Testimony

Corporate Accounting Practices

Robert E. Litan

I am pleased to testify before you today on issues relating to corporate disclosure that I believe ultimately are of greater importance to investors and to financial policy makers than the immediate issues that have arisen out of the failure of Enron. I know this is a bold statement, but I hope that before this hearing is over the members of the Committee will believe it to be accurate. Indeed, the fact that the Committee has called for these hearings on the future of the current corporate reporting model in today’s business and investment culture provides strong evidence of why investors and policy makers should be interested in disclosure beyond the immediate concerns raised by Enron.

I was asked to testify today because of research I conducted on these subjects in conjunction with Peter Wallison of the American Enterprise Institute, reflected in The GAAP Gap: Corporate Disclosure in the Age of the Internet, published by the AEI-Brookings Joint Center for Regulatory Studies in 2000. I believe the Committee has copies of this book, but one can also be easily downloaded from the Joint Center’s website (www.aei.brookings.org).

I will now highlight several important conclusions from this study and the policy implications I believe flow from them. I will not address, however, issues relating to auditing and enforcement––topics that this Committee and indeed the full House have already addressed in legislation authorizing the creation of a new Public Regulatory Board to oversee the auditing profession.

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