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

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