are upon us in alaska. we need to be given the chance to prove we can explore safely. . . . positive implications for security across borders because lng and tankers will be able to have alternatives to their current, more dangerous crowded routes. importantly, they can benefit through the funding element of these huge projects. the exploration, production and certainly the construction necessary to develop arctic resources is going to require all kinds of science and not just for the sheer scale and remoteness of the projects but for the levels of the technology needed to bring them online in a

way that is safe for the workers, the environment and as insulated from ris if at all possible. i had the opportunity not too long ago to go down to new orleans, the images required through the 3-d to give a sense of the shifting oil so the geologists can study the trends and get a picture of the resource potential. it is almost surgil compared to the basic exploratory drilling which we have seen over the past century. and it does give a confidence and a well can be targeteand explored with limited impact to surrounding areas. i think this is just one example of the ways in which technology is able to provide a more reassuring answer to questions about whether or not the world is ready for increased energy development in the arctic. another good example of this,

and this is more alaska-pacific, a project we call the liberty project. some of you may be familiar with this project. it's an extended reach drill rig which parker drilling helped develop for b.p. to access an oil field direction neal eight miles away. it's not quite there yet, but i'm hoping and bettingn just how far we can continue to reach both literally and figuratively with the direction national drilling. and this brings me to a point, technology is advancing because oil and natural gas is still the most econocal viable energy sources in the world. the term easy oil is being slowly redefined as these technologies develop and i predict we will see measured but certain expansion into land and

waters. this is significant because the first people of the sea arctic have a right to benefit from all of their resources, not just their energy resources, but the fisheries and marine mammals th they depend on their livelihoods and i'm encouraged by what i'm seeing to be an increasing level of engagement rather than opposition from these constituencies. 30 years ago in alaska when we were first developing our north slope fields, we were able to establish production from america's largest single oil fields, prudeau by involving the native people in this substantial change to their land and to their lifestyle. there was engagement and it was very contentious and very difficult, but there was ngagement on multiple levels, on the legislative level, the

personal level. and the ultimate result has benefited all the people of alaska and our national energy security in ways beyond anything we could have predicted at the time. now, it's not just arctic energy that is drawing increased tivity in the rion. the impacts of a diminished arctic are affecting marine fishing. we saw two german vessels complete a commercial transit from asia to europe through the artic ocean north of russia. two lift carriers transited through the northwest passage during august and september of last year. the route is open for a short time in late summer but cuts off about 4,000 nautical miles from the 11,000-mile long traditional journey through the suez canal. a shipping firm will use one of its arctic tankers to carry oil

to japan this year. this would be proof of the concept that could also apply to lng tankers based on the ice-breaker tanker design that we use for the oil tankers. while the arctic marine shipping assessment present difficulties it will be decades before these routes are open, i think we have to consider that this is only the beginning and if it pves economical, it will happen. we know there are national security and sovereign interests for all the arctic coastal states in the region. the u.s. navy has a new road map for the arctic and studying the feasibility of a deepwater port. i have introduced legislation that directs the department of defense and the department of homeland security to study the feasibility, the location and the resource needs for an aric deepwater port.

we will find from this study whether it is in a strategic interests of this country whether to build a port and where it might be located. a deepwater port wld not only serve our military and coast guard needs but as we develop our oil and natural gas needs and see more tourism, a deepwater port could provide valuable support for these activities as well. the coast guard has embarked on a high latitude study to determine what infrastructure they may need to increased maritime activity in the arctic and shortage of infrastructure, it is vital we determine what the needs are and actively work to provide those resources to protect the residents and environment. i have stated and i know many of you in the room have heard this, but i think we are at a critical time in the arctic.

there seems to be a couple paths we could take here in regards to international relations. one is a path of competition and conflict and the other is a path of cooperation and diplomacy. and i believe the decisn on which path we ultimately take will require dynamic leadership. and one of the first areas we need that leadership is in the united states and the senate ratification of the convention of the law-to-sea treaty. i believe it's crucial for the unit states to be party to this treaty and be a player in the process rather than than an outsider hoping that our interests are going to be protected. access to the convention would give current and future administrations th enhanced credibily and leverage in calling upon other nations to meet convention responsibilities. given the support for the treaty by arctic nations and the drive to develop natural resources, the treaty will provide the

