The future of corporate reporting: from the top. (Financial Reporting).

Samuel DiPiazza, CEO PricewaterhouseCoopers

PricewaterhouseCoopers LLP's CEO Samuel DiPiazz Jr. says he's known by friend for his "impeccable timing," yet, having stepped into his top role in January, he's questioning whether his luck has turned. Maybe not. For if indeed "timing is everything," DiPiazza may be in the right place at the right time to push for changes lie wants to see in corporate reporting -- by revamping U.S. generally accepted accounting principles.

Even one year ago, who would have thought that the future of U.S. GAAP would be threatened by some principles-based approach, as advocated by the International Accounting Standards Board (IASB)? In the following interview, DiPiazza responds to questions by Managing Editor Ellen M. Heffes about his views for corporate reporting's future, and how he's making his voice heard -- at a time, when that's difficult. "The rhetoric is loud, and none of us are perfect." he says, conceding "we've had our own stumbles," but that when dealing with human judgments and complex business issues there will be "bumps in the road."

From your perspective, what's the problem with corporate reporting in the U.S. now?

SD: The initial problem that we are dealing with around corporate reporting is driven from the lack of trust that exists in the investing public as to what is being reported, and a lack of understanding around that reporting. The underlying problem relates both to the nature of what is being reported -- that is, how financial reports are compiled, [and] maybe more importantly, the scope of those reports. Let's take those one at a time.

The nature of reporting: financial reporting in the U.S., under historical U.S. GAAP, has served us well in many respects; but as business has become more complex, and financial reporting standards more rules-based, it is difficult for investors to work through the process to gain a deep understanding of what's going on inside a company. The rules-based process of U.S. GAAP lends itself more to "financial engineering" than it does to good consistent principled reporting.

We suggest going to [a system] we call "Global GAAP," although it really doesn't exist yet. This is not to suggest that International Accounting Standards (LAS) are the perfect answer; we are suggesting moving to a set of standards that are driven more on principles than rules, exceptions, and rules and exceptions on top of each other.

The second is scope. What we have now is companies issuing their GAAP financial statement, and then beyond that, in many respects it's a "free-for-all." They're able to disclose whether it's pro forma reports or additional information that is different company to company. If changed to a principles-based model, we'll wind up with a model that is more consistent company to company.

So, the problem was broad, along the entire corporate reporting supply chain, and I think the response was very positive around accountability, but it also needs to be around transparency and integrity. We have a long history of strong, efficient capital markets. But like any system, it reaches a point where it can get better. What worked in the past doesn't always work for the future. It was a combination of markets getting ahead of the processes -- both governance and reporting processes. We now have an opportunity to let it catch back up.

In your view, is the corporate reporting model itself the culprit for some of the problems?

SD: No, and I think you have to be careful. When you talk about corporate reporting, you are talking about one of the issues that are critical here. We use the concept of what we call an "information supply chain," [going from] management to a board, to auditors, to analysts, to investors.

The capital markets have their strength in transparency and information and in a good framework around governance. So, when you ask the question: What has broken down today? the governance system left a great deal to be desired, and the information supply chain -- from top-to-bottom, and its various participants, from top-to-bottom -- has left something to be desired. It's much broader than just a reporting model.

Following the loss in confidence in the equity markets, the dismal performance and a lagging U.S. economy, a host of remedies have been put forth. Do you believe the Sarbanes-Oxley Act will make a difference? And will more and harsher SEC enforcement make a difference? SD: I believe that the actions that have taken place both at the SEC and at the U.S. Congress will help. Will they solve the problem? No. But bringing focus on the need for good governance, accountability and transparency can only help.

The regulators and the legislators remain focused on what I call "remedial steps, remedial actions." Who's going to go to jail? Who's going to be held accountable? Who's at fault? That's important, but it doesn't answer the questions, and won't solve the problems. We have laws against robbing banks, but banks are still robbed because that's where money is. With laws against doing "bad" things, you'll still have people who push the limit.

