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Report
of
Meeting #1 - September 28, 2000
Performance Analysis & Information Standards Panel
The PAIS Panel conducted its first meeting at the
NYSSA facilities on Thursday, September 28, 2000, from 3:15PM to 5:30PM,
attended by:
·
Gary Lutin (Chairman)
·
Peter F. Brennan
·
James C. Goodale
·
Kurt N. Schacht
· Tim
Stone, Amazon.com Director of Investor Relations, substituting for Russell
Grandinetti (first hour only)
· Arleen
R. Thomas, AICPA VP for Professional Standards, substituting for Elizabeth
Fender
At the start of the meeting, Ms. Thomas announced that, on September 26th,
the AICPA’s Auditing Standards Board revised its standards to better enable
CPAs to attest to the broader range of information or “metrics” which is
increasingly important to analysts, extending beyond the traditional GAAP
financial statement. This will allow CPA review of “pro forma” numbers, one
of the issues to be addressed at this meeting, as well as key financial and
non-financial performance measurements, breakeven analyses, and even
behavioral information such as compensation alignment and corporate
governance practices. The new standards will also accommodate information
requirements developed by the Business Reporting Research Project being
conducted by the FASB in cooperation with the AICPA. Noting that Project’s
relevance to the Panel’s interests, Ms. Thomas encouraged the Panel’s
establishment of a working relationship with the Project.
The Panel then asked Marie Menendez, Vice President and Senior Credit
Officer of Moody's Investors Service, to make a presentation and answer
questions regarding the ratings agency's policies regarding the analysis of
"e-commerce" companies. Essentially, Ms. Menendez explained, her firm views
"New Economy" companies according to the type of products or services they
provide rather than as a separate category based on the technology they
use. Most new technology companies are "early stage" businesses, and share
characteristics of all venture companies, with or without new technology.
And for historical perspective, the changes in information requirements
associated with the latest generation of internet companies are similar to
the changes associated with the development of railroads or telephones,
requiring adaptation but no fundamental change in the concepts of business
analysis. The most significant change in the “New Economy,” concluding from
Mr. Goodale’s observations, is the relative importance of intellectual
property, suggesting a need for improved accounting and valuation of
intangible assets.
Addressing current controversies concerning the increased use of "pro forma"
numbers, the Mr. Lutin reported that several people familiar with the
practice had declined the Panel's invitation to speak. Ms. Thomas commented
on the policies of the AICPA and other authoritative sources on the
desirability of standard definitions for whatever numbers are used. Panel
members and audience participants noted that it has become common to use
"pro forma" numbers as undefined presentations of a company's preferred
view, provided without explanation of the calculations to analysts as well
as to the public. Several participants observed that in the past, "pro
forma" numbers had been used strictly among professionals, exclusively to
eliminate the effects of conditions which were not relevant to continuing
operations, and always in a presentation of specific line item
reconciliations to show exactly what was being adjusted from GAAP.
At the end of the meeting, Mr. Lutin suggested the Panel's establishment of
a "Review Board" to make recommendations for resolving analyst information
demands. Specific definition of the proposed Board’s operation and
governance would be developed in the course of future Panel hearings. In
discussions with participants, Mr. Lutin expressed preliminary views that an
analyst should be required to exhaust a specified process of appeal at the
company, possibly by a request to the audit committee of the company's board
of directors, before submitting a request to the Review Board. Mr. Lutin
stated his belief that the procedure should be designed to reinforce rather
than diminish a company's responsibility to provide information, and also to
minimize disputes.
During the meeting, the Panel adopted the following positions as a
foundation for its development of standards for analysts to obtain the
information they need:
1. The Panel will explore opportunities to work with the FASB Business
Reporting Research Project to support common objectives.
2.
While the increasing importance of new technologies clearly requires
adaptation in the accounting and valuation of intellectual property, there
is no need to establish separate standards of information for New Economy
and traditional companies, or to assume that there are substantive changes
in the essential nature of the information required, beyond historically
typical differences between companies and industries.
3.
There is a need for standard definitions of measurement terms, and
companies offering "pro forma" or any other non-standard numbers should be
expected to disclose sufficient information to identify adjustments and
reconcile the numbers to GAAP.
4.
A "Review Board" should be established to make non-binding
recommendations for the resolution of disputes between analysts and
companies concerning requests for information.
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