environmental framework to develop these resources while minimizing envonmental impacts. the united states is the only arctic sta that is not a party to the law-to-the sea treaty. both canada and denmark join the treaty. canada in 2003 and denmark in 2004. there are some who say they don't see the point in joining the rest of the world i rat filinghe treaty. they say the u.s. enjoy the benefits of the trty even though we are not a member. and we can somehow pick and choose which sections we abide by while not subjecting our actions to international review. i resctfully disagree with this opinion. i believe that the united states must ratify the treaty. we are at a stale mate. the white house is looking to the senate to lead and the

senate is waiting for strong support from the administration. in part the senate calendar is to blame. should the majority leader move to the senate floor, it would consume some time. it would take a week of floor time. and considering that we have less than 40 legislative days before the august recess, it's highly uncertain that such time will be carved out unless, unless it becomes a priority for the administration. but given the president's focus on advancing the start treaty, i see even less of an opportunity to schedule of law-of the see treaty. failure to ratify continues to keep the united states at a disadvantage internationally and outside the process without a seat at the table. until the u.s. ack seeds to the

treaty, it cannot submit its data t the commission. and without a commission recommendation regarding this data, the legal foundation for the limits is much less certain than if we were a party to the treaty. and according to the u.s. arctic research commission, ifhe u.s. were to become a party to the treaty, we could lay claim to an area in the arctic of about 450,000 square kilometers, the size of the state of califora, that lies north of the north slope there. and while the united states has not ratified the treaty, we continue to map our extended continental shelf. we have been working cooperatively with canada the last two summers on extending continental shelf data. we are scheduled to work again this coming summer. the u.s. icebreaker completed

the second summer. and each ship has their own equipment in order to accomplish the mission, combining the efforts together provides better data a can cover more area together. canada is expected to make its submission to the commission in september of 2013 to meet its deadline under the law-of-the-sea and the united states will not be able to submit its claim until we ratify the treaty. i'm pleased that ever so slowly and it does seem painfully slow, the united states does seem to be waking up to the fact that we are an arctic nation and arctic nation with responsibilities and obligations. i'm confident that with growing leadership in the congress, recognition within the administration and from the

arctic community at large, we can continue to highlight the strategic importance of the arctic for the united states. with that, i thank you for your attention this afternoon. i'm happy to ta questions if that's appropriate. but delighted again to be with you. and thank you. [applause] >> it is a breath of fresh air to here your support on this treaty. we have talked about issues of national security and talked about the very interests that as a citizen i have for our country. you are a strong voice as a proponent of ratification of

this treaty. what do you feel would be the most persuasive messages to send to the senate so that this treaty can be afffirmed? >> there are several mesges that i think need to be conveyed and i'm not going to tell you anything new. i will repeat the strength of what we have within this argument. when it comes to being a participant, when we talk about our ability as an arctic nation to allow for an extension to our area in the outer continental shelf, the only way we can do it is if we are a participant in the law-to-sea treaty. when we are talking about environmental issues in the arctic, we need to recognize that the treaty that will govern the arctic nation is that of the

law-of-the-sea. that was set forth a couple years ago. there is no need for an additional treaty. when we are talking about the additional stepped-up activity in the arctic, i think it is imperative -and i'm speaking from an arctic perspective. there are many other reasons that we look to that treaty, but from the arctic perspective, we are talking about environment, talking about safety of maritime activity, when we're talking about development of resources and really being able to define where our bordersr i think it's imperative that this nation step forward, that the senate step forward with ratification of

law-of-the-sea. i have urged many of you to not let down in yr advocacy on this issue. i know it cane discouraging when you don't see it being considered on the floor. we are dealing with many weighty issues in the senate, but i think it's important that members of the senate that this issue does not go away. in fact, it becomes even more imperative as we see an area in the arctic that is ever expanding and truly evolving at this time. so keep up the advocacy. anyone else out there? >> what are the chances of having this brought to the floor in a lame duck session after the november election? >> i don't know. i wish i had a crystal ball that

was a little less foggy. anything's possible in a lame duck, but i tell you it will take, i believe, a real firm commit mnt frothe administration saying there -- this is a priority for us. at this point in time, there is a little bit of a stalemate. the administration is looking for us to lead on it. we're looking to them. and neither one is prepared to take that first step yet. and it's not for lack of commitment in the senate from the chairman and the ranking member on the foreign relations committee. chairman kerry and ranking member lugar are both very committed in their efforts on this issue. i don't mean to speak for them, but in my conversations, they have been strong advocates and agree it is clearly in our best

