PRICEWATERHOUSECOOPERS

“BUILDING PUBLIC TRUST: THE FUTURE OF CORPORATE REPORTING”
MONDAY JUNE 17, 2002

JOHN AUBUCHON: Good afternoon, and welcome to the National Press Club. I’m John Aubuchon. I’m Senior Correspondent for Maryland Public Television, and President of the National Press Club. I’d like to welcome Club members and their guests in our audience here today, as well as those of you watching on C-SPAN or listening to this program on National Public Radio. The video archive of today’s luncheon is provided by ConnectLive and is available through the National Press Club web site at press.org. NPC luncheons are also carried live by many sites on the World Wide Web. Press club members may access transcripts of our luncheons at our web site. Non-members may purchase transcripts, audio and video tapes by calling 1-888-343-1940. Before introducing our head table, I’d like to remind our members of future speakers. On June 18^th, Senator Edward Kennedy will discuss "America's Forgotten Health Care Agenda: A Call for Action." On June 26^th, Secretary Mel Martinez, US Department of Housing and Urban Development will be our guest at the Club. On July 2^nd, Lynn Cheney, Senior Fellow of the American Enterprise Institute and the wife of the Vice-President of the United States will discuss “Why History Shouldn’t be a Mystery: The Importance of Teaching our Kids about the American Past.” If you have questions for our speaker today, please write them on the cards provided at your tables and pass them up to me. I’ll ask as many as time permits. I’d like now to introduce our head table guests and ask them to stand briefly as their names are called. Please hold your applause until all head table guests are introduced. From your right, my left, Llewellyn King, publisher, King Publishing Group, Jeffrey Kosnett; Senior Editor of Kiplinger Personal Finance magazine; Alan Weltman, partner for Government and Professional Activities, PricewaterhouseCoopers, a guest of our speaker; Owen Ullman, Deputy Editorial Page Editor with USA Today; Dick Gilquist, Global and US Leader for Regulatory Affairs and Public Policy, PricewaterhouseCoopers, again a guest of our speaker. On my immediate right, Frank [unintelligible] co-chairman, chairman, that is, of the Speakers Committee and an esteemed Past President of the National Press Club. Passing by our speaker for just a moment, Joan Walsh-Cassidy, Executive Director of the American Council of Independent Laboratories and a member of the Speakers Committee responsible for organizing today’s luncheon. Thank you very much, Joan. Jim Lafond, managing partner, Washington Metro region, PricewaterhouseCoopers, guest of our speaker. Peter Ramgood with Reuters, Judy Matthewson with Bloomberg, Doug Harbreck, Senior Editor, BusinessWeek Online and the 1998 President of the National Press Club. Peter Spiegel, Washington correspondent for the Financial Times. [applause]

Well, leave it to Dilbert to capture yet another gut truth about corporate America. I don’t know if you saw it, this morning Scott Adams had Dilbert’s boss telling him “Stockholders are worried that are profits are nothing but accounting gimmicks. I’m putting you in charge of destroying our accounting records.” “That’s illegal,” Dilbert replies. “Oh,” says the pointy-haired boss, ‘then just make them more confusing.” With that backdrop [laughter] of the crisis in confidence in corporate America and its financial reporting, we asked the CEO of the largest accounting and financial services firm in the world to talk to us about reform. Samuel A DiPiazza, Jr. is the Global CEO of PricewaterhouseCoopers, often called simply PwC. PwC was formed in July 1998 by the merger of Coopers and Lybrand, Intl and PriceWaterhouse, two venerable firms with their roots in mid-nineteenth century London, with more than 150,000 employees in 150 countries. PricewaterhouseCoopers provides accounting, tax and consulting services to some of the largest companies around the world. This summer it will spin off its consulting unit from its accounting and tax practice, more than two years after announcing it would demerge the two and after a collapsed plan to sell the consultancy to Hewlett-Packard for up to $18 billion. According to CNN-Money, the unit being spun off reported $6.67 billion in revenue last year, a third of the firm’s total and it employs a fifth of its workforce, 35,000 people. Sam DiPiazza has, became PwC’s Global CEO in January. He joined the company in 1973, made partner in ’79, headed branch offices in Birmingham and in Chicago. He later oversaw all of PwC’s New York area offices as regional manager. He also has led the firm’s tax practice for the United States. Most recently he was Chairman and Senior Partner of the US firm and a member of PwC’s Global Leadership Team. He’s active in the accounting industries leadership positions, currently as a trustee of the Financial Accounting Foundation and a member of the Frankfort-based Mergers and Acquisitions Group of the CEO Academy. He was honored as Accountant of the Year by the Beta Alpha Psi Society. He took his undergraduate degree at the University of Alabama, and earned a master’s in tax accounting, suma cum laude, from the University of Houston. Mr. DiPiazza is a leader in New York area civic affairs, serving on the executive council of the Inner City Scholarship Fund, the Board of Directors of the New York City Ballet, the executive committee of the National Corporate Theater Fund and the International Advisory Board for Junior Achievement. Last year he was elected President of Big Brothers-Big Sisters in New York City and in the spare time, all that has left him is co-authored with Robert Eccles, a book coming out soon that is nothing if not timely. It is titled “Building Public Trust: The Future of Corporate Reporting” and that is what he will be talking to us about today. Please join me in welcoming, Sam DiPiazza. [applause]

