WEBMASTER NOTE: This is the unedited transcript of the Roundtable on the International Financial Reporting Standards "Roadmap" held on March 6, 2007, which we received directly from the court reporter. We are posting the transcript in this form to make it available as soon as possible. 1 THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION 2 3 4 5 6 INTERNATIONAL FINANCIAL REPORTING STANDARDS 7 ROADMAP ROUNDTABLE 8 9 10 Tuesday, March 6, 2007 11 10:00 a.m.- 5:30 p.m. 12 13 14 United States Securities and Exchange Commission 15 100 F Street, Northeast 16 Washington, D.C. 17 18 19 20 21 22 23 24 Diversified Reporting Services, Inc. 25 (202) 467-9200 1 C O N T E N T S 2 PAGE 3 Call to Order 3 4 5 Introductions by Professor Hal Scott 5 6 7 Opening Remarks by: 8 Christopher Cox, Chairman, 8 9 U.S. Securities and Exchange Commission 10 11 Charlie McCreevy, European Commissioner 22 12 for the Internal Market and Services 13 14 Panel 1: Effect on the Capital Raising Process 31 15 in the U.S. Capital Markets 16 17 Panel 2: Effect on Investors 98 18 in the U.S. Capital Markets 19 20 Panel 3: Effect on Issuers 167 21 in the U.S. Capital Markets 22 23 Closing Remarks 227 24 25 1 P R O C E E D I N G S 2 MR. WHITE: Good morning. Welcome to the SEC 3 staff's Roundtable on International Financial Reporting 4 Standards, or IFRS, and their effect on U.S. capital markets. 5 I am John White, director of the Division of 6 Corporation Finance. And on behalf of Ethiopas Tafara, 7 director of the Office of International Affairs; Conrad 8 Hewitt, the Commission's chief accountant; and myself, I want 9 to thank all of the panelists and the public audience for 10 being here today for this important program. 11 Our principal goal today is to obtain input on the 12 potential effects of a coexistence without reconciliation of 13 the IFRS and U.S. GAAP reporting models on the various 14 participants in the U.S. capital markets. And I would like 15 to begin by outlining what we have planned for the rest of 16 the day. 17 First, SEC Chairman Chris Cox will share with us 18 his thoughts on the roadmap to ending reconciliation. 19 His comments will be followed by remarks by 20 European Commissioner of the Internal Marketing Services, 21 Charlie McCreevy. 22 Chairman Cox and Commissioner McCreevy will be 23 introduced by Professor Hal Scott, the Nomura professor and 24 director of the Program on International Financial Systems at 25 the Harvard Law School. Professor Scott has taught at the 1 law school for over 30 years. His courses include capital 2 markets regulation, international finance, and securities 3 regulation. He is also a director of the Committee on 4 Capital Markets Regulation. 5 After Chairman Cox's and Commissioner McCreevy's 6 remarks, we will then move directly to the first of three 7 roundtable panels that will look at the effects of 8 reconciliation and the possible elimination of reconciliation 9 on the capital raising process in the United States. 10 We will then take a break at approximately 12:30. I 11 should point out that, if you are looking for lunch, there 12 are a number of places in Union Station, both sit-down 13 restaurants, and there is a large food court downstairs. You 14 go back out the same way you came in. Go through security, 15 take a right, and you will have to come back through security 16 when you come back in the afternoon. 17 Our second roundtable panel will begin at 1:45, and 18 it will focus on the effect on investors in the U.S. capital 19 markets. That should go until about 3:30. 20 We will take a 15-minute break. 21 And then our third and final panel will begin at 22 3:45 and will focus on the effects on issuers, both foreign 23 and domestic. 24 And we are particularly fortunate to have on the 25 final panel Don Nicolaisen, the former chief accountant of 1 the SEC, who, in April of 2005, first described the roadmap 2 for eliminating the requirement for non-U.S. companies to 3 reconcile to U.S. GAAP the financial statements they prepare 4 using IFRS, as issued by the International Accounting 5 Standards Board. 6 We expect to conclude this roundtable at around 7 5:30. 8 Now, I was also handed this long sheet of paper 9 about how to evacuate this building in case of emergencies. 10 And I'm not going to read the whole thing through, but there 11 are exits in back, there are exits on the side. There are 12 all kinds of directions when you go those places, if you have 13 to evacuate. If there is a shelter-in-place incident, stay 14 here, and we will give you additional instructions. 15 I hope, Chairman Cox, that I got that all right. 16 With that, I will turn it over to Professor Scott. 17 PROFESSOR SCOTT: Thank you. It is an honor and a 18 pleasure to introduce today two men who are, separately and 19 together, making key contributions to ensuring that we have 20 the right regulatory framework for the global financial 21 system for the 21st Century. 22 One of the most important features of this system 23 -- perhaps even the most important -- is the accounting 24 system. A global financial system ultimately requires, in my 25 view, a global accounting framework, whether this is to 1 achieved by a single set of rules, or through mutual 2 recognition, or choice among a few of the best rules. 3 The EU and the SEC have taken an important step in 4 this direction by a commitment to a roadmap under which the 5 U.S. would accept IFRS by 2009 -- which, as you know, is the 6 Europe accounting standard -- and the EU would continue to 7 accept U.S. GAAP. 8 An important issue in meeting this objective is to 9 understand the impact of differences in the two standards. We 10 should learn a lot about this from the IFRS-U.S. GAAP 11 reconciliations now being filed in the U.S. The differences 12 between these two standards should continue to narrow as a 13 result of the FASB-IASB convergence project. 14 Equally important is to gain an understanding as to 15 how IFRS will be enforced in the EU member states and 16 elsewhere where it has been adopted. The acceptance of IFRS 17 in the U.S. will be an important change, and it is incumbent 18 that there be open and serious discussions between now and 19 2009 as to how this will actually work. 20 Accounting standards may be arcane to some, but 21 they are the bedrock of the financial system and, ultimately, 22 the economy as a whole. 23 The Committee on Capital Markets Regulation, which 24 I am privileged to serve on, made a number of recommendations 25 for improving the competitiveness of the U.S. capital 1 markets. Fortunately, given the roadmap, we did not need to 2 advocate U.S. recognition of IFRS. However, it should be 3 kept in mind that permitting foreign companies to use IFRS to 4 lower the costs of foreign companies publicly issuing their 5 securities in the U.S. can allow U.S. investors to invest in 6 these securities under U.S. disclosure rules. 7 Let me now introduce our principals. 8 Commissioner McCreevy is the European commissioner 9 for the internal market, a position he has held since 2004. 10 Prior to that time, he served in a number of positions in the 11 Irish government, including minister of finance. 12 He has championed many internal market reforms 13 within the EU to perfect the achievement of a single market, 14 including the Prospectus, Transparency, and MiFIA Directives. 15 He has also been instrumental in greatly improving the law 16 and regulatory process for the EU. 17 He was instrumental in the creation of the roadmap 18 in April 2005 and its reconfirmation at his meeting with 19 Chairman Cox in February of 2006. He has made further 20 integration of the EU and U.S. capital markets a major 21 priority. 22 And let us not forget that he is a member of the 23 Institute of Chartered Accountants. 24 Chairman Cox, after a distinguished career in the 25 U.S. Congress, became the chairman of the SEC in August of 1 2005. 2 Since coming here, Chairman Cox has been 3 instrumental in pursuing a consensual approach of the 4 Commission to the resolution of a number of controversy 5 issues -- for example, the Commission's policy on civil 6 penalties. 7 Like Commissioner McCreevy, Chairman Cox has 8 demonstrated his commitment to the development of capital 9 markets. The current Commission proposals on deregistration 10 and the implementation of Section 404 of Sarbanes-Oxley have 11 been responsive, in part, to European concerns, as well as 12 the competitive position of the United States. The Chairman 13 has led the way in showing that investor protection and 14 increased U.S. competitiveness can both be achieved through 15 the right combination of sound policies. 16 And I would be remiss if I didn't note that 17 Chairman Cox received an MBA from Harvard Business School 18 and, more importantly, a JD from Harvard Law School. 19 We in the world are fortunate to have these two 20 talent and dedicated leaders. Thank you. 21 CHAIRMAN COX: Thank you very much, Hal. I want to 22 join in welcoming everyone that is here -- and some that 23 aren't, because others will be able to participate in these 24 proceedings remotely or by our publication and transmission 25 of all that goes on here today. 1 I want particularly to point out that I am joined 2 here this morning by two of my fellow Commissioners, Roel 3 Campos and Kathleen Casey. And, throughout the day, all of 4 the members the Commission will be here because of the 5 importance that we attach to what we are talking about this 6 morning at the SEC's Roundtable on our International 7 Financial Reporting Standards Roadmap. Oh, and Commissioner 8 Nazareth is already here, as well. So we are almost at full 9 strength right now. Perhaps we should call a quick vote. 10 Today's forum is focused both on next steps and on 11 looking back at where we have been. It has been two years 12 since our then-chief accountant, Don Nicolaisen, first laid 13 out the roadmap, which, as Hal pointed out, I endorsed as 14 Chairman, just a few months later. 15 But this has been a much longer journey than that. 16 Eleven years ago, in the National Capital Markets Efficiency 17 Act, the Congress directed the SEC to give vigorous support 18 to the development the high-quality international accounting 19 standards as soon as practicable. 20 Four years later -- in February 2000 -- the SEC 21 issued a concept release that solicited comment on whether we 22 should consider accepting IFRS in the United States. 23 Two years after that, when Enron and the wave of 24 the accounting scandals that followed called into question 25 the intensely rule-based approach of U.S. GAAP, Congress 1 again urged us to take action. In Section 108(d)(1) of the 2 Sarbanes-Oxley Act, the SEC was directed to study, quote, 3 "the adoption by the United States of a principles-based 4 accounting system." SOX expressly required that we examine 5 the length of time that would be necessary to change from a 6 rule-based to a principles-based financial reporting system. 7 And so, in 2002, with the SEC's express support, 8 the FASB and the IASB began in earnest to achieve short-term 9 convergence between their respective sets of accounting 10 standards. 11 In the Norwalk Agreement that was struck between 12 the FASB and the IASB in September of 2002, the respective 13 boards agreed to work toward making their existing financial 14 reporting standards fully compatible "as soon as is 15 practicable." Those were the words in the Norwalk Agreement 16 -- the phrase that was used by Congress in the National 17 Capital Markets Efficiency Act. 18 That same year, the European Parliament and the 19 Council of the European Union determined that all listed 20 European companies -- including banks and insurance companies 21 -- would have to prepare their consolidated financial 22 statements using IFRS beginning in 2005. 23 So when the roadmap was laid out two years ago, we 24 had already covered a lot of ground. 25 The roadmap commits us to eliminating the current 1 U.S. GAAP reconciliation requirement, with the result that 2 eligible firms listing on U.S. exchanges could choose whether 3 to report under IFRS or U.S. GAAP. And if an issuer chose 4 IFRS, it would not be required to reconcile the differences 5 with GAAP, just as, today, issuers reporting under U.S. GAAP 6 are not required to reconcile the differences with IFRS. 7 Once it was unveiled, the roadmap took on a life of 8 its own. Governments, regulators, and standard setters 9 around the world have been relying on it to determine their 10 actions. We are committed to this process, and we are not 11 looking back. 12 Have you ever tried to re-fold a roadmap? It's not 13 pretty. Not only is it impossible to divine which side folds 14 where, but, usually, we undertake this while the car is in 15 motion, while the driver is yelling, and probably while you 16 are not entirely sure if you are on the right track 17 -- because, otherwise, you wouldn't need a map in the first 18 place. 19 So we are not going to re-fold the map or try to 20 stuff it, all mutilated, back into glove box. I am here to 21 tell you, as I have said before, that I and the SEC are 22 committed to the roadmap. 23 And, in that regard, I would like particularly like 24 to welcome EU Internal Markets Commissioner Charlie McCreevy 25 because I know that he, too, and the EU are, likewise, 1 committed to the roadmap. 2 As the world securities markets continue to 3 integrate, it is easy to imagine that this process is 4 inevitable, inexorable, somehow impelled by forces of nature. 5 But everyone in this room knows that you all bear a special 6 burden. It's a lot of work, every day, to make this 7 happen -- to turn that vision of seamless integration into 8 reality. 9 As issuers and investors increasingly look beyond 10 their borders for opportunities to invest or to raise 11 capital, it is critical that the financial information that 12 they use to make their decision be both accurate and timely. 13 One of the obstacles that investors have to 14 overcome in making their investment decisions is the 15 different ways that information might be presented to them. 16 Sometimes the differences are due simply to the happenstance 17 of the country in which an issuer happens to find itself. 18 That's why virtually everyone -- issuers, investors, 19 stakeholders of all kinds -- agree that the world's capital 20 markets would benefit from the widespread acceptance and use 21 of high-quality global accounting standards. 22 The rationale for a global standard, instead of the 23 babble of competing and sometimes contradictory national 24 standards, has been often stated. But it is so important 25 that it bears repeating: Global accounting standards would 1 improve investor confidence in the market, so long as the 2 standards are high quality, comprehensive, and rigorously 3 applied. 4 They would allow investors to draw better 5 comparisons among investment options. They would also lower 6 costs for issuers, who would no longer have to incur the cost 7 of preparing financial statements using different sets of 8 financial reporting standards. And those lower costs, in 9 turn, would benefit investors, who ultimately bear the burden 10 of the entire cost of the financial reporting system. 11 The purpose of today's roundtable on the roadmap is 12 to consider the possibility that IFRS and U.S. GAAP might 13 coexist in U.S. capital markets and to assess the impact that 14 this would have on capital markets in the U.S., on the 15 decisions that investors make, and on our program of investor 16 protection. 17 Not only the European Union, but also many other 18 nations -- including Canada, Australia, New Zealand, Israel, 19 China, and Hong Kong -- are adopting IFRS. And so, without 20 question, it is becoming a widely used set of standards. 21 But we shouldn't forget that it is also a new set 22 of standards. IFRS has existed as a truly comprehensive set 23 of accounting standards for only a few years. And because of 24 that relative newness, it necessarily has a limited history 25 of interpretation and application. We are all now engaged in 1 the exercise of ensuring that IFRS is being applied 2 consistently, faithfully, and transparently. 3 This exercise is of importance, of course, to our 4 friend in the European Community because consistency and 5 faithfulness in the interpretation and application of IFRS 6 are critical to the creation of a seamless integrated capital 7 market comprising the EU's 25 member states. 8 The exercise is also of critical importance to us 9 here at the SEC. Allowing the use of two different sets of 10 accounting standards in the United States would mark a 11 significant change for us, but allowing two standards is a 12 nothing compared to allowing two dozen. And, for that 13 reason, we have got to be able to demonstrate that IFRS is 14 indeed a single set of international accounting standards and 15 not a multiplicity of standards going by the same name. 16 It is the premise of the roadmap that, if we can do 17 this, that the potential benefits to U.S. investors of 18 allowing the use of IFRS in the United States almost 19 certainly outweigh the risks and the costs. 20 These benefits include increased investor access to 21 foreign investment opportunities and entry into the U.S. 22 capital markets by issuers that might otherwise be deterred 23 from listing here because of cost of reconciling their 24 financial statements to U.S. GAAP. 25 The risk, by contrast, is not that IFRS isn't of 1 high enough quality to provide U.S. investors with adequate 2 information about the companies in which they invest, but, 3 rather, that financial statements prepared using IFRS might 4 not be comparable with one another because of a lack of 5 consistent, uniform application. 6 That imperative of consistent application and 7 interpretation depends on policy makers, on governments, on 8 issuers, and on accountants. Regulators, such as the 9 Securities and Exchange Commission, also play a role because 10 it is our job to review financial statements, whether they 11 are filed using IFRS or U.S. GAAP, to see whether the 12 accounting standards are being applied consistently and 13 faithfully. 14 Last summer, we saw the first wave of filings by 15 non-U.S. companies using IFRS. While the number of IFRS 16 filings was smaller than we had expected it would be, those 17 that we did receive were helpful in orienting us to the kinds 18 of issues that we can expect to see as number of filings 19 rises over the next few years. 20 While these were the first IFRS filings we have had 21 the opportunity to review, the SEC has long been in the 22 business of reviewing filings by foreign private issuers. The 23 kind of review that the SEC staff has done of these first 24 IFRS filings is the same that we have done for years for 25 filings reconciled to U.S. GAAP. 1 But, given the relative newness of IFRS, the staff 2 of the Office of the Chief Accountant and the Division of 3 Corporation Finance have worked hard to understand the new 4 standards and how issuers are using them to state their 5 financial results. 6 The initial comments of staff reviewing these 7 filings are most appropriately described as 8 information-seeking. They are not intended to be conclusions 9 about the application of IFRS. They are instead meant to be 10 an effort to better understand things that might be unclear, 11 or call attention to things that may be omitted. 12 I want to emphasize that the staff's comment 13 letters should not be viewed as an attempt to straight-jacket 14 the interpretation of IFRS, or to make it a more rules-based 15 and less principle-based system. It's one thing to say that 16 IFRS should be interpreted and applied consistently and 17 another thing to say that it should be stripped of its 18 flexibility business and its essential principles-based 19 nature. 20 One of America's early icons, a rough-and-tumble 21 frontier lawyer, who Tennessee's first Congressman, once 22 memorably said that, "It's a damn poor mind indeed that can't 23 think of at least two ways to spell the same word." 24 Old Hickory, as he came to be known, was our 25 seventh President, and Andy Jackson's folk wisdom is 1 appreciated today by some of the great Americans who work in 2 the Division of Corporation Finance and the Office of the 3 Chief Accountant. They know as well as anyone that, the same 4 way that a poem or a short story or a novel or a play is 5 subject to multiple interpretations, so are the standards set 6 forth in IFRS, even if accounting standards don't often rise 7 to the level of poetry. 8 But just as is it true that any piece of literature 9 can be subject to multiple interpretations, it is also true 10 that some interpretations can be incomplete, or just wrong. 11 For example, an essay on Moby Dick that doesn't mention the 12 whale may raise questions that the writer has perhaps missed 13 something important. Or when an essay on Hamlet begins with 14 the statement that Lady Macbeth is the key to understanding 15 the play, we know that something has gone terribly wrong. 16 So while there may be more than one reasonable 17 interpretation or understanding, that interpretation or 18 understanding has to be susceptible to explanation. And a 19 comment letter that asks for more detail or greater 20 explanation doesn't mean that the SEC is trying to impose its 21 own interpretation. We and others around the world will 22 instead be focusing on a shared understanding of the 23 principles of IFRS. 24 To this end, the SEC and the Committee of European 25 Securities Regulators have entered into a joint work plan to 1 further the consistent and faithful application of accounting 2 standards. 3 The work plan provides a forum in which the SEC and 4 the EU regulators can discuss questions about the application 5 of accounting standards. The work plan helps foster 6 consistency and faithfulness by helping regulators to avoid 7 conflicting decisions. 8 The process is very much collaborative, and it 9 recognizes that, by their very nature, neither IFRS nor U.S. 10 GAAP is the exclusive purview of a particular regulator, but, 11 rather, they are public goods for the common benefit of many. 12 By consulting with each other, the SEC and the CESR staff can 13 help ensure that high-quality global accounting standards are 14 consistently interpreted and faithfully applied. 15 At the same time, FASB and the IASB have embarked 16 on a project to converge accounting standards, which, as I 17 noted, was formalized in the Norwalk Agreement. Over the 18 past few years, these efforts have gone far to reduce 19 differences between the two sets of standards. And, by all 20 accounts, they have improved both IFRS and U.S. GAAP in the 21 process. 22 But accounting standards are complicated, and this 23 process can be difficult. And that inherent difficulty has 24 led some to the view that the convergence of IFRS and U.S. 25 GAAP is ultimately impossible; thus, rendering the 1 elimination of the reconciliation requirement an eternally 2 unattainable goal. 3 So let me repeat that we don't expect to see total 4 convergence, or even a specific level of convergence, before 5 eliminating the reconciliation requirement. Instead, there 6 must be a robust and active process for converging IFRS and 7 U.S. GAAP. If the process is in place, then the current 8 differences will be minimized in due course. 9 This is hard work, but the benefits for investors 10 in our markets, if we are successful, are enormous. 11 Convergence of IFRS and U.S. GAAP will allow the United 12 States and markets around the world to capitalize on the 13 benefits of a single set of globally-accepted accounting 14 standards. And the process of reducing the differences 15 between IFRS and U.S. GAAP gives us the opportunity at the 16 same time of taking both to the highest-quality level. That's 17 why the SEC originally committed to the roadmap and why, 18 years later, we are still committed. 19 That original commitment was enormously 20 consequential because it implied a great deal. It meant that 21 IFRS and U.S. GAAP would some day compete freely in America's 22 capital markets, and that two accounting systems would 23 operate side by side -- at least, until the process of 24 convergence concludes with actual convergence and there is 25 truly one global accounting standard and seamless 1 international comparability in reporting. 2 It meant that issuers, markets, and investors would 3 have a choice because they -- not the government -- could 4 decide between IFRS and U.S. GAAP. 5 And it meant that the SEC was seriously 6 contemplating a system in which, not only foreign issuers, 7 but also domestic issuers, will have that choice. 8 Most importantly, it meant that the work of 9 standard setters toward convergence of the two systems that 10 is ongoing here in the United States, at the IASB, and in 11 every nation that is implementing IFRS will not be of 12 infinite duration. 13 As the name implies, the roadmap has a destination 14 and an estimated time of arrival. We are now less than two 15 years away from our planned arrival at the intended 16 destination. Whether or not complete conversion is 17 susceptible of practical implementation in the short term, 18 the elimination of the present reconciliation requirement is 19 not dependent upon the FASB and the IFRS resolving all major 20 differences between their regimes. As I said, rather, it 21 requires sustained progress toward that goal. 22 It is a significant implication of the roadmap 23 that, once the reconciliation requirement is lifted, there 24 will be no incentive for delay in truly converging IFRS and 25 U.S. GAAP. 1 The roadmap isn't an article of faith. It's a 2 plan -- nothing more or less. And just as with the garden 3 variety roadmap, every once in a while, it pays to stop and 4 ask questions about the particular route that we have chosen 5 answer. And that is why we have convened this distinguished 6 group of panelists today, drawn from those who play a vital 7 role in the capital raising process. 8 We are interested in multiple points of view -- 9 from issuers, accountants, investors, credit rating agencies, 10 investment bankers, lawyers, and directors. Because all of 11 these people -- all of you -- are observing this process 12 firsthand, you are the experts. We aim to be empiricists and 13 to learn from your experience. 14 Twenty-three centuries ago, Aristotle concluded 15 that heavier bodies fell faster than lighter ones because it 16 seemed logical that they would. For almost two millennia 17 afterward, just about everybody believed that that was true, 18 not only because it seem logical to them, as well, but also 19 because Aristotle had said so. It was not until Galileo 20 constructed a carefully conceived series of experiments and 21 meticulously observed and reported the results was it proved 22 once and for all that bodies fall at the same rate of speed, 23 whatever their weight. 24 And as important as that discovery was, the far 25 more important consequence was the triumph of empirical 1 observation over ivory tower analysis -- or, as the great 2 American sage and New York Yankee legend Yogi Berra, an 3 unheralded empiricist, once said, you can observe a lot just 4 by watching. And you can learn a lot just by listening. 5 As a matter of theory, the benefits of eliminating 6 the reconciliation requirement seem reasonable and logical. 7 What remains to be determined is whether those benefits can 8 be and will be achieved in practice. 9 That is the reason the SEC is hosting this 10 roundtable and why, as Yogi might put it, it is now my turn 11 to observe by watching. 12 Thank you to all of our panelists and presenters 13 who are here today. I look forward to what will surely be an 14 illuminating discussion. I know that we will accomplish a 15 lot of good today. 16 MR. MCCREEVY: Firstly, thank you, Chris, for the 17 invitation to take part in this roundtable. And also thanks 18 to you, Professor Scott, for your very kind words of 19 introduction and for you own pioneering work over many years. 20 Now, this is all further proof of the close and 21 effective cooperation the SEC and the European Commission 22 have established. I am very pleased about what we have 23 already achieved together. It is of great practical 24 importance to all of our citizens and to our businesses, and 25 I would like to commend you on your leadership. 1 Capital markets are global. Our financial markets 2 are becoming ever more close to integrations and can no 3 longer be viewed in isolation. Global markets, the global 4 standards, and global regulatory cooperation -- this is the 5 only way to ensure proper investor protection and to promote 6 transparency and efficiency. 7 We are destined to work together more, on 8 securities regulation, banking, insurance, and so on. I note 9 that the G7 finance ministers, in Essen last month, urged 10 that we should now, and I quote, "explore free trade in 11 securities based on mutual recognition of regulating 12 regimes." That is a major step up. 13 Some years ago, the European Union was faced with a 14 situation where our financial reporting practices no longer 15 met the requirements for building and integrating European 16 capital markets. We had to rethink our goals, and we decided 17 to move for international financial reporting and accounting 18 standards. That move, we think, was bold and visionary. 19 The changeover to IFRS has not come easy. It has 20 taken a lot of time and a lot of money for 8,000 or so listed 21 companies to adapt to the new accounting environment. 22 Analysts and shareholders have had to learn how react to new 23 financial information. 24 But I am very pleased to be able to say today the 25 move towards IFRS has been going well. The feedback we get 1 is generally positive. Studies of IFRS accounts have shown 2 that the overall quality of the accounts and the disclosures 3 have improved. 4 Of course, the introduction of 40 new standards, 5 plus interpretations, has given rise to some application and 6 interpretative issues. Most of these have been dealt with at 7 company level, by auditors or regulators. And this is how it 8 should be in a principles-based system. Robust and 9 understandable principles should be handled and use by 10 skilled professionals. To sift out any more complex 11 problems, we have set up a roundtable to assist in 12 interpretation. 13 Cooperation between regulators on both sides of the 14 Atlantic is also crucial for the smooth introduction and 15 enforcement of IFRS. In the global market, only regulators 16 working closely together can ensure adequate investor 17 protection. I am very pleased to see the increased level of 18 contacts and the joint work between Committee of European 19 Securities Regulators -- which trades over the imperious 20 title of CESR -- and the SEC. 21 The work done between CESR and the SEC is an 22 important step within the roadmap of facilitating cooperation 23 between regulators. This cooperation is crucial in order to 24 ensure consistent application and enforcement by IFRS and 25 U.S. GAAP and to avoid any conflicting regulatory positions 1 on the application of IFRS. We need to be open towards each 2 other and to exchange information at every stage and to do so 3 frequently. There is still work to be done, but I am 4 confident we are on the right track. 5 Since we in Europe took the decision to use IFRS, 6 more than 100 jurisdictions around the world have decided to 7 require or to allow IFRS. The United States has taken 8 significant steps in this direction. I am convinced 9 accepting IFRS without reconciliation in the U.S. capital 10 markets will have very positive effects. It will bring more 11 openness to capital markets, it will benefit U.S. investors, 12 it will facilitate access for third country issuers into the 13 United States financial markets, and also contribute to a 14 more coherent global regulatory structure. 15 And let me underline this: This is in the U.S. 16 interest, just as it is in ours, and can and will be done in 17 a way that will benefit and safeguard U.S. investors. 18 I fully subscribe to the conclusions of the Capital 19 Markets Competitors Group that Professor Scott chaired, the 20 Bloomberg-Schumer-McKenzie report, and the speech of Treasury 21 Secretary Hank Paulson -- all calling for convergence of 22 accounting standards and a more principles-based approach to 23 regulation. 24 In the long term, it is crucial that we receive 25 substantial convergence in IFRS and U.S. GAAP, the world's 1 most important accounting frameworks. I welcome the efforts 2 made by the standard setters in FASB and the IASB to develop 3 accounting standards for worldwide use. 4 But this does not mean that IFRS and U.S. GAAP 5 should be identical. The differences should be narrowed down 6 so that investors can understand the financial statements 7 prepared under the different accounting frameworks. 8 The convergence process should improve the 9 information available to investors, with the opportunity to 10 replace weaker standards with stronger ones. However, any 11 new standards must be introduced in such a way that there 12 will be a stable framework of rules that users and preparers 13 can learn to apply in an orderly fashion. We need a period 14 of accounting stability and predictability, not a palace 15 revolution every day of the week. 16 While standards setters are continuing on the 17 conversion process, we should also have short of short-term 18 benefits. Therefore, we need to work on mutual recognition 19 and equivalence of accounting rules between the United States 20 and the European Union. 21 Last year, Chairman Cox and I confirmed our mutual 22 commitment to removing the reconciliation requirements for 23 IFRS and U.S. GAAP. I am happy that good progress has been 24 made since then. 25 In the European Union, we took a decision to 1 continue to permit listings on the basis of statements 2 prepared according to the United States and a number of other 3 GAAPs until 2009. This aligns the EU timetable with the SEC 4 roadmap. 5 Next year, both the SEC and the European Commission 6 have to take crucial decisions. I am convinced that we will 7 achieve a positive result. This is a win-win situation for 8 the United States and the European Union. 9 And I think the principle of equivalence can also 10 be applied in fields beyond accounting. This morning, PCAOB 11 Chairman Mark Olson and I have agreed to deepen EU-U.S. 12 cooperation on other regulation. 13 The starting point for cooperation between 14 oversight bodies should be the whole country principle. This 15 is why we have agreed today to launch roadmap discussions on 16 equivalence of our respective auditing systems. We want to 17 move towards full reliance on our respective public oversight 18 systems in the same spirit as in accounting. 19 This does not require standards and systems to be 20 identical, but robust enough to ensure investor confidence, 21 robust enough for each us to have confidence in each other. 22 We must also work to find a way to narrow down differences in 23 auditing standards. The aim is to have, by 2009, inspections 24 of audit firms carried out by the home country public 25 oversight body, not by host country inspections, which are 1 legally and organizationally very cumbersome. 2 Now, this agenda is ambitious, and we will need to 3 work hard to achieve it. But I am confident, and I think we 4 can built on the experience we have gained in the are of 5 accounting. 6 And let me also say that these two areas 7 -- accounting and auditing -- are the outriders, the 8 precursors to much deeper EU-United States cooperation, as 9 Chancellor Merkel of Germany is hoping to build with her 10 trans-Atlantic initiative. 11 To conclude, global capital markets are a reality. 12 Regulators have to adapt their structures and thinking to 13 this reality. The convergence of accounting standards 14 removes differences so the investors can understand different 15 financial statements and make similar investment decisions, 16 regardless of whether accounts are prepared under IFRS or 17 U.S. GAAP. 18 While this process is going on, regulators in the 19 United States and the European Union must already take two 20 important steps. One, deepen their corporation to ensure 21 consistent application and enforcement of the accounting 22 standard, their confidence in each other, and to trust each 23 other; and, two, eliminate costly reconciliation 24 requirements. 25 This will create a real win-win situation, will the 1 removal of barriers and unnecessarily costs to give better 2 access for funding, lead to lower cost of capital, and boost 3 our economies on both sides of the Atlantic, towards a 4 friction-free trans-Atlantic capital market, which is no less 5 than 70 percent of the global total. 6 The prize is within our grasp, so we must reach out 7 and take it. Thank you very much. 8 MR. WHITE: Thank you, Chairman Cox, Commissioner 9 McCreevy, Professor Scott, for being here and setting the 10 stage for today's roundtable. 11 We are now going to move directly to our first 12 panel, if everyone can come up. Thank you. 13 (Panel members come forward.) 14 MR. WHITE: Thank you. Before we actually start 15 this panel, a couple of preliminary matters. 16 First, we have joining us on this first panel two 17 of our SEC Commissioners, Annette Nazareth and Roel Campos. 18 I know, from talking with both of them, that they have a very 19 keen interest in this topic, and I am very pleased that they 20 could join us for this first panel. We will actually have a 21 number of Commissioners coming and going during the course of 22 the day, but they are here for the first panel. 