We have to go beyond the remedial actions and move towards something that changes the framework. In my profession, establishment of the oversight board is a good thing. I believe that in the U.S. we were operating with self-oversight that wasn't working; the fact that we have an obligation to the public requires -- demands -- oversight, about our quality and our ability to discipline.

Concepts you've developed for a new corporate reporting model are outlined in your book, Building Public Trust, The Future of Corporate Reporting, co-authored with Robert Eccles. Will you describe the process?

SD: In writing Building Public Trust, we wanted to focus on a couple of critical issues. One, for the markets to work, they have to be based on accountability, transparency and integrity. [Current] remedial actions and the regulatory and legislation actions have all been about accountability. The market has to operate beyond accountability and transparency. In the end, it doesn't matter unless you have people of integrity. So, the ethics of business needs to be reinforced.

With that thinking, we felt that we could be the most help around [the issue of] transparency: What was the basis of corporate reporting that would improve the understanding in the market? That led us to a "three-tier" model -- taking the historical audited financial statements that are the bedrock of information, but adjusting the way that they are compiled, away from a U.S. GAAP complex rules-based, exception-based structure, to a more principles-based environment, and making that environment global, not just country-to-country. Our markets are global for both consumer and capital; our financial reporting standards should be global as well.

The first tier is a very substantive change from what we've operated in, but [one that] we never felt created true transparency. It created a good snapshot, a good basis. On top of that, there needs to be an entirely new set of consistent and comparable information provided to investors. Now, while there are reams of information provided in MD&A, the management and discussion analysis, it's hard to compare one company to another and get the true "apples-to-apples" comparison; and that's true even within individual industry sectors.

The second tier suggests that each industry sector establish a handful of measurements, benchmarks and metrics -- that are different by sector and consistent and comparable company to-company -- that every company within that sector begins to report on. Energy companies, consumer products, retail and banks are different, and while you can't compare a bank to an energy company, energy companies ought to have a set of metrics that an investor can look at and see the differences between Chevron and Exxon and Royal Dutch Shell, etc.

The third tier is company-specific information, but again, not a loose narrative that can go where you please, but one that begins to focus on a handful of consistent subjects. It might be presented in different ways because it becomes more subjective, but if every company reported on its compensation strategies, its distribution channel strategies or opportunities, its technology, its infrastructure -- then even if it is loose and self-serving, it's the same subject, [and] that will allow investors to see how Company A compares to Company B compares to Company C.

All three tiers can fit into a "nice package" that can be written in English, or whatever the native language might be, and investors can begin to understand that one company has a higher risk tolerance to leverage than another; one company has more vulnerability to patent expiration - not necessarily something that you would see in U.S. GAAP statements. When we talk about a different reporting model, we're talking about a transformation from what we have.

What do you intend to do with this to make it "the operational model?" SD: This is where some of your constituents might challenge me a bit. I think that we are extraordinarily close to breaking some of the old models toward new models, if we push -- and PwC is going to push. And we're going to ask others to push.

A year ago you would have said, "no chance in the world that U.S. GAAP would have ever found itself under threat to the IAS, or some new principles-based model." Today, with new leadership at the FASB and all of the press around the faults of U.S. GAAP, we think by pushing this subject -- both as an accounting firm, but also as a leader in the market -- [that] if others do the same, we think we'll move rapidly to a consistent global set of standards. The Eurpoean Union's requirement for all EU companies to use IAS by 2005 is a great pressure point on this subject.

With respect to the industry sector standards, maybe a lot of the CFOs wish we would be a little quieter, because it's easier to report "your way," as opposed to a consistent comparable way. We think the investing public, particularly the user environment -- the analysts and the big institutional buyers -- would be very supportive of what we're describing; they've shown interest in what we are suggesting. Ultimately, companies will do this their own way, or could find themselves in a position where the big institutions say, "Either report consistent industry sector information, or we won't trade in your stock."

Whether our model is perfect or not, we'd like to further the debate around the standards. We've been in dialogue with the SEC, because we feel both Chairman Harvey Pitt and Chief Accountant Robert Herdman are both very sympathetic to this change in model. So we're going to push the subject to see where it goes.