[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