Oversight Hearing on "Accounting and Investor Protection Issues
Raised by Enron and Other Public Companies."


Prepared Statement of Mr. James G. Castellano, CPA
Chairman, Board of Directors
American Institute of Certified Public Accountants (AICPA)
Managing Partner, Rubin, Brown, Gornstein Co., LLP

10:00 a.m., Thursday, March 14, 2002 - Dirksen 538

Thank you, Chairman Sarbanes, Ranking Member Gramm, and other distinguished Members of the Committee for permitting me to testify before you today on accounting and investor protection issues raised by the collapse of Enron and other public companies. I am Jim Castellano, Chairman of the Board of the American Institute of Certified Public Accountants. Enron and its aftermath have clearly shaken public confidence in the accounting profession, in the quality of financial reporting, and in the reliability of our system of public company disclosureand in the stability of our financial markets. It has brought us to the cusp of an historically significant moment when the need emerges to give thoughtful and careful consideration to systemic reform.

Commitment to Reform

The AICPA is deeply committed to maintaining and improving the quality and reliability of financial disclosures. The public demands nothing less. In order for our capital markets to function effectively and for our economy to allocate resources efficiently, it is essential that business enterprises report accurately and fairly to investors and that investors perceive that they do so. Our economy needs both the fact and the appearance of credible financial reporting. To that end, our paramount concern is the restoration of public confidence in the quality of financial reporting and in the accounting profession.

I am here to assure the Committee that the AICPA will support meaningful and appropriate reforms, and has been both an advocate and a catalyst for necessary change throughout its history. We recognize the importance for elected leaders to act responsibly in order to do what they can to prevent a business failure on the scale of Enron from happening again. In doing so, however, rapid action should not be a substitute for principled reform. We believe the real value of any new public policy affecting our profession must be assessed by asking four threebasic questions:

      1. Will it help investors make informed investment decisions?
      2. Will it enhance audit quality and the quality of financial reporting?
      3. Will it help restore confidence in the capital markets, our nation’s financial reporting system, and the accounting profession?
      4. Will it be good for America’s financial markets and economic growth?

Using these four three criteria as benchmarks, the AICPA will work with the Committee, the Congress, the SEC, and the FASB to continue to develop meaningful and appropriate reform.

Context for the Accounting Profession

Each year, many CPAs who are employed by public companies prepare the financial statements for the 17,000 companies that are registered with the SEC, and many CPAs audit those financial statements. In cities big and small, CPAs prepare and audit financial statements for tens of thousands of small, medium and large companies to meet federal, state, local and other commercial requirements.Each year, AICPA members perform 17,000 audits of public companies and file their audit opinions with the U.S. Securities and Exchange Commission. In that same period, AICPA members perform tens of thousands of audits to meet federal, state, local and other commercial entitiesrequirements. The men and women preparing these filings and auditing these financial statements do so with the utmost integrity and fairness. Unfortunately, it is often the case that the significant role they play in the U.S. capital markets only gets recognized when a business fails. In cities big and small, CPAs prepare and audit financial statements for tens of thousands of small, medium and large companies to meet federal, state, local and other commercial requirements. The men and women preparing these filings and auditing these financial statements do so with the utmost integrity and fairness. Unfortunately, it is often the case that the significant role they play in the U.S. capital markets only gets recognized when a business fails.

The AICPA and its members are committed to the goal of assuring that our markets remain the best in the world. Our paramount concern is the restoration of public confidence in the quality of financial reporting and the accounting profession. To that end, we believe the public interest requires a comprehensive approach designed to foster improvements in the quality of audits, the reliability of financial disclosure and the efficiency of our capital markets.

Modernizing the Financial Reporting Model

To keep pace with today's fast moving economy, the system of financial reporting must be modernized. Economic change has outpaced the corresponding accounting for such change. Intellectual capital has become the greatest engine for corporate growth. Yet, accounting is still based on hard assets – physical plant and related items for producing goods. Even companies producing tangible goods have become highly dependent on intangible sources of revenues and competitive advantage. Knowledge work has become the key to corporate effectiveness.

The accounting profession was first among those convinced that the accounting model needed to be modernized. From 1991-1994, a special committee of the AICPA studied the state of business reporting. The Special Committee’s greatest achievement was its research on the needs of investors and creditors. The research showed that investors have many unmet informational needs. Figuratively speaking, because corporations seek capital from investors and creditors, investors and creditors are customers of the corporation’s sale of securities. Monetary exchanges do not take place without information and, the better the information about a prospective purchase, the better the purchaser’s chance to make a satisfactory pricing assessment. Putting the same point in terms of investors’ purchases of securities, the better the information investors have, the lower the risk of poor investment or credit decisions.

In the broadest sense, if we are going to modernize the accounting model, we must focus on the following areas:

To achieve these fundamental improvements to our system of investor information, the accounting profession needs the best and brightest minds with a variety of interdisciplinary skills. As you will hear from my fellow panelist we must be careful to avoid quick fixes that would deprive the profession of this talent.

Conclusion

We will continue to work with the Committee, the Congress and the regulators to develop meaningful and appropriate reforms. At the beginning of my remarks, I identified four basic questions that we suggest must be asked to assess any new public policy. In that vein, we all must consider whether any reform under consideration -- while well-intentioned -- will have unintended consequences that outweigh any benefits it may bring to the system.

We look forward to participating in this healthy debate in the days and weeks ahead.



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