SAM DIPIAZZA: Thank you, John. I knew that there would be something in the Washington Post noteworthy this morning. I didn’t realize it would be Dilbert that would set, set off this speech today. It is, it’s a great pleasure for me to be here at the National Press Club, the tradition, the richness, listening to the speakers that follow me and learning of some that have come before me. It is a wonderful opportunity for me and I guess given the verdict this weekend with the Andersen trial, I don’t think this conversation could be any more timely. I want to take the opportunity today, though, to move the conversation a bit beyond rhetoric and finger-pointing toward issues of real change. My remarks, as John said, will be more about the future of corporate reporting and truly really the future of our profession in this environment.

You know, John, there was once a time when those of us that operate in the capital markets, the accountants, the analysts, the rating agencies, audit committees and the like, operated in sort of a world of obscurity. People didn’t really know much about us. As I’ve been with the firm almost 30 years and I guess up till about 6 months ago, my mother would still ask me “Now Sam, what is it that your firm does?” Boy, to return to those days. It’s much better today when my daughter suggests when I left this morning to come down to Washington, ”Dad, maybe you shouldn’t tell them you’re an accountant.” You know, given the swirl of controversy around our profession and the numerous business failures that we see, some would suggest that the National Press Club is exactly the place that I wouldn’t want to be. Their advice would be: hunker down, find a deep hole, ride out the storm. But PwC is the world’s largest and we would the leading accounting firm and hunkering down was never a consideration for us. From the beginning, our response has been to draw from the global knowledge of our firm, all of our experiences, and try to address this crisis head-on, looking for real answers, not just simple ones.

Hank Paulson stood in front of you just two weeks ago and he declared that the US capital markets were in a crisis of confidence. Well, I agree with Hank. He also said, and I agree as well, that the US capital markets are the strongest in the world, but I would go on to say that that is because the US capital markets have an efficiency built into them that’s built there because of consistent, transparent and disciplined reporting. So here we are in the US, clearly a crisis, and the question is what do we do about it?

Shareholders, stake holders, clamoring for change, reform, silver bullet answers, we can follow it with this, we can follow it with that. And we believe that much of that is piecemeal, it’s superficial. If you’re going to resolve the fundamental issue, then you have to address the issues around financial reporting. Now do not misunderstand me. We at PwC and in outspoken terms I have been clear. We aggressively support many of the proposals that are in front of the market today. The New York Stock Exchange has taken the lead and a large majority of their proposals we think will had to recovering the confidence. Other proposals have significant merit. We would say clearly that the capital markets and our profession, the accounting profession, has to go an extra mile to regain the ground that we’ve collectively lost.

And what does that mean? For us it means the formation of an independent body here in the US to provide oversight for our own profession. We have been consistent in our support of a US public oversight body dominated from people outside our profession, an oversight body that looks into our quality processes, understands what we do for a living, investigative powers to find the answers when situations go bad and the power to discipline those who do not follow the rules. Many countries around the world have this right now. It’s time for the US to get it right going forward.

We’ve also been outspoken about the limitations on services provided by accounting firms. PwC was one of only two firms to support Chairman Levitt three years in his efforts to reform the profession. We were the first firm to publicly come out and say we would not do IT consulting and Internal audit for our SEC clients here in the US. We’ve done other things. We’ve committed to add outside directors to our Board, and remember, we are a private partnership, outside directors. We’ve agreed to issue an annual report on our quality processes. We’ve agreed to disclose our evaluation and compensation policies for our partners to audit committees, so they understand what it is our people do.

But you know the truth is this debate has been far too focused on remedial actions, the do’s, the don’ts, the conflicts, the oversight. We believe we must move to dealing with core issues, not just treating the patient, but instead creating an environment that deals with the underlying issues of information and the confidence that the investing public has in the integrity of that information.

