REMARKS BY CHAIRMAN ARTHUR LEVITT
        UNITED STATES SECURITIES AND EXCHANGE COMMISSION 
              SEC AND FINANCIAL REPORTING INSTITUTE
                UNIVERSITY OF SOUTHERN CALIFORNIA
        THURSDAY, JUNE 6TH, 1996 -- PASADENA, CALIFORNIA



I'm here today to speak out on behalf of one of the most
underappreciated groups in American society -- certified public
accountants.

I've noticed an alarming trend in the way our society allocates
fame: It seems that the further removed you are from reality, the
more famous you become.

Think about it: Who are the best-known people in America today?

Without a doubt, actors -- who owe their celebrity not so much to
who they are, but to their portrayal of people they are not.

Running a close second are professional athletes -- but they,
too, are only playing a game -- as difficult as it may be for
some Lakers fans to believe.

CPAs, on the contrary, perform a very real function, without
which our economy would be crippled.

But I can't recall a CPA ever making the cover of People
magazine.  

Oprah has probably never done a show on "Auditors who have
discovered major discrepancies."  

And while millions tune in to the Academy Awards every year, the
AICPA's Gold Medal Awards aren't even carried on one of those do-
it-yourself cable channels. 

It seems safe to conclude that accountants have not captured the
popular imagination.  That is all the more remarkable in light of
what it is accountants really do.  They are highly sophisticated,
knowledgeable professionals.  And they serve one of the most
valuable functions in a capitalist society.  

Their stock in trade is neither numbers, nor pencils, nor
columns, nor spreadsheets, but TRUTH.  Accountants are the people
who protect the truth.

Can there be a more important role, or a greater responsibility? 
The livelihood of every American depends in a meaningful way on
how well accountants do their job.  Economic decisions are no
better than the information on which they are based -- if the
numbers are wrong, the decisions are wrong, and our economic
future is imperiled.

Accountants are the guardians of financial truth.  But the truth,
as Oscar Wilde famously noted, is rarely pure, and never simple. 
In any society, people have different ideas about what
constitutes the truth; and at any time, a different definition
might prevail.  

Accountants are not immune to the ebb and flow of custom.  But
they are bound to defend the terrain of their truth.  And we, the
beneficiaries of their work, are bound to support them.

Popular culture aside, the laws of our nation have long
recognized the pivotal role played by accountants, and the huge
public interest in keeping them independent.  The responsibility
for setting accounting standards for public companies was
entrusted to the SEC more than 60 years ago.  

The SEC has looked to the private sector for leadership in
setting standards and improving financial reporting.  

At the same time, the Commission has worked to keep the standard-
setters independent, because public faith in our markets requires
it.  Accounting standards must be perceived as being above
political concerns, special interests, or bureaucratic
convenience.

The members of the Financial Accounting Standards Board are the
standard-setters; as you know, they are appointed and supported
by their parent organization, the Financial Accounting
Foundation.  But while the FASB is generally acknowledged to be
independent, the structure of the FAF opens a door to potential
conflicts of interest, and that's what I want to talk to you
about today. 

We're concerned about the potential conflict between those who
prepare financial statements -- that is, corporations and
governments with an interest in presenting themselves in the most
favorable light possible -- and those who use financial
statements -- including investors, creditors, analysts, and
members of the public.  Put simply, the FASB sets standards for
preparers, in order to protect the interests of users and the
public.

Almost from the moment it came into the world, the FASB and its
pronouncements have been criticized by corporate interests. 
There's nothing wrong with criticism -- it's expected -- indeed,
it's what I used to do when I was on the corporate side.  A frank
dialogue between those who make the rules and those who must
abide by them is healthy.

But earlier this year, healthy criticism turned into withering
attack.  The FEI, a financial officers' group, issued a series of
recommendations that would have put FASB in the corporate
equivalent of leg irons.  Among other things, they would have
reduced the number of Board members, made them part-time,
diminished the size of the staff, and given control of the
agenda-setting process to an external corporate body -- an idea
so over the top that it taxes the imagination:  What corporation
in America would ever let an external body set its agenda?  

The same group tried to tar the FASB as "anti-business" -- a
ludicrous notion.  Calling the FASB "anti-business" is like
calling the College of Cardinals "anti-Catholic."  Faith in the
integrity of FASB's rules is what enables capital to flow so
freely in our markets.  Still more extreme was a recommendation
that would have required 4 out of a possible 5 votes for
approval, giving corporate interests an effective veto on
accounting rules.

Despite some words of reconciliation, the pressure has continued. 
We've witnessed a barrage of public statements against FASB,
along with a series of initiatives that would eviscerate it. 

But as harsh as the rhetoric has been, more disturbing yet have
been the silences.  I was very disturbed that the FAF did not
rise to defend the FASB.

