Highlights of GAO's Corporate Governance, Transparency and	 
Accountability Forum (05-MAR-02, GAO-02-494SP). 		 
								 
The recent sudden and largely unexpected bankruptcy of the Enron 
Corporation, and financial difficulties experienced by several	 
other large corporations have resulted in substantial losses to  
employees and shareholders. Many believe that the decline of	 
Enron and other instances of financial statement earnings	 
restatements and bankruptcies have resulted in a general decline 
in investor confidence in the nation's financial markets and	 
external auditors. This report discusses GAO's forum on corporate
governance, transparency, and accountability in an attempt to	 
reduce the possibility of future Enron-like situations occurring.
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-494SP					        
    ACCNO:   A02854						        
  TITLE:     Highlights of GAO's Corporate Governance, Transparency   
and Accountability Forum					 
     DATE:   03/05/2002 
  SUBJECT:   Employee benefit plans				 
	     Employee retirement plans				 
	     Financial analysis 				 
	     Financial management				 
	     Reporting requirements				 
	     Accounting procedures				 
	     Accounting standards				 
	     Auditing procedures				 
	     Auditing standards 				 
	     Intergovernmental relations			 

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GAO-02-494SP
     
                  United States General Accounting Office

GAO By the Comptroller General of the
United States

March 2002

HIGHLIGHTS OF GAO'S CORPORATE GOVERNANCE, TRANSPARENCY AND ACCOUNTABILITY
FORUM

                                      a

GAO-02-494SP

United States General Accounting Office Washington, DC 20548

March 5, 2002

Subject: Highlights of GAO's Corporate Governance, Transparency, and

The recent sudden and largely unexpected bankruptcy of one of the nation's
major corporations, Enron Corporation, and the financial difficulties being
experienced by several other large corporations have resulted in substantial
losses to employees and shareholders. Many believe that the decline of Enron
and other instances of financial statement earnings restatements and
bankruptcies have resulted in a general decline in investor confidence in
our financial markets and in certain key parties under our current system,
such as external auditors. These events have also raised a range of
questions regarding how such dramatic and unexpected dealings can happen
under our current system and the role of various key players under that
system. As a result, a number of congressional committees and executive
branch agencies have initiated Enron related investigations.

The Congress has asked GAO to examine many of the systemic issues arising
from its oversight in connection with these matters. In particular, the
Congress and GAO are interested in changes that could serve to reduce the
possibility of other Enron-like situations occurring in the future. To
provide us with a foundation to help inform this work, on February 25, 2002,
we convened a forum on corporate governance, transparency, and
accountability. Forum participants included individuals from federal and
state government, the private sector, standards setting and oversight
bodies, and a variety of other interested parties.

The forum was designed to discuss systemic issues, including accounting and
reporting, corporate governance, auditing, pensions, oversight, and other
selected matters. As expected, the forum participants expressed a range of
views on these broad topics, which do not necessarily represent GAO's views.
However, there was general agreement that there are no simple solutions, or
a single "silver bullet," and that the Congress needs to be careful not to
act on perceived problems without appropriate review and analysis. To do
otherwise may result in actions with unintended consequences. Several other
key observations follow.

* Potential investors and shareholders would benefit from financial
information that is more timely and understandable, including reporting of
key trends, performance indicators, and risk-related information.

    GAO-02-494SP Corporate Governance, Transparency, and Accountability

* Accounting and reporting rules should be based on "economic substance" of
the related transactions and should employ a "substance over form" doctrine
in resolving related matters. Auditors should place additional emphasis on
whether the financial statements "fairly present the financial condition" of
the entire entity in all material respects rather than merely assuring that
the financial statements are presented "in accordance with generally
acceptable accounting principles." Auditors should also assure that the
financial statements are not "materially misleading."

* Management is primarily responsible for a firm's financial condition and
related financial reporting. Those in key corporate leadership positions, as
well as external auditors, must set the tone for managing ethically and with
integrity.

* Audit committees have an important role to play in overseeing and
interacting with internal and external auditors.

* External auditors should view shareholders as their clients versus
management, and they must maintain independence and stand firm in resolving
key financial reporting and audit issues. In this regard, external auditors
play an important safety net role to protect the shareholders, the public,
and others.

* Because defined contribution plans that provide participant-directed
investments have experienced significant growth, more emphasis needs to be
placed on providing additional education and appropriate advice to plan
participants.