23 The one Commissioner you will not see today is 24 Commissioner Atkins. He is actually in California today as 25 part of the Commission's program to promote investor 1 protection for the men and women in our armed services. But 2 he did specifically ask me to convey how important today's 3 topic is to him and his strong support for our efforts in 4 this area. 5 Let me also point out that today's program is being 6 video-cast on the Commission's website and will be available 7 through the archive after today. There will also be a 8 transcript of today's proceedings showing up on the 9 Commission's website. 10 The rules of the road for our panels today are, 11 really, fairly simple. Each panel will have two moderators. 12 The lead moderator will introduce the panelists. I'll play 13 that role for the first panel. 14 My co-moderator for this panel will be the 15 Commission's chief accountant, Conrad Hewitt. Conrad joined 16 the Commission staff last August and brings a wealth of 17 experience and a diversity of perspectives to today's topic. 18 Conrad and I will also be moderating the third 19 panel this afternoon. 20 Before I introduce the panelists, let me lay out a 21 couple of the rules of the road for the -- for all three 22 panels, actually. 23 We have asked the panelists not to make any opening 24 statements. And, in fact, we will actually direct certain 25 questions to the panelists, but we then encourage any of the 1 panelists who would like to comment to please do so. 2 The way we would like you to be recognized is to 3 turn your tent card up on end, like this. Then, if Conrad and 4 I are in the mood and we like what we think you are going to 5 say, we will call on you. If not, we will think twice about 6 it. But that's how you, at least, get our attention. I 7 guess we will ask the Commissioners to follow the same 8 procedure, although you can interrupt if you want. 9 So let me introduce the panelists for the first 10 panel. 11 Starting on the far left, Richard Blackett. Mr. 12 Blackett is the head of the International Equity Capital 13 Markets Group at Citigroup, where he has worked for 24 years. 14 He described himself to me that he had worked on almost every 15 international offering underwritten by Citigroup since 1993. 16 So I am quite pleased and impressed that we have Mr. Blackett 17 with us today. 18 Neri Bukspan is a managing director with Standard & 19 Poor's Credit Market Services. He is S&P's global chief 20 accountant and is responsible for providing direction on the 21 manner in which financial statement information is analyzed 22 and incorporated into S&P's rating considerations. 23 Nick Grabar. Mr. Grabar is a partner in the New 24 York office of the international law firm of Cleary, 25 Gottlieb, Steen & Hamilton. His practice focuses on 1 international capital markets and securities regulation. He 2 has also served in their Paris office. 3 Dave Kaplan. Dave has over 30 years of experience 4 with the international audit firm of PricewaterhouseCoopers. 5 He is currently the leader of PwC's International Accounting 6 and SEC Services Group. 7 Roberta Karmel. Professor Karmel is the Centennial 8 Professor of Law and co-director of the Center for the Study 9 of International Business Law at Brooklyn Law School. She 10 served as a Commissioner of the SEC from 1977 to 1980 -- but 11 not in a room as nice as this, as far as I know. I don't 12 think it was quite like this. And she was also a public 13 director of the New York Stock Exchange for six years. 14 And speaking of the York Stock Exchange, we have 15 Cathy Kinney. Ms. Kinney has been with the New York Stock 16 Exchange for approximately 33 years, if I understand it 17 correctly, and is currently serving as its president and 18 co-chief operating officer. 19 And, interestingly, among the many perspectives 20 that she brings today is that she is recently going through 21 the process of being a U.S. public company merging with 22 Euronext -- a different perspective than we are used to 23 having from our New York Stock Exchange representative. But I 24 hope she will share some thoughts on that with us. 25 Next, we have Ken Pott, who is in his 20th year at 1 Morgan Stanley, where he is currently head of Morgan 2 Stanley's Capital Markets Execution Group, where he focuses 3 on equity offerings, particularly IPOs, of both international 4 and domestic issuers. 5 And, finally, we have Sam Ranzilla. Mr. Ranzilla 6 is the partner in charge of the Professional Practice Group 7 in the national office of the auditing firm of KPMG. Among 8 his many roles at KPMG was a stint in their Hong Kong office. 9 So I think you will appreciate that that is a 10 pretty impressive group of panelists, particularly their 11 international experience. 12 As I mentioned earlier, the focus of our panels 13 today is the reconciliation requirement for foreign private 14 issuers reporting under the U.S. securities laws and, in 15 particular, what are the anticipated effects of ending that 16 reconciliation requirement. 17 And, to that end, we are going to try to focus the 18 panels today, as we look at that issue through, I guess I 19 would say, the lens of three missions that we have here at 20 the SEC -- which is, promoting capital formation, maintaining 21 fair and orderly markets, and protecting investors. 22 And so we have asked each of the panelists on the 23 all three panels to formulate their comments thinking about 24 the following questions: 25 What are the factors that cause investors and 1 issuers to go to particular capital markets? 2 What are the effects on the availability of capital 3 in the U.S. markets if both IFRS, without reconciliation, and 4 U.S. GAAP are coequal financial reporting systems? 5 What are the opportunities and consequences for 6 various capital market participants of having this dual 7 system in place? 8 And finally, and quite importantly, what is the 9 impact on investors, and will they be receiving the necessary 10 information to make informed investment decisions? 11 So with that long wind-up, let's get started on our 12 first panel. 13 I would like to first call on Mr. Blackett and Mr. 14 Grabar for our first discussion topic, which is whether 15 ending reconciliation may result in U.S. investors having 16 additional opportunities to invest in foreign securities here 17 in our U.S. markets, presumably because the U.S. markets will 18 become more attractive to these issuers. 19 So, Mr. Blackett? 20 MR. BLACKETT: For my first point, I think I would 21 like to step back a little bit and try and put the investor 22 base in context, because it's not just the retail investor 23 base, which I think we traditionally view as being 24 potentially the, quote, "beneficiary" of such a change, but I 25 think it is also there is a large body of institutional 1 investors who would also benefit. 2 We look at our businesses with much the same view. 3 We break our investor base down into three broad categories: 4 Very large sophisticated institutional investors, 5 who generally have the scope and scale to invest 6 internationally by setting up offices abroad and investing in 7 local markets, investing in the back office systems, the FEX, 8 the custody, safekeeping, et cetera. Those are generally 9 institutions that probably have about $2 billion or more. 10 The other two categories -- and, of course, this 11 investor base is a spectrum, rather than a neat little series 12 of silos -- is what we call middle market. And we cover 13 about 5,000 of those institutions, and they run the gamut 14 from a few million to several billion dollars. 15 And then, of course, our retail investors that run 16 the gamut from the small accounts, with just an IRA, up to 17 Bill Gates, arguably. 18 So the spectrum of each silo can be quite broad, 19 but I think it's important to look at those three silos. 20 All of these, I think, have seized on the same 21 themes or trends over the last several years -- the last 5 or 22 10 years -- of diversification of portfolio assets, 23 increasing global awareness, the search for relative 24 out-performance, risk mitigation by buying non-correlative 25 assets -- and perhaps that has been tested in the last 1 week -- and thematic investment, looking for ethanol or 2 alternative investments around the world -- IT investments, 3 technology and natural resources, entry level housing. 4 So the themes that have driven those investors are 5 probably very similar across the various silos. The large 6 institutions, as I said, can do this locally. They have the 7 costs of scale, the local offices, the back offices, the 8 custody, et cetera. And, to some degree, that acts as a 9 barrier to entry for other institutional investors, in 10 particular, let alone retail, to get into that line of 11 business and benefit from those themes. 12 The smaller institutions and retail investors, from 13 where we sit, see the same opportunity, have the same general 14 awareness of the themes I outlined, but, for various reasons, 15 are substantially frustrated, either because of the lack of 16 availability of stocks in the United States or, indeed, their 17 ability to replicate it. 18 They are very focused -- particularly the small 19 institutions -- on us fees, fees on fees, fixed cost charges, 20 expenses that they may or may have to pass through. 21 So there is a huge body of investors that sees the 22 same opportunity, but are substantially frustrated, not just 23 by the lack of listing, if you will, but, more importantly, 24 the incremental cost of doing it themselves in a foreign 25 market. You're buying FEX, you're buying it at the retail 1 rate, rather than the wholesale rate -- those sorts of 2 expenses. 3 They do see the same themes and, from where we sit, 4 would be significant participants in offerings in the United 5 States -- but not just offerings here, but also the secondary 6 market and the liquidity that a ADR would provide them. 7 So, certainly, there is a large constituency out 8 there that I think would benefit both from the primary 9 market, but also the secondary market. 10 MR. GRABAR: I would just add, from the perspective 11 of the participants in the offering process that 12 reconciliation and the 2009 deadline are something that we 13 hear from our clients everybody is looking to, very eagerly. 14 Foreign issuers who are already in the U.S. market 15 have now dealt with 404 reporting. They understand that 16 foreign private issuer deregistration is on the way. And the 17 other thing they want to know before they decide whether to 18 stay is what is happening with reconciliation in 2009. So 19 people are very focused on this deadline. 20 For those who are already in the U.S. market, the 21 elimination of reconciliation will make a number of specific 22 kinds of transactions available to U.S. investors that are 23 not available today. And that is because the reconciliation 24 creates an anomaly in the reporting process for big foreign 25 private issuers. 1 Big issuers who comply in full with their '34 Act 2 reporting requirements find themselves blacked out from 3 making registered offerings under the '33 Act by the absence 4 of a recent U.S. GAAP reconciliation. 5 So our big foreign private issuer clients who took 6 advantage of securities offering reform to set up automatic 7 shelf registration statements, for example, find that, 8 because they don't prepare reconciliations of interim 9 financial statements, the only period during which they can 10 actually their beautiful new automatic shelf is between the 11 time they file their 20-F on, say, June 15th, and the time 12 that they would be required to prepare an interim 13 reconciliation, which is September 30th. That, of course, 14 includes the summer. 15 So that many of our foreign issuers actually, when 16 they, for example, are raising fixed income in the U.S. or 17 conducting a rights offering will avoid the U.S. public 18 markets and do private placement through registration rights 19 because of the blackout effect that falls from the 20 reconciliation. 21 So this is a small point, perhaps, in the big 22 picture, but it is a technical anomaly that means that 23 eliminating the reconciliation will make deals available to 24 U.S. investors that are not available to them today. 25 MR. WHITE: Ms. Kinney, do you want to give us the 1 stock exchange's perspective -- or your own? 2 MS. KINNEY: Well, I think the assumption that 3 there would be a larger pipeline of listings or issuers 4 coming to the U.S. markets is a fairly reasonable and sound 5 assumption to make. 6 We, as well, hear issuers, very excited, about the 7 progressive nature of the recent announcements by the SEC -- 8 the changes in 404, the deregistration, and then the 9 impending 2009 adoption. 10 So I think non-U.S. issuers are very encouraged by 11 what they hear and are really hoping to be able to stay in 12 the U.S., and many of them are hoping to come to the U.S. And 13 we see an enormous pipeline coming from Asia, as well as from 14 other developing markets around the world. 15 So, first, we encourage as much work as can be done 16 and, certainly, mutual recognition as quickly as possible. 17 And if it could be accelerated or any pilots could be 18 conducted, I think that would be useful. 19 We do think that more issuers will come to the U.S. 20 We think they will come in the form of dual listings. That 21 will mean that, because the markets outside the U.S. growing 22 and developing, the home country listings, as well as 23 international listings, will be the way that companies access 24 investors, broadly speaking. 25 And I think this would be very good for U.S. 1 investors because, today, many of those investors are going 2 to the home country to buy those securities, anyway. They 3 are being brought there by their broker-dealers. And, in 4 some cases, they are already relying on the disclosures and 5 the financial reporting in those home countries. So I think 6 investors are looking at the companies and wanting to invest 7 wherever those companies reside. 8 And I would say, finally, you can see that fact in 9 that, today, 20 percent of all investable assets are being 10 invested in non-U.S. companies. And so, to the point that 11 was made earlier, investors are seeking opportunities, and 12 they will go outside the U.S., if they have to, but they 13 would prefer to be here. 14 MR. WHITE: And you see this happening as soon as 15 the reconciliation requirement ends? 16 MS. KINNEY: I think that companies are getting -- 17 the answer is yes. I think that we see companies getting 18 ready and thinking about that and how to position in time 19 things into the U.S. But, you know, as I said, the faster 20 and sooner it could come, I think that would be great. 21 MR. WHITE: Mr. Grabar, just going back to your 22 comment, as soon as the reconciliation requirement ends, the 23 problem you described disappears? 24 MR. GRABAR: Yes, I think that's right. I would 25 also add that there are ways and ways of eliminating the 1 reconciliation requirement. And part of the effect that 2 Cathy Kinney is referring to could turn on which issuers can 3 take advantage of a system in which IFRS financial statements 4 are accepted without reconciliation. 5 And, obviously, the discussion focuses very much on 6 European issuers, but the same questions will arise -- and an 7 interesting variable in how this is implemented will be 8 whether issuers from non-European countries, or even 9 countries that have not adopted IFRS as their standards, will 10 be able to take advantage of this new regime. 11 Can a Brazilian or Thai issuer that chooses to 12 report in IFRS take advantage of the elimination of 13 reconciliation? The answer to that will drive much of the 14 business that Cathy is referring to, of new listings and new 15 registrations in the U.S. 16 MR. WHITE: Mr. Pott, from your perspective? 17 MR. POTT: Well, I agree with everything that has 18 been said. I completely agree with Cathy that the 19 elimination of reconciliation to U.S. GAAP will bring more 20 issuers to the U.S. and will be a good thing for U.S. 21 investors, since they are already going outside the U.S. to 22 invest. 23 And not to butter up my host, by having SEC 24 oversight on those issuers who are currently only listing now 25 outside of the U.S. would be a good thing, and the small cost 1 of eliminating U.S. GAAP reconciliation, I think is, to me, a 2 terrific step that -- you know, I think 2009 couldn't come 3 too soon. 4 I will say -- and it may be in the context of some 5 of these other questions you have here, John, but I will say 6 that I'm not saying that U.S. GAAP reconciliation is useless 7 right now. In fact, we are dealing with a number of issues 8 currently and over the past year where we are recommending to 9 our clients to have more details than less in their U.S. GAAP 10 reconciliation for some of their financings. But I'll talk 11 more about that in a little bit. 12 MR. WHITE: Professor Karmel, I know you are 13 particularly focused on retail investors -- 14 PROFESSOR KARMEL: Yes. 15 MR. WHITE: -- and opportunities for them. So I'll 16 let you go. 17 PROFESSOR KARMEL: Let me say that I think that the 18 elimination of reconciliation could prove a particular boon 19 for the retail investor, particularly the more sophisticated 20 retail individual investor, who now has certain difficulties 21 and has to experience certain costs in buying foreign 22 securities which are not listed on one of our exchanges or in 23 the SEC system. 24 And I know that the SEC is particularly worried 25 about protecting the retail investor, but it seems to me 1 that, today, the retail investor is less protected because, 2 as another one of the panelists said, coaxing foreign issuers 3 into the SEC reporting system really gives the individual 4 investor more protection in purchasing securities of such an 5 issuer than that retail investor is now having to go to 6 foreign market to do so. 7 MR. WHITE: We'll move to another topic -- unless 8 you have a question. 9 MR. HEWITT: This is a question for Mr. Blackett 10 and also Professor Karmel, because you mentioned you have 11 three groups of investors, basically, and the latter group 12 being the retail group and the small institutional investors. 13 And I wonder, since they are used to seeing U.S. 14 GAAP today, will they need any additional education or 15 information on IFRS to understand the implications of what 16 difference there is between U.S. GAAP and IFRS statements? 17 MR. BLACKETT: That's an interesting question 18 because, right now, I think most investors in foreign 19 securities list in the United States their interim results, 20 which are, in many cases, as important to them as the final 21 reconciliation with GAAP because it gives them an interim 22 check on how the business performing four times a year, if 23 you will, as opposed to the reconciliation, which generally 24 comes once a year. 25 They have increasing become understanding, I think, 1 of IFRS, or whatever the local generally accepted accounting 2 principles might be, some variation thereof -- which brings 3 up the interesting question about reconciliation within IFRS. 4 But I think they are generally used to seeing that 5 information presented in the local accounting term because 6 that's what they see -- not just on the three interim 7 periods, but also in the year-end results that come out in 8 late January or early February. And there is usually a long 9 period of time -- Nick talked about June 15. Maybe it's not 10 exactly that long, but it's pretty close to that before they 11 finally see the reconciled GAAP statements. 12 And, by then, the world, to some degree, has moved 13 on. The market is focusing on the June 30th results coming 14 up and, indeed, beginning to transition, frankly, into the 15 following year -- momentum into the following year. For 16 example, this year, by the time a filer files on June 15th of 17 the '07, investors are generally beginning to transition to 18 what the results for '08 look like. So it's almost a 19 historical anomaly. 20 They are reasonably sophisticated. Generally, for 21 foreign markets, a primary metric evaluation initially to 22 screen investments or some variation of firm value to EBITDA, 23 which doesn't necessarily drive you down into some of the 24 changes. I think they are appreciative in certain sectors 25 -- perhaps the natural resource area, home building, where 1 there is revenue recognition -- of a discussion about the 2 major differences, but I think, generally, they are 3 reasonably educated today about the local market and are 4 reliant on that flow today to have make an investment 5 decision. 6 PROFESSOR KARMEL: As an educator myself, I have to 7 say education is always worthwhile. And, of course, it, I 8 think, will be useful for the SEC and others, once 9 reconciliation is no longer required, to point out some of 10 the differences that still exist between U.S. GAAP and IFRS. 11 I think this will be important, not only for U.S. 12 investors and, particularly, retail investors, but something 13 that relates to a later question we are going to discuss, and 14 that is a decision that U.S. issuers will now have as to 15 whether they should report in IFRS, as opposed to U.S. GAAP. 16 So I think a concern of education will certainly be 17 in order, and I am fully confident that the SEC staff will do 18 its job here. 19 MR. WHITE: I am always fully confident that the 20 the SEC staff will do its job, of course. 21 Why don't we move to our second topic, which I 22 guess I will call more kind of the process or mechanics 23 topic. 24 But in a world when we are no longer reconciling, 25 how is it going to change, or is it going to change the way 1 that the securities of foreign private issuers are marketed? 2 Is the process going to be different? Is it going to look 3 different? 4 Mr. Pott, I know you were starting to go in the 5 direction before. Do you want to start us on how the world 6 will look different then, in terms of the process. 7 MR. POTT: Let me start by -- I want to follow up a 8 little bit on what Richard was saying because I do agree with 9 him that there is a broadening acceptance of IFRS. 10 I do think, though, that getting into the process 11 here and what we do -- which is, as investment bankers in 12 capital markets, we deal with issuers early in the process 13 who are trying to raise capital and who are trying to make 14 decisions about what the most efficient mechanism to raise 15 capital is going to be at the lowest cost of capital. And 16 involved in that is the decision on where to list and perhaps 17 even, in some cases, when we are dealing with foreign 18 issuers, what accounting principles to use. 19 And I would say that, in some of the industries 20 that I deal with, there is still a strong preference for U.S. 21 GAAP. And what we are trying to do is appeal to a number of 22 different constituencies. And among those are the research 23 analyst community and the investor portfolio analyst 24 community. 25 And when we talk to them, whether it be, you know, 1 potentially -- mostly out of the conservatism, there is still 2 a view that those constituents would like to do see numbers 3 in U.S. GAAP. 4 So what we have done in some of these industries, 5 some of these cases -- whether it be comparing to local GAAP 6 or IFRS -- we have strongly urged the issuer to forward in 7 U.S. GAAP financials and, if they cannot do that, then to 8 provide this reconciliation and to do in a way that is as 9 detailed as possible. 10 And I would say that that is -- given the 11 convergence of the two sets of principles, I would say that 12 that is the mostly out of -- I think the process is 13 inherently conservative. 14 And when you are dealing with a issuer who might 15 have some extra time, although they want to come to market 16 fast, if it only takes another month to reconcile to U.S. 17 GAAP or to provide -- in one case that we are dealing with, 18 they had to provide a more detailed reconciliation of 19 financial statements, which actually are shown in U.S. GAAP 20 -- then often we end up pursuing that route when, in fact, 21 the investors would probably be able to handle the IFRS 22 financials without the reconciliation, especially given that 23 there are many other comparable companies out there who will 24 be reporting in IFRS. 25 But I want to raise a little bit a note of caution 1 as to where we are right now, which is we are not completely 2 -- I'm not going to sit here and say that U.S. GAAP 3 reconciliation is not useful, because our clients are 4 reporting very detailed U.S. GAAP reconciliation, and it has 5 been effective in some recent instances. 6 MR. WHITE: That's interesting. I'm jumping ahead 7 a little bit on our topics here, but why don't we do it, 8 since you have teed it up. 9 So if we are in a world of no reconciliation, are 10 there others here who believe that we will still have to -- 11 that companies will need to provide that information in some 12 form? 13 MR. POTT: Well, John, let me -- 14 MR. WHITE: Or did I interpret what you said 15 correctly? 16 MR. POTT: No, no, no. What I'm telling you is 17 where things have been over the past year. But I do think, 18 by the time we eliminate reconciliation as an SEC policy, 19 that we will not be advising issuers to reconcile to U.S. 20 GAAP. 21 But there is -- I'm reinforcing the notion that 22 there is an educational process and a kind of baby steps 23 process to get the participants in the capital raising 24 process used to only dealing with IFRS. 25 Because, in a lot of ways, you have legacy issuers 1 that have -- let's take an industry, such as the airline 2 industry, where most of the key participants in that industry 3 report in U.S. GAAP, and the ones who are not U.S. have 4 detailed reconciliations. So you are dealing with people who 5 build their models in U.S. GAAP and are used to reading U.S. 6 GAAP financial statements. 7 So I think there is a process of educating 8 everybody who is involved in the capital raising exercise to 9 get them used to understanding what the differences are 10 between IFRS and U.S. GAAP and not seeing a reconciliation 11 every time somebody reports. 12 MR. WHITE: I'm seeing a lot of nodding heads up 13 here. Is everyone agreeing with Mr. Pott? Mr. Bukspan? 14 MR. BUKSPAN: Just to pick up on this point and 15 reflecting on change, people -- sometimes, it takes time for 16 them to get used to change. I'm still reflecting on the 17 change from Lotus 1-2-3 to Excel. For those of you that 18 remember that, you still had the slash in Excel. It took a 19 little bit, and then it was gone. So, clearly, there is an 20 element of education. 21 I think the point that you made about industries 22 that had predominant participants that are reporting using 23 one method versus the other -- it's important to note. 24 The question is: Who is responsible for the 25 education? Is it the responsibility of the Securities and 1 Exchange Commission, or the responsibility is the market's 2 responsibility? 3 As Commissioner Cox said earlier, it's a roadmap. 4 Ultimately, we're going to be converged. At the current 5 state, we have differences. And there is clear differences. 6 And differences are still arising whether you are reporting 7 only under IFRS and having certain options with IFRS, and 8 even under U.S. GAAP. For a variety of reasons, including 9 facilitating the transition, there are numerous options. 10 The issue of education does exist. And I think the 11 importance is that the education will come through, one, 12 robust disclosures -- because, at the end of the day, people 13 think about accounting and whether the reconciliation is 14 going away. In my mind, in my experience, many times, it's 15 an information game, rather than a number game -- how you 16 provide information. And in the spirit of the information 17 game, it is critical to think about what is the role of 18 disclosures in the spirit of educating the market. 19 And I am also pretty confident that whether it's 20 going to be CEOs or CFOs, or it's going to be market 21 participants, such as ourselves, or equity analysts, or 22 equity investors, they will point out the differences. 23 To the extent to the differences do exist and 24 you've got two nearly identical airlines and gross profit 25 margins are substantially different because there is 1 reporting differences, I guarantee you that you don't need an 2 education system or education structure. Somebody will take 3 care of our education. And they are generally going to be 4 enterprise that will be looking sub par -- notwithstanding 5 the fact that it's not really sub par, but it happened to be 6 sub par because of the reporting. 7 Just going back to the question that we are 8 actually covering now, which is the offerings -- I think one 9 thing to remember is that the spirit of reconciling creates 10 dual systems. You need to report under dual systems. 11 Reporting under dual systems requires dual 12 expertise. You have to have accountants that are experts in 13 U.S. GAAP and IFRS. We know how difficult it is to find 14 accountants who are experts in one versus the other. So 15 creating replicating systems -- and then the auditors will 16 have to be educated on auditing both. 17 I think it will take certain costs out of the 18 system. I haven't measured them, but I have a sense that 19 this could be quite significant over time. So broadly, if 20 you think about the global financial market, I don't know if 21 it is going to translate to more U.S. offering versus EU or 22 other markets offering, but I think, broadly, from a system 23 perspective, having one system will yank a lot cost out of 24 the system. 25 MR. WHITE: Can I ask one of the accountants to 1 comment on that? Mr. Kaplan? 2 MR. KAPLAN: Well, I certainly agree with that. I 3 do think it will take costs out of the system. We do hear 4 from our foreign private issuer clients that they have to 5 maintain the systems in order to prepare the U.S. GAAP 6 information. They need to educate people to be able to do 7 that, as well. We, obviously, need to educate our auditors 8 around the globe in order to make sure they understand both 9 U.S. GAAP and IFRS. So it certainly will take costs out of 10 the system. 11 We do also see, though, that there are other 12 concerns that foreign private issuers have in coming to the 13 U.S. markets. Many of those concerns have been enumerated by 14 some of the committees that have issued the publications 15 fairly recently around the litigation environment and other 16 concerns, as well. 17 But as it relates specifically to the 18 reconciliation, we do see that costs will be coming out of 19 the system. 20 We also see that education, which has been 21 mentioned here, is increasing. IFRS is becoming -- maybe the 22 best way to say it is more stable. And its stability is 23 growing. It clearly has increased the transparency of the 24 information. 25 And then, as it sort of relates specifically to the 1 question as to whether foreign private issuers -- you know, 2 how those securities are marketed to U.S. investors -- we do 3 see that, at least the way we understand it, the investment 4 community builds their models based upon the base GAAP -- so 5 it's either on IFRS or on U.S. GAAP -- so that they are able 6 to do their analysis in ways that don't always require those 7 reconciled numbers between the two in every instance. 8 And, in fact, our foreign private issuer clients 9 tell us that they generally get very few questions on the 10 reconciliation itself. Now, that may be because it comes out 11 very late in many cases; certainly, after press releases and 12 maybe some initial financial statements have been released. 13 So there is, at least, some anecdotal information that there 14 is not a lot of questions today on some of those 15 reconciliation matters. 16 MR. WHITE: Mr. Blackett? 17 MR. BLACKETT: I concur with that. The most 18 critical result for a newly issued company are that first, 19 second, and third quarter results and the correct 20 presentation of that. Now, the IPO, if you will, has relied, 21 to some degree, on that U.S. GAAP reconciliation. Again, to 22 your point, it has been a parallel process because people 23 have been building their models generally on local 24 accounting, so that when that first or second quarter results 25 come out, they are understandable and viewable within a 1 framework that is consistent with what you saw at the time of 2 the IPO and then what you saw in that first, second, or third 3 quarter. 4 Once you get through that first or second quarter 5 as a public company, you now know what investors' 6 expectations are, what they are interested in, et cetera, et 7 cetera. And if this is poorly relayed because you have 8 confused them with accounting issues, the stock will be, 9 arbitrarily perhaps, punished in the short run, and all of 10 the constituents in the process -- the underwriters, 11 underwriters' counsel, management, financial management of 12 the company and, arguably, the auditors -- will be punished 13 to some degree reputationally, or, certainly, verbally by 14 their investors. 15 So there is a huge incentive in the IPO process to 16 educate people about what the process will be going forward, 17 and not just over-reliance on the annual GAAP reconciliation, 18 which, as Nick said, is a very delayed process and almost 19 overcome by events. 20 MR. WHITE: Mr. Grabar? 21 MR. GRABAR: I was just going you have to remember 22 what reconciliation is good for and what it isn't good for. 23 It isn't good for giving investors what they want 24 going forward -- which is comparability issuer to issuer and 25 comparability period to period. The reconciliation doesn't 1 do that. 2 What the reconciliation does is it identifies 3 differences in accounting principles and measures them. And 4 it has been very valuable for that purpose. But I submit 5 that that purpose is falling away because of convergence. So 6 I am more optimistic than Ken is that, when reconciliation 7 goes, it won't be missed. 8 MR. WHITE: Mr. Ranzilla? 9 MR. RANZILLA: Let me follow on on a couple of 10 themes here. To first address the issue of the cost, one of 11 the issues that will need to be addressed -- not by, 12 necessarily, the Commission directly, but, rather, by the 13 PCAOB -- is the current requirement in the quality control 14 standards, which are referred to in their overall standards. 15 They are in our standards and it's, you know, code name 16 Appendix K, if you will. 17 And it requires a review of filings that are made 18 here in the U.S. by foreign private issuers by individuals 19 knowledgeable in U.S. GAAP, U.S. auditing, and U.S. 20 independence standards, who will be able to understand the 21 differences between the home country requirements and those 22 here in the U.S. 23 One has to sit back -- "one" being the SEC and the 24 PCAOB -- and decide whether or not that requirement makes any 25 more sense -- to require, in essence, an involvement of a 1 filing reviewer -- the term used in Appendix K -- in those 2 situations where there is no U.S. GAAP reconciliation. 3 Now, that goes directly to the cost and taking cost 4 out of the system, because most of the filing review process 5 that is undertaken today is generally done by U.S. teams -- 6 U.S. partners, senior managers -- very skilled, very seasoned 7 people. There is there virtually no leverage in that 8 situation. And there are costs associated with that. But, in 9 order for the foreign member firm to be able to state 10 compliance with PCAOB standards, that review needs to be 11 undertaken. 12 So that's one factor to consider as we look forward 13 to the auditor's involvement in a world with no 14 reconciliation. 15 MR. WHITE: So you're saying when the 16 reconciliation requirement leaves, you'll have that cost, 17 unless -- 18 MR. RANZILLA: It's currently sitting in the 19 interim standards of the PCAOB. One surely has to sit back 20 and say, well, one of those elements has gone away, right -- 21 the U.S. GAAP to home country GAAP or IFRS reconciliation. 22 But there are still audit standard differences, home country, 23 and independent standards. 24 Which maybe brings me to my second point, which is 25 that -- maybe to make an advertisement for the need to 1 converge auditing standards and independence standards. 2 Obviously, that is further behind than where we are with the 3 convergence of U.S. GAAP and IFRS, but there is, I think, a 4 need to converge auditing standards in a world where we truly 5 are Cross-border and trying to be transparent in that manner. 6 So that is a second issue, I think, of a longer-term nature 7 for us to deal with. 8 MR. WHITE: Ms. Kinney? 9 MS. KINNEY: I was just going to comment on the 10 point that Nick made about reconciliation won't be missed. 11 And just to use our own example, as you raised earlier, we 12 are going to be a U.S. company and are going to merge with 13 Euronext. But, as a consequence of that merger, we had to go 14 back and reconcile Euronext's financials to U.S. GAAP. And 15 because they were very acquisitive over the last several 16 years, that was an extremely expensive reconciliation. 17 And I think our CFO, and I'm sure John Thain would 18 say that the results would have been probably neither 19 perceived nor appreciated by the investors who were going to 20 look at the company's disclosed financials that were audited 21 and will be continued to be audited under U.S. GAAP going 22 forward. 23 So we went through a very expensive process, and 24 it's not clear that investors would really have appreciated 25 the very small differences that resulted from that 1 reconciliation. 2 MR. WHITE: Professor Karmel? 3 PROFESSOR KARMEL: I think others have made good 4 points with regard to periodic comparability of a particular 5 issue. And, yet, there is still the question of 6 comparability of various companies within the same industry 7 and an investor trying to decide, "Should I buy" -- to use 8 the example given before -- "X U.S. airline or X foreign 9 airline?" 