...failures exposed massive manipulations of financial reporting by management, inexplicable breakdowns in the independent audit process, astonishing revelations of holes in our financial-reporting standards and practices, and stunning lapses of corporate governance. In this environment, investors and the public have become increasingly skeptical about a system that seems to be out of control. Indeed, financial reporting is once again at a crossroads.

We witnessed high-profile failures in the past and encountered similar questions about the performance of the key players in our financial-reporting system. Clearly, however, the revelations that continue to unfold have had cataclysmic effects that changed the world's view of a system that we often tout as "the best in the world." So severe is the damage that the investing public can be expected, rightly so, to demand answers and meaningful reforms.

SOME CHALLENGING QUESTIONS DEMAND ANSWERS

As we re-examine the partnership between the public and private sectors that has been the basis for oversight of our capital markets, we must confront candidly and honestly some challenging questions:

* Can we believe in and rely on the independent audit?

* Can we believe that our accounting and disclosure standards provide the transparency that is essential to investors and the public?

* Can we rely on self-regulatory systems to ensure audit quality and to root out and discipline substandard performance?

* Can we rely on corporate governance processes--oversight by boards of directors and audit committees--to ride herd on management and to see to it that auditors do their job?

Events have changed how we look at and think about those questions, and the change may last for decades to come. The road ahead seems awesomely challenging. Where do we begin to reform a system that suddenly seems very fragile and perhaps seriously flawed? What are the essential changes that we need to make?

I offer some perspectives and insights drawn from my nearly 40 years in accounting practice and public service and share some thoughts on needed reforms.

SHARED GOALS OF CAPITAL MARKET PARTICIPANTS

I begin with some essential views that I think all who have important roles in and benefit from a vibrant capital market system can embrace--business, government, auditors, standards setters, investment bankers, analysts, and the investing public. We all share a common, linked starting point:

* First, I think all will agree that our capital market system is a national treasure. It is vital to the success of the economy. Indeed, our exceptional standard of living depends on its vitality.

* Accordingly, we share a compelling common interest in assuring the strength and liquidity of our capital markets. We all benefit from the result.

* This compelling common interest must shape our policy goals and guide our thinking as we search for solutions. Other goals and interests must not obstruct our vision.

* Finally, the most critical, yet intangible, ingredient of a successful capital market system is the confidence of investors and the public in the fairness of the markets--confidence that information flowing into the markets is trustworthy and that insiders do not have an unfair information advantage over public investors.

Indeed, the focus of the securities laws is rooted in this view of our capital markets. Historian David M. Kennedy (1999) discusses the events that surrounded the enactment of the securities laws in his Pulitzer Prize-winning book, Freedom From Fear. In describing the formulation of the securities laws, he writes:

For all the complexity of its enabling legislation, the power of the SEC resided principally in just two provisions, both of them ingeniously simple. The first mandated disclosure of detailed information, such as balance sheets, profit and loss statements, and the names and compensation of corporate officers, about firms whose securities were publicly traded. The second required verification of that information by independent auditors using standardized accounting procedures. At a stroke, those measures ended the monopoly...on investment information. (Kennedy 1999, 367)

He goes on to observe:

The SEC's regulations unarguably imposed new reporting requirements on businesses....But they hardly constituted a wholesale assault on the theory or practice of free market capitalism. All to the contrary, the SEC's regulations dramatically improved...

NOTE: All illustrations and photos have been removed from this article.



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