* Consideration should be given to providing greater parity between senior
management and other employees, including 401(k) plan participants, in
connection with the ability to sell stock or other equity instruments.

* Steps need to be taken to strengthen enforcement of existing requirements
and to hold the responsible parties fully accountable for any related
problems. This should involve both civil and criminal sanctions, as
appropriate.

* Additional safeguards, more effective oversight, and tighter enforcement
by regulators and others will not necessarily prevent businesses from
failing. However, greater attention to these issues is necessary to help
ensure that investors adequately understand related risks, financial
performance is measured in an accurate and timely manner, and conflicts of
interest are identified and properly dealt with.

Appendix I includes further highlights of the matters discussed by the
forum's participants, who are listed in appendix II. Prior to the forum, we
provided them with possible questions for discussion, which are shown in
appendix III. We anticipate that the forum members will meet in the future
to again share knowledge and provide current perspectives on these issues,
which are of great concern to the financial well-being of the nation and its
citizens. This document will be posted to our website at www.gao.gov.

   2 GAO-02-494SP Corporate Governance, Transparency, and Accountability

I wish to thank each of the forum participants for providing their insights
on the important matters this document discusses. I appreciate their
willingness to spend their time and to provide their views in connection
with various matters concerning corporate governance, transparency,
accountability, and other issues.

David M. Walker Comptroller General of the United States

   3 GAO-02-494SP Corporate Governance, Transparency, and Accountability

     GAO's Corporate Governance, Transparency, and Accountability Forum

                     Highlights of the Forum Discussion

The forum's overall objective was to have an informal and interactive
discussion regarding certain systemic challenges, such as those associated
with the recent decline of Enron. Some have questioned how an entity such as
Enron could fall so quickly and unexpectedly. Many believe that the decline
of Enron and other instances of financial statement earnings restatements
and bankruptcies have resulted in a general decline in investor confidence
in our financial markets and in certain key parties under our current
system, such as external auditors. While the focus of the forum was not on
Enron per se, it serves to illustrate a number of the systemic and
interrelated challenges that need to be addressed.

Addressing these challenges will involve the public, private, and
not-for-profit sectors. In general, there must be the proper incentives,
transparency, and accountability mechanisms in place to ensure the
effectiveness of any system. As a result, these principles were considered
in connection with all of the issues discussed.

Accounting and Financial Reporting

The forum participants identified the following as important issues to be
addressed in designing an updated accounting and financial reporting model.

* Accounting and reporting rules should be based on "economic substance" of
the related transactions and should employ a "substance over form" doctrine
in resolving related matters.

* There are trade-offs between principles-based and rules-based accounting
standards. Principles-based standards should focus on substance over form
and may result in volatility and inconsistent implementation among entities.
Rules-based standards, however, can be too detailed and compliance oriented
and focus more on form over substance. They can also lead to attempts by key
parties to ask "show me why I can't do this?" Both approaches require that
all key parties have integrity and exercise good judgment.

* International accounting standards are moving toward a more
principles-based approach. Ultimately, we may see more of a convergence
between international and United States accounting standards.

* It may be feasible to have more rigorous reporting requirements for larger
entities, particularly those that pose a greater individual risk to capital
markets, investors, and others. Investors, though, should be clear on any
differing requirements.

* It is often difficult for investors and other users, even experts, to
understand the complexities of current financial reporting, including for
example, disclosures on derivatives and special purpose entities. Steps
should be taken to help assure that investors have the ability to comprehend
and inquire about any issues with significant implications on value or risk.
It will be a challenge to define the degree of required understandability,
given the wide disparity of expertise among investors.

* There has been a proliferation of pro forma financial statements, which
allows "spin" in reporting financial results and causes confusion for
investors and others in understanding a corporation's true financial picture
and prospects.

* There is a fair amount of interest in more useful and timelier reporting,
perhaps on a quarterly or even more frequent basis. However, such reporting
will require even greater communication to explain the swings in financial
results and may require accounting standards setters to evaluate current
provisions for leveling or "smoothing" financial results over multiple
periods.

* There is need for more timely, useful, and consistent information about
important trends and key performance indicators. This type of information
needs to be considered in connection with any broader reporting model.

Auditing

Forum participants identified the following key issues related to auditing.

* Auditors should view shareholders as their clients versus management. The
board of directors and the audit committee serve as agents for the
shareholders and have a fiduciary responsibility to them.

