FOSTERING ACCURACY AND TRANSPARENCY IN FINANCIAL REPORTING HEARING BEFORE THE SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED ENTERPRISES OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED NINTH CONGRESS SECOND SESSION MARCH 29, 2006 Printed for the use of the Committee on Financial Services Serial No. 109–80 ( U.S. GOVERNMENT PRINTING OFFICE 30–174 PDF WASHINGTON : 2006 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 VerDate 0ct 09 2002 13:00 Nov 06, 2006 Jkt 030174 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 F:\DOCS\HBA088.160 HFIN PsN: TERRIE HOUSE COMMITTEE ON FINANCIAL SERVICES MICHAEL G. OXLEY, Ohio, Chairman JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts RICHARD H. BAKER, Louisiana PAUL E. KANJORSKI, Pennsylvania DEBORAH PRYCE, Ohio MAXINE WATERS, California SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California NYDIA M. VELA´ ZQUEZ, New York FRANK D. LUCAS, Oklahoma MELVIN L. WATT, North Carolina ROBERT W. NEY, Ohio GARY L. ACKERMAN, New York SUE W. KELLY, New York, Vice Chair DARLENE HOOLEY, Oregon RON PAUL, Texas JULIA CARSON, Indiana PAUL E. GILLMOR, Ohio BRAD SHERMAN, California JIM RYUN, Kansas GREGORY W. MEEKS, New York STEVEN C. LATOURETTE, Ohio BARBARA LEE, California DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas WALTER B. JONES, JR., North Carolina MICHAEL E. CAPUANO, Massachusetts JUDY BIGGERT, Illinois HAROLD E. FORD, JR., Tennessee CHRISTOPHER SHAYS, Connecticut RUBE´ N HINOJOSA, Texas VITO FOSSELLA, New York JOSEPH CROWLEY, New York GARY G. MILLER, California WM. LACY CLAY, Missouri PATRICK J. TIBERI, Ohio STEVE ISRAEL, New York MARK R. KENNEDY, Minnesota CAROLYN MCCARTHY, New York TOM FEENEY, Florida JOE BACA, California JEB HENSARLING, Texas JIM MATHESON, Utah SCOTT GARRETT, New Jersey STEPHEN F. LYNCH, Massachusetts GINNY BROWN-WAITE, Florida BRAD MILLER, North Carolina J. GRESHAM BARRETT, South Carolina DAVID SCOTT, Georgia KATHERINE HARRIS, Florida ARTUR DAVIS, Alabama RICK RENZI, Arizona AL GREEN, Texas JIM GERLACH, Pennsylvania EMANUEL CLEAVER, Missouri STEVAN PEARCE, New Mexico MELISSA L. BEAN, Illinois RANDY NEUGEBAUER, Texas DEBBIE WASSERMAN SCHULTZ, Florida TOM PRICE, Georgia GWEN MOORE, Wisconsin, MICHAEL G. FITZPATRICK, Pennsylvania GEOFF DAVIS, Kentucky BERNARD SANDERS, Vermont PATRICK T. MCHENRY, North Carolina JOHN CAMPBELL, California Robert U. Foster, III, Staff Director (II) VerDate 0ct 09 2002 13:00 Nov 06, 2006 Jkt 030174 PO 00000 Frm 00002 Fmt 5904 Sfmt 5904 F:\DOCS\HBA088.160 HFIN PsN: TERRIE SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED ENTERPRISES RICHARD H. BAKER, Louisiana, Chairman JIM RYUN, Kansas, Vice Chair PAUL E. KANJORSKI, Pennsylvania CHRISTOPHER SHAYS, Connecticut GARY L. ACKERMAN, New York PAUL E. GILLMOR, Ohio DARLENE HOOLEY, Oregon SPENCER BACHUS, Alabama BRAD SHERMAN, California MICHAEL N. CASTLE, Delaware GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois MICHAEL E. CAPUANO, Massachusetts EDWARD R. ROYCE, California HAROLD E. FORD, JR., Tennessee SUE W. KELLY, New York RUBE´ N HINOJOSA, Texas ROBERT W. NEY, Ohio JOSEPH CROWLEY, New York VITO FOSSELLA, New York, STEVE ISRAEL, New York JUDY BIGGERT, Illinois WM. LACY CLAY, Missouri GARY G. MILLER, California CAROLYN MCCARTHY, New York MARK R. KENNEDY, Minnesota JOE BACA, California PATRICK J. TIBERI, Ohio JIM MATHESON, Utah J. GRESHAM BARRETT, South Carolina STEPHEN F. LYNCH, Massachusetts GINNY BROWN-WAITE, Florida BRAD MILLER, North Carolina TOM FEENEY, Florida DAVID SCOTT, Georgia JIM GERLACH, Pennsylvania NYDIA M. VELA´ ZQUEZ, New York KATHERINE HARRIS, Florida MELVIN L. WATT, North Carolina JEB HENSARLING, Texas ARTUR DAVIS, Alabama RICK RENZI, Arizona MELISSA L. BEAN, Illinois GEOFF DAVIS, Kentucky DEBBIE WASSERMAN SCHULTZ, Florida MICHAEL G. FITZPATRICK, Pennsylvania BARNEY FRANK, Massachusetts JOHN CAMPBELL, California MICHAEL G. OXLEY, Ohio (III) VerDate 0ct 09 2002 13:00 Nov 06, 2006 Jkt 030174 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 F:\DOCS\HBA088.160 HFIN PsN: TERRIE VerDate 0ct 09 2002 13:00 Nov 06, 2006 Jkt 030174 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 F:\DOCS\HBA088.160 HFIN PsN: TERRIE C O N T E N T S Page Hearing held on: March 29, 2006 ................................................................................................. 1 Appendix: March 29, 2006 ................................................................................................. 45 WITNESSES WEDNESDAY, MARCH 29, 2006 Cunningham, Colleen, President, Financial Executives International ............... 