10 And I would just add to what has already been said 11 that I think this really puts something of a burden on many 12 of the intermediaries represented at this table -- the 13 investment bankers, research analysts, the exchange, and the 14 rating agencies -- in that it is going to be important to 15 investors, particularly smaller institutional and individual 16 investors, to gain an understanding of what all of this means 17 in terms of comparability of different issuers in the same 18 industry. 19 MR. WHITE: I would actually like to have Mr. 20 Bukspan and Mr. Grabar comment on that point. What is your 21 reaction, from the rating agency standpoint, and what are 22 lawyers going to have to do here? 23 MR. BUKSPAN: First, I welcome the challenge. I 24 think this is when we have seen our role all along as 25 analysts. The difference between the analyst and the 1 accountant is the accountants will have to peg something to a 2 number. Analysts, by definition, will take the numbers, pick 3 them apart, slice and dice them, stress them, project them. 4 So there is a clear difference between the accounting method 5 and what we are doing with the numbers. 6 I will reemphasize and reiterate the significance 7 of disclosure, including disclosure will allow us to provide 8 -- or use past information for forward-looking data that we 9 need in order to project, ultimately, a company's ability to 10 pay its obligations when they become due. 11 On the point of whether the reconciliation will be 12 missed or not and the cost associated with this, just a point 13 of caution. In preparing for today, I pulled two financial 14 statements, and there are pronounced differences -- huge 15 differences. 16 So the first reaction would be for someone to step 17 back and say, "You know, we still need a reconciliation," 18 because if the company was an acquisitive company, or the 19 company was not an acquisitive company and the business 20 combination rules were introduced in the EU three years later 21 or two years later, we can have meaningful differences in 22 equity. 23 So you are looking at a financial institution that 24 has a U.S. GAAP equity of X and an IFRS GAAP of 2X. So 25 someone can feel a little bit uncomfortable. And I think 1 this is exactly where the role of an intermediary is. 2 And this is where, you know, disclosure comes into 3 play, risk assessment comes into play. There is other 4 influences that we are seeing. And I think it's maybe a 5 little semantic here, but IFRS stands for International 6 Financial Reporting Standards and U.S. GAAP stands for 7 Generally Accepted Accounting Principles. I think there is 8 some sentiment here that we need pick up on. It's the 9 importance and the difference and importance between 10 accounting and financial reporting. 11 There is trends about -- for example, European 12 insurers are reporting under a framework called EEV -- 13 European Embedded Value. There is a trend now about Solvency 14 II, about Risk Measures, Basel II, and other risk disclosures 15 that are provided by the Commission, for example, we are 16 focusing on very closely. 17 So it is not necessarily the number. It is what is 18 behind this number. It is not necessarily whether it's an 19 acquisition. And this is our role. This is what we do day 20 in and day out. 21 The reason what we somehow will miss the 22 reconciliation, but we are willing to be live without it, is 23 that we are information freaks. And, you know, the more out 24 there, we have another data point we can analyze and 25 benchmark and look at. So we are clearly going to miss the 1 reconciliation, but we clearly can live without it, given 2 more information and supplementary disclosures. So that's 3 where we come out on that. 4 MR. WHITE: Mr. Grabar, what happens from your 5 securities counsel perspective? 6 MR. GRABAR: Well, I was just going to say we are 7 living without the reconciliation today because, if I think 8 back over my calendar the last six months, I have worked on 3 9 or 4 registered offerings, but I have worked on 6 to 10 10 144(a) offerings that we conducted full due diligence without 11 the benefit of a reconciliation. 12 So what do we do with the differences in accounting 13 principles when we don't have the reconciliation? That's a 14 tough question. And part of the answer does turn on the 15 practices of the accounting firms and on having a robust due 16 diligence process that includes people who understand 17 accounting. 18 Getting rid of the reconciliation will take the 19 educational burden off of a particular issuer and a 20 particular accountant and put it on the people that Mr. 21 Bukspan is talking about -- on the rating agencies, on 22 research analysts and, I think, on public sources. 23 One of the things we look at, if you -- say, you 24 have an airline; you're doing a 144(a) offering for an 25 airline. One of the things that you would look at to see if 1 there are GAAP issues, GAAP principles that you to need to 2 think about is CESR's study on technical equivalence, because 3 CESR went to the effort of inventorying large numbers of GAAP 4 differences and thinking through what they might need. 5 That kind of exercise is something that people will 6 have to do without a reconciliation. They will have to find 7 sources for intelligent discussions of important GAAP 8 differences, other than the issuers. And we are already 9 there. 10 MR. WHITE: Mr. Kaplan? 11 MR. KAPLAN: Maybe this runs a little bit to what 12 Sam said and also to what Nick said. I do agree that one of 13 the next steps that the PCAOB will need to think about is 14 what to do with what Sam referred to as being Appendix K -- 15 that is, the requirement that there is a designated review by 16 a knowledgeable person in U.S. auditing standards and 17 independence and whether or not that review -- which was 18 initially put in premised more on the accounting than 19 anything else -- continues to be necessary. 20 However, I do also think that, likely, what would 21 happen, even if that requirement were removed -- and a little 22 bit to what Nick said -- is that most of the firms have their 23 own internal quality review processes that take place and, in 24 many cases, those are focused on -- you were talking about 25 Cross-border financing -- on the inbound territory's 1 regulatory procedures. 2 So even though the specific requirements that would 3 be eliminated might be around the U.S. accounting aspects, if 4 you were to eliminate the designated review, from a 5 regulatory perspective as it relates to accounting and other 6 disclosures that might be required for that jurisdiction, 7 likely, there would still be market forces that would require 8 some of these reviews and, therefore, may embed some of the 9 quality that we are talking about for the regulatory 10 requirements for whether it be the U.S., or London, or 11 whatever the territory might be. 12 MR. WHITE: Ms. Kinney? 13 MS. KINNEY: I think, just to put some statistics 14 around Nick's point about 144(a), if you look at the year 15 2000, there were 149 deals -- global IPOs -- with 144(a) 16 tranche that year, and they raised $58 billion. In 2006, 17 there are 204 deals done with a 144(a) component, raising 18 $138 billion. 19 Now, if you contrast that to the non-U.S. companies 20 that were SEC-registered in 2000, you had 100 deals raising 21 55 billion. And in the year of 2006, you had only 40 deals 22 that raised $11 billion. 23 So to his point, reconciliation really doesn't 24 exist today. 25 MR. HEWITT: I have a question for the accountants 1 concerning the PCAOB and the requirement now on the 2 reconciliation process of a U.S. review partner. 3 If the reconciliation goes away, is there a 4 necessity at all for a U.S. partner to be reviewing 5 information? I don't want to put you on the spot, but -- 6 MR. WHITE: Mr. Kaplan? 7 MR. KAPLAN: Well, as it relates to the IFRS-based 8 set of financial statements, I mean, clearly, the auditors 9 that would be looking at that around the globe -- whose now 10 base accounting language is IFRS, in a sense -- would be as 11 knowledgeable in that as anyone might be in the U.S. 12 So to look at it from purely a U.S. accounting 13 perspective, once you eliminate the reconciliation from a 14 U.S. GAAP perspective, the answer is, likely, no. 15 However, as I mentioned, there are a number of 16 regulatory requirements in the U.S. to file with the 17 Securities and Exchange Commission that go beyond just the 18 U.S. accounting, and those also may relate to the filing from 19 an IFRS perspective. 20 So to make sure that our clients meet the 21 regulatory requirements, likely, we would still want to have 22 someone from a quality perspective that would take a look at 23 the filing, make sure that it meets that. There are also 24 often thing like comfort letter requirements and other 25 requirements, as well, that we would need to look at from a 1 U.S. PCAOB perspective. 2 MR. RANZILLA: Let me take a shot at that. I agree 3 with Dave. The question will be: Do you require that 4 through the quality control or auditing standards of the 5 PCAOB, or is that just an element of -- an international 6 network of firms would designate a quality control element on 7 its own and compete in the marketplace with some difference 8 in that regard. 9 But Dave is absolutely right. If you eliminate the 10 measurement and recognition issues through the 11 reconciliation, there still are SEC requirements, and there 12 is still an auditing issue. 13 But if you look at risk from the perspective of the 14 investor, the risk of missing a reconciling item between home 15 country GAAP and U.S. GAAP, I think is far more significant 16 than the risk of the auditing standard not being complied 17 with. 18 Because, again, focusing on just the largest of 19 firms, there is a global methodology. I mean, it's a base 20 methodology that the firms employ around the world. It's 21 tweaked to meet individual jurisdictions' requirements. But 22 the risk of an audit not being conducted in accordance with 23 PCAOB standards, in my mind, is a much lower risk than a risk 24 that a reconciliation might miss a material item without the 25 involvement of somebody who is schooled and expertised in 1 U.S. GAAP. 2 MR. HEWITT: Thank you. Mr. Kaplan? 3 MR. KAPLAN: Actually, another way to think about 4 it, in answering that question is, even today, many of the 5 firms -- and one of them includes PricewaterhouseCoopers -- 6 actually have a requirement that requires a review of 7 144(a)s. So even there is no designated review requirement 8 there, we actually, under 144(a), would require a review of 9 those offerings. 10 MR. WHITE: Why do not we move to the next general 11 topic. I know we have danced around this one in a number of 12 ways already, but, at least, for those of us that come from 13 Corporation Finance, I guess what we focus is, of the three 14 SEC missions -- investor protection and disclosure to 15 investors is the one that, at least, I am the most focused 16 on. 17 And, in fact, I think each lawyer who has started 18 work here at the Commission, when we are sworn in by Chairman 19 Cox, he points out to us that the investor is our new client, 20 as opposed to whoever our clients were before. 21 So, with all of that as a lead-in, do we believe 22 that investors will be receiving the information they need to 23 make informed investment decisions when we have eliminated 24 the reconciliation requirement? 25 Let's start with Ms. Kinney. 1 MS. KINNEY: Well, I think the answer is yes. And 2 I think the point was made earlier that perhaps, even in the 3 lack of reconciliation, the timing of information can be 4 improved. 5 So the point was made earlier, if you have a 6 December 31 reporting company, in the February to April time 7 frame, you would have the numbers. And today, an investor 8 has to wait for the 20-F until late June or, at the latest, 9 the middle of July. And so I think that there would be a 10 presumption that the information coming forward would be more 11 timely and, therefore, investment decisions could be made 12 with perhaps better information. 13 MR. WHITE: Professor Karmel, do you think 14 investors are going to be taken care of here? 15 PROFESSOR KARMEL: I think investors will receive 16 enough information, but -- and I think it's a big but -- as I 17 said before, I think this puts a certain burden on the 18 intermediaries. 19 If, for example, a securities firm is recommending 20 to one of its clients that the client purchase a particular 21 foreign security where there is no reconciliation, then, in 22 order to have a reasonable basis for that recommendation -- 23 which is a simple requirement -- the firm is going to have to 24 understand what this means and is going to have to appreciate 25 the difference between the way in which reporting was 1 previously done where there was a GAAP reconciliation and 2 now. 3 Now, maybe that would be irrelevant in terms of a 4 particular security, but in terms of another security, it 5 might be something important. 6 MR. WHITE: I mean, the 144(a) offerings we have 7 been commenting on are obviously all sold to sophisticated 8 investors. 9 PROFESSOR KARMEL: That's right. But now -- 10 MR. WHITE: But we are now talking about sales to 11 retail investors. 12 PROFESSOR KARMEL: Well, now, we're talking about 13 sales to retail investors and smaller institutions that don't 14 qualify as credit investors for purposes of 144(a). 15 So I think that is going to be a different dynamic, 16 and I think investors will be expecting that the 17 intermediaries involved will have analyzed the securities. 18 And, as I said, this puts a burden on the exchanges 19 that list these securities, on the investment bankers, on the 20 research analysts, and on the rating agencies, when we are 21 talking about foreign bonds, particularly. 22 MR. WHITE: We'll keep going down to the left 23 there. Are investors going to be protected? Mr. Blackett? 24 MR. BLACKETT: I think, to Neri's point, there are 25 multiple sources -- or silos, if you will -- of information, 1 and GAAP reconciliation is just one. 2 We shouldn't lose sight of -- first, in no 3 particular order, SOX 404 is a continuing obligation for all 4 foreign issues. That is a real hammer in the minds of 5 foreign issuers. They take that extraordinarily seriously. 6 So there are a number of constant disclosure 7 requirements. The advent of websites. When they come to the 8 U.S. market, they clearly realize that they have to, in many 9 cases, step up their investor contact and their investor flow 10 of information. And when you look at a website for a foreign 11 issuer today versus two or three years ago, part of the 12 extraordinary change is not just technology, but also 13 recognition. Analysts, when they publish, are invariably 14 publishing exclusively, I would argue, in local GAAP for 15 comparative purposes. 16 And, also, let's not forget one thing. Local 17 regulators and markets are seeing the potential for liquidity 18 to go to the United States. Particularly, regulators are 19 looking at what we do to improve the attractiveness of our 20 market to try and reverse that trend, because none of them 21 want to see their market wither for lack of -- for a 22 perception that they are somehow delinquent. 23 Novo Mercardo, for example, in Brazil, is a clear 24 example where the regulator, in anticipation of seeing 25 liquidity move, realized they had to join that flow of 1 increased disclosure and awareness. 2 So I think there are multiple channels. And I do 3 think, at the end of the day, discussion of the differences, 4 where materially appropriate, between IFRS and GAAP are 5 important. 6 Now, as the two converge, so that goes away. But 7 until they converge, disclosure and discussion around it, at 8 least on the annual basis when they come out, is important 9 for investors. And that is usually on, as I said earlier, 10 revenue recognition and timing of revenue recognition, or 11 disclosure, in mining and natural resources, of probable and 12 possible reserves, and issues like that. 13 MR. WHITE: I want to keep going down here and 14 getting everyone on record on this question. Mr. Bukspan? 15 MR. BUKSPAN: Well, on that point, I'm just getting 16 myself on record. I'll try to condense a day in the life of 17 an analyst to two minutes. 18 But when analysts look at these issues, sometimes, 19 you can have the reconciliation that will allow you -- 20 sometimes, analysts can say there is a clear economic answer. 21 For example, some of our analysts truly believe that the 22 entire economic deficits of a pension plan needs to be on the 23 company's balance sheet. Sometimes, it's just an exercise in 24 comparability. 25 And, stated differently, maybe it will be pure to 1 measure everybody and put them all on a scale without their 2 shoes on. But let's say that 90 percent of population has 3 their shoes on. So what the analyst would do is approximate 4 what is going to be the weight of the shoe in order to get an 5 approximation and do a relative comparison. 6 So there are differences. There are clear 7 differences. And, frankly, it's not necessarily the 8 difference between IFRS and U.S. GAAP. There's clear 9 difference within U.S. GAAP alone. FASB just reduced the 10 fair value option, which creates differences with U.S. GAAP. 11 And differences existed always, even within U.S. 12 GAAP. Of course, you will remember pooling versus purchase; 13 FIFO versus LIFO. And if you start looking at companies, and 14 you compare those companies, you need to make an analytical 15 decision. 16 Sometimes you have the information or you can 17 reconstruct the information. So we try to capitalize leases, 18 put them on the balance sheet, look at pensions, and quantify 19 some things. So you sometimes you can quantify. 20 Sometimes our pencils are not as sharp because it's 21 impractical to do it, or you don't have the information. And 22 then you just know that, with any single number, you have 23 x-degrees of freedom. 24 And if there is a very large gap, I'm sure analysts 25 will be asking the questions, and companies will look at the 1 issues, and these gaps will be minimized over time, either 2 through convergence or through disclosures, to allow users to 3 understand those differences. 4 And I don't see it as any different than what we 5 are seeing today. I think people forget the optionality 6 within existing accounting. I think the analogy was made 7 earlier about a roadmap and how difficult it is to follow a 8 roadmap. I use my own analogy on the road. I think, 9 currently, we have a system where you can drive on the right, 10 you can drive on the left, you can drive on the center in 11 some points. And this is part of the convergence. 12 I think what is very important for us to understand 13 is to have road signs. If we have the appropriate road 14 signs, we know how to drive, using the system. If we don't 15 have the road signs, we are running the risk that we have 16 major clashes . 17 And this is the role of the auditors -- to make 18 sure that we have the appropriate transparency, consistent 19 auditing, whether it's the PCAOB or the regulator. But I 20 think this is ultimately the confidence of the users in the 21 financial report. 22 And, at the end of the day, I think the jury is 23 still out. If there is going to be a significant uncertainty 24 in the market with respect to the quality of learning, 25 whether it is under U.S. GAAP or under IFRS, there will be a 1 market discount for uncertainty because there is some -- and 2 if we reflect back on the Enron, I don't think it's an issue 3 of U.S. GAAP. I think it's an issue that the information 4 about the VIE wasn't prominently disclosed in the financial 5 statements in the first place. I would probably vouch that 6 Enron wouldn't have happened if they just needed to provide 7 certain disclosures under VIE. 8 I think the focus will be also on the disclosures, 9 and risk disclosure and information disclosure. I think we 10 will all benefit and the system entirely will benefit, given 11 that, as analysts, I think we don't like options. We like to 12 have to a single system. We recognize that are some 13 differences, but, with the roadmap, hopefully, at some point, 14 we will have a single starting point, and I think, hopefully, 15 sooner than later. 16 MR. WHITE: I take it from that that you agree 17 with, in effect, what Chairman Cox said earlier, in that we 18 don't need to get complete convergence because we can have 19 two coexisting systems that are different, as long as they 20 are understood. 21 MR. BUKSPAN: I fully agree with that. And I also 22 will take it to the next level and say, even if you have only 23 U.S. GAAP entirely, or only IFRS, within a single system, you 24 will have differences that you need to be equally aware; 25 that, in theory, there could be subsets of the standard that 1 are not harmonized because companies can elect one option 2 versus the other, which could create meaningful financial 3 statement differences in results. 4 MR. WHITE: Mr. Grabar, let me get you on record, 5 as well. 6 MR. GRABAR: Well, I'm not sure I know what 7 investors need. I just have a checking account, and I'll 8 leave it at that. But what people need is high-quality 9 financial statements, and I think the Commission is going to 10 make the decision that IFRS financial statements are 11 high-quality financial statements. 12 And, having gotten that, do they need to hear from 13 each foreign private issuer about the difference between 14 System B and System A? I think the answer to that is, "Not 15 really." You may get better information down the road. 16 Investors are hearing that through participation with 17 intermediaries. 18 I'll add that I think that another kind of 19 convergence that you may see within the next three or four 20 years is convergence around IFRS; that the airline that, 21 today, is being asked by Morgan Stanley to prepare a U.S. 22 GAAP income statement so it will be comparable with other 23 airlines, in four or five years, may have to prepare an IFRS 24 financial statement the same purpose. 25 MR. WHITE: More comments on investor -- 1 MR. POTT: I totally agree with that. I think that 2 the quality of information that investors are getting is 3 going to be no less than under a current standard. And with 4 the combination of convergence and SEC review of financial 5 statements, investors are going to be just fine. 6 I mean, after all, U.S. GAAP has not exactly 7 distinguished itself over the course of the last few years. 8 And so I wouldn't necessarily conclude that one is better 9 than the other, but, certainly, IFRS is not inferior. 10 MR. WHITE: Further comments, or are we ready to 11 move to the next topic? 12 MR. HEWITT: I have a question for any of the panel 13 members. Under the roadmap, as it was originally designed, 14 FASB and the International Accounting Standard Board were 15 going to look at, say, 11 major accounting standards between 16 the two of them -- one of those being, say, the business 17 combinations for which there are two different standards, 18 FASB and IASB. 19 Assuming that FASB and IASB could not agree upon 20 converging this particular accounting standard -- say, on 21 business combinations, which is a very important standard, in 22 terms of accounting standards -- would that make any 23 difference to the investor? 24 Anybody can answer. Mr. Blackett? 25 MR. BLACKETT: Let me start the conversation. I 1 think it would be -- again, in the context that information 2 is, you know, a multi-sourced phenomena, I think the fact 3 that if they could not would mean that the intermediaries -- 4 whether they were the rating agencies, the underwriters, the 5 underwriters' counsel, company's counsel -- would clearly be 6 obligated to highlight what is, I would argue, almost a 7 redundancy -- because it has been so highlighted by the fact 8 that two prominent entities could not agree, that it is 9 almost a redundancy for us to then continue to over-highlight 10 it. 11 But I think that would be one of the disclosure 12 items that we would feel obligated to put in the prospectus 13 -- that, you know, there are material differences, as 14 recognized by both jurisdictions, if you will, and, you know, 15 trying to help investors quantify what financial impact there 16 might be. 17 I think it's a very manageable topic and, arguably, 18 because it has been highlighted both entities, it is almost 19 an easy one to answer because of that visibility. It's the 20 ones that are less obvious or have some problem that raise 21 bigger issues. 22 MR. GRABAR: I would just say when -- I mean, 23 acquisition accounting is a good example of this -- that the 24 areas in which the FASB and IASB may end up being unable to 25 agree will be areas in which, whatever those two organisms 1 may think, the market will probably react that there was no 2 right answer. And where there was no right answer, these 3 questions of comparability will be maybe less important. 4 I think that the things that we focus on in the 5 offering and due diligence process tend to be subjects on 6 which the agreement has come rather rapidly, which we have 7 mentioned that reconciliation is a prominent example. 8 MR. WHITE: Okay. Why don't we move to our next 9 topic. So far, we have been talking about foreign private 10 issuers coming into the U.S. markets and no longer having to 11 reconcile. 12 I guess the next question is: What about the U.S. 13 issuers that are already sitting here, reporting in U.S. 14 GAAP, were never involved with IFRS, were not reconciled? 15 What is the impact of -- let's just start with, 16 assuming this is fully implemented, in terms of the 17 elimination of the reconciliation requirement, what is going 18 to be the impact on U.S. issuers? 19 We'll start with you, Mr. Pott. 20 MR. POTT: Well, I'm not sure I have the answer on 21 that one, John. But I do think that -- 22 MR. WHITE: But there are a lot of people that are 23 interested. 24 MR. POTT: Maybe. I'm not sure they're interested 25 into my opinion about it. 1 But I do think that it is possible -- as I think 2 Cathy might have mentioned before, it is possible that -- or 3 perhaps Nick also -- the dramatically increasing acceptance 4 of IFRS may move the comparability of a company's competitors 5 in an industry more from U.S. GAAP over to IFRS, which might 6 cause, I think, the U.S. company to decide that it is better 7 off reporting in IFRS. 8 So there is a possibility of a move to that. If 9 that is something that is going to considered allowable by 10 the SEC, I don't know. 11 MR. WHITE: Well, I mean, you obviously heard 12 Chairman Cox hinted that, in his remarks earlier, as a 13 possibility. 14 MR. POTT: Right. 15 MR. WHITE: I mean, do you see, at this point, 16 reconciliation in the other direction, on a voluntary basis? 17 MR. POTT: No. No, I don't. 18 MR. WHITE: Ms. Kinney? 19 MS. KINNEY: We talked to a couple of large global 20 issuers, and a number of them said that they would look at 21 both standards, but, in fact, they might choose to go to IFRS 22 in the future. 23 But I think it would be something they would 24 welcome -- they would like to have a choice. And given their 25 business models and the industries in which they find 1 themselves and the comparadors, I think that they would, as I 2 said, welcome a choice between the two alternatives. And I 3 think many companies might go into the direction of IFRS. 4 MR. WHITE: Professor Karmel? 5 PROFESSOR KARMEL: Well, all regulatory changes, 6 you have unexpected side effects, and this could well be one 7 of the unexpected or not so thought about side effects of 8 this change. 9 I believe that when the SEC, years ago, put out a 10 concept release on this topic, some U.S. issuers commented 11 that this would be unfair to us. We would have to still 12 report in U.S. GAAP, and foreign issuers could report in 13 international standards. 14 And I think the SEC probably will have to allow 15 U.S. issuers this choice in the future -- to either report in 16 IFRS or U.S. GAAP. And that could be a very interesting 17 experiment, if important U.S. issuers decide to stop 18 reporting in U.S. GAAP and to start reporting in IFRS. 19 In any event, I think this could possibly be a spur 20 to more principle-based accounting standards in the U.S. and 21 worldwide because IFRS is more principle-based than U.S. 22 GAAP. And I think it could assist that kind of convergence. 23 It's always hard to speculate on what the effects 24 of a new regulation are going to be, but I think there could 25 be an interesting result. 1 MR. WHITE: Do you think this is a choice we are 2 going have to offer on day one, or is this kind of step two? 3 PROFESSOR KARMEL: Well, that's up to you, not to 4 me. This is for the Commission to decide. 5 MR. WHITE: Well, I guess we're here to ask for 6 input. I heard the mention of a concept release as another 7 choice here. That's one of the ways we get input, you know, 8 but roundtables are another. 9 PROFESSOR KARMEL: I think, usually, the government 10 generally does better doing something in incremental steps. 11 So it probably makes sense to do a change that is this 12 important in incremental steps also. 13 But, yes, I think the SEC will have to offer that 14 choice to U.S. issuers, and it will be interesting to see 15 which U.S. issuers take advantage of it. Will some seasoned 16 issuers change to IFRS? And what about companies that are 17 going public for the first time? That would be even more 18 interesting, I think. Will they choose IFRS, or will they 19 choose U.S. GAAP? 20 Also, when you look at the agreement between the 21 SEC and CESR, in terms of how this will work, you see that, 22 if U.S. issuers that are listed abroad continue to report in 23 U.S. GAAP, securities regulators in Europe will then have the 24 opportunity, maybe the obligation, to question those 25 financials, just as the SEC has started to ask questions of 1 foreign issuers reporting in IFRS. And I think that also 2 will really be a spur to convergence down the road. 3 I think that, once regulators start talking to each 4 other about these kinds of problems, surprisingly, they often 5 agree and cooperate with each other -- because they have the 6 same mandates and the same problems. 7 And so I think allowing U.S. issuers to report in 8 IFRS and having the dynamic where foreign regulators are 9 asking U.S. issuers questions about U.S. GAAP will generally 10 assist convergence, so that it probably will be a good 11 development. 12 MR. WHITE: Mr. Kaplan? 13 MR. KAPLAN: We see two different aspects of this, 14 John. The first is, obviously, CESR is working on a similar 15 timetable as is the USC, in terms of whether or not there 16 ought to be additional disclosures or some reconciliation for 17 U.S. issuers in European markets. 18 And if the SEC does not head down this direction, 19 you know, could there eventually be some additional costs for 20 U.S. issuers raising capital in other markets overseas? And 21 the answer is, certainly, that's a possibly that I think many 22 U.S. companies would not prefer to see happen. 23 Second, of course, is what you mentioned in terms 24 of whether or not the SEC would consider allowing U.S. 25 companies to file on IFRS-based financial statements in the 1 U.S. capital markets. And, certainly, we would not want to 2 see the decision around eliminating the reconciliation held 3 up for that question. We think that the decision around 4 eliminating the reconciliation to U.S. GAAP should move 5 forward in accordance with the roadmap which has been 6 established, and I wouldn't want to see that held up. 7 However, I think there are a number of different 8 considerations that U.S. companies may have with respect to 9 going to IFRS financial statements. Certainly, they would 10 have to go through the -- as you say, the transformation -- 11 the knowledge, the transformation, the systems changes, 12 everything else, which they would have to evaluate from a 13 cost benefit perspective. 14 Of course, they would want to be looking at their 15 competitors to find out whether or not they would be moving 16 towards -- whether their basic marketplace reports mostly on 17 an IFRS basis or on a U.S. GAAP basis. 18 I think there is also some litigation questions 19 that they would be thinking about. In particular, there is 20 certain information which is required as disclosures in the 21 basic financial statements under IFRS which would bring it 22 into the basic financial statements, which might now be 23 disclosed outside of the financial statements and be subject 24 to some safe harbor rules, SEC rules. So they would want to 25 consider some of those aspects, as well. 1 So there would be a number of different 2 considerations that U.S. preparers would have to think 3 through. 4 MR. WHITE: Is there any concern in terms of the 5 accounting profession getting ready, if there was a 6 significant movement of U.S. companies to -- 7 MR. KAPLAN: Certainly, it would be a very large 8 educational effort for the accounting profession, as well, in 9 order to train people. But, you know, we are already in the 10 process of doing that, as it relates to IFRS. 11 We have in the U.S. certain people that already 12 specialize in IFRS financial statements. We hold internal 13 seminars and training programs. But, at the end of the day, 14 you know, we wouldn't be asking people here to do anything 15 more than that what Europe has just done in educating their 16 entire marketplace on a change to IFRS. 17 MR. WHITE: Mr. Ranzilla? 18 MR. RANZILLA: I agree with David on that last 19 point -- at least from our firm. We have done some fairly 20 extensive IFRS training here in the U.S. to support our 21 clients from the European Community. 22 But as it relates to this question, I think the 23 Commission may have an ideal avenue to address this whole 24 issue of the U.S. issuers and IFRS versus U.S. GAAP when it 25 addresses complexity at some point. 1 It would seem to me an appropriate question on the 2 table with respect to complexity is: If it's good enough for 3 X U.S. companies to report without any reconciliation, why, 4 in the U.S. marketplace, would we not just convert to IFRS as 5 a matter or course? It would seem to me the complexity 6 discussion is absolutely the right place to put that issue on 7 the table. 8 MR. WHITE: Why don't we move on to our next topic. 9 Mr. Grabar, I know this is one of your favor topics, since 10 you suggested that I raise it. 11 How is the due diligence process going to work -- I 12 guess, really, for underwriters, securities counsel, 13 auditors, and all the different gatekeepers of sorts? How is 14 it going to work in the world of no reconciliation? 15 MR. GRABAR: I like this question so much, I feel 16 like I have already answered it. 17 MR. WHITE: Well, you have touched on it about 18 three times. But I wanted to, you know, get it here real 19 directly for you. 20 MR. GRABAR: In the due diligence process today for 21 a reporting company or a registered IPO, the reconciliation 22 plays a very secondary role. People review the 23 reconciliation, try to understand what it's about, but a sign 24 of its relative importance would be the attention that it's 25 given in MD&A by reporting companies. 1 And I think you will find that most reporting 2 companies address reconciliation quite briefly in MD&A. It's 3 a practical matter. They do it because their counsel and 4 their auditors insist that they do so, not because their 5 underwriters or their investors insist that they do so. So, 6 for reporting companies, the reconciliation is something that 7 the professionals deal with, and the investors and the 8 underwriters generally don't spend very much time on it. 9 In 144(a) deals, of course, we have been engaged in 10 this massive process of learning how to do without 11 reconciliation over the last 6 to 10 years. And, as I was 12 mentioning earlier, some tools have emerged in order to 13 understand the significance of GAAP differences without the 14 benefit of reconciliation. 15 For years, you would see in 144(a) offerings a 16 narrative description of significant differences between U.S. 17 GAAP and the home team GAAP. That practice is, I think, in 18 the process of falling away in 144(a) offerings today. I 19 think we see it less -- we're starting to see it less and 20 less, in favor of the kinds of information sources people 21 were talking about earlier -- research reports and the due 22 diligence process itself -- sort of other ways to get at the 23 significance of different accounting principles. 24 I would also add that, when the issuer is reporting 25 under IFRS, the team that is working on the transaction is 1 liable to consist very largely of nationals of the issuer's 2 country, who understand IFRS often much better than they 3 understand U.S. GAAP, and the focus is on the IFRS 4 information. 5 When I say "the team," I'm saying the lawyers, the 6 underwriters, the auditors. For an offering by a registered 7 French issuer, the personnel on the ground will French 8 personnel of each of those institutions, who will understand 9 IFRS better than U.S. GAAP, anyway, and that is where the 10 focus will be. 11 MR. WHITE: Any other comments on, as some call it, 12 the due diligence front? 13 (No response.) 14 MR. WHITE: All right. Then why don't I move to 15 our last topic. Ms. Kinney, this one is obviously for you. 16 In part, it is: What is the impact on our markets? 17 And, in part: What are the exchanges, themselves, going to 18 have to do to get ready for this? It's both of those 19 questions. 20 MS. KINNEY: I think that our listing standards 21 really wouldn't change, John, because, today, they really 22 don't recognize any particular accounting standard. There 23 are financials, and we rely on disclosure, and we rely on 24 audited financial statements. 