* Auditors should place additional emphasis on whether the financial
statements "fairly present the financial condition" of the entire entity in
all material respects rather than merely assuring that the financial
statements are presented "in accordance with generally acceptable accounting
principles." Auditors should also assure that the financial statements are
not "materially misleading."

* Auditors need to stress their independence over any other business
relationships or potential conflicts of interest with their clients. They
should emphasize with management the need for making the right disclosures
rather than ascertaining whether the rules do not preclude
management-preferred forms of disclosure.

* Consideration might be given to strengthening independence by looking at
periodic audit firm rotation, renewable terms, or periodic rotation of all
key personnel assigned to an audit within a firm. Rotation, though, is
costly in terms of an extended start-up time due to lost experience,
particularly for larger entities with complex finances.

* Consideration might also be given to adopting a variety of auditing
models, such as more joint auditing, instead of a "one firm does all"
approach. For example, Canada requires big banks to have two auditing firms.

Pensions and Savings Plans

Forum participants identified the following key issues related to employee
pension and savings plans.

* The advent of 401(k) plans and a decrease in defined benefit plans have
caused employees, rather than employers, to bear related investment risks.

* The average plan participant does not have sufficient amounts in their
401(k) plans to retire at ages such as 55 years.

* Plan participants are not required to diversify their portfolios and may
too narrowly concentrate their portfolios on a single stock of interest to
them, such as their employer. For this and other reasons, the investing
public may not necessarily want a paternalistic approach from government on
investment options and choices. However, they may need more flexibility to
reallocate employer matching contributions from stock to other forms of
investment in a more timely manner than required under current law.

* Many employees may also want to share in the growth and success of an
entity they work for, and employers may want to use stock and/or stock
options to ensure or increase company loyalty and better align employee
interests with those of the company and other shareholders. There are many
successful examples of entities with employee stock ownership and stock
option plans. There are also examples of when such plans were not
successful.

* A large segment of the investing public, including 401(k) plan
participants, may not have all the knowledge necessary to make intelligent
investment decisions, and may want or need additional education and
appropriate investment advice. For example, they need additional assistance
to better understand the need for diversification and the risks associated
with building large percentages of their account in any one investment,
especially employer securities.

* Consideration should be given to requiring more transparency and parity in
the rights of senior management vis-ï¿½-vis plan participants, particularly as
to the rights to sell company stock during plan freezes or lockdown periods.

Corporate Governance

Forum participants identified the following key issues related to corporate
governance.

* The United States is largely viewed as having the most effective capital
markets in the world, and the current system of corporate governance has
generally supported these markets and the overall economy of the United
States over the past several decades.

* It is not readily clear whether the spate of recent business failures and
earning restatements, such as Enron, is a result of systemic weaknesses in
the current corporate governance structure. Any major revisions to corporate
governance models should be considered only after obtaining and analyzing as
much information as possible from past failures and restatements.

* A governmental body, or unit, modeled perhaps after the National
Transportation Safety Board, and whose sole purpose would be to investigate
large business failures, could lead to more immediate results and help to
prevent such failures in the future. This body, or unit, would need to draw
upon expertise from a variety of governmental and nongovernmental entities
in discharging its mission.

* Management is primarily responsible for the accuracy and integrity of an
entity's financial reporting, internal controls, performance reporting, and
compliance with applicable laws and regulations, as well as for establishing
and enforcing an appropriate code of conduct.

* The integrity and competency of top management, often referred to as the
"tone at the top," are critical factors in an entity's ultimate success. The
nominations and compensation committees of boards of directors can play a
meaningful role in ensuring that entities identify and attract competent and
ethical members of the board and senior management-the right people in the
right environment--and ensuring fair and transparent compensation policies.

* Boards of directors, including audit committees, work for the shareholders
and should have appropriate job qualifications, independence, and resources
to be able to do their job effectively.

* Consideration needs to be given to matters such as (1) what type of
relationship the board should have with management (for example,
constructive engagement), and (2) what, if any, selection process changes
are necessary in order to assure the proper identification of qualified and
independent board members.

* The mutual funds industry might be a good model for defining the expertise
needed for audit committee membership, as well as for nominations and
compensation committees.

* Increasing demands regarding expertise and potential liability concerns
could limit the number of potential committee candidates. However, there is
a vast pool of more senior, former corporate executives and public
accounting profession members that could serve as potential committee
members (e.g., early retirees).

