Little progress has been made in moving toward a more comprehensive  reporting model that would include both financial information (financial  statements and related disclosures) and nonfinancial information (such as  high-level operating and performance measures used by management and  forward-looking information about opportunities, risks, and management’s  plans). Participants stated that the current model is too driven by  accountants, regulators, corporate management, and boards of directors  who have historically focused on the technical aspects of financial  reporting and are more likely to move slowly and cautiously in making  changes. As a result, the current model has failed to get adequate “traction”  to move toward a more comprehensive reporting model. There was  general agreement that (1) a combination of principle-based and rule-based  standards would be needed and (2) principle-based accounting rules were  not a panacea to solve financial reporting problems. The Accounting Profession

An expectation gap between what an audit is and is not continues to exist,  especially with regard to the auditor’s responsibility for detecting fraud. It was recognized that the  standard auditor’s report could be made more useful to users who are  seeking greater information about what the auditor did and found, as well  as expanded assurances. Regulation and Enforcement

A strong, viable Securities and Exchange Commission (SEC) is needed to  maintain investor confidence in the markets. The new Public Company Accounting Oversight Board (PCAOB) needs to  officially get up and running. Suggested priorities for the PCAOB included  establishing policies and procedures for disciplinary actions and  conducting inspections of registered public accounting firms. Users of  these products will need to step forward to help ensure the value of an  enhanced financial reporting model and related auditor assurances for the  effective functioning of U.S. capital markets. Corporate Governance

	Defining the Roles and Responsibilities of the Board of Directors

Recent legislative and regulatory initiatives, such as the Sarbanes-Oxley  Act of 2002, Securities and Exchange Commission (SEC) proposals and  rules, and proposed revised stock exchange listing requirements, have  addressed weaknesses in corporate governance exposed by the major  financial reporting issues raised by restatements and corporate failures,  placing greater emphasis on the roles and responsibilities of boards of  directors. Although these reforms are not yet fully in place and not all  issues have been addressed, many corporate boards are reassessing their  roles. However, participants agreed that there is no “silver bullet” and that  it is difficult at this time to say what is working and what is not working. In addition to  focusing on what accountants, regulators, and corporate management and  boards of directors (the “supply side”) should do, boards need to focus  more on what investors and other users of financial information (the  “demand side”) want from corporate governance. For example, management is  responsible for the operations of the company and members of the board in  their oversight function should have the ability to challenge the CEO in  managing the company. Participants discussed the lack of investor confidence in the current  financial reporting model and the need to first improve the reliability of  financial reporting before adding any new reporting. Participants offered that an “artful” blend of  both principles and rules would be useful. The Accounting Profession

	An Expectation Gap Exists Concerning the Role of Auditing

The participants discussed the auditor’s responsibility for detecting fraud  and the meaning of the assurances provided by the auditor’s report on the  financial statements. Participants also believed that a challenge facing the new PCAOB will be  dealing with the complex relationship between federal and state  governments involved in regulating the accounting profession. GAO’s Governance and Accountability Forum

	Participants

Gaston L. Gianni, Jr.
A.W.
Why GAO Did This Study

On December 9, 2002, GAO convened a governance and accountability forum to discuss challenges facing regulators, the accounting profession, and boards of directors and management of public companies in effectively implementing the Sarbanes-Oxley Act of 2002 and related regulatory actions to improve public confidence in U.S. corporate governance and accountability systems. Major accountability breakdowns recent years, exacerbated in the last 2 years by the unprecedented massive breakdowns and bankruptcy of Enron and WorldCom, have contributed to the decline in investor confidence in U.S. capital markets. The forum focused on the four interrelated areas of corporate governance, the financial reporting model, the accounting profession, and regulation and enforcement that the accountability breakdowns have surfaced as critical areas to be strengthened. Addressing these challenges will involve the public, private, and not-for-profit sectors. In general, there must be the proper incentives, transparency, and accountability mechanisms in place to ensure the effectiveness of any system. As a result, these overarching principles were considered in connection with the issues discussed. Forum participants included individuals from federal and state government, the private sector, standards setting and oversight bodies, and a variety of other interested parties.

What GAO Found

There was general agreement among the participants that the root causes of the accountability breakdowns are systemic in nature, complex, and will require leadership and alterations to the current models in each of the four interrelated areas to transition to an overall system that is more focused on protecting the public interest and, in that regard, accountability. They also agreed that considerable actions have been taken and/or proposed towards achieving those objectives, but that having the "right people" and "stakeholders" involved was critical to successfully achieve and effectively maintain the necessary reforms. Several other key observations follow. Many boards of directors are reassessing their roles and responsibilities, and currently it is difficult to determine what is working and what is not working. Participants agreed there is no "silver bullet" to enhancing the effectiveness of boards of directors in their role of overseeing management and protecting the public interest. However, for a board to effectively perform its responsibilities, it must have the "right people" who possess an "independent spirit" and are "knowledgeable" of the company/industry and the company's constituencies. Little progress has been made moving toward a more comprehensive financial reporting model that would include such information as operating and performance measures and forward-looking information about opportunities, risks, and management's plans. The impetus for changing the financial reporting model needs more involvement of investors and other users of financial information as the current model is too driven by those who have historically focused more on the technical aspects of financial reporting, such as accountants, regulators, corporate management, and boards of directors. An "artful blend" of principle-based and rule-based accounting standards, as well as a financial reporting model with different tiers of reporting that provides full disclosure, are fundamental changes needed to improve the financial reporting model. An "expectation gap" of what an audit is and what users expect continues to exist, especially with the auditor's responsibility for fraud detection. Supplementing the traditional financial statement audit with a "forensic audit" as well as with a more informative auditor's report could help to narrow the "expectation gap." A strong, viable Securities and Exchange Commission is needed to maintain investor confidence. Concern was raised that the Commission is not fully at that status and that funding issues need to be resolved. The new Public Company Accounting Oversight Board needs to officially get up and running with immediate priorities focusing on establishing policies and procedures for performing its disciplinary, inspection, and standard-setting functions.