25 So, you know, it is our view that we would continue 1 to have one set of listing standards, the companies would 2 choose the accounting convention, and then we would use those 3 reported financials to determine the eligibility of a 4 particular company for listing on the exchange. 5 I do think, however, that there will be probably, 6 as we said earlier, companies that will take advantage of 7 these changes to perhaps dual-list their companies. So we 8 would expect companies listing in the home country, as well 9 as U.S. markets. 10 And I think we would still expect that companies 11 may trade in both ADRs, and we would hope that, given some of 12 the other work that is going on at the SEC right now -- 13 Ethiopas and a number of others -- that there may be some 14 greater movement of capital flows among the markets on a 15 global basis and, therefore, ordinaries may be trading in the 16 U.S. markets with much more attention to the post-trade 17 clearance and settlement. 18 So, you know, it's our view that companies will 19 list in multiple markets; that we will rely on disclosure and 20 audited financials; that there will be no reconciliation; 21 that investors will have this information on a very timely 22 basis; and that the trading in the markets will be global. 23 MR. WHITE: That finishes my basic questions. I 24 had said earlier that I would give each of you a minute or so 25 -- I think it's going to turn out to be about a minute and a 1 half each -- to give us a final comment on anything that we 2 have missed discussing, and, I guess, perhaps, particularly 3 to ask if there are any recommendations you would like to 4 give us here at the Commission, or on the staff which you 5 would like particularly for us to take away from today. 6 And, given my personal place in the alphabetical 7 world, I am going to start in reversal alphabetical order 8 with Mr. Ranzilla. I sit my life at this end of the 9 alphabetical world, so Mr. Ranzilla? And then we will go 10 that way across the -- 11 MR. RANZILLA: I'm fairly close to you. 12 We support -- where we sit today, I should say I 13 support the elimination of the U.S. GAAP reconciliation 14 within the context and in accordance with the roadmap. 15 I think the only point that I would like to raise 16 that hasn't been fully discussed is this issue of U.S. 17 issuers, and we would encourage the Commission, as a part of 18 its addressing the whole area of complexity, to really take 19 on front and center the issue of whether or not our national 20 financial reporting standards are something that we ought to 21 be moving towards here in the U.S. marketplace. 22 MR. WHITE: Mr. Pott? 23 MR. POTT: John, I think, unfortunately, you seem 24 to have picked a topic and a panel where there seems to be 25 very little disagreement. 1 But I will say that I think my -- just very 2 shortly, my closing remarks are that this is a terrific idea. 3 It can't come fast enough. And I did caveat it earlier by 4 saying, you know, we are still dealing with these issues, and 5 we are dealing with conservatism among some of the players in 6 the industry. But they will come around. Education will get 7 them there. 8 I think the SEC needs to do all it can to encourage 9 more business here in the U.S., and this is part of that 10 movement. And so I think this, combined with convergence, 11 are both terrific ideas whose time is now. 12 MR. WHITE: Thank you. Ms. Kinney? I can guess 13 what you're going to say. 14 MS. KINNEY: I was going to say it's an avalanche 15 of momentum here. 16 I would just like to say that I think that the 17 three steps that the SEC, as I said, has taken a particular 18 view on -- both the changes in 404, the deregistration 19 requirements, and then the topics that we discussed today -- 20 to Ken's point, I think all of those can't come fast enough, 21 and the more we can do to encourage the broad listing of 22 companies in the U.S., I think can be managed, both from the 23 perspective of protection of investors, as well as the 24 competitiveness of the U.S. market. So I think we would 25 encourage you to do it as quickly as possible. 1 MR. WHITE: Professor Karmel? 2 PROFESSOR KARMEL: Back in 1991, I was asked to do 3 a project for the New York Stock Exchange -- I actually did 4 that with someone who is now on the SEC staff -- having to do 5 with how to encourage more foreign issuers to come into the 6 U.S. and list. And we recommended that there be an end to 7 reconciliation by foreign private issuers. That was a long 8 time ago. And so I certainly agree with those who say this 9 can't come soon enough. 10 I think the recent reports by -- the Paulson report 11 which Professor Scott orchestrated, the reports done by 12 McKenzie for Bloomberg & Schumer show that, in fact, the 13 opposite has happened, and some of the capital markets are 14 going abroad instead of coming here. And so I think this is 15 a matter of more urgency now than it was in 1991. 16 The only advice I really can give the SEC is don't 17 wait until you have solved every problem, until you have a 18 perfect regulation. As I said before, the government does a 19 better job when they do things in an incremental way. And, 20 you know, take the plunge and see what happens. But you 21 don't have to do everything all at once. Do what you can as 22 soon as possible. 23 MR. WHITE: Thank you. Mr. Kaplan? 24 MR. KAPLAN: I would also support the elimination 25 of the IFRS-to-U.S. GAAP reconciliation. I believe that it 1 would remove any perception of barriers to the free movement 2 of capital, which we think is a good thing. 3 Also, it would remove any perception that some 4 might have that the SEC doesn't believe that IFRS is a robust 5 and stable accounting and financial reporting language. 6 And it would certainly remove some of the resources 7 that are necessary -- some of the costs in the system -- by 8 eliminating that reconciliation. 9 I would also suggest, as has been mentioned before, 10 that the PCAOB, together with the SEC, consider whether or 11 not the ongoing designated review requirement continues to be 12 required, as a sort of corollary statement. 13 MR. WHITE: As you know, we have a major project 14 going on in Corporation Finance looking at all of the IFRS 15 filings that came in for the first time last summer for 16 faithfulness and consistency of application and timeliness. 17 So we are very involved in that process right now. 18 Mr. Grabar? 19 MR. GRABAR: I was going to mention that process, 20 though, because I think those comment letters are, really, 21 terribly important as part of the acclimatization of the 22 issuer world to the role that the SEC is going to play with 23 respect to IFRS. And I think that the comments have been of 24 very high quality, and our experience has been they have been 25 handled very well and sharply between the SEC and the 1 issuers. 2 But I think that there is one thing that could be 3 done to improve that process. The staff, I think, may have 4 underestimated how threatening comment letters look to 5 issuers when they get them. 6 And your staff's philosophy -- which I think it 7 announced pretty clearly -- of trying to understand, trying 8 to achieve clear disclosure, and taking the hard cases 9 upstairs, as opposed to going to the mat with issuers about 10 interpretation of IFRS, taking them to another process, in 11 which you talk to national regulators -- that approach is 12 very sound, but our issuers don't really understand it. 13 When they get a letter, I think one thing you could 14 do that would simplify it is to describe your approach in the 15 letter itself, so that it's clear between you and the 16 issuer -- who are the real parties to this dialogue -- what 17 the Commission staff thinks it is doing with the comment 18 process. 19 As a lawyer, the other two comments I would make 20 about the whole process is that I think it would be valuable 21 to clarify the timetable -- the idea that something is going 22 to happen by 2009, at the latest. 23 I think we need, at this point, more precision 24 about what it is exactly that is going to happen when, and, 25 specifically, does that mean that, on December 31, 2008, that 1 the goal is that those financial statements can be presented 2 without reconciliation? Or is it softer than that -- that 3 there will be a rule by some time? I think more clarity 4 about the timetable table would be helpful. 5 And the last point I would make as a lawyer is that 6 these rules are going to be hard to write. They are going to 7 be harder to write than anybody realizes until they sit down 8 and try write them, so that an early start is going to be 9 essential, and 2009 is right around the corner. 10 MR. WHITE: Just as general information on the 11 comment process, we are looking at, I think, over 100 filers 12 in IFRS that came in last year. And I think we are somewhere 13 like halfway through that at this point. 14 We have a policy of posting those comment letters 15 45 days after the review is completed, and I think something 16 in the neighborhood of half of the half are already posted, 17 and the rest are in that 45-date waiting period. 18 So there actually is a fair amount of daylight 19 here, in terms of companies and for everyone to be able to 20 see what we are doing and what we are saying to people and 21 what we are hearing back from foreign issuers, as we go 22 through that process. 23 Mr. Bukspan? 24 MR. BUKSPAN: A couple points. One, the first 25 point is in conjunction with the move to IFRS in Europe -- 1 from home country GAAPs to IFRS. We have seen instances 2 where we have actually had transparency loss, rather than 3 transparency gains. There is probably going to be the issue 4 of the comment process and the review. One would hope that, 5 if you produce a new accounting system, all and all, you will 6 transparency gains. The numbers will be clearly explained 7 and articulated. 8 The other topic is perhaps it's an opportunity 9 because there is a reshaping of financial reporting broadly. 10 And the role of the SEC -- and there is many financial 11 reporting data that is currently reported outside the 12 financial statements. From a user perspective, sometimes, if 13 there is some assembly required -- I am a little bit also 14 concerned with the discussion about whether U.S. participants 15 will be allowed to use IFRS. 16 Again, in the spirit of the discussion, I was 17 hoping to something more convergent, where the two boards 18 work together -- use efficiencies and scale of the two boards 19 to see enhance financial reporting for all of us, rather than 20 going out on their own way and then allowing, again, to 21 converge and pick up whatever companies believe may be a more 22 appropriate financial reporting method. 23 So, again, from my perspective, ideally, we will 24 have one starting point, clearly explained, clearly 25 articulated, and the integration of financial reports, 1 financial statements, and information that is outside the 2 financial statements in the MD&A will be better integrated. 3 MR. WHITE: Mr. Blackett, you are going to get the 4 last word here. 5 MR. BLACKETT: I don't get it at home. 6 I'd say a couple of things. It will help domestic 7 institutional retail investors meet their evolving investment 8 desires of diversification and the rest of it. I think it 9 will simplify foreign issuers' access to the United States to 10 provide that service. 11 However, I would say -- an earlier question that 12 Neri talked about, too -- at the margin, and perhaps 13 theoretically, it will raise potentially the cost capital of 14 U.S. issuance, when you have foreign issuers coming into this 15 market and if you have a finite group of demands. 16 So I do believe reciprocity is going to be an 17 important issue to consider. No one likes giving up an 18 option, okay, no matter how invaluable that option might be. 19 And I think that, therefore, for the issuers' panel, the 20 question is going to be how they see this world where their 21 cost of capital could go up on the margin, and what are they 22 going to be able to do to address that -- I mean, to be able 23 to have acceptance of their U.S. GAAP in markets where they 24 could, in reverse, raise capital on their equity. 25 So I do think the issuers, with respect to 1 accessing foreign markets on a reciprocal basis, is an 2 important topic, because there is value -- potentially value 3 diminution by liberalizing access to our market while, at the 4 same time, necessarily giving them an option to go to other 5 markets. 6 Whether that is a practical option is to be debated 7 because the concept of equity ownership isn't necessarily 8 viable to most other markets. It could very well be on the 9 bond market side where access to lowering their cost of debt 10 has value. 11 So I think the reciprocal nature, and to get to 12 Neri's point, convergence is probably the ultimate objective 13 here, rather than sort of having two reciprocal or mutually 14 acceptable, but not convergent, trends. 15 MR. WHITE: Wow. I didn't realize you were going 16 to drop this bomb on us at the end that it was going to raise 17 the cost of capital for U.S. issuers. So I've got to ask you 18 a question. 19 Is that partly solved if we take the second step 20 that we are talking about of allowing U.S. issuers to choose? 21 MR. BLACKETT: Certainly, I think they would view 22 that having that as an option allows them, at least, to 23 address it. As a practical matter, I don't see the big 24 points of retail demand in Japan or Australia having a 25 culture that says, "I'm buying non-Australian or Japanese 1 stock." I think it's more practical if one is accessing 2 those markets from a bond side. 3 MR. WHITE: All right. Well, thank you all. I 4 very much appreciate your coming here and doing this today. 5 This concludes this panel. We'll take a lunch 6 break. As a mentioned earlier, for the audience, there is 7 food at Union Station. I'm not making any comments on its 8 quality, but there is food there. But you have to go out 9 through security and come back in. 10 And we will resume at 1:45 with the panel for 11 investors. Thank you very much. 12 (Applause.) 13 (A lunch break was taken from 12:30 p.m. until 1:45 14 p.m.) 15 A F T E R N O O N S E S S I O N 16 MR. WHITE: Welcome back, everybody. We are ready 17 to get started with a second panel. We going to cover the 18 same broad topics that we covered this morning, but, in this 19 case, with a special focus on investors. 20 And joining me to moderate this panel is Julie 21 Erhardt. Julie joined the Commission as a deputy chief 22 accountant in October 2004, under the then-chief accountant, 23 Don Nicolaisen. 24 The focus of her work is on international matters, 25 and she is very clearly one of the Commission's leading 1 thinkers on IFRS, the end of reconciliation, and 2 international financial reporting from all different angles. 3 I have gone through her bio, and you don't find 4 this in her many bios, but if I understand it correctly, she 5 made a substantial contribution to the roadmap at the end of 6 reconciliation which ended up being published by Don 7 Nicolaisen, but, as I understand it, Julie was really very 8 much behind the process of writing that roadmap. So we are 9 very fortunate to have her here. 10 A little other background: She was a Sloan fellow 11 at the Graduate School of Business at Stanford University, a 12 partner at Arthur Andersen, and a practice fellow at the 13 FASB. And I guess she even had an interim assignment at the 14 IASB. So Julie has been a lot of places. 15 So, Julie, I am very happy to turn this panel over 16 to you. 17 MS. ERHARDT: Thank you, John. And thank you to 18 the audience members and those watching, as well as, 19 certainly, to our panelists for taking the time to be with us 20 today. 21 I would certainly like to start by introducing our 22 panelists, just from this side down to the other end. 23 At my immediate right, we have Steve Todd, who, in 24 simple terms, is a partner at Ernst & Young; in more complex 25 terms, is the global vice chair for professional practice. 1 Next to him, Joel Osnoss, from Deloitte & Touche. 2 He is in charge of their Global Offering Services Group. 3 Then, to Joel's right, we have Christian Leuz, who 4 is a professor and, in particular, David Booth faculty fellow 5 at the Graduate School of Business at the University of 6 Chicago. 7 To Christian's right, we have Joe Joseph, who is 8 the managing director and the chief investment officer of the 9 small and mid cap equity team at Putnam Investments. 10 Then, to Joe's right, we have Greg Jonas, who is 11 the managing director of Moody's Accounting Specialist Group. 12 To Greg's right, we have Dennis Johnson, who is the 13 senior portfolio manager for global corporate governance for 14 CalPERS, the California employees' retirement system. I 15 think Dennis earns the award for almost traveling the 16 farthest -- at least, domestically, and perhaps Steve, 17 globally. 18 And then last, but not least, to Dennis' right, we 19 have Trevor Harris, who is the managing director and vice 20 chair of client services at Morgan Stanley. 21 So thank you. 22 As John mentioned, there is really four broad areas 23 I would like to explore and, as with this morning's panel, 24 leaving a little time at the end for just observations from 25 the panelists that didn't otherwise fit in, or suggestions or 1 recommendations for our work going forward. 2 But let me just break those four areas into two 3 broad categories -- first, the capital markets landscape 4 globally, and then the second category, and where we will 5 spend more of our time, the capital markets landscape in the 6 U.S. markets. 7 With respect to the capital markets landscape 8 globally, I would first just like to set the stage for the 9 discussion to ask for comments by the panelists with respect 10 to, you know, what factors cause investors and issuers to go 11 to particular capital markets to buy or sell securities. And 12 maybe, in particular, you could focus on what causes 13 investors to go to particular markets. 14 I mean, to give a simple analogy, I know, when I 15 want to buy one can of soda, I am certainly happy to go to 16 the convenience store to buy it, but when I need a case of 17 soda, I may be more inclined to go to the warehouse club. 18 I don't know if such thinking applies to buying one 19 share versus many shares or one bond versus many bonds, but, 20 in essence, what I'm trying to get at in the first part of 21 our discussion is just: What motivates investors to buy 22 securities, or, to the extent you are familiar, issuers to 23 offer securities where they do? 24 And, in that regard, I would like to ask Trevor to 25 start us off, and then maybe move to Joel and Greg, and then, 1 certainly, at that point any panelist that wants to join in, 2 just please signal that by standing your name card on the 3 end. 4 So, Trevor? 5 MR. HARRIS: Thank you, Judy. And thanks for 6 inviting me here. 7 Before I answer your question directly, Chairman 8 Cox mentioned this morning that it's nice to have real 9 evidence to base various comments on. And I have been 10 looking at this area and actually worked with 20-F 11 reconciliations in the early '90s, in my former life as an 12 academic. So I have actually read and tried to analyze 13 hundreds of these reconciliations and looked at the capital 14 markets' effect on them, as well as working with the issuers 15 and, clearly, investors in my role at Morgan Stanley. 16 And I think, first and foremost -- and it almost 17 doesn't matter which type of investor you are; the single 18 Coke, or the soda, or the case -- is liquidity matters the 19 most, if you go where the markets are almost liquid and, in 20 some sense, where the transaction costs are least. And the 21 globalization of capital markets in various forms has changed 22 that whole perspective. 23 But I think it is also important to allude to what 24 Richard Blackett had spoke about this morning. The markets 25 are quite diverse in terms of the buckets. And he used three 1 three buckets this morning -- the large cap, or large pools 2 of investment on the institutional side; mid market; and 3 retail. 4 But, that, I think is not sufficient, either. I 5 think there is also a lot of investors who are what I would 6 call index huggers. And the ETF market has actually grown 7 that a lot. And so there is a way to access a lot of 8 non-U.S. issuers through ETF that, historically, really 9 wasn't available in a very liquid form. And, clearly, the 10 accounting reconciliations don't really play a role to the 11 same extent in that case because you've got an intermediary 12 dealing with it. 13 Even in the large institutions, if you are a very 14 active trader and that is the way you are actually looking at 15 things, again, the accounting information set is a very 16 different set and you clearly go where the liquidity is. 17 Moving to the retail space, which is, I think, 18 where there is the most information need, in some sense, I 19 think it is also an illusion to believe that all retail 20 investors transact just in our markets, and even that they 21 only transact in those companies that have Level III or Level 22 II ADRs, which are registered with the SEC and have full 23 reconciliations. 24 Today's Wall Street Journal talks about the pink 25 sheet market. It talks about two very large 1 multinationals -- Hoffman-La Roche and Nestle -- who have 2 chosen to operate in those markets. 3 For a retail investor, if we have liquidity in 4 these markets and we can deal with the foreign exchange and 5 taxation issues, or it gets done for us through a custodian 6 or an ADR process, then I think you will see that being done 7 in that form. So the reconciliation, in and of itself, may 8 even not be known whether it exists or not to a retail 9 investor. 10 Two other observations on that, and then I'll pass 11 it on is that, even in that space, today, there adverts and 12 an online broker this is focused on the retail -- they are 13 going to be offering trading in individual securities in the 14 local markets, in six or seven non-U.S. markets. 15 So, again, you don't need to even go into the U.S. 16 markets as an individual to make transactions -- with, I 17 think, a $20 transaction cost. So, again, that makes it a 18 much simpler process to actually go and do these 19 transactions. 20 But my experience with both institutional investors 21 and with the more retail investor, where the size of 22 liquidity issue is, what they are really looking for is an 23 ability to reduce risk and uncertainty -- which was alluded 24 to this morning. 25 So, in my mind, it's much more having the 1 regulatory oversight -- having the SEC actually opine and 2 monitor what is being done that is really what we are looking 3 for, or investors are looking for in this whole process. 4 And I want to make an important distinction that 5 wasn't made as much, I don't think, this morning, in this 6 line. There is a big difference, when we go through these 7 discussions, between a local accounting system and a local 8 market -- especially in an emerging market with an 9 undeveloped capital system. So one of the other factors is 10 the actual nature of the system itself and the regulatory 11 oversight. 12 That's very different to having an international 13 system -- or IFRS, specifically -- which is with the 14 regulatory oversight, so the SEC. So the reduction of 15 uncertainty through some -- be it the auditors or the 16 regulators opining -- I think is much more critical, in terms 17 of where people want to go. 18 MR. WHITE: So when Ken was saying that he sees the 19 need for reconciliation in the 144(a) offerings today, that 20 is less the case, from your perspective, if the underlying 21 reporting system was IFRS? 22 MR. HARRIS: There is no question. And this is -- 23 many of the issuers he is alluding to -- because he and I 24 actually were talking earlier this morning -- are actually 25 coming from the emerging markets. And, in that case, people 1 are, firstly, unfamiliar -- and this is even many 2 institutional investors -- with the idiosyncracies of that 3 reporting regime. 4 And, you know, if -- again, this is probably a 5 little later in the panel, but if we get into the specifics 6 of what these reconciliations are, as Neri mentioned this 7 morning, I have never found, both in my buy side clients and 8 working with sell side analysts in two institutions, anyone 9 who actually makes a forecast based on those reconciliations. 10 They forecast in the local GAAP, and then they look to the 11 disclosures to see what else they can learn. More information 12 is always preferred, especially if it's costless to us, as 13 investors -- at least, directly costless. Indirectly, it is 14 always costly, as Chairman Cox said. So I think that is what 15 he was alluding to. 16 And there is one other issuer that he is dealing 17 with right now, where there is some demand for U.S. GAAP, but 18 it's from a small subset of investors because it's a very 19 narrow placement, in some sense. And they are undereducated, 20 going back to what you were talking about this morning. 21 I think, if the system understood that this was 22 acceptable to you at the Securities and Exchange Commission, 23 I think that's 90 percent of the work done. 24 MR. OSNOSS: First of all, thank you very much for 25 the opportunity to participate in this group. 1 I have to say that, just to allude to the analogy 2 of the roadmap, we are all sort of communicating, and that's 3 the most important thing. And it's good that we don't have 4 to pride to refrain from rolling down our windows and asking 5 for directions. I think my wife would really love for me to 6 take that as an example. 7 Just in terms of what an investor looks for, you 8 know, I think a good investor will look for a good investment 9 anywhere, no matter where it is. But, having said that, 10 there are factors at play that really drive that decision of 11 the investment banks, some of which are out of my 12 purview -- you know, things like market factors, liquidity, 13 currency risk, depth of analyst and media coverage. 14 In looking into the foundation of how the investor 15 makes those decisions, the investor, I think, will gravitate 16 towards, all other things equal, that market that is 17 regulated better, that has more transparent financial 18 reporting requirements, the degree to which the standards are 19 enforced and respected. 20 And also I think that investors -- and this might 21 be a controversial point, but I would argue that investors 22 would like to view making investments overseas through their 23 their own lens to understand what those financial statements 24 would look like, if there was -- you know, to basically give 25 them comparability between their own investments and their 1 own markets and an investment overseas. 2 And, to that point, I do believe that, while I 3 agree that the reconciliation should be eliminated, I do 4 think that it would be appropriate for companies to continue 5 considering disclosing the large reconciling items between 6 the two GAAPs, so that investors want to look at the company 7 through their own market's eyes to actually get a good view 8 of what that company would look like. 9 And also, by the way, it provides a degree of 10 discipline in the process to have companies actually 11 disclosing these differences. I think we shouldn't lose 12 sight of the fact that U.S. GAAP is a very mature set of 13 standards, has been around for many years. You can stack 14 U.S. GAAP from the floor to the ceiling. IFRS had been 15 around for, well, many years, but it has really come into its 16 own over the last about 5 to 10 years. 17 And I think that it gives preparers an 18 opportunity -- when they have to think about, "How would I 19 view this under U.S. GAAP -- " In a framework that is quite 20 similar, in a lot of respects, to similar to IFRS, "How would 21 I view this under U.S. GAAP if I were to be reporting under 22 U.S. GAAP?" 23 Conversely, I do think also that companies inside 24 the U.S. should be thinking about comparing to companies 25 outside the U.S. and trying to -- I think companies should be 1 thinking about, "What would we be doing under IFRS?" And I 2 think it would improve the whole process of financial 3 reporting as a result. 4 MS. ERHARDT: Greg, do you want to chime in? 5 MR. JONAS: Thanks, Julie, I also appreciate the 6 opportunity to be with you today. 7 I cannot directly answer the good question that you 8 asked through the lens of investors and issuers, but let me 9 comment on your question through the lens of a rating agency. 10 Let me do so by making three observations and then draw a 11 conclusion from the observations. 12 The first observation is the rating business is 13 very much a global sport. We rate companies, as we all know, 14 from all over the world. But, in recent years, we have 15 applied global rating methodologies industry by industry. We 16 have global standard adjustments that we make to financial 17 statements to fix certain things that we think can be better 18 for financial analysis than they are. 19 We have standard definitions of the metrics that we 20 use to derive ratings. More on that in just a second. We 21 have a standard communication format, standard packages of 22 data that go to rating committees. And we perform global 23 portfolio reviews that we hope promote consistent ratings 24 across geographic boundaries. So the first observation is 25 global sport. 1 The second observation is boring old reporting 2 standards turn out to be critically important to us. The 3 metrics derived from public financial data, the fact is, 4 drive credit ratings for most companies in most industries. 5 In each industry, there are, typically, 7 to 12 6 metrics that are particularly important to our perceptions 7 about credit risk, and we derive about three-quarters of 8 these metrics from public financial data. 9 Importantly, we feel we have no choice but to live 10 with much of the diversity that comes from multiple GAAPs. 11 That is, when comparing companies across GAAPs, we pretend 12 that the reporting amounts are comparable, even though we 13 know that they are not. 14 Generally, we are not able to adjust reported 15 numbers to achieve comparable reporting across GAAPs, even 16 though we have access to inside information in most 17 jurisdictions. The fact is companies don't have the data to 18 do so. 19 We do adjust financial statements, as I mentioned 20 earlier, in eight areas for corporations. But these 21 adjustments generally serve to improve GAAP in areas that we 22 think are broken, not to improve the comparability across 23 GAAPs. 24 So my bottom line here is that non-comparable 25 reporting undermines rating quality, and there isn't much we 1 can do to fix it without help. 2 So now the conclusion: Financial analysis, I feel 3 very strongly, is best served -- essentially served -- by a 4 single body of global GAAP, uniformly applied and accepted 5 everywhere. Multiple languages may be good for human 6 culture, but multiple GAAP languages stink for financial 7 analysis. 8 Comparability of companies is key. It is essential 9 to what we do. Due to the globalization of product and 10 securities markets, we are increasingly trying to compare 11 companies on a global basis. Global portfolio reviews, as I 12 mentioned, global industry methodologies, and global comps 13 for companies at similar rating levels are all standard fare 14 at rating committees. 15 Our analysts are located all over the world, and 16 they have highly diverse experience with financial reporting 17 standards, underscoring the need for a common analytical 18 language -- that is, global GAAP, uniformly applied. 19 Now, there are two other benefits from global GAAP 20 I want to mention before contrasting what I'm talking about 21 to the roadmap. 22 One of those benefits is that it promotes investor 23 understanding and, thus, confidence in reported amounts, 24 which, in turn, promotes capital formation and reduces, it 25 seems to me, the average cost of capital. It also greatly 1 improves the efficiency of financial analysis. 2 I believe that the roadmap is very important, but 3 the roadmap is to a rest stop. It is not the final 4 destination. The final destination has to be a single body 5 of GAAP, consistently applied. 6 And to do that, we need conversions, not only of 7 accounting standards -- which has gotten a lot of discussion 8 and where I think we have made the most progress -- but the 9 importance the convergence for auditing standards, as well as 10 global regulatory standards are things that I think need 11 equal attention, if we can get the uniformly applied part of 12 the vision in place. 13 MS. ERHARDT: Thank you. Would anybody else like 14 to comment, just on this global landscape? I don't see any 15 tents up, but I see a pencil up. So Joe? 16 MR. JOSEPH: As an equity investor, who is running 17 about $5 billion globally in small cap money, all I do every 18 day is buy and sell shares across the world and compare 19 companies across the world. 20 And to answer your question as to buying stocks in 21 specific locations, it comes back to something that Trevor 22 said, which is: Where is the biggest pool of liquidity 23 available where the bid-ask spreads are the tightest? 24 Transaction costs are critical. In the rare event that there 25 is a pricing arbitrage somewhere, we will, obviously, go 1 where we can move that arbitrage. 2 But then the other part of it is: How is research 3 structured? And, within our company and increasingly across 4 the sell side shops, research is structured across global 5 sector lines, and not company lines. So the ability to 6 compare using a common set of financial standards is 7 critical. 8 And because a lot of the research then -- a 9 corollary of that is a lot of the research becomes available 10 first in local markets. And if that information becomes 11 available immediately there, that's when we would go in to 12 take advantage of that new insight that we get. 13 So it really comes down to liquidity, where the 14 insight is first made available, where the information is 15 first disclosed, and to the extent that we have global 16 industry analysts leads covering the stocks. 17 MS. ERHARDT: Dennis? 18 MR. JOHNSON: First, let me say that CalPERs 19 appreciates being a participant in today's roundtable 20 discussions. 21 Secondly, I think it's important to realize, from 22 our vantage point, that we are a long-term, if not arguably a 23 permanent investor, in public equities around the globe. And 24 so I thought it would be beneficial to bring that point of 25 view to this particular topic. 1 We think about going to markets in the context of 2 returns -- return opportunity, certainly, relative to our 3 actuarial rate of return -- but also looking at that return 4 relative to a given level of risk. And there are several 5 macro and micro factors that we consider in assessing risk, 6 and I would just like to comment on a couple of them. 7 First, political risk and, specifically, the 8 adherence to law and rules and regulations are very important 9 to us. 10 Secondly, the existence of corporate governance 11 practices, both in the marketplace as well as at the company 12 level, are extremely important to us -- the respect for 13 shareowner rights, if you will. 14 Third, the effectiveness of the exchanges to 15 function, and also the ability to settle and report on 16 transactions of the markets are of key importance to us. 17 And then the last point I would note would be the 18 quality of the financial reporting and, as it was noted 19 earlier, the comparability of that reporting is a 20 consideration that is very important, as we look around the 21 globe to make potential public equity market investments. 22 MS. ERHARDT: Trevor? 23 MR. HARRIS: Just one added comment that I was 24 reminded of by some of the comments that were made. The 25 timeliness dimension is also important. 1 There are always information gaps between what a 2 company knows and is telling us and what they are actually 3 going to transact in the markets and where investors are 4 going to look for investment opportunities. 5 So to the extent we can get more timely information 6 from one source or another -- and that, frankly, may not be 7 the financial reporting domain -- that's going to actually 8 drive a lot of where the transaction takes place and, 9 clearly, where either issuers or investors are going to go. 10 And to the extent that things like reconciliations, 11 as was mentioned this morning, take a long time to actually 12 be made available to the market, there is a lot of other 13 sources one is going to look to to do that. 14 And related to that and to Greg's comment, when I 15 started in the early '90s trying to do global comparisons to 16 30 companies, we made a decision not to go to a single GAAP. 17 We looked to -- what we labeled apples to apples was, really, 18 to go what is the underlying economics. 19 So I think, in answering a lot of this, it is where 20 we go to in terms of this information set that is going to 21 give us the best correlation or association with what is 22 actually happening in the companies. And that may be in 23 different markets, different regimes, different reporting 24 regimes, subject to all of the things that Dennis alluded to. 25 MS. ERHARDT: Steve, and then we will go to 1 Christian. 2 MR. TODD: Thank you. I, too, am glad to be here. 3 I appreciate the invitation. 4 I just want to follow up on a point made by Greg a 5 little bit ago about convergence of auditing standards. I 6 think that is extremely important, given the complexity of 7 IFRS standards and U.S. GAAP. And even though IFRS is 8 principles-based, it clearly has complex standards. 