SEC-Inspired Task Force Issues Report Suggesting Accounting System Falls Short and That Investors Would Benefit From More and Additional Types of Company Disclosures
New Haven, CT, May 22, 2001 --- Amidst the current turbulence in our financial markets, a group of leaders from business, banking and academia, established at the suggestion of the U.S. Securities and Exchange Commission in April 2000, released its findings today on ways to improve the system of financial reporting for companies. It concluded that investors do not have all the information they need to make the most reasoned judgments on how to value companies.
The group indicated its belief that any disclosures that allowed investors to better assess future profits and cash flow of companies -- and therefore to make more informed judgments about future value -- should be encouraged. This includes more information on a company's business model, competitive environment, intangible assets, and operating performance measures. The task force believes that companies should be encouraged to make these enhanced disclosures voluntarily, and that the market will penalize those who do not.
The task force focused its efforts on two categories of information in particular: intangible assets and operating performance measures, and it offered two principal recommendations:
First, the existing accounting system needs to be supplemented to provide more information on intangible assets and operating performance measures that are not now adequately dealt with by official financial reporting. (Examples of intangible assets are patents, technology licenses, customer lists, airwave spectrum rights, skills of employees, business alliances, etc. Examples of operating performance measures are revenue per customer, inventory turnover, order backlog, speed of introducing new products to market, etc.)
Second, the government needs to create a better environment for encouraging companies to disclose more soft and speculative information without fear of litigation -- so long as such information is clearly labeled and there is no intentional deceit.
The report makes specific suggestions to accomplish these two goals.
The group was chaired by Jeffrey E. Garten, Dean of the Yale School of Management, and was comprised of the following members: G. Leonard Baker, Managing Director, Sutter Hill Ventures; John Doerr, Partner, Kleiner Perkins Caufield & Byers; Rob Glaser, Chairman & CEO, RealNetworks; Henry Kaufman, President, Henry Kaufman & Company; Timothy M. Koller, Principal, McKinsey & Co.; Kenneth Lay, Chairman, ENRON; Baruch Lev, Professor of Accounting and Finance, Leonard N. Stern School of Business, New York University; Nancy Peretsman, Managing Director, Allen & Company; Peter G. Peterson, Chairman, The Blackstone Group; Dennis Powell, Vice President and Corporate Controller, Cisco Systems; David L. Shedlarz, Executive Vice President & CFO, Pfizer; Richard Sherlund, Managing Director, Goldman Sachs & Co.; Joseph E. Stiglitz, Professor of Economics, Stanford University; and Hal R. Varian, Dean, School of Information Management and Systems, U. of California at Berkeley.
"At a time when our stock markets loom so large in the economy," said task force chairman Jeffrey Garten, "we need to close large gaps in the quality of information that companies disclose. A lot of studies have been conducted on these issues, and now it's time for concrete measures."
The report is being widely disseminated to interested professionals, and Garten said that the task force stands ready to meet with administration officials to go over the report, and with the next chair of the SEC once he or she is appointed.
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