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PAIS Panel: Announcement of Meeting #1

The material copied below had been published on a web site maintained by the New York Society of Security Analysts ("NYSSA"), and was accessible from a link on a summary page for the "PAIS" Panel, which was organized in association with the NYSSA Forum Program addressing "Amazon.com: Responsibility for Investment Information."


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.



Material dated between January 1999 and July 2001 was originally published on the web site of the New York Society of Security Analysts ("NYSSA"), and was provided by Gary Lutin as co-sponsor of a "Forum Program" conducted for public educational purposes with NYSSA's Committee for Corporate Governance and Shareholder Rights during that period. Material dated after July 2001 was not published by the NYSSA unless specifically indicated.

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