Performance Goals and Objectives.................................     5
New Budget Authority, Entitlement Authority, and Tax Expenditures     6
Committee Cost Estimate..........................................     6
Congressional Budget Office Estimate.............................     6
Federal Mandates Statement.......................................     7
Advisory Committee Statement.....................................     7
Constitutional Authority Statement...............................     7
Applicability to Legislative Branch..............................     7
Section-by-Section Analysis of the Legislation...................     7

                               AMENDMENT

  The amendment is as follows:
  In paragraph (2) of section 2, strike ``to the quality and 
transparency of financial reporting''.

                          PURPOSE AND SUMMARY

    H.R. 5024, the Promoting Transparency in Financial 
Reporting Act of 2006, requires the Securities and Exchange 
Commission, the Financial Accounting Standards Board, and the 
Public Company Accounting Oversight Board to provide oral 
testimony by their respective Chairpersons (or designees), 
beginning in 2007, and annually for five years, to the 
Committee on Financial Services on their efforts to increase 
transparency in financial reporting and provide more accurate 
and clear financial information to investors. The testimony 
will include a report on their efforts to reassess complex and 
outdated accounting standards; improve the understandability, 
consistency, and overall usability of the existing accounting 
and auditing literature; develop principles-based accounting 
standards; encourage the use and acceptance of interactive 
data; and promote ``plain English'' disclosures.
    H.R. 5024 was introduced to prompt our regulators and 
standard-setters to pursue their initiatives to drive greater 
transparency and reduce complexity in financial reporting. 
These efforts are integral to the continued growth and strength 
of our capital markets. This legislation intends to fortify 
investor confidence by increasing Congressional awareness of 
the matter. Further, H.R. 5024 stimulates additional levels of 
investor protection by ensuring financial information is 
delivered in a more widely usable and practical form.