And that’s what I want to offer today, a vision of the future of corporate reporting. It’s based on a fresh view of the responsibilities of every participant in the corporate reporting supply chain and in effect, a revised model for disclosure. And that is what has been outlined in our book Building Public Trust: The Future of Corporate Reporting. Now we do not prescribe a rigid formula, but we do lay out what we think is a clear path for the road ahead and the reforms must be taken to regain the sacred trust that we as a profession have and in fact has made the US capital markets so special themselves.

The consequences of Enron, Global Crossing, Adelphia and others are enormous. Billions of dollars in value have been lost, and questions are being asked, was the value real in the first place? Public trust has been shaken in the chain of institutions upon which this value creation depends, and it’s something that I like to call the Corporate Reporting Supply Chain. Who makes up this supply chain? It begins with management. They prepare the financial statements. It’s their information. They report it to investors and other stakeholders. They own that information and are ultimately responsible for the adequacy of the information. It’s approved by an independent board of directors. In the public environment, that must be an independent board of directors, and the ought to operate under a clear code of governance, responsible not to management, but to the shareholders. Then the information is attested to by an independent auditing firm, hired and overseen by the board, not by management. Then it’s analyzed by objective security analysts. It’s broadcast by information distributors, people like you in the media. It’s based on this information supply chain that many of the decisions around investing are made, and so it’s critical that this information supply chain work. It has until now been the best in the world. We have to find a way for it to recover.

Now let’s be clear. Business failures will occur. We operate in a capitalistic system. It rewards risk taking and with that you will have failures. Even the best corporate reporting is not going to stop that. But improved reporting can reduce losses because it will enable management and the board and maybe most importantly the investing public to respond more quickly, to understand the situation at hand.

The aftermath of Enron serves as a lens to sharpen our focus on the key elements that underlie this trust in the capital markets, and it’s these elements, you cannot legislate the elements. They’re either there or the trust goes away. Transparency, accountability and integrity, the same in our profession, the same in the profession of the media. They’re easy enough to describe, but often difficult to practice. And they must exist at every point in this information chain. First, the spirit of transparency, and by that I mean a corporation has an obligation to willingly disclose to shareholders information needed to make decisions. Now we know and we’ve seen the history, all too often management and boards are not consistently making this information available to the investors. Sometimes they’re hiding something. Sometimes they just don’t want to tell the truth. Sometimes they’re just trying to beat next quarter’s earnings estimates. Shareholders are increasingly aware of the issue and the requirement for transparency and they’re not going to be left in the dark. So they demand more.

Second, a culture of accountability. Just providing information is not enough. It must be accompanied by a commitment to be accountable for your step in the supply chain. This means taking responsibility and this can only occur if an ethos exists that values and understands accountability. Management, it must hold itself accountable for using shareholders’ money to make decisions to create value for shareholders, for the risk it takes and the reward it produces. Accounting firms, my own profession, we are responsible for never forgetting that our work serves first the interest of the public and the shareholder, not the management that writes the check. And analysts, responsible for providing objective, bias-free reviews of company performance, free of conflict.

Most importantly, members of the supply chain have to work together. It’s not one piece isolated from another. It’s only as strong as each individual piece, transparency and accountability, but that won’t get us back public trust. In the end it depends on people of integrity. Hank Paulson also said “Integrity is the cornerstone, if not the bedrock, upon which all financial markets are based.” What we have lost today is a sense of integrity in our markets. Individuals of integrity simply do the right thing, not what’s expedient, not what’s permissible, but the right thing. You can’t compromise the right thing. You can’t cut it at the edges, especially when you’re serving the public and using shareholders money. Transparency, accountability and integrity, embracing and demonstrating all three elements really is at the core of rebuilding public trust and if the members of the supply chain, from management to the boards to the accounting firms and analysts and the media do not understand it, we don’t have a chance. And you can’t legislate it. It has to be something built into the core of what we do.

Yes, more oversight, we agree. Less conflicts, we agree. More clarity around relationships, yes, but frankly, that’s not enough. The members of the investing public and the participants of the Corporate Reporting Supply Chain must have, we think, different tools, different standards, that provide stakeholders with simply better information, information that’s timely, easy to understand, easy to analyze, complete, accurate, trustworthy, and that takes us to what we think is really a transformation in the way corporate information is reported.

Our response, we refer to it simply as the Three-Tiered Model of Corporate Transparency. First, a set of truly global generally accepted accounting principles, Global GAAP. Second, standards for measuring and reporting information that are specific to specific industries. Consistent company to company within that industry and understandable. And third, company-specific information such as information on strategy, risk management, compensation and governance. It’s very particular to an individual company.