9 And, particularly, fair value standards require 10 really robust auditing procedures to determine that the right 11 calculations have been made and the right presentations have 12 been made. 13 So one of the things that I know concerns me quite 14 a bit is that, even if you have a robust IFRS framework 15 around the world, the auditing standards and the application 16 of them are extremely important in deterring the right final 17 accounting and financial reporting. So hand-in-hand with the 18 convergence, I think the convergence of auditing standards is 19 extremely important. 20 MR. LEUZ: First of all, I would also like to thank 21 you for the opportunity to participate in this panel. 22 I would like to add a comment to the points that 23 have been made about the liquidity issue and sort of add an 24 empirical perspective. 25 There is actually -- if you look out in the 1 research and the literature, in terms of studies that people 2 have done on the effects of accounting standards per se, 3 there is relatively little evidence that would say that the 4 markets really reward one standard over the other, when you 5 try to put the standards, really, on a level playing field -- 6 which has been pretty difficult to do empirically, but, in 7 recent years, because we have had more and more settings 8 where, in the same country under the regulatory regimes, 9 companies were operating under different standards, and you 10 were able to sort of do comparisons. And there is, as I 11 said, relatively little. 12 What we have evidence of and what the markets do 13 reward, however, is a firm's commitment to transparency -- 14 the seriousness of their disclosures, the actual -- part of 15 that is the actual reporting quality, but it's not the 16 standards per se. It's sort of to what extent firms disclose 17 in good and bad times and how forthcoming they are. Those are 18 the things that we find are rewarded in terms of the cost of 19 capital, bid-ask spreads, or the liquidity in the markets. 20 And so, in my view, there is often too much focus 21 on the accounting standards per se and too little emphasis on 22 some of the underlying forces that drive reporting quality as 23 an outcome -- which, I guess, is what we ultimately care 24 about. 25 And so the reconciliation issue -- I'll come back 1 to this theme -- is, in some sense, just an application of 2 that general point, which I think is important. 3 MS. ERHARDT: Sort of an element of transparency, 4 but not the be-all/end-all concept, if you will. 5 MR. LEUZ: Yeah. But what I meant more is I think 6 that the reconciliations are particularly focused on the 7 standards, rather than being focused on the reporting quality 8 and the outcomes that I think is what really matters to the 9 markets. 10 MS. ERHARDT: So, in essence, the reconciliation is 11 an element of the standards, and the standards themselves are 12 only one element of transparency. 13 MR. HARRIS: Judy, sorry. It's Trevor. I just 14 think it's -- to pick up on Christian's point, it's a 15 commitment device. A company is committed to be held to a 16 standard which is considered robust. That is the issue more 17 than the actual number itself that you are reconciling. 18 MS. ERHARDT: Okay. Well, with that, let's move 19 away from the global stage, if you will, and get back to the 20 practical question at hand -- the policy question for the 21 Commission. 22 And that is, in our capital markets, what happens, 23 if you will? What are the consequences, opportunities, 24 effects of going to a two-GAAP system -- U.S. GAAP and IFRS? 25 And, in that regard, I guess I would like to break 1 the conversation into three pieces, which dovetail with the 2 three aspects of our mission because, in the end, while I'm 3 not a Commissioner, if I were, I would say, "Okay. Well, my 4 responsibilities are to carry out the mission. I have this 5 policy question. So what happens -- you know, am I 6 discharging my duty if I decide X or Y on the question?" 7 And, as everyone knows maybe -- at least, the 8 lawyers in the room -- the first element of our mission is to 9 facilitate capital formation -- you know, in essence, have a 10 capital market functioning in the U.S. 11 And so, starting with Joe and then maybe to 12 Christian and Trevor, I mean, what happens, if anything, to 13 the availability of capital, the opportunities for investors 14 to put it to work? 15 I mean, would it be kind of the day before and the 16 day after, if you will, that you drop the reconciliation 17 requirement? Would the newspaper headlines be the same, or 18 would there be a huge headline, you know, "Today is the first 19 day without a reconciliation and" -- dah-dah-dah-dah-dah-dah 20 -- "a lot has happened to the markets"? Or is it more nary a 21 blip, if you will, to the capital markets as a whole? 22 So Joe? 23 MR. JOSEPH: I think the headlines would say, 24 "Today is the first day without reconciliation," and then the 25 capital markets would yawn. 1 So let me explain to you, as a practitioner, how it 2 would affect us. And I guess the conclusion, really, is that 3 it's very difficult to find value-relevant information in 4 GAAP. And, basically, what I mean is information that helps 5 me forecast futures cash flows, future returns on capital, 6 and changes in risk. 7 And so, you know, being forced to compare companies 8 across the world, given that I cannot get into the accounting 9 that went -- you know, all I get is the actual financial 10 statements themselves -- we have to make a number of 11 adjustments. 12 And, roughly, if I could scale it, 70 percent of my 13 investable universe, which is mostly a developed market 14 universe, has adopted IFRS, or will in the next year or so 15 -- Japan and, obviously, the U.S. being the exceptions. 16 And, in a lot of instances -- because, again, the 17 way we have structured and analysis is on global sector lines 18 -- we have adopted IFRS-type accounting, even for some of our 19 U.S. companies. And then I'll just run through some of 20 -- the usual suspects of this is R&D expensing, pensions, 21 debit charges. You know, we basically unwind a lot of that 22 stuff to put companies on a comparable basis. So I can now 23 compare companies. 24 Then, on the valuation side, we use a residual 25 income-type approach, where the only requirement for that to 1 work is clean surplus accounting. And as long as clean 2 surplus accounting is adhered to, which IFRS does, we can 3 value these businesses. 4 So there is nothing in the 20-F that we can see 5 that would prevent us from doing this. And I think Trevor 6 mention the accounting standards and the oversight that a 7 local regulator would have. And, clearly, yes. You know, I 8 would prefer to buy a stock in Hong Kong, as opposed to 9 China. And if you assume that most developed markets that 10 have IFRS or will adopt IFRS do actually have some degree of 11 oversight, then that's not really an issue for us. 12 So sitting here, from my perspective, I don't see 13 anything changing, really, if the reconciliation goes away. 14 MR. WHITE: Did you say companies that report in 15 U.S. GAAP, that you would deconstruct them over to IFRS? 16 MR. JOSEPH: Yes. And I can give you -- a classic 17 example is the airlines. If I had to look at airlines, and I 18 wanted to compare Continental Airline with, say, British Air 19 or Air France, what do I do with the leases? 20 MR. WHITE: And can you do that off of the 21 information that is in the public financial segments? 22 MR. JOSEPH: Not really. But you try and do the 23 best you can. So, at a very simplistic level, you take the 24 rent and add it back, and you capitalize for the rental 25 expense on the balance sheet. That's really all you can do. 1 MR. WHITE: I mean, where I was going is -- 2 MR. JOSEPH: It's probably completely -- it's not 3 probably the perfect way to do it, but that's all I have, as 4 a investor. 5 MR. WHITE: So Chairman Cox's vision that you could 6 do this with XBRL isn't actually a reality then? 7 I mean, Chairman Cox, if he had his way about this, 8 you would be able to take U.S. GAAP financials and have them 9 filed in XBRL, and you would be able to convert into GAAP 10 instantaneously. But it sounds like that isn't really 11 doable, from what you are saying. 12 MR. JOSEPH: Probably not, yes. 13 MR. HARRIS: Can I answer that question? 14 MR. ERHARDT: Jump in briefly, and then we'll get 15 back to Christian. 16 MR. HARRIS: I was actually going to allude to the 17 XBRL dimension later. But when we move to interact the data 18 for XBRL, as is inevitable in my mind, what Joe is talking 19 about doing and what Greg has talked about doing and what we 20 do to some extent would be facilitated significantly. 21 I don't think you can say we would do everything -- 22 because it's a question of what the companies supply us with 23 -- but he would be able to do in more detail, much more 24 quickly, and much more persistently the aggregation to a 25 single framework that is suitable for him and the way he 1 invests much more easily with that probably. 2 MR. WHITE: So you could have a separate software 3 program that would write in whatever the algorithms you are 4 using to -- 5 MR. HARRIS: Yes. 6 MR. WHITE: So even though it wouldn't come 7 directly, you could take the XBRL -- you could take the data 8 and, in effect, convert using assumptions. 9 MR. HARRIS: We had actually created that. I 10 presented that at the roundtable here. I mean, I did a live 11 presentation, so it's on your website. But we actually have 12 done specifically that using an XML-XBRL type technology to 13 do it. 14 MS. ERHARDT: Okay. Christian, we were kind of on 15 this morning after. The headline says, "Reconciliation 16 gone." Is there any more to the story, or not? 17 MR. LEUZ: Well, I would expect the same reaction 18 as Joe, in the sense that the news will report about it, but 19 then the markets will probably yawn. 20 But before I sort of answer your question and 21 explain a little bit more why I think this would happen, let 22 me also give you some general, I think, empirical evidence 23 which I think will put the comments a little bit into 24 perspective. 25 We do have a fair amount of evidence that firms 1 from countries with strict securities regulation do enjoy a 2 lower cost of capital. We also have evidence that strict 3 securities regulation is associated with more developed 4 capital markets, with higher investor participation, and 5 greater market liquidity. 6 So we have a fair amount of evidence that strict 7 securities regulation can offer substantial benefits, along 8 the lines of, you know, the SEC mission statement of things 9 that you are looking for looking for. 10 Perhaps more importantly -- and Trevor sort of 11 briefly alluded to this -- we also have evidence that one key 12 reason -- certainly not the only one, but a key reason why 13 firm come across in the United States on U.S. exchanges is 14 because they want to show that they are willing and committed 15 to play by very tough rules. They are seeking the 16 environment with strict enforcement and market monitoring. 17 And what we also see, then, on the flip side is 18 that, actually, the markets reward this commitment on the 19 part of the companies, and it helps their ability to raise 20 finance and, again, lowers their cost of capital and helps 21 their equity valuations. 22 Interestingly, we don't have similar evidence for 23 other markets, and we also don't see this evidence in the 24 U.S. OTC markets or the pink sheets that Trevor has 25 mentioned, or we don't see this in the private placement 1 market, either. 2 So, in my mind, the question is not at all whether 3 we should lower the standards or should reduce the investor 4 protection. I think the key issue is: Is the reconciliation 5 an important part in that? And this is where I'm skeptical 6 and where I doubt that is actually does play a key role. 7 And to give you an example why I think that is the 8 case -- and it is admittedly an extreme example -- but take a 9 foreign company that reports under IFRS, and just assume for 10 the sake of the argument that you didn't fully trust their 11 financial statement. Let's say you thought they weren't as 12 forthcoming about their true economic performance. Why would 13 you trust that same company when it reconciles to U.S. GAAP? 14 As Chairman Cox sort of alluded to this morning, 15 accounting standards offer substantial discretion, there is 16 differences in interpretation, and there is lots of estimates 17 involved. And so a firm that does not want to be forthcoming 18 in terms of its economic performance will find ways to 19 obscure, in my mind, under IFRS, under U.S. GAAP, or any 20 other local GAAP. 21 And so, while this is an extreme example, I think 22 this takes us back to the general point I made -- that I 23 think we shouldn't focus so much on the standards per se, but 24 should also think about these other forces and factors that 25 are really important for the reporting quality. 1 And what are, in my mind, the key elements in this 2 regard are the 20-F disclosures, is the SEC oversight and, in 3 particular, the SEC disclosure activities and the comments 4 that are provided to the issuers. In the U.S. markets, the 5 threat to litigation is, to some extent, an enforcement 6 mechanism. And it is, obviously, high-quality auditing in 7 marketing monitoring that plays a key role in that. And 8 those elements, in my mind, are sufficient to ensure 9 high-quality reporting. 10 And just sort of backing this up with some 11 empirical evidence and consistent with this view, when firms 12 come and cross-list in the United States, and you look at 13 their home country GAAP -- their local GAAP -- and compare 14 that to firms that aren't cross-listed in the United States, 15 you actually find that the quality of financial reporting 16 goes up for these cross-listed firms -- which can't be the 17 GAAP because you are holding that constant. The firm is 18 still reporting under German, French GAAP, or what have you. 19 And so it really is these other factors that are driving that 20 quality improvement. And so I think that's the key element. 21 So going back sort of to your question, I think the 22 reconciliation requirement wouldn't substantially change that 23 or is not a key input. It's these other things that I 24 mentioned that are likely to be the key factors. And we're 25 not talking about changing those. 1 MS. ERHARDT: Trevor, did you want to join in on 2 the morning after headline? 3 MR. HARRIS: Yes. I think there is a more positive 4 dimension to it. I think the Joe Josephs of the world can 5 yawn because he is already sophisticated enough and doing 6 investing enough to do it. 7 If you take Christian's point, what you would have 8 done by doing that is taking away a significant cost and risk 9 to the issuers listing in the United States and providing 10 them some additional benefits. 11 One of the reasons issuers -- historically, anyway 12 -- have come here is actually to get closer to the consumers 13 and their customers and to demonstrate a commitment to our 14 country. That is going to continue. 15 So, to the extent that it attracts -- as you heard 16 this morning -- more companies to come and list in the United 17 States, for the retail investor and the less sophisticated 18 than Joe Joseph, you have now actually brought all these 19 other positive dimensions to a new set of investors that 20 really are transacting more and more outside our markets, 21 probably at higher cost, without the regulatory oversight in 22 the same context. 23 So you have leveled the playing field that I think 24 would actually help the set of investors that probably need 25 it the most. 1 MS. ERHARDT: Let's move on, then, to the second 2 aspect of our mission, which would be the second part of the 3 analysis, which is, in colloquial terms, keep the trains 4 running on time with respect to the markets. So, in more 5 sophisticated, in the words of those that drafted the '33 6 Act, it's to maintain fair, orderly, and efficient capital 7 markets. 8 And what I would like people to comment on here is 9 just what thoughts do they have on what are the opportunities 10 and consequences -- and for whom -- of going without a 11 reconciliation. 12 And I know we have sort of alluded to some of 13 those. Trevor just made some comments about opportunities 14 for, in essence, retail investors. But just examining it 15 more broadly, where do you see the shift, if any? Where do 16 you see opportunities? Where do you see consequences? 17 And since we will go to our third aspect of our 18 mission of protecting investors in a second, maybe focus on 19 -- certainly, you can talk about investors, but think even 20 more broadly, if you'd like to, about those opportunities and 21 consequences. 22 And let's start with Greg and then Steve, Dennis, 23 and Joel, and then whoever else would like to chime in. 24 So Greg? 25 MR. JONAS: Well, let me start with a confession, 1 and then I can't help but give you all some advice. 2 So, first, the confession. Our analysts don't use 3 the 20-F reconciliation in their day-to-day work of analyzing 4 companies. And there is four reasons for this system. Some 5 of this was a little surprising to me, but let me relate what 6 I have come to understand. 7 First of all, increasingly, our analysts of foreign 8 private issuers, our analysis of a foreign private issuer is 9 done in IFRS. For most IFRS filers, our lead analyst is not 10 based in the U.S. and has not grown up with U.S. GAAP. IFRS 11 a rapidly becoming the universal language. It's becoming the 12 language of our analysts. 13 Let me give you a couple statistics that underscore 14 this point. We rate about 165, if my calculation is right 15 -- about 165 foreign private issuers that file financial 16 statements from countries that have adopted some form of 17 IFRS. And of those 165 companies, in only 13 cases is the 18 analyst inside the U.S. So in the vast majority of the 19 cases, the analyst is outside the U.S. and is thinking in a 20 language that is very different than U.S. GAAP. 21 So, if anything, that analyst would be predisposed 22 -- if they could put companies on absolutely comparable 23 footing, they would probably want everybody on IFRS, as 24 opposed to think that they were going to convert everybody to 25 U.S. GAAP. 1 The second reason why our people don't use the 2 reconciliation is, for the typical foreign private issuer, 3 its peer group is not primarily based in the U.S. So 4 converting foreign private issuers to U.S. GAAP would not 5 result in a comparable data across the peer, anyway. 6 The third reason is the reconciliation -- this has 7 been mentioned several times, both this morning and even on 8 this panel -- the reconciliation is filed too late for our 9 purposes. Most companies, of course, file the 20-F very near 10 the file deadlines, a full six months after their year-end. 11 And long before that time, they have reported their financial 12 results in international or local GAAP. 13 By that time, we have updated our analysis of the 14 company. We have decided whether to hold a rating committee. 15 We have made decisions, and life has moved on. So it's 16 interesting information, but it's too late for our purposes. 17 And, finally, the fourth reason why is it the 18 reconciliation does not provide enough data to compute some 19 of our key metrics, even if we wanted to try to compute the 20 key metrics from the data. 21 Two examples of key metrics we often use are what 22 we call funds operations and cash flow measures, where I need 23 to understand each of the working capital components 24 reconciled to U.S. GAAP -- which most companies don't give 25 us. And even EBITDA we have difficulty based on the 20-F 1 information. 2 So for those four reasons, our folks just not using 3 that. 4 And I fully appreciate the many practical reasons 5 why giving up on the reconciliation could help, many of which 6 were mentioned this morning, and other reasons were given 7 here in this panel, so I won't repeat them. 8 But I have to tell that, viewed in isolation -- if 9 you just ask me, "Greg, as a user of these financial 10 statements every day, if I gave on the reconciliation, does 11 that mean you don't care because your people don't use it 12 every day in setting ratings?" I would say, "Wait a minute. 13 Viewed in isolation deleting the reconciliation isn't really 14 helpful. We're not just giving up nothing." 15 And here is why: First of all, it removes some 16 benefits to companies and auditors that we perceive result 17 from the discipline of reconciliation. And those benefits 18 may be improved detection of errors in both GAAPs, not just 19 just U.S. GAAP; better competence in reporting standards and 20 requirements; and greater discipline and control in the 21 company's financial reporting generally. 22 So we think the fact that you all, Julie, have 23 required this reconciliation, as imposed into the process, a 24 discipline that otherwise would be either absent or less so, 25 and that could be very helpful to us. 1 Also viewed in isolation, dropping the 2 reconciliation will reduce the data that helps people measure 3 the extent to which companies are applying IFRS consistently. 4 You know, we have said time and again it's not only 5 important that we have IFRS standards; we have got to have 6 them uniformly applied by folks. And the reconciliation 7 helps us gauge the extent to which there is uniform 8 application. I know, Julie, you are engaged in a study, as 9 best as you can at this point, to try to gauge that in your 10 work. 11 And finally -- and I think this may be most 12 important -- and unintended consequence of dropping the 13 reconciliation could be -- could be -- reduced pressure for 14 convergence to a single body of global GAAP. 15 Progress for convergence to a single body of global 16 GAAP has been, in part, due to the desire of foreign filers, 17 the IASB, and non-U.S. regulators and legislatures to win 18 acceptability of international standards in the U.S. Let's 19 face it, that has been an important reason for the remarkable 20 progress of convergency to date. 21 With that victory in hand, will the pressure be off 22 for continued progress toward a single body of global GAAP? 23 Remembering, I am not worshipping at the altar of U.S. GAAP. 24 I am saying we needing a similar quality as GAAP, and we 25 don't want to screw up the kind of great thing we've got 1 going right now with convergence, and would the reduced 2 pressure, if you all gave up on the reconciliation, undermine 3 that? 4 But, having said that, I'm balanced. I would be 5 willing to give it up if you all conclude that you've got to 6 do it in order to get to the promised land. 7 MR. WHITE: How does the reconciliation help you 8 determine that you have a more consistent application of 9 IFRS? 10 MR. JONAS: Well, if you see two industry players, 11 John, for example, that you consider to be peers, and they 12 file a set of IFRS statements, and they look on the surface 13 to be comparable, but then you look in the 20-F and you find 14 radically different reconciling items to the same U.S. GAAP, 15 I would conclude from that the differences must be with the 16 IFRS application. That's what I would say. 17 MS. ERHARDT: Steve, did you want to join in on 18 consequences or opportunities in particular you see in your 19 work? 20 MR. TODD: Maybe just to add to a couple of Greg's 21 points. 22 You know, I think I have a little different view on 23 the reconciliation than what we have heard a lot throughout 24 the day. You know, a lot of attention has been focused on 25 the fact that the reconciliation doesn't seem to be used by 1 analysts. But following up on some of Greg's points, to me, 2 it's clear that the reconciliation requirement -- to me -- 3 has helped IFRS be implemented more consistently around the 4 world. 5 And it's interesting -- Chairman Cox talked this 6 morning about, you know, IFRS being principles-based. There 7 is a lot of room for interpretation. There is very little 8 practical guidance. There is not a whole lot of EITF-type 9 things out there. And so there is a lot choices that 10 companies can make. 11 And if you are a filer into the U.S. market, and 12 you have to have to reconcile to U.S. GAAP, you start looking 13 at transactions -- as least, most of our clients seem to do 14 it this way -- they look at a transaction or a revenue 15 recognition issue and say, "Well, I have to reconcile to U.S. 16 GAAP, so I have to kind of report it under both. What makes 17 sense?" 18 And what I have seen happen is the U.S. GAAP people 19 and the IFRS people will get something together and try to 20 make a determination. Most of the time, you would say, -- if 21 it's an impairment charge or a valuation reserve for income 22 taxes or recognizing revenue, something like that, you would 23 say, "Well, why wouldn't you try to have the same accounting 24 under both?" 25 Now, obviously, we all know that there is different 1 rules or principles in some cases that would lead you to 2 different accountings, but most investors would like to know 3 why you wouldn't have a valuation reserve under IFRS if you 4 have one under U.S. GAAP. 5 And what I think has happened -- and it goes toward 6 maybe discipline, or whatever, but when you think about 7 people that have companies that have adopted IFRS around the 8 world, coming from totally different backgrounds, different 9 national accounting systems, trying to go to IFRS and, at the 10 same time, reconciling to U.S. GAAP, I think, has had a major 11 influence in the adoption and implementation of IFRS, 12 consistently for those filers in the U.S. market. 13 And, earlier, one of the panelists made the comment 14 about home country GAAP improving, or having higher quality 15 home country GAAP because of filing in the U.S. market. Well, 16 a lot of that, again, in my view, has happened because of the 17 reconciliation requirement, you know, pre-IFRS. 18 If you are in a home country GAAP, and you are 19 recognizing revenue on a transaction or not having a 20 valuation reserve, but you have to reconcile to U.S. GAAP 21 and, all of sudden, under U.S. GAAP, you don't have the 22 revenue -- you know, you have a valuation reserve, and then 23 sometimes people go back and kind of challenge the home 24 country GAAP, which maybe has not quite, again, the guidance 25 or practical application, and make an adjustment. 1 So it's interesting because you could say the same 2 thing about an audit. Nobody reads the auditor's opinion too 3 much, other than to see that it has the appropriate number of 4 paragraphs, but it is nice to know that financial statements 5 have been audited. 6 And though the footnote, which I can understand why 7 lot a people wouldn't want to read, that has the U.S. GAAP 8 reconciliation, at least, in my view, the underlying IFRSs 9 have been -- you know, during the year, have been reconciled 10 to U.S. GAAP. And I think that that really adds a lot to the 11 discipline process. 12 Now, like everybody here, I think, at some point in 13 time, when IFRS is at a stage where it is robust and it has 14 been applied consistently around the world, both for various 15 subject matters or industry, you know, I think it should be 16 dropped. And when we look at the roadmap, you're talking 17 2009. Well, at the end of 2008, there would be five full 18 reporting years under IFRS into the U.S. market. You know, 19 on the roadmap time line, to me, it would seem like we are on 20 target for that. But I don't think it would be a great idea 21 to drop it, like, say, in the next year. 22 MR. WHITE: I'm just a lawyer here trying to 23 translate what you said, but did you say that the end of 24 reconciliation would result in more aggressive 25 principles-based choices under IFRS? 1 MR. TODD: No, I didn't say that. 2 MR. WHITE: Okay. I just -- 3 MR. TODD: What I said was-- and we used and we 4 used an earlier word, "discipline." I'm saying that, as you 5 look back over the last few years -- the key years, where 6 companies have come from their home country GAAP to IFRS, and 7 they have had to adopt various IFRS accounting and, 8 obviously, reporting standards -- while they are doing that, 9 and there is a lot of leeway in the standards or, to say 10 another way, not a lot of practical guidance out there -- 11 well, they know that, if they going into the U.S. market, 12 they are going to have to reconcile to U.S. GAAP. 13 U.S. GAAP has a lot of guidance. You may argue 14 whether it's practical or not, but there is a lot of guidance 15 out there. And there is a lot of interpretations. And what 16 I have seen is that a lot of that guidance that is there has 17 been utilized in adopting the most appropriate, say, IFRS 18 standard or interpretation of the standard. 19 I'm saying that, to me, even though maybe no one 20 reads -- I look at the reconciliation footnote as not so much 21 what the reconciliation is. We don't go in there with the 22 idea of trying to identify the differences. It's more like, 23 if you have a transaction, why should there be a difference? 24 And, if there is a difference, fine, and everybody agrees 25 that there should be a difference. 1 But I think a company that is transparent doesn't 2 go in with the idea that, "I'm going to have a whole 3 different mindset for IFRS and a whole different mindset for 4 the U.S. GAAP." 5 MR. WHITE: So in the world after reconciliation 6 ends, then where are we? 7 MR. TODD: Well, I'm saying, after five years, I 8 think you're going to have some established positions on 9 various technical matters or industry-related matters. And I 10 think, at some point, a discipline has gone -- you know, you 11 have used it in five years of working through the process and 12 having a very robust IFRS consistently applied around the 13 world. And I think the usefulness of the reconciliation may 14 not be quite the same. 15 MS. ERHARDT: Let's move to Dennis. We're talking 16 about kind of consequences and opportunities. 17 MR. JOHNSON: In terms of opportunities, I would 18 say one opportunity exists for the investor at large to make 19 a more informed decision about investment opportunities, as 20 they have greater insight into the real economic performance 21 of companies. 22 In addition to that, I would say that the New York 23 Stock Exchange -- as it was alluded to earlier today 24 Catherine Kinney -- and related parties would also 25 potentially benefit from the adoption of IFRS. 1 A suggested unintended consequence would be the 2 agenda for the accounting standards boards around the globe, 3 which was alluded to earlier. How that agenda is set, 4 prioritized, and then executed, I think, deserves great 5 consideration. 6 And in the category of challenge, I would just 7 point out the PCAOB, specifically here in the U.S., and the 8 implementation of IFRS to the accounting industry -- that is 9 something worth noting, and, specifically, the adequacy of 10 the staff and the resources to the oversee the effective 11 implementation of IFRS. 12 MS. ERHARDT: Thank you. Joel, do you want to 13 follow up? 14 MR. OSNOSS: Sure. Not to beat a dead horse, but I 15 do think that the reconciliation has been a huge source of 16 the quality in the implementation of IFRS. 17 IFRS, as I mentioned, is still a relatively new 18 standard. A lot of people had to apply this for the first 19 time for the year ended 2005. And different people from 20 different countries, different viewpoints -- all brilliant 21 people -- trying to figure out the set of standards. 22 And, you know, what better way to try to, you know, 23 figure out what to do than to kind of look at a mature set of 24 standard that has a similar framework, to try to put it all 25 together and try figure out what the numbers should look 1 like. 2 That is why I'm still espousing some form of a 3 disclosure of the major differences, because it will enforce 4 that kind of discipline. 5 I am also concerned, as Greg mentioned, that, as a 6 result of eliminating the reconciliation without any added 7 level of disclosure, there is possibly going to be a little 8 relaxation on both sides of the pond on this issue, and I 9 think that that is a very serious matter and, you know, we 10 should be looking at this as am intermediate step towards one 11 language -- one global language -- not towards IFRS in one 12 part of the world and U.S. GAAP in another. 13 MS. ERHARDT: Trevor, I see your name up. 14 MR. HARRIS: I'm sort of a little puzzled by some 15 of these conversations because, while I understand that, for 16 the first time adoption of IFRS, one may look to other 17 sources to help come up with what is the appropriate 18 accounting or representation, I think it's a somewhat 19 dangerous path to argue that that means these things should 20 persist indefinitely. 21 And if I hear from several people -- Greg, Steve, 22 and Joel -- that it provides better analysis, discipline and 23 control, consistency, and helps us to capture errors, the 24 inference I would make from that is maybe we should require 25 U.S. companies to reconcile to IFRS because it's going to 1 help auditors and companies capture areas, and go down that 2 list. 3 I think it's also a little presumptuous to believe 4 that a standard that was set in the United States -- like 5 Financial Accounting Standards 5, which, I think, was set 6 before I finished college -- is necessarily going to be a 7 higher quality standard than something that was set maybe two 8 years ago. We learn from our mistakes and from how the world 9 evolves. 10 So, again, I think it's a little -- we have to be a 11 bit careful about always presuming that this is the single 12 best solution. 13 And, frankly, just as a final point, I think that's 14 a really important process, but I think the defining 15 benchmark should not be a single national standard -- or, 16 frankly, even IFRS -- but it should be: What is the economic 17 reality? And so, if we assign "Does this represent the 18 economics that an investor, or a corporation, frankly, can 19 actually make a good business decision from?" then I think 20 we've got the right benchmark. 21 MS. ERHARDT: Christian, do you want to comment? 22 MR. LEUZ: I just want to comment on the concerns 23 that have been raised about consistency and the argument that 24 the reconciliation sort of imposes discipline. I mean, 25 Trevor sort of already made some important points in this 1 regard, so I'm going to be brief. 2 I share the concern for consistency, but I also 3 don't think that the reconciliation is sort of the right tool 4 to address this issue. Trevor sort of hit it on the head by 5 sort of saying, "Should we should then require the U.S. firms 6 to also reconcile to some other GAAP or IFRS?" 7 But I also don't think that we can pinpoint the 8 benefits that we have seen -- sort of the increased reporting 9 quality of firms that come and cross-list here -- that we can 10 pinpoint that in any way to the reconciliation, when, at the 11 same time, you have the SEC oversight and you have the SEC 12 looking, for instance, at the local GAAP or the IFRS 13 statements. 14 In my talking to companies, my sense is always that 15 that process is a really important one, and that is one that 16 changes, to some extent, their local GAAP. 17 And I would say, if we are concerned about 18 consistency, let's rather hit that issue head on, rather than 19 sort of go around the bush and sort of do it through the 20 reconciliation. I'd rather sort of see people spend time on 21 the consistency issue and the problems that are associated 22 with that, rather than sort of doing it sort of in an 23 indirect way via the reconciliation. 24 MS. ERHARDT: Joel? 25 MR. OSNOSS: This is going to get good now, I 1 think, because, you know, Steve and I are sitting down here 2 at the end of the table. We are the guys that are actually 3 in the trenches, working with clients to reconcile their 4 financial statements. 5 And, you know, frankly, first of all, I think that 6 -- for the avoidance of death, I am not espousing continuing 7 with the reconciliation. I think the reconciliation should 8 be done away with. 9 There is a lot time spent in, I would say, tracking 10 down the unnecessary reconciling items that aren't going to 11 be important to master, but I do think that some form of 12 disclosure outside the financial statements -- perhaps as 13 part of the critical accounting estimates, which would fit 14 elegantly with the staffs' interpretative release of a couple 15 of years ago. 16 And I'm a little concerned about the observation 17 that, once you have actually adopted IFRS, everything should 18 be okay, so you should be able to just do away with any kind 19 of disclosure of the differences. But you can't forget that 20 there are ongoing transactions that happen. 21 And just to FAS 5 as an example -- yes, FAS 5 is a 22 very old standard, but it's actually a very good standard. 23 And the way that U.S. companies have dealt with FAS 5 has 24 been documented for many years. There have been many 25 different types of transactions that have been dealt with in 1 the context of FAS 5. 2 So now you have people looking at IFRS for the 3 first time. You would think that they might want to look to 4 FAS 5 and how it has been applied in the past. Is it the 5 right way? I'm not saying it's the right way. But it is a 6 way that has been researched over many years, and you have to 7 give some credit to that. 8 The flip side of that, on the other hand, is I do 9 believe that it might be appropriate for U.S. companies to 10 have some form of an analysis as to what the effects would be 11 of applying IFRS because IFRS is, you know, the standard that 12 is being adopted by many companies and it deserves that kind 13 of review. 