* Audit committees are not in a position to manage the audit process and,
thus, may not be in the best position to hire the auditors. However, audit
committees can serve as a buffer between the external auditors and company
management, which hires the auditors.

* Audit committees would be most effective if they (1) are comprised of
highly qualified individuals who are truly independent of top management,
(2) meet periodically (e.g., quarterly) with both external and internal
auditors without entity management present, and (3) have their own counsel
and other resources. Audit committees need to ensure that there is an
effective internal audit function, effective internal controls, and an
appropriate code of conduct, and they need to invest time in researching the
entity and asking the right questions.

* Consideration might be given to creating more independent, whistle-blowing
mechanisms within entities, such as establishing chief ethics officers or
ombudsmen. It may make sense to model such a mechanism in part on the
current federal inspector general concept. Here again, there is a large pool
of highly qualified early retirees who could fill such positions.

Oversight

Forum participants identified the following key issues related to oversight.

* Capital markets and investors rely on entities to report timely and
reliable financial information and to provide reasonable disclosure to
understand related risks.

* Effective oversight will not necessarily prevent entities from making bad
business decisions and from failing. Oversight can, however, help to ensure
that investors adequately understand related risks; that financial
performance is measured in a timely, accurate, and reasonably consistent
manner; and that conflicts of interest are identified and properly dealt
with.

* A more direct government role in accounting and auditing standards setting
and other intervention may not necessarily improve oversight, particularly
when taking into account the knowledge and expertise needed to address
conflicts of interest and increasingly complex financial issues. It may be
more effective in the long run for regulators to require stronger
self-regulatory measures, to aggressively oversee those measures, and to
take more timely and meaningful civil and criminal enforcement actions when
rules are violated.

* Many entities today are taking a closer look at their own governance and
risks in light of recent high profile business failures. Disclosure of how
they address key governance issues, in the form of asking questions or
adopting best practices, may be more effective than placing undue reliance
on severe enforcement mechanisms, such as delisting companies.

* There may be merit in considering more rigorous requirements and/or
restrictions for larger companies, such as those listed on the major
exchanges. In such instances, though, investors should know fully about any
differing requirements.

Where Do We Go From Here

The forum participants identified the following ideas for possible
follow-up.

* Efforts by GAO and other organizations to identify possible common
denominators for major business failures might identify other specific
issues, particularly those related to potential conflicts of interest and
inadequate disclosures.

* Best practices guides in connection with certain important areas (e.g.,
audit committees) could be beneficial in helping to enhance the
effectiveness of the related parties.

* Roundtable discussions with members of specific groups, such as audit
committee members or internal auditors, might help to identify other
specific issues related to corporate governance, transparency, and
accountability.

* The issues identified in this forum should be periodically revisited by
these participants or by others. For example, this group should consider
meeting again in one year to review and assess progress and determine what,
if any, additional actions may be appropriate.

GAO's Corporate Governance, Transparency, and Accountability Forum

Charles A. Bowsher

William E. Brock Robert C. Butler

James G. Castellano

James Cochrane

Michael J. Cook

Mark W. Everson Kayla J. Gillan Christina Gold Barbara Hafer

Robert K. Herdman

Edmund L. Jenkins Marc Lackritz Philip B. Livingston Barry C. Melancon

Robert A. G. Monks

Participants

Chair, Public Oversight Board;  and Former Comptroller General of the United
States

Former Secretary, U.S. Department of Labor

Former Chair, Financial Accounting Standards Advisory Council

Chair, American Institute of Certified Public Accountants

Senior Vice President, Strategy and Planning, New York Stock Exchange

Retired Chairman and Chief Executive Officer Deloitte & Touche LLP

Controller, Office of Management and Budget

General Counsel, CalPERS

Vice Chair, The Conference Board

President,  National  Association   of  State  Auditors,  Comptrollers,  and
Treasurers

Chief Accountant, Securities and Exchange Commission

Chair, Financial Accounting Standards Board

President, Securities Industry Association

President, Financial Executives International

President, American Institute of Certified Public Accountants

Founder, Institutional Shareholder Services; and Former Assistant Secretary,
Pension and Welfare Benefits Administration, U.S. Department of Labor

David Mosso
John F. Olson
Stephen C. Patrick
Gary J. Previts

Roger W. Raber
David S. Ruder
Mary L. Schapiro
David Shedlarz
A.W. Pete Smith
Stanley Sporkin

Elmer B. Staats
Mark J. Ugoretz

Chair, Financial Accounting Standards Advisory Board

Chair, ABA Committee on Corporate Governance

CFO, The Colgate-Palmolive Company

Chair, Global Communications Committee of the International Association of
the Financial Executives Institute

President, National Association of Corporate Directors

Former Chair, Securities and Exchange Commission

President, NASD Regulation; and Former Chair, CFTC

Executive Vice President and CFO, Pfizer Inc.