Now this is not disclosure for disclosure sake. It’s a new model for going about corporate reporting. You have seen, I’m sure as well, a number of companies in the market today that are disclosing everything, seven, eight, nine hundred pages of disclosure in the annual reporting to the SEC. That’s not going to help the situation. You can’t understand it anyway. It needs to be much more systematic, much more to the point. Investors will benefit only if companies communicate in an integrated fashion, holistically and consistently, company to company. The marketplace, the strategies, the value drivers that make up value, let’s take this down one more level.

Tier one, a set of truly globally accepted accounting principles, Global GAAP. Now Global GAAP does not exist today, but in a world of global capital markets, global companies, global competition, global investors, it is just obvious we need one set of principles that cross borders for all companies in all countries. Now the EU has taken a very important step here by requiring all members of the EU, all companies filed within the EU to comply with International Accounting Standards by the year 2005. We think the US must move there as well. I have been very outspoken in my comments. Our firm has felt very strongly about it that, that there needs to be a movement from US GAAP to a new model.

Now this is not about the structure of the FASB or its governance. FASB is an independent organization. It’s governed outside the profession, but it’s also not about the government getting into the business of setting accounting standards. Let me just tell you, accounting standards and politics simply do not mix. No. Global GAAP, this move away from US GAAP is really about a philosophy of standard setting. It’s about moving to a principles based approach, one that’s short on volume and long on principles. Now, to date, a major obstacle here has been the focus of US GAAP and its, its view among many of perfection. Well, I think Enron set us straight there. US GAAP versus the rest of the world is really a debate about what we think of as a rules based system versus a principles based system. US GAAP contains significant detail, exception on top of exception, direction after direction, a very highly rules based standard. Some of the standards of US GAAP are seven, eight hundred pages long, compared to the broad guidelines of the UK GAAP and more importantly the International Financial Reporting Standards that are really based upon principles. You do this, or you don’t do this. We think it’s the best foundation, the first tier, of financial reporting. It assigns the responsibility to management to select the most appropriate accounting method for whatever situation that reflects the economics of the transaction, not just the accounting method that can be dictated by a narrow rule.

It also requires accounting firms to use judgment. What we do is based upon judgment and we believe that’s much better than working through a mechanical set of rules or exceptions that are really designed to appease everyone in the market and frankly are a roadmap for investment bankers to engineer transactions. Let’s move back to principles, force management to be held accountable for their decisions and auditors to be held accountable for their judgments. One set of standards consistently around the world would allow comparison company to company, one country to another, in any country, in any industry. Market regulators around the world would allow companies that comply with Global GAAP to list inside their companies.

But the objectives of transparency, accountability and integrity will not be fulfilled if the model stops at just Global GAAP. You know markets today are made up of a lot more than simply historical information based on accounting. Hank Paulson made this point two weeks ago. Markets are driven by financial and non-financial information today more than ever before, much of which exists, but little of which is ever made available in an understandable way to an investor. Investors need complete, reliable, useful information about a company’s performance, benchmarked within its own industry, applied in a consistent way and that takes us to Tier Two, Standards for measuring and reporting information that are industry-specific, consistently applied, and developed by the industries themselves.

Assume an investor decides to invest in a particular industry. The first decision is that he wants to go to that industry. Then the decision is which company within that industry and he has to understand both financial and non-financial issues, metrics to make that call. No broad set of accounting principles is going to answer the question. The dynamic environments of industries mean that some metrics apply in one place and not in another, so we perceive a set of metrics applied differently in different industries, but consistently among the companies within the industries. Banks, for example, will not evaluate customer satisfaction the same way hospitals do. The standards need to be consistent. We think they can be developed by global industry-based groups, trade associations. They can be done in collaboration with investor communities or analysts. The Society of Petroleum Engineers and the World Petroleum Congress have jointly developed a set of principles around petroleum reserves that everybody reports under. It’s a great model.

Now frankly, if industries do not step up, and that’s probably your question, who would ever volunteer? We suggest institutional investors, analysts and others should create a demand, a requirement. Industries either report or will be, in effect punished by not being transparent. So we begin with Global GAAP, we move to disclosure at the second tier of industry relevant data, consistent, but there is still more.

Tier Three: Guidelines for Company-specific Information. More robust disclosure of relevant company information, specific to that individual company, strategy, risk, compliance, compensation, governance. To report on the value drivers that actually create value within the company, management, and many companies are doing this today, take this information to advantage by explaining their value proposition very clearly. It will demonstrate the links between the marketplace and strategy, between value drivers and value creation. Now you’re not going to be able to craft specific definitions around much of this Tier Three content, but you can get some guidelines. The UK Accounting Standards Board is recommending revisions to their regulations that requires boards of directors in the UK to discuss and disclose business objectives, strategies and key performance metrics. Now the boards have to decide what to disclose, but there is an obligation under the draft that something be done. How can this happen? I firmly believe if the investing public with all the members of the Corporate Supply Reporting Chain together demand it, it will happen.