                  BACKGROUND AND NEED FOR LEGISLATION

    Since the passage of the Securities Exchange Act of 1934, 
public companies have been required to file financial reports 
with the Securities and Exchange Commission (SEC). The goal of 
these reporting requirements is to ensure that the public 
understands companies' financial condition. Although the 
concept of periodic financial reporting has remained relatively 
unchanged since the 1930s, the standards and rules governing 
the dissemination and presentation of financial information--
securities regulations, accounting standards, and auditing 
standards--have become increasingly complicated. This 
complexity, in turn, has reduced the usefulness to investors of 
financial reports.
    Public companies file with the SEC four financial 
statements--the income statement, the cash flow statement, the 
balance sheet, and the statement of changes in equity. Public 
companies report their financial statements according to 
generally accepted accounting principles (GAAP) promulgated 
since 1973 by the Financial Accounting Standards Board (FASB), 
an independent standard setter.
    As the financial statements alone do not provide sufficient 
information for a complete financial portrait, the FASB 
requires companies to provide supplementary information in 
notes to these statements. In addition, the SEC requires that 
public companies discuss their financial condition in detail in 
a section of their annual and quarterly reports labeled, 
``Management's Discussion and Analysis of Financial Position 
and Results of Operation,'' or ``MD&A.'' The SEC also issues 
accounting bulletins, concept releases, and regulations 
establishing and clarifying financial reporting requirements.
    In addition to these reporting requirements, auditing 
standards known as generally accepted auditing standards (GAAS) 
govern the performance of auditors as they examine public 
companies' financial statements. Today, the Public Company 
Accounting Oversight Board (PCAOB), created under the Sarbanes-
Oxley Act of 2002 to register and inspect public company 
auditors, promulgates these standards.
    The corporate scandals at the beginning of this century 
revealed weaknesses in many aspects of our financial reporting 
system. While many companies were clearly violating financial 
reporting requirements, for other companies, the complexity of 
these requirements was, in reality, undermining compliance and 
led to a number of financial restatements. Additionally, the 
complexity of financial reporting requirements has made it 
difficult to detect purposeful violations of the standards. 
Congress, regulators, and the industry assessed these financial 
reporting failures and reacted with efforts aimed at 
strengthening the financial reporting system.
    The accounting scandals revealed the weakness of a rules-
based accounting system: Companies structured transactions to 
circumvent ``bright-line'' accounting rules and succeeded in 
avoiding any accounting objectives inherent in those rules. 
Congress, noting the problem of a rules-based system, directed 
the SEC to study the adoption of a principles-based accounting 
system. In July 2003, the SEC released this report recommending 
that the U.S. accounting system gravitate towards developing 
accounting standards on a principles-based or ``objectives-
oriented'' basis--where the objective of each standard would be 
clearly stated. This report followed the FASB's October 2002 
proposal, ``Principles-Based Approach to U.S. Standards 
Setting,'' documenting how a principles-based approach might 
improve the quality and transparency of financial reporting. In 
July 2005, in its Sarbanes-Oxley Act-mandated report on off-
balance sheet transactions, the SEC reaffirmed its support for 
the adoption of an objectives-oriented financial reporting 
system. In addition, the PCAOB adopted GAAS as its interim 
standards and is in the process of revising those auditing 
standards to meet a principles-based auditing approach.
    The SEC and the FASB have recently reaffirmed their 
commitment to reducing complexity in financial reporting. FASB 
Chairman Robert H. Herz stated in a December 2005 speech, ``We 
at the FASB strongly support the goal of reducing the 
complexity of and increasing the quality and transparency of 
financial reporting. We have taken a number of steps to try to 
do our part to begin addressing these matters.'' The FASB 
intends to revise complex and outdated accounting standards; 
provide a more solid foundation for principles-based 
accounting; improve the consistency and usability of the 
existing accounting pronouncements, including codifying all 
GAAP by subject matter for ease of use, consolidating all 
accounting standards-setting, and developing principles-based 
standards; and continue to cooperate with the International 
Accounting Standards Board on the convergence of international 
and U.S. accounting standards. SEC Chairman Christopher Cox has 
described the SEC's efforts as including moving from long, 
hard-to-read disclosure documents to easy-to-navigate web pages 
that let investors more simply find what they want; moving from 
boilerplate legal vernacular to ``plain English'' in every 
document intended for retail consumption; and reducing the 
complexity of accounting rules and regulations.
    In addition, the SEC is encouraging the use of interactive 
data through eXtensible Business Reporting Language (XBRL), a 
computer code which tags data in the financial statements. 
Investors are able to quickly download this financial data into 
spreadsheets for analysis rather than spend time manually 
entering the data into a software application. In March 2006, 
the SEC announced a series of roundtables on the use of 
interactive data and since 2005 has supported through a 
voluntary pilot program the filing of tagged financial reports. 
The SEC believes that the use of XBRL will lead to better 
quality, lower cost, and more accessible financial reporting. 
SEC Chairman Cox stated in a December 2005 speech, ``I 
completely agree that XBRL will do for business reporting what 
bar coding did for product distribution. But I believe its 
possibilities extend much farther than that.'' Some supporters 
believe that the use of XBRL may eventually lead to real-time 
financial disclosure.
    In order to further explore ways to reduce financial 
reporting complexities, the Subcommittee on Capital Markets, 
Insurance, and Government Sponsored Enterprises held a hearing 
on March 29, 2006, entitled ``Fostering Accuracy and 
Transparency in Financial Reporting''. The SEC, the FASB, the 
PCAOB, and financial services industry representatives 
testified on the importance of a concerted effort to reduce 
complexity in financial reporting. The SEC's Acting Chief 
Accountant, Scott A. Taub, testified, ``Transparent financial 
reporting is essential to informed investment decisions by 
investors and lending decisions by creditors, and to other 
users of financial statements.'' Marc E. Lackritz, President of 
the Securities Industry Association, testified, ``The 
complexity and sheer volume of current accounting literature 
has become overwhelming even to the most sophisticated 
professional...Standard setters, regulators, and the private 
sector have all recognized the benefits that would result from 
a more `principles-based' approach to accounting.'' President 
and CEO of the American Institute of Certified Public 
Accountants, Barry Melancon, testified on the merits of XBRL. 
He stated, ``[XBRL] provides major benefits in the preparation, 
analysis, and communication of business information. It offers 
cost savings, greater efficiency, and improved accuracy and 
reliability to all those involved in supplying or using data.''
    Recognizing the difficulties posed by the increasing detail 
and volume of accounting, auditing, and reporting guidance, as 
well as the Committee on Financial Services' duty to maintain 
oversight of the efforts to ameliorate these issues, 
Congressman Geoff Davis (R-KY), along with original co-sponsors 
Congressmen Scott (D-GA) and Israel (D-NY), introduced H.R. 
5024, the Promoting Transparency in Financial Reporting Act of 
2006.