The FASB is charged to create the most hallowed rules of
accounting, and the FAF is charged to protect the rulemakers. 
And yet, throughout this one-sided war of words, the Trustees of
the Foundation have largely remained silent.  

I met with the CEOs of the Big Six accounting firms and the
Trustees of the FAF and urged them to speak up in support of the
FASB.  Not long ago, we worked together to gain much-needed
relief for the profession from frivolous lawsuits.  We should
also work together to preserve the independence of FASB. 
Unfortunately, every new assault on the FASB was met with
silence.

One reason for this lies in the fairly obscure details of how the
standard-setting process is governed: Though operating ostensibly
in the public interest, the FAF has been dominated by private
interests.  Its governance structure has not featured the balance
and strong independent representation that I believe are critical
to any self-regulatory effort.  

The FAF raises funds for the FASB's operations, and selects its
members.  But FAF membership has been allocated by formula,
principally to constituent groups most affected by FASB's rules. 
One need not hold a degree in public policy to realize that such
an arrangement opens the door to conflicts of interest.  The
system was created 25 years ago, but the world was far less
complicated then; it is more difficult today to avoid the
conflicts inherent in the system.  The time has come to change
it.  

In April, I asked the FAF to change the composition of its Board
to achieve a better balance between constituent and public
representation.  The FAF needed more people with a strong track
record of independence and public service -- free of conflicts,
and committed to the interests of investors.  

I'm pleased to say that, in recent days, the SEC and the FAF have
made some progress toward resolving our differences.  And I'm
optimistic that we will move toward a solution.  

There should not be the slightest doubt about the Commission's
goal in these negotiations.  We know something about hostile
takeovers, and this is not one of them.  

It's our aim to keep the standard-setting process in the private
sector, while strengthening it.  I would hope that we can
reconstitute the FAF's Board to achieve a balance between those
who do and those who do not have a stake in the outcome of how
accounting standards are set.  

I would hope that we can reduce the number of constituent
representatives, and simultaneously increase the number of public
representatives.

I would hope that we can reach a similar balance on the FAF's
nominating committees, which will select the next chairman of the
FASB.

And, finally, I would hope that the FAF and the SEC can work
together to establish selection criteria for new, independent
members of the Board.  

Independent oversight is not a unique need of those who set
accounting standards.  Over the years, the Commission has worked
to broaden public representation among several bodies with public
or quasi-public responsibilities, from the New York Stock
Exchange in 1938 to the NASD in 1996.  It's time the FAF
modernized its structure as well.  

If anyone doubts the need for independent governance of standard-
setters, consider the huge difference that accounting standards
can make.  In 1993, Daimler-Benz became the first German company
to register securities in the US.  Under German accounting
standards, Daimler had reported a profit of 168 million
Deutschmarks for its 1993 fiscal year; under US GAAP, the company
reported a loss of almost a billion Deutschmarks for the same
time period.  

Closer to home, in 1992, the FASB required companies to record
retirement health benefits as liabilities.  As a result, the
balance sheets of General Motors, for example, showed a "new"
liability of $36 billion for retirees' health care costs. 
Without the new standard, total shareholder equity would have
shown up as $42 billion; with the new standard, shareholder
equity was actually shown to be $6 billion -- a huge difference
in value.

The controversy over marking securities to market provides
perhaps the most dramatic example of how accounting standards can
make a difference.  Prior to 1993, securities often were carried
on balance sheets at their historical cost, regardless of their
current value.  That's like keeping your watch set to the time
you first bought it -- it doesn't help you figure anything out. 
Under this standard, for example, American S&Ls showed a positive
net worth of $36.2 billion in 1980, when Congress was considering
deregulating the thrift industry.  

S&L assets consisted more of bad loans than devalued securities. 
But had those assets been marked to market, the real net worth of
S&Ls would have been evident -- somewhere between minus $78
billion and minus $118 billion.  I cannot say whether Congress
would still have deregulated the industry, had these figures been
widely known.  I can say that we would have had a better chance
of averting the S&L crisis.  

I said earlier that accountants are the guardians of financial
truth, and I think these examples demonstrate that.  The
profession's credibility and dedication to the public interest
have been well established among investors.  

But recent developments in the profession threaten to diminish
that trust -- and not just the onslaught against the standard-
setters, but also the more general changes in accounting practice
as we approach the millennium.  If I may digress for a moment:
I'm deeply concerned that "independence" and "objectivity" are
increasingly regarded by some as quaint notions.

I see a profession that is seeking to expand its business
interests far beyond traditional services, into such activities
as investment banking, franchising the use of the auditor's name,
and providing "outsourcing" for a variety of services.  

There are those who say that increasing competition puts pressure
on accountants to branch out and try new ways of generating
profits.  I caution the industry, if I may borrow a Biblical
phrase, not to "gain the whole world, and lose [its] own soul."  