Now, in adopting a Global GAAP, an industry-based system and company-specific information where does that take us? We think it takes us far down the path toward transparency and accountability and then people of integrity will have to apply it. What about us? What about accounting firms? What about a fresh look at the standards that we apply, and that becomes the question of the day, that’s what everybody seems to talk about. We think there’s room for revision there as well. The world where accounting firms have a pass/fail, fairly represent, doesn’t fairly represent, simply isn’t going to cut it in the future. And we think maybe there’s a different paradigm that could be applied.

Management can begin to be judged on a series of standards of criteria. Let me just put a few out in front of you. Completeness, that there information is reported in a forthright and completed manner. Compliance, that the information is reported in a way that complies with the rules and regulations of Global GAAP. Consistency, consistent accounting principles, but maybe even more importantly, consistent with industry standards, consistent with the past. Commentary, that management’s commentary lays out the risk, the uncertainties, the estimates that management uses around its financial statements, the quality of accounting in management controls. Clarity, how the company reports to shareholders, is it in a clear and understandable way. Communicating, communicating in plain language and reporting format, not eight hundred pages, but something that an investor can understand and relate to. 3

Now we think an auditing firm would work with an audit committee to begin to judge a company against these kinds of standards, around clarity and communication, around consistency, around completeness and commentary and in fact, issue an audit opinion on any or all of those standards taken as a whole or separately, rating those, the performance against those standards. Now there’s no question that the audit opinion must become more relevant in assessing the health of a business. We think that we need to look for other alternatives and places to go. Our work must be refocused on a broader range of information within all three tiers and we must state more aggressively whether a company is applying with what we refer to as the six C’s.

Auditors do not insure the well-being of an enterprise. Business risks are taken, companies will fail, auditors play one role, but it is a very important role because we represent, when we sign an opinion, that a set of statements fairly present a company’s position. The pass/fail model can be improved, we can go further than that. Can we get there? Few companies today do what I’ve described, but we really can not wait. We have to start practicing this today, in real time. I think the investing public is moving hard to a new model and we accept that challenge at PwC. The public outcry that’s been directing toward the accounting practitioners has struck at the very heart of our values, objectivity, independence, and integrity. The promise of improving future audits has been constrained. We’re all worried about antiquated laws, rigid provisions, punitive legal systems and that can chill innovation in reporting, but you know what? We just have to move past that. Rather that managing investor expectations as to what we do with the help of standard setters and regulators, we’ve got to move forward with the other members of the Corporate Reporting Supply Chain and cast a new model. We have to measure ourselves by a higher standard, nothing less than the public trust in our markets is at stake.

I hope what I’ve presented here today is a bit of a blueprint. It may not be the perfect model, but it certainly takes us past the day when all that’s done is a report on historical information and a lot of inconsistent, hard to understand pro forma information. It will take informed, committed leaders to make it a reality. Investing will always have risk, but if we follow the six C’s, if we create a new paradigm around corporate reporting, if investors and stakeholders operate with a spirit of transparency by people of integrity with a shared culture of accountability, then we’ll get this right and that’s how we’re going to reclaim the public trust. Thank you. [applause]

JOHN AUBUCHON: Thank you very much. We will move quite quickly into questions, if you don’t mind. You supported creation of an outside oversight board and yet you asked for the industry itself to be allowed to do this, rather than having something written into law. What does that mean in specific reference to the Sarbanes bill, coming up in the Senate?

SAM DIPIAZZA: You know, the truth is we are almost ambivalent as to whether it’s legislation or regulation. In fact, I think if you’re going to have an independent oversight body here in the US, you need to do that outside the profession, and so whether that’s done through the Oxley legislation or the Sarbanes legislation or done by Chairman Pitt himself, we think it needs clear intervention. Otherwise, we do not believe the public will give the credibility that it actually, is needed, so badly needed for the oversight to work.

JOHN AUBUCHON: Mr. DiPiazza, what do you think the Andersen verdict means for the future of reforms? How does it impact? Does it stall it? Does it provide additional incentive?