                                HEARINGS

    On March 29, 2006, the Committee on Financial Services' 
Subcommittee on Capital Markets, Insurance, and Government 
Sponsored Enterprises held a hearing entitled ``Fostering 
Accuracy and Transparency in Financial Reporting.'' The 
following witnesses testified: The Honorable Willis Gradison, 
Acting Chairman, Public Company Accounting Oversight Board; The 
Honorable Robert H. Herz, Chairman, Financial Accounting 
Standards Board; Mr. Scott Taub, Acting Chief Accountant, 
Securities and Exchange Commission; Mr. David Hirschmann, 
Senior Vice President, U.S. Chamber of Commerce; Mr. Marc E. 
Lackritz, President, Securities Industry Association; Ms. 
Colleen Cunningham, President, Financial Executives 
International; Mr. Barry Melancon, President, The American 
Institute of Certified Public Accountants; and Ms. Rebecca 
McEnally, Director of Capital Markets Policy, Centre for 
Financial Markets Integrity, CFA Institute.

                        COMMITTEE CONSIDERATION

    The Committee on Financial Services met in open session on 
June 14, 2006, and ordered H.R. 5024, the Promoting 
Transparency in Financial Reporting Act of 2006, as amended, 
favorably reported to the House by a voice vote.

                            COMMITTEE VOTES

    Clause 3(b) of rule XIII of the Rules of the House of 
Representatives requires the Committee to list the record votes 
on the motion to report legislation and amendments thereto. No 
record votes were taken in conjunction with the consideration 
of this legislation. A motion by Mr. Oxley to report the bill, 
as amended, to the House with a favorable recommendation was 
agreed to by a voice vote.
    The following amendment was considered:
    An amendment offered by Mr. Sherman, No. 1, striking 
certain lines in the findings, was AGREED TO, as modified, by a 
voice vote.

                      COMMITTEE OVERSIGHT FINDINGS

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee held a hearing and made 
findings that are reflected in this report.

                    PERFORMANCE GOALS AND OBJECTIVES

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee establishes the 
following performance related goals and objectives for this 
legislation:
          H.R. 5024, the Promoting Transparency in Financial 
        Reporting Act of 2006, requires the Securities and 
        Exchange Commission, the Financial Accounting Standards 
        Board, and the Public Company Accounting Oversight 
        Board to provide oral testimony beginning in 2007, and 
        annually for five years, to the Committee on Financial 
        Services on their efforts to increase transparency in 
        financial reporting and provide more accurate and clear 
        financial information to investors. This bill will 
        prompt regulators and standard-setters to fulfill their 
        initiatives to drive greater transparency and reduce 
        complexity in financial reporting. These efforts are 
        integral to the goal of continued growth and strength 
        of our capital markets, will fortify investor 
        confidence by increasing Congressional awareness of the 
        matter, and will stimulate additional levels of 
        investor protection by ensuring financial information 
        is delivered in a more widely usable and practical 
        form.

   NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX EXPENDITURES

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee adopts as its 
own the estimate of new budget authority, entitlement 
authority, or tax expenditures or revenues contained in the 
cost estimate prepared by the Director of the Congressional 
Budget Office pursuant to section 402 of the Congressional 
Budget Act.

                        COMMITTEE COST ESTIMATE

    The Committee adopts as its own the cost estimate prepared 
by the Director of the Congressional Budget Office pursuant to 
section 402 of the Congressional Budget Act of 1974.

                  CONGRESSIONAL BUDGET OFFICE ESTIMATE

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, the following is the cost estimate 
provided by the Congressional Budget Office pursuant to section 
402 of the Congressional Budget Act of 1974:

                                                     July 14, 2006.
Hon. Michael G. Oxley,
Chairman, Committee on Financial Services,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 5024, the 
Promoting Transparency in Financial Reporting Act of 2006.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Gregory 
Waring.
            Sincerely,
                                          Donald B. Marron,
                                                   Acting Director.
    Enclosure.

H.R. 5024--Promoting Transparency in Financial Reporting Act of 2006

    H.R. 5024 would require the chairpersons of the Securities 
and Exchange Commission, the Financial Accounting Standards 
Board, and the Public Company Accounting Oversight Board, or 
their designees, to testify before the Committee on Financial 
Services of the House of Representatives on their respective 
efforts to reduce the complexity of and increase the 
transparency of public companies' financial reporting 
documents. The bill would require annual oral testimony in 2007 
and in each of the following five years. CBO estimates that 
implementing the bill would have no significant impact on the 
federal budget and would not affect direct spending or 
revenues.
    H.R. 5024 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would not affect the budgets of state, local, or tribal 
governments.
    The CBO staff contact for this estimate is Gregory Waring. 
This estimate was approved by Robert A. Sunshine, Assistant 
Director for Budget Analysis.

                       FEDERAL MANDATES STATEMENT

    The Committee adopts as its own the estimate of Federal 
mandates prepared by the Director of the Congressional Budget 
Office pursuant to section 423 of the Unfunded Mandates Reform 
Act.

                      ADVISORY COMMITTEE STATEMENT

    No advisory committees within the meaning of section 5(b) 
of the Federal Advisory Committee Act were created by this 
legislation.

                   CONSTITUTIONAL AUTHORITY STATEMENT

    Pursuant to clause 3(d)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee finds that the 
Constitutional Authority of Congress to enact this legislation 
is provided by Article 1, section 8, clause 1 (relating to the 
general welfare of the United States) and clause 3 (relating to 
the power to regulate interstate commerce).

                  APPLICABILITY TO LEGISLATIVE BRANCH

    The Committee finds that the legislation does not relate to 
the terms and conditions of employment or access to public 
services or accommodations within the meaning of section 
102(b)(3) of the Congressional Accountability Act.

             SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title

    This section provides the short title for the bill, the 
``Promoting Transparency in Financial Reporting Act of 2006.''

Section 2. Findings

    This section sets forth certain Congressional findings 
describing the importance to the capital markets of clear and 
transparent financial reporting. This section further finds 
that the growing complexity of accounting, auditing, and 
reporting guidance poses a major challenge, thereby raising 
reporting costs.

Section 3. Annual testimony on reducing complexity in financial 
        reporting

    This section requires the Securities and Exchange 
Commission, the Financial Accounting Standards Board, and the 
Public Company Accounting Oversight Board to orally testify 
before the House Financial Services Committee annually for a 
period of five years beginning in 2007 regarding their efforts 
to reduce complexity in financial reporting in order to provide 
more accurate information to investors. These efforts should 
include: reassessing complex and outdated accounting standards; 
improving the clarity and usability of existing accounting and 
auditing literature; implementing principles-based accounting 
standards in lieu of rules-based standards; encouraging the use 
of interactive data; and promoting disclosures in plain 
English.

                                  
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