interests that we advance this. but it really does come down to making it a priority within the administration and we in the senate then finding that time, making that time on the senate calendar for the date that will ensue. over in the corner. >> senator, we appreciate your eloquence here today and your strong advocacy for the arctic issues and for the convention and i know the coast guard and admiral allen is appreciatetive of what you do. i have a question dealing with some of the negativity concerning the convention. what do you say to someone who writes to you and says this is giving away to the united nations control 70% of the world's surface or the convention is going to permit

the united nations' attack of u.s. companies. completely false, but still there are believes that are held by -- beliefs that are held by some. former governor sarah palin and others, and i know there must be people in alaska who say you are giving away the store. >> there are those and not just those in alaska. you know there are -- there is a group of folks out there. there is a whole lot of people who have their objections to the convention -- ratification of the convention of law-of-the -sea. they are operating off of old information. old information from back during reagan days. so it's important that they fully understand what it is that

we will have in front of us. and as you say, the iss of taxation by the u.n., we recognize that is not correct. the myths need to be dispelled and the old history needs to be updated, which i think is very important. and again, i think we need to remind individuals that have opposition that the arctic that we are seeing evolve today is different thant was during the reagan years, for instance. and commandant allen has stated many, many times, he says, you know, you want to talk about climate change, we aren't going to talk about the science here, but i do know i have more ocean up there tt i'm in charge of. that's a fact. and as we putt in those terms and recognize again, we are an arctic nation with obligation,

with responsibilities. i think it's important that we convey the full current, updated facts as it relates to what exactly we are talking about with ratification of the law of the sea and again, dealing with an area that was only dreamed about being explored. the thought that we would have cruise ships steaming through the community of barrow not something we would see in my lifetime but we are there now. it is updating what, unfortunately, iold information. >> senator, back to oil exploration, how do you think the current fiasco in gulf of mexico would affect the

enthusiasm of your constituents for drilling on the north slope? i used to deal with the eskimos and been up thereor a few times and i know the extent to which those people in your north slope depend upon that fragile ecosystem. so the question is do you think what is happening in the gulf of mexico will have an effect for prospects of drilling in the north slope? >> i do. i believe what we're seeing in the gulf impacts not only drilling activity in the gulf of mexico close in and deepwater, but it impacts the opportunities for offshore through the country. i think it will have an impact on development of our energy policy. and i would like to think, and i think i stated very clearly in my remarks, i would like to

think that as a consequence of this tragedy that we're seeing unfold in the gulf, we will learn from what has happened, but we will be thoughtful and considered in how we go forward and do so in a manner that is not reactionary. there is a lot of emotion that is attached to this disaster. 11 lives were lost. the environmental damage that we anticipate is unknown. there is a great dea of uncertainty and anxiety out there. and as an alaska and who has lived through great tragedy with the oil spill with the exxon valdez we know it all too well. i do believe that we recognize that with exploration and

activity there will be risk, so how can we work to minimize that risk? right now, there is -- i wouldn't say an impulse because it is more considered that that. it was appropriate that the secretary put on pause, if you will, the permits that were nding for offshore. i am hopeful that the secretary and the president will look at the differences that you have when you are exploring 5,000 feet below the water's surface versus what we would be doing up in the arctic. we're looking in the sea, the area that's being considered by shell right now and the permits that they're waiting on is drilling in an area about 150 to

200 feet. the dth of your water and the pressures are entirely different. when i spoke to commandant allen a couple of weeks ago and i compared the oil spill in the gulf and the exxon valdez, he said no, it is more comparable to apollo 13. he said we may as well have been on the moon. where we will be operating hopefully in the sea is in shallow enough waters where you can send a man down there to check out, to inspect. i think it is appropriate to note though, that after the spill, shell, in their efforts to gain final approval toll proceed up in the sea went

through not only a critical review of the plan they had proposed, they wen beyond. they went beyond what was requested in their permit and have put in place some additional measures that they have identified in light of what they're seeing going on in the gulf of mexico. they've got well control enhancements. they have enhancements in the blowout preventers, evaluating the risk benefits of additional sheer rams so you have greater redid you understand dance si, a remote system, all aspects in the prevention components in terms of having the capability to respond in the event of a disaster, having the remote operators there in the backup

launch, having a dome pre-staged in alaska. they have looked at what's going on and saying, we are going to be operating in a way that is long from assets that is in the gulf. how can we be prepared? if we were in this situation, what would we do to respond? they have gone ahead and put in place in -- these meeshes. there is probably not a permit under way for exploration drilling offshore in this nation right now that has met with more rigorous scrutiny over years. shell has been under way with thisroject in attempting to get the permits for three years now and has gone through asany