14 MS. ERHARDT: That's a great segue to the last 15 section, and perhaps even the most important to this 16 panel -- the SEC's mission, which is just outright to protect 17 investors. 18 So let's just start with Dennis, who is every day, 19 like Joe, investing money, making those decisions, and then 20 go to Christian and Joel and Steve. 21 I mean, what happens to investors directly 22 -- maybe, in particular, are they still going to seek 23 reconciling information? I mean, I have colloquially, on 24 this hypothetical morning, you know, will you see the new 25 shingle outside somebody's storefront will be, you know, 1 "Reconciliations 'R' Us," and there is new entrepreneurial 2 opportunities there. 3 So, you know, are we shifting the costs that 4 investors incur to, now, they write a check to 5 Reconciliations 'R' Us? Or, indeed, is that not the case 6 because issuers would be incented to provide the information 7 voluntarily? Or it will just disappear into the system, to 8 some of the points that Joe and Greg have made that they are 9 not doing their analysis off of it, to begin with. 10 So, Dennis, whatever comments you would like to 11 make. 12 MR. JOHNSON: Let me start out by saying that we do 13 not believe that investors will seek reconciliation. 14 Secondly, just over lunch, I heard an interesting 15 discussion about the prospects of the cost of the entire 16 audit going down through the combination of implementing 17 IFRS, as well as, potentially, XBRL. So, from a shareowner's 18 standpoint, if there is a more efficient use of that capital, 19 that would certainly be in the best interest of investors. 20 I would just broadly say, though, that the interest 21 of the owners of public companies should be the primary focus 22 of the roadmap that is being discussed. Directors of public 23 companies are required to and should be held accountable for 24 presenting financial statements that are a true reflection of 25 the economic performance of the company, and we believe IFRS 1 is certainly a step in that direction. 2 I would just reiterate, though, that the auditor, 3 we believe, will play a very important role in this process 4 in ensuring that the financial statements accurately reflect 5 the conditions of the corporation. And, as you go down the 6 path of implementing IFRS, we just encourage the SEC to think 7 about the role and the importance of the role that the 8 auditor will play here. 9 MS. ERHARDT: Christian? 10 MR. LEUZ: I would say, to get straight to your 11 question, I think, based on the empirical evidence that I 12 have seen, removing the reconciliation requirement is 13 unlikely to change investor protection much. 14 The reconciliation might offer a translation 15 benefit to investors, in the sense that it might help them 16 IFRS financial statements. 17 But, again, let's consider the role of the 18 reporting incentives of the issuer. A firm that wants to 19 make sure that U.S. investors understand its IFRS financial 20 statements can provide additional disclosures and can provide 21 even a reconciliation, if the firm deems that that is useful. 22 But do we think that a reconciliation of a firm 23 that has very little interest in conveying this information 24 forward, doesn't think that the reconciliation is all that 25 useful -- that forcing this firm to provide the 1 reconciliation is going to be all that useful? I doubt that 2 that is going to be the case. 3 But those are particularly the firms that we would 4 care about from an investor protection perspective or that 5 are relevant in terms of the requirement -- because, again, 6 companies can voluntarily provide that information, if they 7 think it's useful. 8 Sort of being the academic here, and given that 9 Chairman Cox mentioned this morning that the SEC has an 10 empirical approach, let me sort of also bring some other 11 empirical evidence to the panel. 12 We have evidence where people have looked at the 13 properties of U.S. GAAP earnings of both foreign issuers and 14 U.S. companies -- sort of comparing the two, holding the 15 standards constant. 16 And what you find is that the properties of these 17 numbers, despite the fact that they are using the same 18 standards, are very different. In fact, when people look at 19 sort of ranking equality metrics, you find that they are not 20 of the same quality. 21 But that's not really surprising if you sort of 22 look -- and people have sort of mentioned this, both in the 23 morning, as well as in this panel -- that, around the world, 24 these firms are operating under very different institutional 25 environments, under very different enforcement regimes, but 1 there is another sort of element -- the markets are very 2 different. 3 And it's also the ownership structures. The 4 typical foreign issuer that comes to the United States has a 5 relatively concentrated ownership structure compared to the 6 typical U.S. firm, which also means that they are going to be 7 communicating very differently. So I don't think it is 8 surprising in the end that those numbers are going to look 9 very different and have very different properties. 10 In addition, we have evidence where people have 11 specifically looked at the information content of 12 reconciliations. And, actually, Trevor Harris, in his former 13 life as an academic, has been a pioneer in that area. 14 And the evidence is quite sobering, in the sense 15 that I don't think we have much evidence that would say that 16 the reconciliation has a lot of information content or is 17 very useful to investors -- which, as people have pointed 18 out, they come out late; firms that have an incentive to get 19 this information across will do so, anyway, and they will do 20 so in a timely fashion, so the reconciliation is sort of 21 after the fact. 22 Having said all that, let me sort of add one word 23 of caution, which is along the lines of what several other 24 people have said here. I think one of the implications of 25 sort of this view that the underlying factors -- the 1 institutional environments, their enforcement environments, 2 and so on -- shape the quality of reporting is that the IFRS 3 around the world is not going to be of homogenous quality. 4 So if the reconciliation is removed and -- to some 5 extent, that gives the stamp of approval to IFRS -- I think 6 one of the dangers is that investors will have unrealistic 7 expectations as to the quality or the consistency -- I think 8 it's more the consistency than the quality -- of IFRS 9 financials that they are seeing. 10 And I think there will be heterogeneity because of 11 those different environments that firms are operating under 12 around the world, and it's those differences, I think, that 13 -- or those factors that are not going to go away. 14 And, to some extent, I would say let's not worry 15 about the reconciliation as much, but sort of take on this 16 issue head on, which, in my mind, is the real issue and, 17 actually, has always been the real issue, even before sort of 18 IFRS came to the center stage. 19 MS. ERHARDT: Thanks. Joel, any comments? 20 MR. OSNOSS: (Shaking head.) 21 MS. ERHARDT: Okay. How about, Steve? Just the 22 broad question of protecting investors. 23 MR. TODD: Well, I think a lot has been said and, 24 as I mentioned earlier, I think the reconciliation had a role 25 to play in helping develop IFRS consistently around the 1 world. 2 I do think that, from an investor protection 3 standpoint, if the reconciliation -- or when it is dropped, 4 you are, in effect, de facto saying that IFRS is ready, and 5 we're at the stage where everybody wants it to be -- it's a 6 robust standard being applied as consistently as possible 7 around the world. And I think that will be a definite 8 message to the markets, which, hopefully, will be positive 9 and accurate at the same time. 10 So I go back to the original timetable of the 11 roadmap -- a four- or five-year period of having the 12 reconciliation. I think the original intent was, after that, 13 it probably wouldn't be needed. I think that's correct. 14 MS. ERHARDT: Before I call on those with their 15 name card up, let me just add on to something Steve said. He 16 said, in essence -- and I don't want to put words in your 17 mouth, but some sort of validation or a positive statement 18 about IFRS. 19 There certainly are jurisdictions or companies who 20 don't use IFRS. I mean, will it be a spur, if you will? In 21 other words, would people expect, in essence, the second wave 22 of adopters? Or is this just about what people who are 23 currently using it -- you know, whether they have to add on 24 into their footnote? Or is there more to it than just those 25 people? It is also a signal or an incentive for those that 1 haven't gone to IFRS that, "Hey, maybe this will stick, and 2 I'll go"? 3 MR. TODD: I would think so. We mentioned earlier 4 that the reconciliation requirement has been around for over 5 20 years? This is certainly the first framework, I would 6 think, that the SEC has considered dropping the 7 reconciliation requirement. And so I think it is going have 8 a significant impact. 9 MS. ERHARDT: Joe, do you want to chime in? 10 MR. JOSEPH: I would break investors up into two 11 groups -- the price setters, which would probably most of the 12 large investors, and price takers, who for better or for 13 worse, might be individual retail investors. 14 And the price setters tend, I believe, to reconcile 15 to an economic GAAP as soon as the information is available. 16 So the underlying explicit accounting standards or the 17 reconciliation is not really relevant there. 18 We have not really been able to find any 19 differences in cost of equity within sectors across the world 20 based on economic standards. In other words, once you adjust 21 for the differences and come to an economic kind of a GAAP, 22 the differences in cost of equity are explainable by business 23 model or operating risk, as opposed to an accounting 24 standard. And I don't know if the academics here have any 25 studies to either confirm that or not. And I guess, 1 obviously, if the costs come down because they don't need to 2 reconcile, that's a good thing for everyone concerned. 3 And I would just -- I have one last thing. What 4 keeps me up and makes me worried is not so much 5 reconciliation, but the fact, for example, that sell side 6 analysts for U.S. companies today, in their pro forma 7 estimates, exclude stock compensation. They make a whole 8 bunch of adjustments to the quantity of earnings for U.S. 9 companies -- this has got nothing to do with accounting or 10 accounting standards, but, to me, that is the biggest risk 11 today that drives up the cost of equity for, I would say, 12 U.S. companies, as opposed to international companies because 13 they do not file any reconciliation statement. 14 MS. ERHARDT: Just moving along, Greg? 15 MR. JONAS: Julie, let me address two issues. The 16 first is -- I think your question, as I interpreted it, was, 17 as more and folks pile on the international standard 18 bandwagon, will those who choose not to, or a country who 19 chooses not do so -- would that be tainted in the minds of 20 the capital markets? 21 And I can tell you that, today, Moody's is much 22 more willing to take a negative rating action on a company 23 that we perceive has less than transparent reporting that we 24 ever have been in the past. We don't wait any longer for the 25 bad news to manifest itself in a reporting disaster. If we 1 perceive aggressiveness or non-transparency, I think our bias 2 is to try to do to something in the rating discussion. 3 So if we envision a world where, you know, most of 4 the world is following international standards, and then you 5 have folks who we perceive to be outliers, and we perceive 6 the outlier to be of a less transparent nature, I think that 7 could manifest itself in rating discussions and negative 8 rating actions. 9 The second topic I wanted to address is just to say 10 a couple words about -- I just can't help it -- XBRL. Let me 11 preface this by saying that I am a big fan of XBRL in the 12 hope that it can that really help financial analysis. 13 But I have read with interest, you know, rumors 14 that circulate that XBRL is going to cure cancer. And it is 15 my belief the we need to be realistic about what it can and 16 cannot do. 17 And let me give you a very simple example of just 18 how difficult it might be to use XBRL to try to correct for 19 non-comparability because it comes from different accounting 20 machines. 21 Let's say I have just two retailers, and retailers 22 have latitude as to where they put their store costs. Some 23 retailers could call it cost of sales. Other retailers could 24 call it SG&A. This is the case, for example, in U.S. 25 reporting today. 1 So we have noncomparability among retailers. And 2 let's say we wanted to use the magic of XBRL to fix it, so 3 people like myself could go in and adjust financial 4 statements to fix that. 5 Well, what we would need to tag is information 6 that, today, is not disclosed, right? We would need to know 7 store costs, which are not disclosed, and we would need to 8 know where each of the companies put the store costs, so we 9 could undo one of them and make it comparable to the other. 10 So if we are really serious about XBRL improving 11 comparability, we've got to have the technology, we've got to 12 have people who know how to use it, but, importantly, we need 13 to be tagging some stuff that isn't disclosed. If we keep 14 that in mind, it's not a cheap thing to use XBRL to achieve 15 better comparability. 16 MS. ERHARDT: Thanks. Trevor, I see you have your 17 sign up. 18 MR. HARRIS: Thank you. I want to bring some of 19 these things together because the roadmap talks about 2009. 20 So if we push ourselves to thinking, from an investor's point 21 of view, what would help the broad array of investors in that 22 time frame. 23 Right now, both from my colleagues down at the end 24 there in the audit profession, the issuers, and many of us 25 spend a lot of time developing, working with the standards 1 and the information that it provides, including the 2 reconciliation. 3 If we could take away that time and reinvest it 4 somewhere else -- and several people have worried about what 5 the standard setters would to keep convergence going -- they 6 might actually tend to focus on a number of other issues that 7 actually more relevant to us. And Greg has alluded to one, 8 in the case of the stores and the retail business, where, 9 actually, that might be much more important information for 10 protecting investors. 11 But let me give you one that I think is sort of 12 pertinent, and it relates to a discussion that was taking 13 place this morning, as well. 14 If we think about transportation companies, and you 15 think about one of the primary drivers of what would affect 16 the valuation of that company or the economics of that 17 company, it's going to be the cost of capacity, be it planes, 18 be it rail cars, whatever it may be. 19 Right now, under U.S. GAAP or IFRS, companies, 20 basically, have the freedom to choose their depreciation 21 schedule, their leases, and so on. And the reality is that 22 the way most investors, even the sophisticated investors, 23 tend to deal with this is they add back the accounting charge 24 called depreciation. And, as you heard this morning, they 25 will often use something called EBITDA -- earnings before 1 interest, tax, depreciation, and amortization -- which means, 2 essentially, you've got a zero cost in that summary 3 statistic, or EBITDA, in an earnings-like number in order to 4 represent that capacity cost. 5 If, instead, we had the standard setters and the 6 auditors and the issuers focus on providing a number that 7 better reflects the true cost of capacity to sustain that 8 business, and if it could get tagged in a number of ways, so 9 that Joe, in his way, or Greg, for protecting his ratings, 10 would be able to interpret it, then we have moved everybody 11 to a much more efficient system, where investors are 12 protected to a much greater degree. And that will never get 13 dealt with in a reconciliation or, in some sense, within 14 current GAAP. 15 So I think what this is suggesting is transferring 16 the same investment of dollars that is being done in various 17 forms of reporting and putting it in the right place is how 18 we really get this whole thing moving forward. 19 MS. ERHARDT: Other comments on the broad topic of 20 protecting investors or seeking that reconciling information? 21 (No response.) 22 MS. ERHARDT: John, did you have a question? 23 MR. WHITE: I wanted to go back, because I guess I 24 was troubled by the closing remark in this morning's 25 discussion, when Richard Blackett said that eliminating 1 reconciliation for more private issuers would increase the 2 cost of capital for U.S. domestic issuers -- presumably, 3 because there is more competition for a fixed supply of 4 capital that you guys control. 5 I'm not sure it's the right question for you, but, 6 I mean, do you agree with that, or not? I mean, at least, it 7 caught me by surprise when he said that. But you're the guys 8 that have the capital, and he was talking about you would 9 dole it out differently. 10 MR. HARRIS: I think we can cosset in the investor 11 protection discussion the following sentence: If that is 12 truly the case, what that says is there are going to be 13 higher quality -- there are going to be corporations that 14 come to the United States markets that actually attract the 15 capital because they are perceived of higher quality in terms 16 of taking away, let's say, an information gap. And, in that 17 way, they will raise the bar. 18 But, actually, from an investor protection point of 19 view, I view that as hugely valuable, because what he would 20 be saying is, actually, there is an arbitrage opportunity 21 right now and a mispricing of certain companies because of a 22 lack of transparency. 23 So if removing this improves transparency in such a 24 way that their uncertainty is reduced for a number of 25 issuers -- given that the Joe Josephs of the world and, 1 frankly, more and more retail investors are moving up to 2 invest in non-U.S. companies, anyway -- I only view that as a 3 positive, from an investor's point of view. 4 So to take his point to the literal extension of 5 it, it is actually valuable from an investor protection point 6 of view. 7 MR. WHITE: Joe? 8 MR. JOSEPH: If I could just come back to that, 9 presumably, if a lot of them find lower cost of capital -- if 10 a lot of foreign issuers come to the U.S. because the cost of 11 capital here is lower than the foreign market, that's going 12 to get arbitraged very quickly. 13 And, again, I'm not sure what would happen to a 14 U.S. company, but it if the cost of capital is rising here, 15 they might go abroad to raise capital. 16 So I don't agree -- or I don't see that happening, 17 and I find it very difficult to see that actually happening. 18 MR. WHITE: I mean, I thought maybe what you were 19 going to say in part was that you would just go -- at least, 20 you not being investors, in particular -- that you would just 21 go directly to the foreign market and buy directly there. 22 MR. JOSEPH: Yes, that is actually happening now. 23 And I would also say that -- 24 MR. WHITE: Based on the information that is there 25 today. 1 MR. JOSEPH: Yes. It's happening now. And I would 2 say that the average U.S. investor has about maybe 20 percent 3 of their net worth in international equities, and I think the 4 benchmark is 50 percent. So it is structurally underweight 5 internationally. So I don't know what effect that would have 6 on the way investors would allocate capital. 7 MS. ERHARDT: It's interesting. I mean, if I could 8 just make one observation. You know, you could articulate 9 this policy question as, you know, absent the reconciliation, 10 in essence, would investors be driven to put their money in 11 the bank, if you will, as opposed to the capital markets? 12 Yet, what I take away from many of the comments, 13 including these last ones, is it's not a question of, now, my 14 only alternative is to put my money in the bank because I 15 have been scared away, but, rather, it's a discipline that 16 will bring to light where the best opportunities are. 17 And because, due to the electronic systems, it's 18 easy, functionally, to buy or sell where those best 19 opportunities are, it actually would increase the overall 20 efficiency for investors -- increase their return because 21 it's just going to be better information. 22 So it's sort of an upgrade to the whole system, if 23 you will, as opposed to a, "We have abandoned investors. You 24 know, the only choice is to put money in the bank." 25 Whereas perhaps -- with all due respect to this 1 decision the Commission made, you know, 30-some years ago, 2 perhaps that wasn't the alternative. It was more of, you 3 know, "If we don't do this, people are going to put their 4 money in the bank" -- with no disrespect to what you earn 5 when you put your money in the bank. I certainly have some 6 money there myself. But that that was the alternative, and 7 so, now, you know, reconciliation helped the confidence and 8 drew them out, whereas, today, the landscape is just 9 different. 10 And so that isn't what is at stake. Now, it's 11 almost what is at stake is how do we take advantage of the 12 scenario to get things most efficient. And this is a lever 13 in that process. 14 Okay. That's well my one-minute summary. Let's 15 take the time that we have, then, and just go maybe from my 16 right in order. 17 And just, as we did this morning, I would certainly 18 welcome any comments, thoughts, observations, 19 recommendations, life and death potential transition issues 20 if the Commission went this way, comments on timing, comments 21 on the overall idea -- just whatever comments you might want 22 to make or points you thought you wanted to make that so far 23 haven't come out. 24 So, Steve, do you want to start us out? 25 MR. TODD: Thank you. Well, first of all, I do 1 think that the whole adoption of IFRS across the EU and then 2 around the world has been wildly successful, and I think we 3 certainly are on target for, at some point, dropping the 4 reconciliation requirement. 5 One thing that was discussed this morning, though, 6 that I find interesting -- and you had mentioned this to me 7 the other day, Julie -- about the U.S. would, in effect, have 8 a two-GAAP system. And I never really thought about the fact 9 that, if we have a two-GAAP system, maybe a result of that 10 would be that U.S. companies -- whether you would call them 11 10-K filers, or whatever -- but U.S. domestic companies might 12 have an option of adopting IFRS. 13 If you are going to consider that, I think you 14 should need to make that decision pretty quickly because, you 15 know, unlike our European brethren, who are little more 16 attuned to different languages and different accounting 17 systems, everybody that I know in the United States knows 18 U.S. GAAP to the best of their ability, and we don't have a 19 lot of IFRS expertise floating around, either in public 20 accounting or in industry to the level that it would take. 21 There was, as you know, a massive effort for our 22 overseas friends to get to IFRS. It may not be quite the 23 same because U.S. GAAP has lot of the same underlying 24 principles, but there is numerous, numerous differences -- 25 audit transition-type things. So if that were to be part and 1 parcel to dropping the reconciliation requirement, it would 2 be nice for everybody to know that a little bit in advance. 3 MR. OSNOSS: Thank you for the opportunity. Again, 4 I appreciate the time. 5 Just to reiterate my points, I just think we should 6 be eliminating the reconciliation. We just need to walk 7 before we run. I think eliminating it before the year-end of 8 December 31, 2008 is fine, but I do think that there should 9 be some discipline kept in the process and, for that purpose, 10 we should have some disclosure in potentially critical 11 accounting in filings with the Commission. 12 And, lastly, I think regulators should continue to 13 dialogue amongst themselves across the borders. Obviously, I 14 commend the Commission's joint work plan with CESR, and I 15 think that the commissions talking will help to bring 16 together some of the these different views that are held 17 around the world. 18 And, lastly, I would just advise U.S. companies, by 19 the way, that IFRS is really here to stay. And, in fact, 20 U.S. companies should be thinking about their subsidiaries 21 who are now currently filing statutory reports under IFRS. So 22 we all in the U.S. need to start really thinking about IFRS 23 because it is really gaining steam. 24 MS. ERHARDT: Thank you. Christian? 25 MR. LEUZ: Let me make one point that sort of 1 hasn't come up yet. So far, it has sort of sounded as if the 2 reconciliation maybe provides information that is not all 3 that useful. But I can also see sort of one point where a 4 reconciliation could actually be -- sort of, to some extent, 5 be harmful. 6 Let's take the fact that -- you know, usually, you 7 would think, when you get two pieces of information, you are 8 better off than having one piece of information. But one 9 thing to keep in mind is that, you know, when people report 10 two profit figures, people may be asking, "So which one is 11 the right one?" 12 And we all remember sort of -- I certainly do, 13 being German myself -- sort of Daimler Benz' first time 14 reconciliation and sort of the whopping difference that they 15 had in their numbers and how often that has been cited. 16 And I think, as a result of that and, largely, to 17 avoid these differences, I could see companies actually 18 reporting both their local GAAP or their IFRS and the U.S. 19 GAAP -- the reconciled numbers -- with a desire to make them 20 close, rather than sort of reporting one that properly 21 reflects the underlying economics and gives you a good idea 22 what their sort of economics performance is. And this, I 23 think, is sort of what we care about. So that is sort of a 24 point that hasn't come up. 25 In closing, I would agree with the previous 1 panelist that -- I would support sort of removing the 2 reconciliation and say it's sort of not the key issue to 3 worry about. 4 But I would say let's be very serious about IFRS 5 implementation for cross-listed firms in the United States, 6 as well as around the world, and worry about the enforcement 7 and institutional differences around the world that continue 8 to sort of exist and be clever to sort of how address those. 9 And I'm not as optimistic as some of the previous 10 comments that we can get convergence in all these areas. And 11 the reason is that these institutional differences that we 12 see arose because of economic and cultural differences across 13 these countries, and they are not going to go away overnight. 14 And so I think we will continue to have to live 15 with differences in reporting quality that we see from 16 different companies. But, in my view, that's okay, because, 17 as we have heard, the issuers can make these trade-offs in 18 terms of their cost of capital, liquidity, their capital 19 raising. And the intermediaries and the investors are sort 20 of also in a position to sort of deal with things. We have 21 heard sort of what the investors are actually doing and the 22 solutions that the intermediaries are offering. 23 And so, in my view, you know, if it restricted to a 24 certain number of GAAPs -- and we're not talking about many 25 anymore -- I think, in the future, I think that that is okay. 1 MS. ERHARDT: Thank you. Joe? 2 MR. JOSEPH: I'll be quick here. Basically, if you 3 did away with the reconciliations, it wouldn't have any 4 effect on the way we actually price securities. Nothing 5 would change. 6 And I think one of the ideas that has been thrown 7 around at some point today was, "Well, what if we allow U.S. 8 companies to adopt IFRS?" That might be an interesting 9 exercise, and it might actually make my job easier because, 10 now, I have the whole world on one standard, if they want to. 11 And I would really encourage the SEC -- and I think 12 this is -- it's not relevant to this discussion, but there is 13 a huge disconnect today between what companies report under 14 whatever accounting system and what the analysts and the data 15 base providers put as forecasted earnings for these 16 companies. And I think the retail investor is significantly 17 hurt when they make arbitrary adjustments in violation of all 18 the accounting rules, and I think that is an area that we are 19 concerned about, as opposed to reconciliation itself. 20 MS. ERHARDT: Okay. Thank you. Greg? 21 MR. JONAS: Well, the move in recent years toward 22 international standards has been wonderfully beneficial for 23 our analysts. You know, when you are used to dealing with 15 24 different GAAPs in your portfolio of companies that you 25 analyze, and it drops down from 15 to maybe 2 or 3, it's a 1 better day. It means you can spend more time trying to 2 figure out the underlying economics of what you are looking 3 at and less time trying to fight the different languages of 4 people speaking in different tongues. 5 I'm anxious, in my comments, to encourage you to 6 find ways to keep this momentum going. And, to that end, I 7 would go ahead and follow the roadmap. I think it's a wise 8 roadmap -- but only if you believe two things deep in your 9 hearts. 10 Number one is that you view the roadmap destination 11 as only a rest stop on the course to the real goal of a 12 single body of global GAAP being applied. 13 And, number two, that you believe that the club of 14 global regulators -- the big ones in the major capital 15 markets -- that the club of global regulators is committed to 16 convergence. That doesn't mean just uniformity of standards. 17 It means we converge to higher quality standards. 18 As Trevor pointed out, the goal isn't just 19 standards. It is standards that accurately portray economic 20 reality. I think that is the magic of convergence to date, 21 and think it's very helpful. So that's one thing we want the 22 regulators committed to jointly. 23 And second, as I mentioned, I think global auditing 24 standards are critically important, and I hope the regulators 25 are committed to that, as a club. 1 And third is I think -- you know, there is a whole 2 lot of global regulatory structure that I think would be very 3 helpful. It doesn't do much to have great global converged 4 standards and have absolutely no enforcement in major parts 5 of the world. So the club of regulators needs to be as 6 committed to enforcement and trying to get -- I appreciate 7 that we can't get perfect comparability, but, by God, we've 8 got to try. And have regulators play an important role in 9 that. 10 MS. ERHARDT: Thank you. Dennis? 11 MR. JOHNSON: Two closing points. We support the 12 formal adoption of IFRS. We think it's a net benefit to 13 investors. And, secondly, we do not see the elimination of 14 reconciliation causing any harm to investors. 15 MS. ERHARDT: Understood. Thank you. And Trevor? 16 MR. HARRIS: Very briefly, given I have spoken so 17 much, if you choose to follow the roadmap and review the need 18 to reconcile across these GAAPs, and even one company chooses 19 now to list in the United States from a -- let's say an 20 under-regulated environment, you will have helped U.S. 21 investors. 22 MS. ERHARDT: Okay. John, did you have anything 23 else? 24 MR. WHITE: No. I think that sounds good. 25 MS. ERHARDT: Okay. Well, there is no shame in 1 finishing three minutes early. It just means we have been 2 efficient, which, of course, is what we want the capital 3 markets to be. 4 So please join me in very sincerely thanking our 5 panelists for sharing their insights today. It's very 6 welcome to hear from those outside the building about what is 7 going on and your thoughts. 8 And we will reconvene at 3:45, with the issuers. 9 (Applause.) 10 * * * 11 MR. WHITE: We are back from the break. We are 12 ready for our last panel today, which is the effect on 13 issuers in the U.S. capital markets. Conrad Hewitt has 14 re-joined us as a moderator. And Kathleen Casey, our newest 15 Commissioner -- she was in the audience this morning, and she 16 actually sat in the audience during the last panel, but she 17 is now on stage with us. 18 The rules are that, if you have questions, you can 19 just put your tent card up or just ask. You are allowed to 20 ask questions, as well as make comments -- whatever you would 21 like to do. We are very pleased that you are here. 22 So let me introduce the panelists first, and then I 23 will get into sort of what we are going to do in terms of 24 questions. 25 Starting at far end of whatever we call this, we 1 have Meredith Cross. 2 Ms. Cross is co-chair of the corporate department 3 at the law firm of Wilmer Hale. Prior to joining Wilmer 4 Hale, she was the deputy director of the Division of 5 Corporation Finance here at the SEC. 6 And although that was a very important position, 7 more importantly for this panel, she also served as the 8 associate director responsible for the Division's 9 international corporate finance activities and, in that 10 capacity, played a key role for a number of years in 11 developing international disclosure and accounting standards 12 for use in cross-border financings. 13 So we are very was very pleased that you could join 14 us, Meredith. 15 Bob Deere. Mr. Deere is vice president for 16 accounting and reporting at Royal Dutch Shell. And he is 17 responsible for the worldwide accounting and reporting of the 18 Shell Group, which has oil and gas and petrochemical 19 operations in more than 130 countries. 20 And, if I understand it correctly, the predecessors 21 of Shell were the earliest foreign companies to list on the 22 New York Stock Exchange -- back in 1954, if I have it right 23 -- which, according to some of old records in Corp. Fin., we 24 think you were the first European company to list here with 25 the SEC. So that's pretty neat. 1 MR. DEERE: We may well have been. I believe I 2 cleaned out some similar documentation out of my office 3 recently, so I somewhat can vouch for that. 4 MR. WHITE: Okay. I wasn't born then, of course, 5 so, I mean, I don't really know. 6 Shell reports in IFRS, and Mr. Deere was kind 7 enough to join us from The Hague. Thank you for traveling. I 8 think you actually traveled further than the representative 9 from CalPERS. I heard Julie's comment earlier, but I think 10 you traveled further. 11 Okay. Denis Duverne. Mr. Duverne joined AXA in 12 1995 and is a member of its management board and its chief 13 financial officer. In his role, he is in charge of finance, 14 control, and strategy. And AXA is a global company offering 15 financial protection and wealth management and has 16 approximately 110,000 employees and distributors working in 17 50 countries. Your primary listing is in Paris, if I 18 understand it, but you have American depository receipts 19 listed on the New York Stock Exchange since 1996. 20 You use IFRS in your financial statements, and you 21 are joining us from Paris. Thank you very much for also 22 making a very long trip. 23 Phil Jones. Mr. Jones didn't travel quite so far. 24 I assume he came down on the train this morning. He is the 25 director of external reporting an accounting policy and 1 procedures at DuPont and is responsible for DuPont's 10-K and 2 10-Q filings, as well as interpretation and application of 3 U.S. GAAP globally for DuPont. And DuPont uses U.S. GAAP -- 4 as least, today you do, right? We'll ask you later whether 5 you intend to continue to do that. 6 MR. JONES: Well, many of our subsidiaries are 7 starting to use IFRS. 8 MR. WHITE: Say that again. I'm not everybody 9 heard that. 10 MR. JONES: I said many of our subsidiaries around 11 the world are beginning to implement IFRS. 12 MR. WHITE: Don Nicolaisen. Don is perhaps the 13 best known to us here at the SEC. He was our former chief 14 accountant, from 2003 to 2005. 15 And, as part of his work at the Commission, he, of 16 course, authored and published the SEC staff roadmap for 17 elimination of the requirement to reconcile IFRS financial 18 statements to U.S. GAAP that we have been talking about 19 today. I did reveal earlier -- I don't know if you were here 20 when I revealed it, but my understanding is that Julie played 21 some role in helping you write that. So I did mention that. 22 Before joining the SEC, he was with 23 PricewaterhouseCoopers for almost 30 years, in various 24 leadership positions. 25 And you are currently on four boards, if I 1 understand it, which is Morgan Stanley, MGIC, Verizon, and 2 Zurich Financial. So we are looking to you from a lot of 3 different roles, but one of them is a board member and an 4 audit committee member. 5 And, finally, Will Widdowson. Mr. Widdowson is 6 head of the UBS Group accounting policy, co-head of the UBS 7 Group finance function, and a member of the UBS Group 8 managing board. 9 And in those three different capacities, he is a 10 senior member of the management team responsible for 11 establishing the accounting and disclosure principles applied 12 to the financial reports of the UBS Group. 13 UBS was actually, if I understand it again, one of 14 the earliest major companies to use IAS -- which was the 15 predecessor name of IFRS -- in SEC filings. So you actually 16 have long experience. 17 And UBS is a leading global wealth manager, 18 investment banking and securities firm, and one of the 19 largest global asset managers. Headquartered in Switzerland, 20 it employs 78,000 people around the world, and you have 21 joined us from Zurich. Again, thank you for traveling so 22 far. 23 And I now see that Commissioner Casey has attracted 24 even more Commissioners. So we have Commissioner Nazareth 25 back, and Chairman Cox has rejoined us. We almost have 1 enough here for a Commission meeting. This is terrific. 