34 Gradison, Willis, Acting Chairman, Public Company Accounting Oversight Board ..................................................................................................................... 9 Herz, Robert H., Chairman, Financial Accounting Standards Board ................. 11 Hirschmann, David, Senior Vice President, U.S. Chamber of Commerce .......... 30 Lackritz, Marc E., President, Securities Industry Association ............................ 32 McEnally, Rebecca, Director of Capital Markets Policy, Center for Financial Markets Integrity, CFA Institute ....................................................................... 38 Melancon, Barry, President, The American Institute for Certified Public Ac- countants .............................................................................................................. 36 Taub, Scott A., Acting Chief Accountant, Securities and Exchange Commis- sion ........................................................................................................................ 13 APPENDIX Prepared statements: Oxley, Hon. Michael G. .................................................................................... 46 Clay, Hon. Wm. Lacy ....................................................................................... 48 Davis, Hon. Geoff .............................................................................................. 49 Browning, Candace ........................................................................................... 51 Cunningham, Colleen ....................................................................................... 53 Gradison, Willis ................................................................................................ 64 Herz, Robert H. ................................................................................................. 72 Hirschmann, David .......................................................................................... 149 Lackritz, Marc E. .............................................................................................. 154 Melancon, Barry ............................................................................................... 166 McEnally, Rebecca ............................................................................................ 183 Stevens, Paul Schott ........................................................................................ 195 Taub, Scott A. ................................................................................................... 208 (V) VerDate 0ct 09 2002 13:00 Nov 06, 2006 Jkt 030174 PO 00000 Frm 00005 Fmt 5904 Sfmt 5904 F:\DOCS\HBA088.160 HFIN PsN: TERRIE VerDate 0ct 09 2002 13:00 Nov 06, 2006 Jkt 030174 PO 00000 Frm 00006 Fmt 5904 Sfmt 5904 F:\DOCS\HBA088.160 HFIN PsN: TERRIE FOSTERING ACCURACY AND TRANSPARENCY IN FINANCIAL REPORTING Wednesday, March 29, 2006 U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED ENTERPRISES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. The subcommittee met, pursuant to notice, at 10:00 a.m., in room 2128, Rayburn House Office Building, Hon. Richard H. Baker [chairman of the subcommittee] presiding. Present: Representatives Baker, Castle, Biggert, Shays, Davis of Kentucky, Kanjorski, Velazquez, Hinojosa, Miller of North Caro- lina, Scott, and Wasserman-Schultz. Ex officio: Representatives Oxley and Frank. Also present: Representative Cleaver of Missouri. Chairman BAKER. Good morning. Welcome, all of our distin- guished participants this morning. I have been advised that Mr. Kanjorski is on his way, but did not express any concern about us convening the hearing in his absence, and we will proceed accord- ingly. The purpose of the hearing this morning is to begin what I hope will be a helpful discussion relative to current corporate require- ments for financial disclosures. Since 1934, public companies have been required by the SEC to file certain financial information with the SEC. As is usually the case, over a considerable number of years, those reporting require- ments have become increasingly complex, and much more sophisti- cated. All of this, of course, is disclosed in conformity with GAAP standards. In addition to SEC requirements, of course, the Financial Ac- counting Standards Board, known as FASB, has also required the filing of certain supplementary information. The picture that is now presented every 90 days to the public, the ‘‘beat the Street’’ mentality, is a cause of some concern. On the one hand, the intended purpose of the frequent financial disclosures is to enable an investor to create, in his own mind, an accurate assessment of the corporation’s true financial