President and CEO, Private Sector Council

Former Director of Enforcement, SEC; and Former Federal District Court Judge

Former Comptroller General of the United States

President, ERISA Industry Committee

     GAO's Corporate Governance, Transparency, and Accountability Forum

                     Possible Questions for Discussion

GENERAL:

* What steps need to be taken to minimize the possibility that another rapid
and unexpected decline and fall of a major public company and related
pension plans, like the Enron situation, will occur?

* What types of systemic issues need to be reviewed and considered (e.g.,
accounting/reporting, auditing, corporate governance, pensions,
self-regulatory, legislative, regulatory, enforcement)?

ACCOUNTING/REPORTING:

* Do the current accounting/reporting and SEC disclosure models provide
meaningful, timely and useful information for investors and other key
stakeholders to make informed decisions?

* Are there significant items of value that the current accounting and
reporting model does not adequately address?

* Are there significant liabilities, commitments, contingencies or other
risk related items that the current accounting and reporting model does not
adequately address (e.g., special purpose entities, uncovered arbitrage
positions)?

* Is there a need for enhanced key trend or projection information in
corporate financial statements?

* What should be the minimum standards for "pro-forma" financial information
reported by public companies?

* How does the Internet (e.g., company web site information) affect the
current accounting and reporting model?

AUDITING:

* Are there significant items of value or risk that the current audit model
does not adequately address?

* Does the current approach to testing and reporting on internal controls
make sense?

* Does the current audit framework relating to fraud make sense?

* What type of relationship should the outside auditor have with management?

* What type of relationship should the outside auditor have with the Board
and the Audit Committee?

* Are the current disciplinary mechanisms in place for auditors adequate and
effective?

* What, if any, changes need to be made to the current peer review model?

* What, if any, changes in the current auditor independence rules should be
made?

* How does the Internet (e.g., company web site information) affect the
current audit model?

CORPORATE GOVERNANCE:

* Should CEO's also serve as Chairman of the Board in public companies?

* Who should select Board candidates for voting on by the shareholders?

* What, if any, minimum qualification requirements should be imposed on
public company board and audit committee members?

* Should there be additional restrictions on the number of inside directors
for public companies?

* What, if any, changes should be made to the role and structure of audit
committees (e.g., revisions to independence definitions, limitations on
compensation levels/methods and/or rotation of members)?

* How can the Board and the outside auditors work together to enhance
shareholder value and better address shareholder risks, including the
overall control environment?

PENSIONS:

* What, if any, additional restrictions should be considered or additional
guidance is needed in connection with plan investments in employer
securities? How might these vary by type of plan (e.g., 401(k) plans versus
ESOPs)?

* What, if any, modifications in regulatory or enforcement approaches should
be considered in connection with plan investments in employer securities?

* What, if any, changes should be considered in connection with plan freezes
of investment elections due to changes in plan service providers (e.g., plan
recordkeeper)?

OVERSIGHT:

* What is your reaction to Chairman Pitt's proposal of new oversight bodies
for the accounting profession?

* What, if any, changes need to be made in the current review and oversight
models to identify possible cases like Enron before they occur in addition
to conducting post-mortems?

* How can the coordinated and integration of the current multi-faceted and
multi-dimensional oversight model be improved?

* Does the POB have adequate authority and resources to effectively
discharge its audit oversight responsibilities?

* Does the SEC have adequate authority and resources to effectively
discharge its reporting, regulatory and enforcement responsibilities?

* Does the DOL have adequate authority and resources to effectively
discharge its pension oversight responsibilities?

* Does the AICPA have adequate authority and resources to effectively
discharge all of its professional governance responsibilities (e.g.,
standards, monitoring, disciplinary actions)?

OTHER:

*  What, if  any,  changes should  be made  in  connection with  conflict of
interest rules for corporate management?

* What, if any,  revisions or restrictions should be made in connection with
insider trading?

*  What, if  any,  changes are  necessary in  connection  with the  role and
function of securities analysts?

* What, if any, other related systemic issues should be discussed?

                                  (193031)
*** End of document. ***