2 Actually, we do. 3 COMMISSIONER NAZARETH: We heard there were snacks. 4 MR. WHITE: I understand this was actually 5 officially noticed as a Commission meeting, so the three of 6 you can sit there, as well. And you in are permitted to ask 7 questions, as well. 8 The third panel today, like the first two, will 9 take up, generally, questions about the consequences of the 10 reconciliation requirement and the anticipated effects of 11 ending the requirement. The particular focus of this panel 12 is from the perspective of the issuer, both foreign private 13 issuers and domestic U.S. issuers. 14 With that kind of just general layout of the topic, 15 I would like to break this up into three different subject 16 matters. 17 The first one would be: How does the 18 reconciliation requirement affect foreign private issuers 19 today, and what might change if the requirement is ended? So 20 kind of what does the end of recollection do for the foreign 21 private issuers? 22 The second would be: How would the end of 23 reconciliation affect your relationships and communications 24 with your security holders, particularly U.S. investors, as a 25 second sort of perspective? 1 We really hit that question from slightly different 2 angles on the prior two panels, but it really the question 3 about: Are your investors getting the information they need? 4 Will they be able to get it with the end of reconciliation? 5 How will you get it to them? 6 And the third question is -- and it was alluded to, 7 in part, by Chairman Cox this morning, but: How would the 8 end of reconciliation for foreign private issuers affect 9 their peers and competitors among U.S. companies? And how do 10 we think things should develop with U.S. companies? 11 And, at the very end of the panel, we will do what 12 we have done on the prior two panels. We will come back and 13 give each of you a couple of minutes to give us whatever 14 take-away points you would like to give us, in terms of 15 recommendations, things we have missed, ideas, and so on. 16 So, so far, I think we have introduced this panel 17 like we did the last two, and we are about ready to start it 18 like we did the last two. But there is, really, one thing 19 different about this panel from the first two. And that is 20 that we have Don Nicolaisen with us, because, as I said 21 earlier, he was the author of the roadmap. 22 So, Don, I guess what we would like to do -- before 23 we start with the questions and the normal panel thing here, 24 we would like you to just give us some remarks on, you know, 25 how we're doing, where we're at, where we're going -- just 1 some general thoughts. And then we will get into our three 2 questions. 3 MR. NICOLAISEN: All right. Will do. Thank you 4 very much, and thank you for the opportunity to be here. 5 While I am the principal author of the document, I 6 had a whole lot of help from the SEC staff and, in 7 particular, Julie Erhardt. And I want to acknowledge that. 8 One of the things that happens after you write 9 something, or you think about something, or you have 10 articulated a view is you tend to come back and say, "Was I 11 right? Does this make sense? Is this the right direction, 12 or are there things I should have thought about differently?" 13 In this case, I think we are on the right track. I 14 do think it is appropriate that is a roadmap. I think it is 15 fully appropriate, and I am grateful to the Commission that 16 this is being pursued and that you are really looking 17 actively at what does it take to do away with that 18 reconciliation. 19 And in thinking about, on the front end, what were 20 the things that were really important, well, it was it 21 important to me that we help set the tone; that it mattered 22 that IFRS, as adopted be consistently implemented, so that 23 you wouldn't have different countries or different industry 24 segments using different standards without that being obvious 25 to the investor community. And, to some extent, I probably 1 used, you know, the bully pulpit in saying that. 2 That's all sort of the behind us at this point. We 3 are where we are. And where we are in adoption of 4 IFRS -- and, in particular, I would have to say that the 5 European Union had taken a very good decision in requiring 6 the use of one set of standards around their various 7 entities. 8 That was an improvement for our investors here in 9 the U.S. because the investors here no longer have to look 10 necessarily at 40 or 50 different accounting models that are, 11 to some extent, reconciled to U.S. GAAP. They can now look 12 primarily to IFRS, and I think that is a major improvement, 13 and I think that the rolling stone has become a very critical 14 mass as we go forward. The use of IFRS and the acceptance of 15 it around the globe is overwhelming. 16 If you think about looking ahead a number of years, 17 what is more likely to be accepted broadly around the globe 18 -- would it be IFRS or U.S. GAAP -- I think it's clear that 19 it's going to be IFRS. 20 And so a secondary question and one that we alluded 21 to early on in the paper is, really, what happens, post 22 elimination of the reconciliation, with U.S. companies? Is 23 there some point in time where IFRS ought to be the law of 24 the land in the United States, as well as elsewhere? 25 And we had various people comment on that earlier 1 today. I don't want to revisit all of that thinking. I 2 think it's an appropriate process that we will go through. 3 But I'm sort of a pragmatic person, and if I think about 4 where we will end up in some number of years, it would likely 5 be that International Accounting Standards would be the norm, 6 not FASB standards. The desirability of having one set of 7 standards around the globe is so overwhelming that I just -- 8 I think that is likely to happen. 9 I wanted to comment briefly on the timetable of the 10 roadmap dealing with the reconciliation. No one really 11 seemed to note the fine print that is at the bottom of that 12 map, which is really saying, by 2009 or earlier we should be 13 able to eliminate the reconciliation. And I really would 14 encourage the Commission to think about eliminating it 15 earlier than 2009. 16 We heard a number of comments from the investor 17 community today that there is not a lot of reliance or value 18 that is added by that reconciliation; that IFRS is being 19 implemented, it is being well done, it is being executed, it 20 is a consistent model that exists out there that is as 21 transparent, in many respects, as U.S. GAAP. There are 22 companies that I am aware of that, where are limitations to 23 International Accounting Standards, also apply U.S. GAAP in 24 areas where there is more guidance under U.S. standards than 25 under international standards. 1 But, as we move forward, I would really encourage 2 the focus to be on the positives and things that have 3 happened, and not on the negatives of not every country or 4 every company has done this exactly right -- because that is 5 also true of U.S. GAAP in the U.S. 6 We certainly still have a large number of 7 restatements, and we certainly continue to have areas where 8 U.S. GAAP is either not fully understood or is not being 9 applied as we would expect. 10 So I think, in the broader picture of things, I 11 don't want to say that is there is too much reliance placed 12 on U.S. GAAP, but I would say that there is too much reliance 13 on, at least, the one number produced by U.S. GAAP -- EPS -- 14 and we ought to be looking for, as we have talked about for 15 decades, other, better ways to provide information. 16 Chairman Cox has talked about XBRL and the fact 17 that we live in a different technology age than what we had 18 when the FASB was created, and we ought to be looking for 19 web-based solutions. I always talk about it as being better, 20 faster, cheaper information to the investor community that 21 is, at lease, a supplement to GAAP, as we know it. 22 U.S. GAAP, while it's used by our U.S. companies, 23 is often secondary in the communications with investors. 24 Probably half or more of the U.S. reporting companies refer 25 to pro forma earnings and pro forma numbers in their 1 communications with investors. That would say something 2 about we don't have the full picture when we just look at 3 U.S. GAAP by itself. And, certainly, that is the reason why 4 the SEC has required incremental disclosures -- the use of 5 MD&A and other information -- in communications with 6 investors. 7 So I don't think we ought to focus -- that's a long 8 way of saying I would hope the Commission would not focus 9 excessively on the parts of IFRS that may not be perfect by 10 saying we don't have the perfect system, either, and that the 11 real resources ought to be focused ahead -- looking ahead -- 12 on how do we do this better, and what are the models out 13 there that would better serve investors that what we have 14 today. 15 So I still believe what I wrote a couple of years 16 ago -- that we could do away with the reconciliation. And I 17 would encourage the Commission to look at that hard and to 18 think about doing it earlier, rather than later. I don't 19 think we are going to learn lots more than what we will in 20 looking at the initial filings. The key is International 21 Accounting Standards are here to stay, and it's well-based. 22 So I'll end my comments with that. 23 MR. WHITE: I'm probably jumping ahead a little 24 bit, but we had several comments during the course of the day 25 -- including, actually, starting with the Chairman's opening 1 remarks -- about the possibility of allowing U.S. companies 2 to choose IFRS, or us setting it up that way. 3 You have also, I guess, heard that we should take 4 things one step at that time, and that we shouldn't go that 5 route if it's going to slow up eliminating reconciliation. 6 Doing step one and step two slows up step one. Just get step 7 one done is, I guess, what I heard. 8 But do you have views on whether we need to both at 9 the same time, or we should do both, or how that all would 10 work? 11 MR. NICOLAISEN: I think it's appropriate that you 12 think about doing both. And, certainly, step one is 13 eliminate the reconciliation. That, to me, seems to be a 14 relatively easy step to take. 15 The second step -- do you accept International 16 Accounting Standards in the U.S. for U.S. companies? -- is 17 probably a deeper question. And I would be in the camp, I 18 think, of saying, as opposed to making that a voluntary 19 election, I would rather see it be a requirement. 20 And the reason I say that is because, in the 21 intervening period, you have sort of a creeping system that 22 is hard for investors to really follow as to who is using 23 what and when and where and what might it be. And you end up 24 with these endless questions of what might it look like if we 25 had used an alternative accounting model. 1 So my vision of the future is along the lines of we 2 ought to adopt a good accounting model, and we ought to do 3 that broadly for all companies. And then we ought to be 4 looking for the real investment, where we spend our time: 5 How to we make this better? 6 MR. WHITE: I'm sorry. So your vision is not a 7 choice for the U.S. between one and two. It's going to a 8 single standard. 9 MR. NICOLAISEN: I would go to a single standard. 10 As I said earlier, I left that out of the -- 11 MR. WHITE: That that was in your mind, but you had 12 left it out of the roadmap when you -- 13 MR. NICOLAISEN: I did. I did. And I reserve the 14 right to think beyond that paper. 15 And, as we look forward, I'm really of the belief 16 we have to think about -- I'm not saying we are prepared to 17 do that at this point, that anyone should suggest that we do 18 it at this point, but it is appropriate to think about the 19 future and where that might lead. 20 My real concern is that we are not using our 21 available resources adequately today. We are focused on 22 fixing U.S. GAAP. We are focusing on criticizing and fixing 23 IFRS. 24 That's good, and we ought to do that, but maybe we 25 could better use the assets together doing that and, really, 1 bring, not just the U.S. and Europe, but Asia into the 2 equation in a more comprehensive way, as well. And that's a 3 model and a useful exercise that ought to go forward. 4 But I strongly believe that we ought to also be 5 applying the same sort of effort in thinking about how do we 6 -- that's the traditional model. What is the next step? What 7 do we do to really make this better? 8 XBRL is often suggested as a solution. It's not 9 going to give you everything that you want, either, but it 10 certainly is worth looking at, and it certainly is a 11 tremendous supplemental improvement to what we have today. 12 So I would look to: What can we do better for the 13 investors beyond just GAAP, whether it's IFRS or U.S. GAAP? 14 MR. WHITE: Why don't we move to our first topic. 15 We have three foreign private issuers that have traveled here 16 from Europe, we heard just a moment ago. 17 So I'm going to ask each of you -- well, first of 18 all, each of you has been reporting in IFRS for some time 19 now. So I guess I would like to hear about that experience, 20 but, more importantly, what will life be if you don't have to 21 report in IFRS (sic). 22 And I guess I'll start with Mr. Deere, then Mr. 23 Duverne, and then Mr. Widdowson. 24 MR. DEERE: The last few years have been quite a 25 bit of change for Royal Dutch Shell. Two years or three 1 years ago, we had two separate parent companies. We reported 2 both under U.S. GAAP and Dutch GAAP. And we, at the time, 3 were eying the adoption of IFRS. 4 In this intervening time to the present now, we 5 have adopted IFRS. We have combined our parents. Then we 6 have also gone so far as to combine our to 20-F and our 7 annual report, so it's one document that we issue 8 concurrently. 9 Of all of those changes, the adoption of IFRS, 10 while it was quite a bit of significant work, results in very 11 little day-to-day change on us, as we go forward from where 12 we were previously. 13 Compliments to Tom and the rest of the board. 14 Together a complete framework, an accounting framework in a 15 short period of time was a quite an undertaking and, yet, I 16 think that they have done a fairly successful job with it. 17 The standards seem to be robust and, as a result, 18 our U.S. GAAP differences that we end up reconciling to are 19 not particularly significant in the context of our holistic 20 financial reporting -- our entire package of doing that. 21 I did check with our IR people to ascertain, before 22 I came here, to confirm what I thought was the case. And we 23 seem to get few comments and few inquiries from the 24 investment community about the differences between IFRS and 25 U.S. GAAP. 1 We think that if -- we do support elimination of 2 the reconciliation requirement, and we do think that the 3 biggest impact that that will have on us, given the absence 4 of inquiry from our investor and analyst community, is simply 5 that we will be much more efficient in our reporting process 6 at that point. 7 There is not an insignificant amount of work that 8 goes into producing these numbers, and we do look forward to 9 the streamlining of our processes to make our reporting more 10 efficient in that regard. 11 We report quite a bit of financial information, I'm 12 sure as the other registrants and foreign private issuers do. 13 Financial statement disclosures for global operations are 14 very complex. 15 In addition to that, we do straddle three 16 securities jurisdictions, where we have shares trading in New 17 York, in London, and also on Euronext. As a result of that, 18 there is quite a bit of disclosure requirements that come 19 with that package, whether or not we are on IFRS or U.S. 20 GAAP. 21 In the totality of that, the reconciliation that we 22 have does -- while it requires some effort, we do not think 23 that our disclosures, then, would be materially affected by 24 doing away with that. So we do support that and would see 25 that we would then go on as pretty much business as normal at 1 that point. 2 MR. WHITE: Would there be any change in your 3 ability to access U.S. markets, or any of those kinds of 4 things? 5 MR. DEERE: No, I would not foresee that there 6 would be a change. We don't expect it to. My point being, 7 John, that we have a significant amount of communication that 8 is ongoing, where the reconciliation is one small of part of 9 that. All that communication would continue. 10 And, at this point, IFRS is a fairly stable 11 framework, as we have heard today, with growing acceptance 12 across the globe, and we believe it will be sufficient for 13 our reporting needs. 14 MR. WHITE: Mr. Duverne, do you want to give us the 15 AXA perspective? 16 MR. DUVERNE: Thank you, John. For us, the -- we 17 have been listed, as you said, since June 1996. At that 18 point, we issued a little bit -- I mean, a small quantity of 19 equity. 20 We have accessed the capital markets probably a 21 dozen times since then -- six times with a rights offering -- 22 and only once did we use the U.S. markets for that, which was 23 in 2000, to buy out our minorities in the U.S. But other 24 than that, all of our rights issues were excluded in the U.S. 25 market for reasons I am going to outline now. 1 I mean, we currently have a very limited window to 2 access the U.S. capital markets because we typically file our 3 20-F sometime in June, due to the time required to prepare 4 the U.S. capitalization and other required U.S. capital 5 disclosures. And our year-end financial statements go stale 6 at September 30. We do not prepare a half year U.S. 7 capitalization. 8 Consequently, our window for accessing U.S. markets 9 is between mid or end June and sometime at the beginning of 10 July because we publish our IFRS statements in the first 10 11 days of August, which means that we have a blackout period of 12 one month ahead of that. 13 So we can access the capital markets between 14 sometime at the end of June and the 8th or 10th of July. Then 15 we are in a closed window period because of the half year 16 IFRS accounts. August is not a good time to issue equity, as 17 you know, and then we have September which is available. 18 So, really, when we do a rights offering, we really 19 have no option because it is usually at the occasion of an 20 acquisition, and we are rarely in that opportune window, and 21 so we have not used our ability to tap the U.S. markets 22 because we are U.S. filers. 23 The other issue that we have is that we have a 24 subsequent event risk each year, which arises due to the gap 25 between the filing of our Document Reference, which is our 1 equivalent of a 10-K with the French regulator, which will be 2 filed in April, and the filing of our 20-F in June because 3 auditors have a requirement to double-date those. 4 So the elimination of reconciliation would be 5 extremely favorable for us because, basically, we would be 6 able to file our 20-F at the same time or at the time very 7 close to the filing of our documents with the French 8 regulator. We would have compliance on financials with the 9 Commission and, consequently, we could have nearly 10 uninterrupted access to the U.S. capital markets. 11 So, for us, it would be major change in terms of 12 access to the U.S. capital markets. 13 MR. WHITE: I think this was a point that was made 14 this morning, as well, that, even though we have got 15 securities offering reform and automatic shelf registration, 16 et cetera, at least, for companies in your position, because 17 of the reconciliation requirement, there is a very narrow 18 window of just several months when you can actually access 19 the U.S. markets. And that includes the month of August, 20 which isn't your favorite month to access. 21 So, if I understand it, eliminating the 22 reconciliation requirement does give you a significant 23 increase in the time period you can access. 24 MR. DUVERNE: Since it is, essentially, Christmas 25 time, I can add a few other points on my wish list, if I may. 1 Right now, in our annual reports, our MD&A, we do 2 use non-GAAP measures, which we believe are meaningful for 3 our investor community. And we believe they are meaningful 4 because that's the way we run this business. 5 In our MD&A for the SEC, we are forced to do only 6 GAAP measures, which means that, if this is not looked at, we 7 will continue to have to file two different MD&As. And we 8 believe that it will be something worth looking it. 9 The third point I would like to make is that in 10 post-convergence -- and already now -- in post-elimination of 11 reconciliation, both the SEC and home country financial 12 market regulator look at our IFRS statements. And there is, 13 from our standpoint, a need for a closer cooperation between 14 them. 15 Right now, we may be in discussion with the SEC on 16 the review of our IFRS statements, which made lead to a 17 certain conclusion. And then, if this is not preceded by a 18 discussion between the SEC and our home country regulator, we 19 might have to accept a certain treatment with the SEC, and 20 then go to our home country regulator and say, "Well, this is 21 what we discussed with the SEC and negotiated." And it seems 22 to us that there should be probably a prior discussion 23 between the SEC and our home country regulator to discuss 24 those issues. 25 More importantly, the SEC has been quite active to 1 impose restatements to issuers, both domestic and 2 international. We know that you aware that those 3 restatements may have different consequences in different 4 jurisdictions. I mean, you have made comments to that 5 effect, John, and other SEC people have made those comments. 6 But what happens for us -- at least, in France -- 7 is that our accounts are approved by our shareholders, and if 8 we are forced to do a restatement, it's an admission of false 9 accounts, which has penal consequences. 10 So this needs to be looked also quite seriously. A 11 restatement of our U.S. accounts -- and we had that situation 12 once, is unnoticed -- or was unnoticed, as far as we are 13 concerned. Restatements of our IFRS accounts, we would have 14 penal consequences for that. So that's an important point 15 for us. 16 Lastly, elimination of reconciliation would be a 17 significant cost saving, probably on the order of about $25 18 million for us. So it would be quite a saving. Thank you. 19 MR. WHITE: I just -- I know I'm not supposed to be 20 commenting, but I will. Obviously, one of the purposes of 21 the CESR work plan which was announced last August is to lay 22 out the protocol for the communications between us and the 23 your home country regulator. And we are, obviously, working 24 on that. I think it has been in place for eight months now, 25 or seven months now, and we are actively figuring out how 1 that works. But we certainly have a plan for the kind of 2 communications between the regulators that you referred to. 3 Mr. Widdowson, what is UBS' perspective on this? 4 MR. WIDDOWSON: Well, John, thank you very much. 5 And thank you for the kind invitation and the super 6 introduction that you gave. 7 In preparing for this session, I reflected briefly 8 on the reasons why UBS originally moved to IFRS. As you said 9 in your introduction, that was some many years ago now. 10 And we selected IFRS, really, for two reasons. 11 First, because it was a principle-based set of standards and, 12 secondly, because of the wide geographic constituency 13 underlying that framework. And listening to the debates in 14 the room today, I think that was a rational choice, and I can 15 hear many echoes of similar considerations around the panel 16 during the course of the discussions. 17 We came to the U.S. market in the year 2000. So, 18 for us, actually, we are more experienced under IFRS than 19 under U.S. GAAP. 20 One very important consideration for UBS is that we 21 maintain our books and records both in U.S. GAAP and IFRS at 22 the local level. That means for each of approximately 2,000 23 companies around the world, we produce an IFRS and U.S. GAAP 24 trial balance. We have 3,000 accountants, approximately, in 25 the group, and they all need to be trained on U.S. GAAP, as 1 well as IFRS, and our systems and processes need to be 2 adapted for U.S. GAAP. 3 That is a quite a considerable cost base. And when 4 one puts on top of that the need to educate our investor 5 relations and communications staff, et cetera, et cetera, 6 there is a very considerable cost to UBS of producing these 7 U.S. GAAP balance sheets and the reconciliation. 8 Of course, if you were to remove the reconciliation 9 -- life is life -- it's very difficult for us to recognize a 10 real tangible saving. I couldn't put a $25 million figure on 11 that, like my colleague from AXA, and I am equally sure that 12 I wouldn't be able to bank a saving for my auditor. 13 What I do think, though, is that, when one runs 14 multi-GAAP sets of accounts, as management we have 15 substantial risk, and that risk goes to the heart of 16 educating 3,000 accountants on operating systems and 17 processes at a location level to produce those multi-GAAP set 18 of numbers. 19 And, actually, it's that operational risk, that 20 reputational risk, that implementation risk which is the key 21 benefit -- that's what we would save, and I believe that is 22 of real value to the organization. And I'm sure that the 23 energy spent managing those implementations can be used 24 constructively elsewhere. 25 In terms of our investors, we believe, through the 1 discussion with analysts who follow our company, that they 2 use IFRS as a basis for their valuation. They are not using 3 U.S. GAAP. So the typical sum-of-the-parts valuation of our 4 company would be based on the IFRS model. 5 And we actually receive fewer than five questions 6 on our U.S. GAAP figures each year. And I would put that 7 forward as a piece of evidence that very few analysts are 8 actually looking at the reconciliation, even though those 9 pages of our financial reports are approximately 30 pages. 10 Finally, in terms of the use investors make of our 11 U.S. GAAP numbers, it's very interesting to note that our 12 U.S. shareholder base is probably the fastest growing piece 13 of our shareholder base. And so we know those people are not 14 using U.S. GAAP. We believe they are using the IFRS 15 financial statements. It seems reasonably clear to us that 16 U.S. investors are making investment decisions based on IFRS 17 analysis of our company and, of course, the proposition that 18 we put forward. 19 Now, I'd just like to make one brief comment on 20 timing, if I may. We would advocate strongly, as Don said, 21 moving as quickly as possible to removing the reconciliation. 22 We believe, as management, that accounting is really about 23 communication -- about clear communication of the results of 24 our business. We don't actually see that the reconciliation 25 has added value to that process, and we would advocate moving 1 that as quickly as possible -- and, ideally, from 2008. 2 Thank you. 3 MR. WHITE: Ms. Cross, you have these kind of 4 people for your clients. What is the international lawyer's 5 perspective? 6 MS. CROSS: Well, I guess the first thing I would 7 say is I found it heartening that it isn't all about legal 8 issues today. Nobody is talking about liability. Nobody 9 seems to be all that concerned that the litigious U.S. 10 investors will be bothered by the absence of this 11 reconciliation or the move to IFRS, which I think is a very 12 positive sign. 13 I think, just sort of on the pragmatic front, it 14 would save lots of money and frustration and distaste for the 15 for the U.S. system because I think that so many foreign 16 companies find it incomprehensible that we still have this 17 requirement. 18 And I think, based on the things we are hearing 19 today, where even the investor advocates who are here are 20 ready to give it up -- I don't think I have, in all my years, 21 both as a regulator and as a practitioner, heard somebody 22 from that analyst community ready to say, "Yeah, I can do 23 without that information." So I think that was fascinating. 24 The reconciliation requirement does keep companies 25 from coming here and listing. And when they list in our 1 markets, our investors are better protected. So, in general, 2 if we can find a way to increase the listings, that's always 3 a positive thing. 4 You have tackled 404, which is critical, because 5 that's another thing keeping more companies from wanting to 6 come here. And if you can tackle this, I think many more 7 companies will come here. 8 And I think that the fact that the reconciliation 9 now isn't so scary for people -- it's just irritating -- 10 suggests that it has become less and less relevant over time, 11 because whatever it produces in the way of results, nobody 12 seems to care that much about. And so if we are putting a 13 ton of money and time into something that comes six months 14 late, and everyone seems to be agree can be dispensed with, 15 then that seems like a very important place to try to save 16 resources. 17 The other side of that is the whole mission of 18 today's roundtable and all the work that has gone into the 19 roadmap of making sure that IFRS is a robust, high-quality 20 system. And as we will talk about, I think, later in today's 21 panel, the critical role that the staff plays in reviewing 22 the filings is going to be important to the success. 23 And that is a piece that I think is going to be a 24 little bit difficult for the foreign issuers to get their 25 arms around because, when their financial statements are 1 subject to staff review, there are consequences to that. 2 MR. WHITE: Don, do you have a comment here? 3 MR. NICOLAISEN: (Shaking head.) 4 MR. WHITE: Any questions from the Commission 5 before I -- 6 MR. HEWITT: I have a question I would like to ask 7 Don and Mr. Widdowson. You know, there has been great, 8 excellent movement between the U.S. standard setters and the 9 international standards setters to reach a common goal of 10 convergence to eliminate the reconciliation. 11 If the reconciliation was eliminated -- which it 12 probably should be -- what is the incentive to keep that 13 convergence going like it is now? 14 There is excellent movement to converge our 15 standards. Once that reconciliation is eliminated, is there 16 still the same incentive on both sides to continue this 17 excellent movement? 18 MR. NICOLAISEN: I'll take a first cut at that. I 19 think there is still a very strong incentive, and the 20 incentive is to look for the best solutions -- you know, what 21 works best? What is it that is most beneficial to the 22 investor and analyst community? 23 And being able to really work together, it seems 24 like the economics of that are so overwhelming that I would 25 hope that all the constituents that are affiliated, 1 associated with, supportive of both the FASB and the AISB 2 would continue to work together, work in the direction of 3 improving the quality of financial earnings results, but 4 don't get so distracted that we end up with deviations in 5 footnotes and side agreements as to, you know, what the U.S. 6 would do and what other parts of the world would do. 7 So I'm just a believer that the marketplace puts a 8 premium on solid information consistently across the world. 9 And our investors in the U.S. should have the opportunity to 10 think beyond our national boundaries -- and they do -- and 11 the rest of the world has decided to cast their lot with the 12 IASB, and I think we need to be supportive of that effort, as 13 well. 14 So, to the extent that we can maximize the use of 15 resources, it just seems the market forces would dictate 16 that. 17 MR. WHITE: We normally call on people in order, 18 but, since Mr. Jones hasn't commented at all, why don't we 19 call on you first. 20 MR. JONES: Well, I would just like to thank you 21 for the opportunity to be here today. 22 And I would like to say, even though, you know, we 23 are a U.S. issuers and a U.S. registrant, many of the same 24 things I have heard today are issues for the DuPont Company 25 -- complexity in U.S. accounting, discussions around a more 1 principles-based IFRS. 2 I don't know where the balance is. I have talked 3 to some of my fellow panelists today, and some would say, 4 "Are we going to drive to the same level of detail through 5 IFRS over time, as it evolves in directions that U.S. GAAP 6 has evolved in?" 7 So, you know, if you look to whether a U.S. company 8 might switch to IFRS, maybe, at first, you might just take a 9 look and say, "That's the right thing to do, or, at least, to 10 consider it." I think we ought to have a choice in that 11 matter -- if not right away, at some point in the future. 12 We also, as I mentioned earlier, operated in many 13 of the countries of the world, with a significant number of 14 large subsidiaries in Europe that are evolving in their 15 financial statements on local statutory environments to IFRS. 16 We have reconciliations that we have to maintain, 17 with a similar risk of translating those statements developed 18 in IFRS to U.S. GAAP in terms of our filing and reporting. 19 There is cost that is behind all of that reconciliation and 20 maintaining that knowledge. 21 So I think we would very much support moving to one 22 global GAAP standard, you know, and it's very important to 23 continue the convergence process. Thank you. 24 MR. WHITE: Mr. Deere, do you want to go back to 25 the original question about: Will the convergence process 1 stop if we eliminate reconciliation? Or some version of that 2 question. 3 MR. DEERE: We would hope that that would not be 4 the case. And, in fact, I can see several forces that I 5 would hope would keep that on track -- not the least of 6 which, John, would be for the regulators to actually support 7 and require that. For the various securities commissions in 8 various jurisdictions that we have to understand that the 9 value in that, and to actually push and support for 10 convergence, I think, would be an ongoing force in this 11 regard. 12 I also believe that the analyst community and the 13 the investor community, who we have heard up here today quite 14 a bit, will be very vocal about not wanting to see the work 15 that has been done on convergence to suddenly begin to drift 16 apart, because it would make their life much more difficult. 17 And, thirdly, I think that, between the two boards, 18 there is actually -- the practical matter is, as previously 19 mentioned, the cost sharing and staff sharing. I think is 20 that they do a fairly good job of sharing the lead on agenda 21 items for various subjects that they are undertaking, where 22 they can, and allow one organization or the other to take the 23 lead in doing that. And I think that that will continue to 24 provide them a very practical incentive for cooperation and 25 convergence. 1 MR. WHITE: Mr. Widdowson? 2 MR. WIDDOWSON: Thank you. First of all, I would 3 like to say that we believe that considerable progress 4 towards convergence has been made. And, for us, I think the 5 key move was probably at the year 2005. 6 But as I look forward from today, out of our 7 largest reconciling matters, actually, we expect three to be 8 resolved during the course of 2007. 9 So for us, I echo precisely what Don said. I think 10 it's more a quest for improving and seeking the highest 11 quality accounting standards, rather than convergence for 12 convergence's sake. So it's aiming for quality. 13 MR. WHITE: Let me move to the next general topic, 14 and I think I managed to ask this question to everyone today 15 one way or another and have been getting quite consistent 16 answers. 17 But I guess it's just, in its plainest terms: 18 Without reconciliation, will U.S. investors be getting the 19 necessary information to make informed investment decisions, 20 if all they getting is IFRS information? 21 I guess it's the case of saying to some of you: 22 Will your shareholders be getting the necessary information? 23 So we can start wherever we would like to start on 24 that. 25 MR. DUVERNE: Roughly, 15 percent of our investors 1 are U.S.-based. Having said that, our ADR program only 2 represents less than five percent of our trading volume, 3 which means that a large proportion of our U.S. investors 4 trade, not on the U.S. markets, but on the European markets. 5 When I look back over the last 11 years since we 6 have been listed in the U.S., it's only between 2001 and 7 2003, during the time of the IT markets, that we had a 8 handful of questions on our U.S. GAAP reconciliation for, 9 essentially, two areas. It was a time when we were not 10 filing under IFRS, but French GAAP. In the last three or 11 four years, we have not had a single question on our U.S. 12 GAAP reconciliation. And in the years '96 to 2001, we had a 13 very little number of questions. 14 So we had a period of two or three years where we 15 had perhaps 10 or 20 questions, but, in the last three years, 16 not a single question of our investor relations team, which 17 is based in Europe and in the U.S. No investor, either in 18 the U.S. or in Europe, asked about the U.S. GAAP 19 reconciliation. So that means that I think they could do 20 away with it fairly easily. 