SAM DIPIAZZA: Well, the Andersen verdict has an enormous number of emotions when you ask questions of somebody like me or anybody in our profession around the Andersen verdict. It starts with a recognition of tragedy. There was 85,000 people in the Andersen family that lost there firm or is in the process, very shortly, to lose their firm. That’s on the top of thousands of shareholders of Enron and pensioners and employees, so you know, the first reaction is deep sense of tragedy. But you know, the Andersen verdict is, and I want to draw the distinction, I don’t think it’s going to slow reform down at all, at least I hope it doesn’t. I don’t think we can afford to have reform slowing down. We need, we need to regain the confidence of the public, but you have to understand, the Andersen verdict itself is not about anything I just talked about. It wasn’t about transparency, it wasn’t about corporate reporting, it wasn’t about accounting principles, it was about document destruction and that makes it even more difficult because I don’t think the Andersen verdict will actually, if that’s where our focus stays, it’s not going to further the debate. We have to, as members of this Corporate Reporting Supply Chain, we’ve got to force change and I hope the reform continues.

JOHN AUBUCHON: Before we move back to the broader issue, two other Andersen-related questions. You mentioned document destruction. What is PwC’s document retention policy? Isn’t, this questioner asks, isn’t Andersen’s policy of destroying all documents not material to an audit standard procedure, among big, the big five and even somewhat smaller firms?

SAM DIPIAZZA: You know, John, if you had told me a year ago I’d be up here describing our document destruction policy, wow, the world does change. You know, our policy is very simple. We retain documents relative to an audit for seven years. We do not destroy documents and so it is anything that we think has any relevance to getting to our answer, we save. I wish we didn’t have to save quite as much because it takes a lot of warehouses, but seven years. Everything’s saved.

JOHN AUBUCHON: Simpler that way, isn’t it.

SAM DIPIAZZA: Sure is.

JOHN AUBUCHON: You said Andersen, the people of Andersen are on their way to losing their firm. That suggests that you have no confidence that Andersen will be able to survive with any line of business. Is that accurate?

SAM DIPIAZZA: I think, I think that’s fair and it’s been obvious to most of us within the profession for some time. Andersen as an international accounting firm lost its chance when its network blew up 90 days ago and the inability to hold that network together meant that its public, its large public clients had to go somewhere else. In the end, unfortunate for Andersen, all of the, all of the headlines and discussion cost them the thing that’s most important to what we do. It cost them a sense of integrity. It cost them a sense of, of independence and objectivity and so I don’t believe, I believe this has been done for a while.

JOHN AUBUCHON: It has been said that no matter under what rules the accounting industry is operating and, and the people working under CFOs for corporations who prepare the reports, no matter what rules they’re operating under or oversight, it’s the culture or climate in which they operate or interpret the rules that leads to transgression such as we’ve seen. What was it about the current climate within corporate America and perhaps within the accounting community that lead, lead this to happen?

SAM DIPIAZZA: Well, I’ll speak first to the corporate community as an observer and an investor, then I’ll maybe make a separate set of comments about my own profession. Different issues in different companies, obviously and we all read the reflection around what some refer to as, as greed is good driving capital markets to greed is good going overboard. Whether it’s the compensation structures, whether it’s the sense of endless upward growth in the markets, I think a lot of people simply lost their way. The incredible focus on quarterly results, the missing, missing a quarterly estimate by a penny, and 30% of your stock value blown away, something just isn’t right, so what does that do? It puts an incredible pressure on management to hit the estimate and which trickles right down the supply chain, right down the supply chain. So the board gets it, the accountant gets it, the analyst gets it and maybe you’re the only ones that are exempted from it. I don’t know. So it became a question of, I think, just unreasonable expectations around the marketplace. Sure, there were boards that decided they worked for management and didn’t work for stockholders. There were analysts who were confused about whether they were investment bankers or analysts, and there were accountants who made judgments that weren’t right. You know the question about whether accountants have lost their way is one that I take very, very, very personally and so this is not an objective, independent reaction. This is one that comes from 30 years in a business watching our auditors do work every day for clients, facing tough decisions every day. We do probably around the world, I don’t know, I’ve seen the numbers, I’m going to round it by half, 200,000 audits a year. And that means, you can just figure it out, 1,000 audits a day, and our auditors are facing tough challenges, is it this way or is it that way? And so to say that auditors have lost their way. Yes, they’ve made mistakes. They’re human. Some of them probably aren’t honest. I hope none in our firm. And our process is weed those out and make sure we do the right things. The ’90’s were a bit unbelievable, unfortunately unbelievable in not so good a way for a lot of the excesses we’ve seen.

JOHN AUBUCHON: Headline on Jerry Knight’s column in the Washington Post this morning suggests the market won’t, will not rebound until corporations, corporations clean up their reporting. Is the converse true? Do you believe that big companies who do clean up their reporting, who do better reporting will be rewarded with higher stock valuations?