In contrast with other businesses, the auditing profession bears
the burden of being, at all times, objective and independent, and
of appearing, at all times, objective and independent.  That is a
very strong public expectation, and it is one that this
Commission demands.  If the profession loses its reputation for
independence in the search for greater profits, I fear that it
will be gravely difficult to regain.  

That's all I'll say today about auditor independence, which
deserves its own speech.  Let me return to the broader issue of
the independence of those who set standards for the profession.  

As I noted, a certain amount of tension between standard-setters
and the corporate community is inevitable, and healthy.  I'm all
for maintaining that tension; the corporate community's proposals
from earlier this year would have effectively eliminated it.  

Farsighted business leaders over six decades have supported the
independence of the process and accepted even those standards
that may have worked against their short-term interests.  The
positive economic consequences of a visibly independent and well-
protected FASB far outweigh any potential dislocations and
temporary discomforts it may cause.

More than 20 years ago, as the FASB was being inaugurated,
Reginald Jones, then Chairman of General Electric, said, "We must
recognize that with its first decision the new Board is going to
gore somebody's ox -- and that will be the time for us to pull
together -- not splinter apart."   Those words are still relevant
today.  

Clearly, any organization, including the FASB, can refine and
improve its processes.  A twelve-year turnaround time -- even for
a group of judicious CPAs -- seems a tad on the long side.  I'm
all for due process, but a colleague recently described the
situation at FASB with the phrase, "undue due process."  The
Board has considered a three-year turnaround time for new rules;
I would support any effort to speed the process up.

The FASB is not immune to criticism and change.  But there is a
world of difference between constructive advice and intimidation. 
Changes that would help make the Board more responsive to
critical issues are absolutely welcome; changes that would
undermine FASB's independence are not.  And the first change,
even before we approach changes in FASB procedures, must be to
reconstitute the FAF with a balance between independent and
affiliated trustees.  

We ought to get this done quickly and painlessly.  I believe we
are near an agreement now.  There are so many challenges on the
accounting horizon that we need to put this conflict behind us
and move forward. Mergers and acquisitions are occurring in
record numbers. Derivatives and similar instruments are becoming
increasingly sophisticated.  The public utility and
communications industries are being deregulated.  Advances in
technology raise fundamental questions about what the model of
financial reporting should be as we approach the millennium.  

Finally, there is the vital question of international accounting
standards.  As capital markets around the world continue to
develop, companies seeking capital will look for the best markets
irrespective of national borders.  Investors providing capital
will need to make comparisons of investment opportunities so that
they can make informed investment decisions.

We are facing a future in which capital flows across borders will
continue to grow at an extraordinary rate.  There will be
increasing recognition of the value of higher quality financial
reporting and a more level disclosure playing field.

The SEC and its fellow regulators are working toward this high-
quality, level field through the July 1995 agreement between the
International Organization of Securities Commissions and the
International Accounting Standards Committee.  

Regulators internationally are urging the International
Accounting Standards Committee to develop a core set of standards
as soon as possible.  The IASC is accelerating its process in
response.

The FASB has a key role to play in this process, not only in
establishing accounting principles for domestic and foreign
issuers seeking capital in US markets, but also in contributing
to IASC efforts to develop international standards of the quality
and integrity that US investors expect.  I want to be clear on
one critical point -- as my two immediate predecessors and I have
consistently stated, the Commission will accept only those
standards that provide the transparency that characterizes US
standards.  

The FASB is quite capable of playing this and all of its roles --
but only if given the support it needs.  

                          *     *     *

I hope that in the course of these remarks, I've made my position
clear.  

The problem is not a question of accounting -- it's a question of
governance.  

To be acceptable and credible, the FAF must be balanced -- it
must represent the users, the investors and public for whose
benefit financial statements exist, as well as preparers, who are
most directly affected by the disciplines and constraints that
the standard-setting process imposes.  

The underlying philosophy of private sector self-regulation is
that special interest voluntarily yields to public interest. 
That requires true commitment and leadership from the private
sector participants, to set aside short-term self-interest in the
pursuit of long-term common goals -- in this case, the quality
and credibility of the financial information that nourishes our
capital markets.  

Our capital markets are among our nation's most spectacular
achievements -- they're the envy of the world.  They've raised
more than capital: they've raised the quality of life.

Those markets are a rich legacy we have inherited, but do not
own.  They are a national asset we hold in trust for America.

You are the guardians of that vital trust -- that the markets of
our nation; that the integrity of the process; that the
confidence of investors will not be compromised.

We owe it to those who will come after us to leave those markets
stronger, sturdier, more productive, and more prolific than we
found them.  And, if we ensure the independence of the standard-
setting process, I have no doubt that we will.  Thank you.

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