21 Secondly, investors rely not just on our IFRS 22 financial statements, but we also provide them with 23 substantial financial supplements, plus European Embedded 24 Value Reports, which -- I mean, I don't know, maybe I can 25 expand a little bit on that. The CFO Forum of the largest 1 Europe insurance companies, which I currently chair, has 2 published the European Embedded Value Principles to harmonize 3 the way in which insurance companies in Europe publish 4 embedded value information. We believe it's important 5 information, especially during the period where there is no 6 IFRS standard for insurance until phase two, which we expect 7 sometime in the next decade. So the investors rely on IFRS 8 statements, our financial supplements, and our embedded value 9 information. 10 I believe that, if the reconciliation requirement 11 is removed, the discipline would remain without 12 reconciliation. And I want to make that comment here because 13 I heard questions during the last panel discussion about 14 whether discipline would remain in the quality of IFRS is 15 there was no requirement for U.S. GAAP reconciliation. And I 16 was puzzled by that comment because 90 percent of the IFRS 17 filers is to the U.S., and they are still, I mean, compelled 18 to provide quality IFRS financial statements. 19 But I believe that discipline would remain because, 20 in fact, when you look at IFRS and U.S. GAAP, you can point 21 to many differences, obviously, but 95 percent of the 22 information is the same. And because U.S. GAAP literature is 23 much more abundant than IFRS literature, when you are dealing 24 with a new issue in IFRS, you first look at the U.S. GAAP 25 literature, and you try to find whether there is a reason to 1 do something different than what you do under U.S. GAAP. 2 And this is the attitude of the barristers, this is 3 the attitude of the officers, and this will last until the 4 IFRS is much expanded, which may or may not be the case 5 because it's a principles-based system and not a rules-based 6 system. 7 But I believe that discipline is not provided the 8 U.S. GAAP reconciliation. It's provided by the fact that the 9 underlying principles, the underlying framework are very, 10 very close, if not completely the same. 11 I believe that the substantial portion of 12 differences between U.S. GAAP and IFRS, in terms of numbers, 13 come from the fact that a company that has listed in the U.S. 14 at the first time application -- at a certain point in time, 15 this company has applied the IFRS from a certain starting 16 point, and some acquisitions may have taken place at a 17 certain point, so a significant portion of differences are 18 related to the time at which each standard has been applied. 19 And I think those reconciliation items have absolutely no 20 interest for the investors. So I believe that the end of the 21 reconciliation will not affect the investors in our 22 securities business. 23 MR. WHITE: Mr. Widdowson? 24 MR. WIDDOWSON: Thank you. As I said earlier, I 25 think the objective of financial reporting is to provide 1 clear, transparent views of a company's financial 2 performance. And in the that context, the reconciliation 3 that we provide is of interest. I have mentioned that there 4 has been substantial progress in terms of reducing the 5 differences, the reconciled items, between IFRS and U.S. GAAP 6 in number. 7 However, we are still publishing approximately 30 8 pages of incremental detail relating to the U.S. GAAP 9 reconciliation. That is over and above the U.S. GAAP 10 disclosure requirements, which are embedded in other places 11 in our financial reports. 12 MR. WHITE: And if the reconciliation requirement 13 was ended, would you still provide some of that information? 14 MR. WIDDOWSON: Please, may I come up to that? 15 MR. WHITE: Okay. Sorry. 16 MR. WIDDOWSON: It seems to me that, in 17 circumstances where our investor are not using that 30 pages 18 of information, that that is simply adding to information 19 overload. And that, I think, has been a trend through 20 financial reports over the past few years. They have grown 21 and grown and grown, to an extent that it is rather difficult 22 for people to understand the content. And that information 23 overload is getting in the way of a clear communication. 24 I have one complaint about convergence, which is in 25 terms of the detailed execution. One can find so often that 1 ideas which are converged in terms of intent do not converge 2 with precision at the level of the disclosures. And it's the 3 same sort of points, we have found, I think, as Mr. Duverne 4 mentions, done on prescribed disclosures have increased year 5 on year on year. 6 And, now, if one takes away the U.S. GAAP, what 7 does one do? There is no question, in an organization like 8 ours, where we prepare the numbers bottom up -- that's rather 9 an all or nothing decision. If we switch off the reporting 10 systems at the level of our 2,000 subsidiaries, we will not 11 have the information with which to prepare those U.S. GAAP 12 reconciliations. So it's rather a binary decision. If we 13 switch it off, we don't have the information. We couldn't 14 provide a reconciliation. 15 Please remember that, for an organization operating 16 bottom up accounting -- which, I think, is the preferred way 17 to go, if one really believes that, to report a controlled 18 transaction properly, we should do that as close to the point 19 of the transaction as we can -- for companies preparing 20 financial accounts in that way, one we switch the system off, 21 we switch it off. 22 Now, then, there is a real issue in terms of 23 disclosure because one thing one finds, as management, is 24 that it is very difficult to take disclosure away. Investors 25 like to receive information. Whether or not they use it, 1 they like to receive the information, and they object to you 2 taking it away. 3 And so I think, in practical terms, there will be a 4 real challenge, and we will need to redouble our efforts in 5 terms of clarity of our disclosure and explanation using our 6 existing IFRS primary accounts. It will not actually be 7 easy. I think the investors will expect clarity to continue, 8 and they will expect continued improvement. 9 MR. WHITE: Don? 10 MR. NICOLAISEN: I'm not really adding anything 11 here, but I did listen to the investors that afternoon, and I 12 think it might have been Joe Joseph who said nothing will 13 happen after you turn off the requirement for the 14 reconciliation, and the world will go on the same as it did 15 before you provided that information. 16 I think, if you look back 25 years ago, when the 17 requirement was put in place, it probably made a lot of 18 sense. When we talk today, I don't think there are any 19 investors types who want a portfolio today of just U.S. 20 stocks. They are looking for balance. And if you go to an 21 investment advisor, or any individual does, usually, some of 22 the advice is to balance out your portfolio. 23 So it's important that there be information 24 available about what you are investing in and that that 25 information be reliable and transparent. But I think the 1 focus is not on six-month-old historical data exclusively. 2 It's important. It's a baseline. It provides information 3 and tells something about the management of the company, if 4 nothing else. 5 But I think the investor is really focused also on: 6 What does this company do? What does the market look like? 7 What are its prospects for the future? Who manages the 8 business? And a lot of things that are really not in the 9 requirements of either U.S. GAAP or IFRS. 10 And if we could take resources and deploy them in a 11 more meaningful way, I think investors would welcome that, as 12 opposed to believing that requiring that certain information 13 be provided at what is a very high cost is what the investor 14 needs and wants and should be relying upon. 15 So I would listen very carefully so what the 16 investor community said. 17 MR. WHITE: Recognizing that there are many in this 18 building that believe our most important mission is investor 19 protection and disclosure -- certainly, those of us in Corp. 20 Fin., that's what we focus on; I realize there are others in 21 the building that focus on many other things, but that's what 22 we particularly focus on down in Corp. Fin. -- Meredith, can 23 you -- I just want to kind of get everybody on record here 24 that they think that, with the elimination of reconciliation 25 that investors are going to be taken care of. 1 MS. CROSS: I think so. 2 MR. WHITE: Assuming that you are on record. 3 MS. CROSS: Right. I believe that. I think that 4 there is a few points that would be important in going that 5 way. 6 One would be to provide some sort of -- as was 7 mentioned and on some of the panels today -- qualitative 8 disclosure about accounting policies, so that people can 9 understand what the company's accounting policies are. It 10 doesn't need to be a discussion of the difference to GAAP, 11 because GAAP is not relevant measure here, but it's 12 understanding this particular registrant's accounting under a 13 system that you have decided, as a regulator, is an 14 acceptable system. 15 So I think the critical accounting estimates-type 16 disclosure would be important -- and timely. I mean, it 17 would be nice if you could move up the deadline for the 18 foreign issuers' filing -- hopefully, some. If you didn't 19 need reconciliation, you don't need until June. So the 20 filings would be more timely, which is an important trade, I 21 think. 22 MR. WHITE: And you would take us back to the 23 critical accounting policies release of several years ago? 24 MS. CROSS: I would look at that disclosure, right 25 -- which explains to investors what are the key drivers of 1 this company's results. You know, is the way we are 2 accounting for pensions making a big difference, and if we 3 did it different, would it get you a different result -- not 4 compared to GAAP, but within this particular company? So I 5 would look to that. 6 And then I think another point -- which won't be 7 popular on the panel -- is that the role of the SEC staff in 8 reviewing this needs to be -- and the regulators in other 9 countries, as well -- everyone needs to be willing to 10 understand this information is going to get reviewed and may 11 be commented on. 12 And the sensitivities of different cultural 13 reactions to having to make revisions is going to be a little 14 bit difficult to deal with. It hasn't been hard when you are 15 talking about the reconciliation, but when you are talking 16 about the primary financial statements, I think that's a 17 little bit difficult. 18 But I wouldn't want to discourage a robust staff 19 review. That has been a critical part of the system here to 20 protect U.S. investors for years, and Congress made that 21 crystal clear in Sarbanes-Oxley, when they said, "We want 22 this done every three years." 23 And to say yes, every three years, but for foreign 24 issuers presenting in IFRS, it's too sensitive to have to 25 make revisions -- I mean, maybe we go to a totally futures 1 comments approach, so that you say, "Next year, when you do 2 this, do it this way." But that's a difficult trade, I 3 think. 4 And so I think investor protection -- the usual 5 things that we worry about, we should keep worrying about. 6 But giving up this one piece I think is fine. 7 MR. WHITE: Mr. Jones? 8 MR. JONES: I think it's critical that what we have 9 heard today, and what they hear from our investors in the 10 investment community every day is comparability and 11 consistency are two important factors when you are comparing 12 the results of companies, whether they be foreign issuers in 13 Europe or Asia, or in the U.S. 14 And so I think finding our way to a consistent 15 global GAAP is extremely important for all of us in a 16 competitive environment where many companies -- you know, we 17 have our competitors in other regions of the world. And I 18 think it's very important that we drive for that, so that we 19 have that consistent application, and our investors 20 understand the right opportunities, you know, where those 21 opportunities are for their investment decision, as we become 22 more global and more effective in management of capital 23 around the world. 24 So I really think comparability and consistency is 25 important, and we must drive for that global GAAP, and that 1 our regulators -- you have a role in trying to drive us to 2 help get there so that, if we eliminate this difference, we 3 still are on the path towards a consistent GAAP globally. 4 MR. WHITE: Mr. Deere? 5 MR. DEERE: I absolutely concur with what you just 6 said, and I would take it a step further, though, to say that 7 we need to be very careful about how we pursue this 8 consistency. We need to take a balanced approach. We need 9 to make sure that we do not piecemeal go out after 10 consistency and, if we spot a inconsistency, perhaps, between 11 between jurisdictions, that we have one regulator or the 12 other trying to patch-work in disclosures that they think 13 would solve isolated issues. 14 I think we need to look at the standards as a whole 15 to come up with robust accounting that we believe gives us 16 the measure of consistency desired. 17 MR. WHITE: Don? 18 MR. NICOLAISEN: I would just want to comment on 19 Meredith's comment about robust review by the Commission 20 staff. 21 I certainly, as one of the panelists, do believe 22 that is appropriate; that the staff should continue to take 23 hard looks at financial information from whatever source it 24 arrives here. 25 I think, in a global environment, maybe there are 1 some legitimate questions that are raised as to how you deal 2 with that -- where the home country regulator fits into that 3 process -- but I do think it's right that that very solid 4 protection on behalf of investors is something that should 5 continue. 6 MR. WHITE: We'll move to our next topic. 7 I understand that we are very proud and very happy 8 that we have the 1200 foreign private issuers that report 9 here in the United States, but if I've got my math right, 10 that represents about 10 percent of the public companies that 11 report in the U.S. So we've got that other 90 percent out 12 there. 13 So I guess I would like to turn just for -- I know 14 we have touched on some of this, but just turn for a minute 15 or so to talk about the other 90 percent of the reporting 16 companies in the United States and what the impact on them 17 would be if we eliminate the reconciliation requirement. 18 Mr. Jones, you're the obvious person to go to on 19 this question because you're one of those companies. 20 MR. JONES: Defend them all? 21 MR. WHITE: Yes, you have to defend them all. Well, 22 we're going to go to Don next because he's on the board of a 23 couple of them. But I do want to spend a -- I know we have 24 touched on this, but I would like to kind of get directly, 25 you know, what is the impact for the U.S. companies? 1 MR. JONES: I think, from raising of capital -- I 2 know that has been discussed earlier -- I think the U.S. 3 companies have access to the markets around the world, so I 4 think the elimination probably has little or no effect on 5 U.S. companies trying to raise capital in the markets around 6 the world. 7 To the extent a barrier is put up and we must 8 convert to IFRS at some point in time, I think you might see 9 some of the same comments that you have from my fellow 10 panelists here. But to the extent that that doesn't occur, 11 you know, from what our folks believe, raising capital really 12 doesn't change. So I think that's the important thing. 13 I think, in addition, as I have said before, 14 driving to a global GAAP is important, but, additionally, 15 driving to a global audit standard is very important to go 16 along with that. I've heard that mentioned earlier today, 17 but I think, in driving efficiency around the world, driving 18 our audit costs -- which are significant around the world -- 19 getting to a single audit standard, and also help to enable 20 to reduce our audit costs, which all of our investors, in one 21 way or another, are involved in paying for that cost. 22 MR. NICOLAISEN: I actually it's a good message to 23 everybody because if the message broadly is that, where good 24 faith and effort is put into a system and it's not exactly 25 ours or it's not exactly the same requirement than another 1 country might have, but there is a willingness to accept that 2 there is a strong structure, there is a process, there is a 3 that group of standard setters, regulators, auditors, 4 preparers who are involved in producing information that is 5 important to the investor community, that fact that it's not 6 precisely on the form that a particular agency or particular 7 country may prefer, I think is a good message. I think it 8 basically says there is a willingness acknowledge and accept. 9 And that plays both ways. It's not just here in 10 the U.S., but I think it is also our companies that are 11 subject to various regulatory requirements outside the U.S. 12 To the extent that there is a common methodology and a common 13 acceptance of information provided without redoing it in 14 another format strikes me as, actually, a pretty positive 15 message. 16 MR. WHITE: Ms. Cross, do you want to tell us about 17 your U.S. issuer clients? 18 MS. CROSS: Well, I think that a concern that I 19 think they would have is a competitive concern about 20 comparability of the information. And they all like to 21 present non-GAAP measures to make themselves understandable 22 to investors. Are they going to want to present this 23 information themselves -- at least, in the same industries? 24 You know, it has been interesting today -- the 25 airline industry seems to be the one that gets the most 1 discussion, but I suspect there are many industries that you 2 will some subtle differences under the different accounting 3 standards. And I would be curious as to whether other 4 panelists think this, but my sense would be that there will 5 be some pressure to be able to present information that makes 6 them look good in the competitive marketplace. 7 MR. WHITE: Mr. Widdowson? 8 MR. WIDDOWSON: Thank you. Firstly, I'm going to 9 transport myself and see that I am in the shoes of the 10 issuer. And having made that bold leap, clearly, I will see 11 that the removal of the reconciliation reduces some of the 12 barriers to entry to the U.S. capital markets, so that would, 13 quite possibly, have an impact on me. 14 I think I would actually be even more concerned 15 about getting my organization up to speed on IFRS. And I 16 would be investing now in building my resources and my 17 knowledge of that framework -- because everything that I have 18 heard around the room today indicates that I will need to do 19 that, whether it's at the level of my subsidiaries, or 20 possibly, at some point, at the level of my overall group 21 accounts. 22 And I would be concerned about the EU reaction and 23 the progress that the EU are making towards a reciprocal 24 recognition of U.S. GAAP and the impact that that might have 25 on my accounting framework. 1 So, actually, I think there are some facets to this 2 that I would be deeply concerned about getting up to speed in 3 IFRS. 4 MR. WHITE: Other comments on the fate of U.S. 5 issuers?. 6 MR. JONES: Well, I would just like to say I think 7 it depends on the U.S. issuer and where they are operating. 8 As I have before, we operate in many countries around the 9 world, and I certainly agree that the U.S. companies will 10 need to be getting more familiar with IFRS -- which many of 11 us are probably already doing, like the DuPont Company. 12 So I think it's, you know, again, an issue around 13 appropriate disclosure. The comments Meredith made about 14 comparability do concern us. I think, as we talk to our 15 investment community, and our potential competitors talk to 16 their investment communities -- which presumably might be the 17 same in some respects around the globe -- about how do we 18 report in U.S. GAAP, and what are those difference, and how 19 does that compare to what one of our competitors would be 20 saying, even though they are reporting in IFRS -- to the 21 extent we have not eliminated the significant differences 22 before the elimination, I think that might be an issue. 23 MR. WHITE: Mr. Deere? 24 MR. DEERE: I found it very interesting in the 25 previous financial panels that many of the analysts said that 1 they would start with the respective GAAPs and then make 2 their adjustments. Or, in one case, as I recall, they would 3 all start and just assume the same GAAP adjustments to move 4 to the comparability data. 5 What I inferred from that is that the analysts and 6 the various investor community folks are getting a proper 7 basis from both standards to reach to a degree of 8 comparability in their numbers. 9 We have not gotten any discussion since we have 10 been on IFRS about how do our numbers adjust to look to our 11 competitors due to GAAP reasons. This is -- I mean, not only 12 have we not gotten comments just on the reconciliation 13 itself, but we also have not fielded comments on what are 14 GAAP differences between us and some of our peers in our 15 industry. 16 So I take a bit of comfort from that that the dual 17 standard system seems to be working presently, to the extent 18 that it exists in the industry. 19 MR. WHITE: Well, I must say that this panel has 20 done extremely well because you've gotten through the basic 21 questions we have done a few minutes ahead of time here. So 22 I guess I will head towards the closing piece, but are there 23 any other questions we want to get before I ask everyone to 24 make a comment? 25 CHAIRMAN COX: Well, I think this is an appropriate 1 juncture for me to just put a couple really tough questions 2 because you have been lobbing softballs. 3 MR. WHITE: By all means. 4 CHAIRMAN COX: And I want to start with Don because 5 you pointed out that you have preserved the right to continue 6 thinking since you made your speech a couple years ago, and 7 there is evidence that you truly have done that. You gave us 8 really some big ideas, including your prediction that, in the 9 end, U.S. companies are going to be reporting in IFRS and not 10 GAAP. 11 And then your recommendation that, since this is 12 so, IFRS shouldn't be voluntary for U.S. companies; it should 13 be made mandatory. 14 And if that's the case, I would like to ask: What 15 sort of notice period would you contemplate or phase in, if 16 that's the way that you are looking at this, and what would 17 become of the FASB? 18 MR. WHITE: That sounded like a softball to me. 19 MR. NICOLAISEN: I think the time frame is not one 20 that I would attempt to set sitting here today. I think what 21 we are talking about consistently is a limitation that exists 22 on resources and ability to really move the needle as far as, 23 you know, at least, I'd like to see it move. 24 So if you look at the FASB, and if I think of it 25 more in the resource area, I think they do have resources, 1 they have intellect, they have experience that could be a 2 great help to the rest of the world -- and is. But if it 3 were a combined effort, it could be even stronger than it is 4 as separate organizations operating in somewhat parallel, but 5 not exactly the same universes. 6 The reason I think it's desirable -- and I 7 deliberately want to be provocative -- to think about IFRS as 8 the surviving reporting mechanism is that it forces thinking 9 as to, well, how do we play in that arena. When do we start? 10 How do we build up to it? 11 And, right now, if you look around the U.S. -- I 12 think we heard it from a couple of the audit types in this 13 afternoon's panel. They basically said, "We don't have the 14 resources to be able, in the U.S., to respond to that in 15 today's environment. Our educational process has not been 16 designed around IFRS." 17 There is a lot of things that -- steps that really 18 are important and fundamentally should be looked at, but 19 unless you set a bar at some point -- and I think the 20 European Union did it; said, "On this date, you will report 21 using IFRS" -- if you set that date and you set it fairly 22 concrete, and you're not squishy, saying, "Well, you can use 23 U.S. GAAP or you can use IFRS," I think you force the 24 dialogue to move at a much faster pace, and I think you begin 25 to focus the mind in the direction that says, "This is 1 doable. That's where the debate is. It's on how do you 2 really develop the best system." 3 CHAIRMAN COX: Well, I've just got one more really 4 hard question. Or, at least, intended to be hard. It might 5 be easy for you. I want to direct it to all of the foreign 6 private issuers on the panel. 7 And it is this: Why should a foreign registrant 8 which is identical to a U.S. registrant in every respect but 9 for domicile -- including that is listed in the United 10 States, it is offering securities to U.S. investors, it is 11 subject to the same exchange rules, and it is subject to the 12 same statutory requirements under the '33 Act and the '34 13 Act -- why should that foreign issuer have an election to use 14 either GAAP or IFRS, when the U.S. company does not? 15 MR. WIDDOWSON: Well, why should not the rules be 16 changed so that the U.S. company can choose IFRS or U.S. GAAP 17 to create the equivalency? 18 CHAIRMAN COX: Well, I think that turns a hard 19 question, perhaps, into an easy one. Does anybody else want 20 to deal with that? 21 MR. DUVERNE: I think we have demonstrated to you 22 that our investment community doesn't look at our U.S. GAAP 23 reconciliation. And we have also demonstrated that, in the 24 current system, we cannot use effectively the U.S. capital 25 markets to raise equity because of the timing constraints. 1 And you have been kind enough to have another 2 roadmap, which is a roadmap to registration, so if this -- I 3 mean, if this elimination of reconciliation does not take 4 place, the benefit for foreign private issuers of remaining 5 listed on the U.S. stock exchange is minimal. 6 CHAIRMAN COX: Well, I understand why it makes 7 sense for you. What I'm asking is: Why you have the choice 8 and U.S. issuers not have the choice? 9 MR. DUVERNE: Well, I would give the choice to the 10 U.S. issuers, as well, if that's the condition. 11 MR. DEERE: I would think that it's an evolving 12 question that has reflected the moving on of the standard 13 setting community. 14 I believe, from my perspective, that this has 15 resulted from the desire to have what has been expressed many 16 times today as a single reporting accounting framework that 17 would replace the multiplicity of GAAPs that exist. And 18 there was a challenge put out some years ago to come up with 19 a framework that was robust enough and, in fact, was suitable 20 for reporting in this environment in the U.S. And I believe 21 that, through the roadmap that they demonstrated progress on, 22 that has occurred and, in fact, now, you have a separate 23 framework. 24 At that point, I think it becomes one of a 25 efficiency and acceptability. Now, given where we are at 1 this time, the converse of that question is that, as we have 2 many different reporting requirements in other jurisdictions, 3 if we don't have that option, we are then saddled with a dual 4 GAAP reconciliation that, in fact, domestic filers are not. 5 And I believe, at that point, all that the foreign filers are 6 thinking is a level playing field . 7 CHAIRMAN COX: Well, John, my apologies because I 8 think it is very clear that you were not asking softballs, 9 but, rather, that, no matter how difficult the question, the 10 panelists are so knowledgeable and deft at answering them 11 that they make it look easy. So thank you very much. 12 I know we are not quite finished, but since I am 13 finished with my questions, I think this is just an 14 opportunity to thank you very much for your expert 15 contributions. We really value the experience in so many 16 ways that you bring to this discussion. And your advice and 17 guidance to us in sharing the benefit of your experience is 18 something that will really go a long way to informing our 19 decisions on this topic. 20 So John? 21 MR. WHITE: I know you had a lot of fun poking fun 22 at my early morning telephone skills in reaching these 23 gentlemen, but I did eventually reach them all in Europe, and 24 they did join us -- after I figured out how to dial the SEC 25 telephones -- and I appreciate them all showing up. 1 I guess we would like now to move to what I guess 2 we have been calling our closing remarks. The thing that I 3 think we found most useful in asking each of you to share 4 your closing thoughts with us is any recommendations you 5 might have for us in going forward here. But, obviously, if 6 we have missed anything and other comments you would like to 7 make, those, as well. 8 Knowing my preference for reverse alphabetical 9 order because I'm at that end of the alphabet, we'll start 10 with you, Mr. Widdowson. 11 MR. WIDDOWSON: Well, thank you very much. And, 12 firstly, I would really like to express my appreciation for 13 the invitation and the chance to partake in this event. 14 I think time is short, and there is not a great 15 deal of time in the roadmap. As Don earlier said, 2009, or 16 earlier, is actually pretty much upon us. And I believe the 17 foreign private issuers would greatly appreciate an 18 affirmative signal in terms of the direction of this debate 19 and would appreciate that signal just as soon as possible. 20 Now, obviously, I am aware that you have given 21 speeches and that there is information out there, but there 22 comes a point where one needs to give some concrete 23 information and direction to the community. 24 As I said earlier, we would really advocate 25 removing the reconciliation requirement from 2008. We don't 1 see the significance, the incremental value to continuing the 2 requirement through to 2009, given that our investors are not 3 using that information, but, rather, they are using the IFRS 4 financials as a basis for their investment decisions. And I 5 think, as I explained earlier, there is very significance 6 cost and risk for foreign private issuers preparing accounts 7 on a multi-GAAP basis. 8 I think those would be the key messages. Over and 9 above all of that, there has, on many occasions, been 10 expressed the need for a consistent regulatory framework. 11 And, of course, high-quality rules are nothing without a 12 consistent regulatory framework. 13 I do pay great credit to the SEC for providing a 14 lead in that direction, and I think that leadership, 15 actually, is rather important, and I commend you to continue 16 in those efforts as a way of leading that regulatory 17 consistency through the world. Thank you. 18 MR. WHITE: Don? You've given us enough messages 19 already today, but why not one more? 20 MR. NICOLAISEN: And I'll try keep this brief, but 21 I think that the Commission is on the right track in really 22 asking these questions. And I have absolute confidence that 23 the inputs will be thought about, that there will be balanced 24 decisions, and that there will be the appropriate outcome. 25 When I think about financial reporting, I try not 1 to think just about a compliance exercise. And, you know, 2 perhaps unfortunately, the reconciliation is one of those 3 things that has become a compliance exercise. 4 And, particularly, if you are reporting in the home 5 country and to the vast majority of your investors on the 6 basis of a different accounting model -- IFRS -- and that's 7 your communications, and that's how you manage your business, 8 and that's how you think about it, and that's how you talk 9 about it, to then come along and be required to comply with 10 something that is foreign to what you are doing -- it's not 11 the way you manage your business, it's not the measures that 12 are driving your performance -- sends somewhat of a 13 conflicted message. 14 And so I'm a strong believer that the financial 15 reporting efforts should be about communicating with 16 investors what really happened, what did financial 17 performance look like, what is management's view. And, to 18 that end, I think that how you are responding to the vast 19 majority of your investors in the home in which you operate 20 is an awfully important factor, and I think it is a driver 21 that trumps our reconciliation requirement, and I think we 22 are at that point where it's really appropriate to think 23 about what does the Commission do about that. 24 So I thank you for doing that. 25 MR. WHITE: Mr. Jones? 1 MR. JONES: In guess, in summary, we would also 2 continue to support the elimination of reconciliation, as 3 long as the drive to get to one global GAAP is not impaired 4 by doing that. I think that is important. I think we heard 5 that from our investor community's point that comparability 6 and consistency is of the utmost importance to them. 7 And I think also looking at, as I mentioned before, 8 the audit standard and getting to a consistent audit standard 9 globally is an important factor, as well. 10 I thank you for the opportunity to speak today. 11 MR. WHITE: Mr. Duverne? 12 MR. DUVERNE: First, thank you for the opportunity 13 to speak on this panel. 14 I was very encouraged today by the consensus that I 15 heard on the roadmap. I would point out that this year will 16 also be the first year where the foreign private issuers have 17 the opportunity of including the SOX 404 identifications, 18 which I believe is a guarantee of additional quality of the 19 financial statements, which will -- we have complained enough 20 about the burden of Sarbanes-Oxley 404, but we also see the 21 benefit of that. 22 If the elimination of reconciliation leads to 23 additional disclosures, I hope that they will be narrative 24 only, and not numbers. And I believe that waiting four more 25 years will not give the SEC more in terms of certainty of the 1 quality of what is done. So I would encourage early 2 elimination of the reconciliation because I believe that is 3 in the interest of the investor community, as well as the 4 issuers. Thank you. 5 MR. WHITE: Mr. Deere? 6 MR. DEERE: I, too, would like to thank the 7 Commission for the opportunity to come over here and speak on 8 this matter. 9 We do support, as we said, the elimination of the 10 reconciliation. I have been most encouraged by the comments 11 that I have heard today that all seem to be in that direction 12 and supportive of it. 13 We would also ask that -- it has been referred to 14 once or twice, but that that would include all the additional 15 U.S. GAAP requirements of item 17 and 18 filers that are 16 required, if we are to consider, then, that the IFRS 17 disclosures are sufficient. 18 We do believe that this is an important first step 19 in simply going forward in achieving more efficiency for 20 cross-jurisdictional reporters, such as ourself and many of 21 the other companies on this panel. 22 We would encourage, not only the standard setters 23 to continue their convergence methods, but also we would ask 24 that the regulators continue to look -- as you referred to, 25 John, we were encouraged to hear the activity ongoing to look 1 at the cooperation between the various jurisdictions of the 2 regulators. We think that that is essential. 3 We do think that there is still scope right now in 4 working out how issues are resolved on a timely basis so 5 that -- and it will apply, as well, to U.S. companies as it 6 will to foreign private issuers -- any companies that are 7 dealing in multiple jurisdictions of securities issuance. How 8 do we approach the regulators? Who is first? Are we 9 disadvantaged, then, perhaps with a more cumbersome process, 10 because we happen to be in more than one jurisdiction, than 11 companies that are not? 12 But we do see the elimination of the GAAP 13 reconciliation as an important first step in good recognition 14 along that way. 15 MR. WHITE: Ms. Cross, the last word. 16 MS. CROSS: When one is the lawyer, that doesn't 17 seem quite right. 18 I guess I also support the elimination. It's 19 amazing to me -- since I worked on it for many years in the 20 '90s, and we were going standard by standard at IASCO 21 meetings, this is a lot more pleasant than that. This is a 22 great development that it has gotten to this point. 23 A couple points I would make is I don't think 24 perfection on convergence is the test. It seems like there 25 is a lot of comfort around the fact that these are robust 1 quality standards, and so the implementation and the 2 oversight are critical with the auditors and the regulators. 3 As you go to implementing this change, a couple 4 points I would make. I think that issuers -- particularly, 5 foreign issuers -- need clarity and predictability when they 6 hear from the agency, and so making it clear what you are 7 going to do, what is going to be required, what the staff is 8 going to expect, what the review process could be -- those 9 sorts of points, I think, are going to be very important, 10 because you could have some serious disappointment if they 11 just think everything is done now. So I think that will be 12 probably one of the most important points. 13 Thank you. And thank you for having me here today. 14 MR. WHITE: So I think that brings us to the end. 15 On behalf of Ethiopas Tafara and Conrad Hewitt and the SEC 16 staff and the Commission, I would like again to thank all of 17 the panelists -- the ones that are here right now and the 18 ones that have appeared on the prior two panels -- and to 19 thank all of the public audience members for your time and 20 attention today and for attending. 21 I also want to thank Julie Erhardt for joining us 22 as a moderator. 23 We have listened carefully, and I am confident that 24 the points you have made today will be taken seriously in the 25 coming months. 1 So thank you very much, and that concludes the 2 roundtable. 3 (Applause.) 4 (Whereupon, at 5:30 p.m., the roundtable was 5 concluded.) 6 * * * * * 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25