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Soundview Executive Book SummariesThe trust of the general public in the capital markets - which is recognized as the foundation of value creation all over the world - has been shaken. The straw that broke the camel's back was the Enron scandal - a fiasco that forced the largest market cap company to declare bankruptcy. The authors of Building Public Trust write that the signs of serious flaws in the capital markets were already present - from well-publicized business failures to the collapse of the Internet bubble to the decline and volatility of the equity markets.
Enron and other scandals have focused the public's attention on the institutions and people responsible for the information on which investors (as well as lenders, trading partners, customers and employees) depend. Samuel DiPiazza, the CEO of PricewaterhouseCoopers, and Robert Eccles, a former professor at Harvard Business School and president of Advisory Capital Partners, write that public trust must be restored in this information - and in the purveyors of that information.
Building Public Trust offers a model of corporate reporting that works to restore that public trust and confidence. The authors write that the goal of this model is to ensure a spirit of transparency, a culture of accountability and the participation of people of integrity in the corporate reporting process.
The Corporate Reporting Supply Chain
The authors explain that the Corporate Reporting Supply Chain is responsible for supplying the information on which investors (as well as lenders, trading partners, customers and employees) depend to make their financial decisions. The Corporate Reporting Supply Chain begins with the company executives who prepare the financial statements that are reported to investors and stakeholders. These financial statements are approved by a board of directors, attested to by an independent auditing firm, analyzed by sell-side analysts and broadcast by information distributors, including data vendors and the news media. The entire chain is supported by standard setters, market regulators and enabling technologies.
The authors write that the time has come to reexamine how the Corporate Reporting Supply Chain works and offer ways it can be improved. They write that trust in the capital markets depends on faith in the Corporate Reporting Supply Chain - and that faith has been broken. To restore that faith, the authors write that corporate reporting reforms must rebuild the three key elements that create public trust in the markets: a spirit of transparency, a culture of accountability and people of integrity.
A Spirit of Transparency
The authors write that the first key element of trust is a spirit of transparency. Corporations - that is, the people who work in corporations supported by the corporation's board of directors - have an obligation to provide the information that investors need to make the right investment decisions. Unfortunately, the authors explain, management and boards are not making the information that they know investors need readily available.
The second key element of trust that the authors delve into is a culture of accountability. They write that the members of the Corporate Reporting Supply Chain must feel a sense of accountability to the other members of the chain. Management, they explain, must hold itself accountable to shareholders. The authors write that boards must see that this accountability is recognized and maintained.
People of Integrity
The authors explain that the third key element needed for public trust is people of integrity. Despite rules and regulations, processes and best practices, the authors write that the entire structure of corporate reporting collapses if it is not supported by people of integrity trying to do the right thing.
The vision of corporate reporting presented in Building Public Trust is based on a new model of corporate disclosure and a fresh view of the responsibility of each link in the Corporate Reporting Supply Chain. The first tier of this model is global generally accepted accounting principles. The authors explain that companies today use a variety of generally accepted accounting principles (or global GAAP), but most of these principles are country-based. They write that even the best country-based GAAP standards are based on the historical cost model that many consider obsolete or, at best, irrelevant in the complex global environment of today's business.
The second tier of the model the authors present is industry-based standards. The standards they discuss are global standards. How industries create value for shareholders and the knowledge that industries need to create that value vary widely from industry to industry. Therefore, the authors explain, country-based accounting standards are less relevant and helpful than international industry-based standards. A fundamental key to the success of tier-two standards, the authors write, is that the standards should be developed by the industry participants themselves and should be voluntary, not regulated. The authors write that companies, as well as accounting firms, analysts and investors, should be involved in the development of these standards.
Why Soundview Likes This Book
The authors of Building Public Trust are able to offer clear, timely advice to their readers by advocating openness and consistency throughout good and bad economic times. They also introduce a new model of corporate reporting that offers new hope for investors, as well as new technology that aims to support responsible, transparent corporate reporting and renew public confidence and trust. Copyright (c) 2002 Soundview Executive Book Summaries