SAM DIPIAZZA: Well, we certainly think so. We think that what you’ve seen in the last 6 months are the companies that are too confusing to understand, companies that operate with smoke and mirrors at times are getting hammered, and I don’t think the market has settled down enough to give credit where credit is due. It’s going to take some time and some consistent positive results, but in the end, I don’t think you can legislate this to being fixed. I don’t think you can, you can create an environment where you define everything that is wrong. I think in the end, the market fixes will fix it. The market will move capital to places that are understandable, that are honest with integrity, transparent and accountable, with good governance and we think that building, in our building public trust, we don’t think we need a single law to do this. We think the market simply needs to say what has happened in the past, US GAAP, inconsistent reporting, company to company, needs to change, let’s find a new model. So we certainly think the market will fix it.

JOHN AUBUCHON: Regarding your recommendations for better reporting, this questioner asks how can you have consistent reporting within an industry when so many of the huge firms, GE’s a good example, have business lines that cross both international boundaries and industry boundaries?
SAM DIPIAZZA: Well the, the geographic issues I think are not difficult. I think they’re easy to overcome, whether GE operates around the world or in one territory, I think that’s easy. Segment to segment is more complex, but what is GE? I don’t pretend to be an expert on GE, but GE’s manufacturing company and it’s a financial services company, so compare itself in two ways. Show how it compares on the financial services perspective. If it has a segment and I’ll go further than friends probably would like, if it has a segment that’s a bank, compare it to banks. If it has a segment that’s a manufacturing company, compare it to manufacturing companies. Give it to the investor. I think the investors are pretty smart. The sophisticated investors will get it in a hurry. So no, it’s not simple as to say every company is just alike, but most companies do go down relatively clear lines. There may be multiple pieces, but relatively clear lines. They have to report that way now. I think you can do industry-reporting standards that way.

JOHN AUBUCHON: You suggested that the European model is emerging as admirable, if not perhaps even preferable to that currently used in the United States. This questioner looks at the other side of that coin saying you want to cede US leadership to a bunch of Euro bureaucrats [laughing] in Brussels. How can the US lead European finance and markets are not as transparent as US markets are now?

SAM DIPIAZZA: Well, there’s some truth to that. I was, I was in Europe last week, about 10 days ago, speaking at the Munich Economic Conference on the enlargement of Europe and I met a lot of those bureaucrats in Brussels. I didn’t say cede this to the Europeans. What I said was take a leadership position. The US should take a leadership position. We have a choice here. The US can continue to say US GAAP is perfect and the rest of the world has to conform to us. We’ll give them our 800-page standard on derivatives and we’ll let them have to logically answer the questions around stock options and otherwise, and just say we’re perfect. I just don’t think that makes sense. If the US takes a leadership role, we will craft International Accounting Standards that make sense. If not, you know, be careful. You may be stuck with the bureaucrats in the EU because that system may be the survivor, not this one.

JOHN AUBUCHON: Your call for more reporting in performance areas begs a question corporate executives have wrestled with. What’s the point of more disclosure when most investors, lay people, don’t read all that is currently offered?

SAM DIPIAZZA: Well, now I think that’s fair as well, but I do not believe you build the model to the lowest common denominator. I don’t believe you say ok, you got somebody in Des Moines, Iowa and they buy stock based on what they read in Dilbert that morning. I don’t believe that’s what you do. I believe you lay something out there that’s logical, that’s transparent, you’re accountable for it, and the market momentum will take it where it takes it. And in fact, I think that is, that is in fact what happens. Institutional investors dominate the marketplace, and so what you’re really doing is trying to create a platform that makes their market making more logical.

JOHN AUBUCHON: If I understood correctly your proposal for, for reporting, it suggests that firms choose the most appropriate accounting method. This questioner asks wouldn’t that kind of environment be even more ripe for abuses by, such as those seen allegedly in Enron and also would it allow compare, proper comparisons within the same sector if different firms choose different methods?

SAM DIPIAZZA: It could. I don’t think anyone should suggest that one model is perfect and another is not. If you remember why we actually are in the shape we’re in, 30 years ago there was a movement in the US where because of legal liability issues, because of the complexity of the markets, the standards, there was a request for standards to have more detail, more specificity, more examples and we just went there, and we went there, and we went there. And in fact what we did is we came up with standards that have more exceptions, you know it’s a 6-page standard, or a 5-page standard and 130 pages of exceptions. What happens? People engineer through the exceptions and if you stop at the 6 pages and you give a few examples of what they mean, and then you require management to disclose where it came down on that standard and the auditor to pass judgment as to the clarity and completeness and consistency, is that better than sitting back and letting financial engineers find the exception that best meets the test? Now is one better than the other? Without people of integrity, none of it works. And without a supply chain of information that’s connected, none of it works. So let’s be clear. The US has created its markets based upon transparency and integrity. We think, simply, that the rules based system has gotten out of control.

JOHN AUBUCHON: Before we run out of time, Mr. DiPiazza, a few PwC- specific questions. This questioner asked has PwC cleaned up its independence problem? Do any PwC partners or employees own any clients’ securities?

SAM DIPIAZZA: Yes, we’ve cleaned up that problem. That was several years ago. It was not a great day in either our profession or our firm. Our own compliance with a very complex and changing market was not what it should have been and today our own system is, we think, the best in the world. I’ll give you a quick example, John and to tell you how it works. We have an automated system where each of us are required to input in the system our securities and if that client ever becomes a client, if that ever becomes a client of the firm, we’re informed to get out of that stock and we have 5 days to do it. Well, you may have heard there was, well, I won’t go to the specific, it was a major company about 3 months ago that changed to us as their auditor. Now I was involved in proposing on the work. I met with the management. I was out there. They were going to make a decision on Wednesday. I happened to be in Beijing. They were making the decision on Wednesday. I was calling back to find out. Did we get the work? Did we not get the work? Nobody would answer my call. I turned on the computer, my computer e-mail said sell the stock. That’s how I found out we’d won.

JOHN AUBUCHON: The Washington Post reported that partners at PricewaterhouseCoopers and other firms sometimes looked for employment at audit clients to avoid forced retirement or for an alternative after forced retirement at age 60. The questioner asks why does PwC require its US partners to retire at age 60?

SAM DIPIAZZA: Well, I try to think of every question that you guys would ask, and that was not one that was on my list. [laughing] We are a private partnership. Our partners generally work here for their entire lives and we have a long tradition of at some point in life, our partners hand over the firm to the next generation of partners. Is it 60? Is it 50? Is it 70? I mean, I’m 51, 51 sounds pretty good right now. [laughing] So it’s just what we do and it’s worked for us for dozens and dozens of years. Now where they go when they leave, many of our partners, and the truth is, not that many of our partners when they retire, go to work for our clients. And we monitor that because we have to. We have to stay independent of those clients and it is a very, very rare exception that our partners leave us and go to work for a client.

In recent years the big accounting firms have been pedaling the word perhaps is [unintelligible], but marketing sophisticated tax-avoidance schemes to big corporation or big corporation for contingency fees that are refunded if Treasury shuts down those plans. Given the industry’s image problems, do you think this practice should be halted?

SAM DIPIAZZA: I think there have been some firms that have been very aggressive in this area. PwC has not been one of those. We had our, we had our experiences in the area. As everyone was creating tax-oriented transactions, we did a few and decided we just didn’t like the taste of it. We do very sophisticated tax advice and we get paid well for that, but pedaling tax shelters, that’s not what the world’s large accounting firm wants to do.

JOHN AUBUCHON: We have time for one more brief question, but first I’d like to present you, Mr. DiPiazza, with this National Press Club Certificate of Appreciation in recognition of your appearance here today. Thank you so much. And suitable for the markets or your morning coffee, the coveted National Press Club mug. Thank you so much. [applause]

SAM DIPIAZZA: Thank you.

JOHN AUBUCHON: Now we literally have less than a minute, but I wanted to get this in. You’re active in minority affairs as I mentioned in my introduction. How will PwC and the industry as a whole nurture and promote minorities?

SAM DIPIAZZA: I will answer the question. Before I go there, I do want to turn the table again. This is a copy, it’s actually an advance, uncorrected proof, so it’s not in print yet, of Building Public Trust and I’d like to give it to the National Press Club. I wrote inside that we may have transparency, accountability and integrity in our capital markets. Sam DiPiazza. John, thank you.

JOHN AUBUCHON: Thank you so much. [applause]

SAM DIPIAZZA: We believe that our teams are much richer when they include people of all different kinds of backgrounds and so diversity is very, very important to us and as an Italian-Catholic growing up in the deep South, I understood diversity first-hand. [laughing] And the firm took a chance when it hired me in a southern office because I was the first Italian they’d ever met and I think maybe I added a little value along the way. But it’s hard work. It means we have to stay not only in the face of high school students, kids before they ever go to college to understand what we do and then they’re faced through college to join us a profession. But then when they join us, creating an inclusive environment, we have people of color workshops and team all through the country because it’s not easy for this to work. You have to work at it and our own objective is to create diverse teams, no matter where they may come from. Thank you.

JOHN AUBUCHON: Thank you very much. [applause] And I would like to thank you for coming today. I’d also like to thank National Press Club staff members, Melinda Cook, Pat Nelson, Joanne Booz, Melanie Abdow Dermott, and Howard Rothman for helping organize today’s luncheon. Also thanks to the NPC library for its research. [applause]