courts as you and i would ever want to -- the environmental reviews that ve preceded it. in terms of the level of scrutiny. i know right now, one of the big issues was m.m.s. paying as close attention as they should have. was there not only technological failure, but was there failure on the administrative, on the enforcement end of it? and we need to know for sure that we're not opening the doors for something like that in alaska. as somebody who believes very strongly that we can develop our resources, but who demands that it be done in a way that is balanced and is accountable, we will not accept a level of risk that is not tolerable. so hopefully there will be lessons learned and done so in a positive way. but i do believe that this

tragedy that we're seeing in the gulf will impact our energy policies as we devop forward. >> senator, thank you for your wonderful leadership for alaska. [inaudible] >> so you have also the legacy of a resident of alaska who did a soup esh job in the background of this treaty. >> look forward to working with all of you. thank you, john. [applause]

[captions copyright national cable satellite corp. 2010] [captioning performed by national captioning institute] >> now we talk with a capitol hill reporter about the week ahead for congress. >> much of the year congress has been focused on health care and financial services reform, and it is now finally getting to the meat and potatoes of

what it is supposed to do, including both tax measures and spending, on the house side they will be taking up about a $200 billion package of tax cuts and benefit extensions. this is going to include extending about a dozen tax cuts that expired at the end of last year, extending unemployment insurance, extending some health insurance subsidies for unemployed medicaid funds who states who very much need these fund. the package also will allow states to avert a 20% cut in medicare reimbursements. there will be some controversy because only about $60 billion of this package is actually paid for with some revenue enhancements. so there are going to be a lot of people who are going to raise questions about whether this is affordable given the nation's fiscal situation.

>> that is what the house is going to start with next week. over? the senate they are dealing with the war spending bill. what is the key issues in that debate? >> it is about $45 billion, and much of it is for funding the expansion of the war in afghanistan, including the president's surge of about 30,000 additional troops and also for some of the reconstruction and security measures in iraq. that makes up the bulk of the $45 billion. there is also much smaller items, but relevant, including the president's request for about $125 million for the gulf of mexico oil spill, it also has relief money for haiti and allocates about $5 million to fema to repawlenty tissue his funds. >> who are some of the opponent to this war spending bill? >> probably not too many direct opponents. but people are going to try to add to it.

for example, iowa center tom har ken, a democrat, says he wants to add about $23 billion in state aids so these funds can be used to help teacher. some republicans have signaled that they want to have a good chunk of this billoff set. certainly anything spent beyond the funding of the awards on iraq and afghanistan. so again in this bill you are going to have a lot of discussion about the nation's fiscal situation and whether any of these spending measures and tax merchandise on the house side should be paid for. >> and there is a sense of timeliness for both of those bills next week? >> right. on the tax side you have a lot of provisions that have expired, and you really need to get moving because congress is about to begin its memorial day reyes. on the spending bill front, the secretary of defense, mr. gates has gone to the congressional

leaders and says he need that money soon. harry reed said that is important. international. thanks for the update. >> thank you. >> next, a discussion on yuss counterterrorism policy. after that, a house hearing on accounting and auditing standards. then remarks on sea law and offshore drilling by alaska senator lisa murkowski. tomorrow on "washington journal," christian signs monitor pete spots talks about the spill in the gulf of mexico. james gattuso offers his thoughts on how to fix fannie mae and freddie mac. and bill shore, founder and executor of share our strength looks at hunger in america. "washington journal," live at 7:00 a.m. eastern on c-span. >> in some ways, every class

gives us a sense of what the country is thinking. >> terrence samuel looks behind the institution of the u.s. senate, the upper house 0 sunday on c-span's "q & a." >> now an event with daniel benjamin. topics i collude the attempted terrorist attacks on christmas day and times square. >> good afternoon. thank you for joining us this afternoon. today's speaker is ambassador dan benjamin, who i am very proud to say has been a friend

for a long time, and we are all better off for him having returned to government as a taxpayer. i am pleased. dan is the state department's coordinator for counterterrorism. prior to that he was a senior fellow in foreign policy studies and at the brookings institution, before that the c.i.s. and before that he served on the clinton administration. he is the author of the age of sacred terror among other books, and we are very pleased to have you with us today. let me give a quick shout-out to my colleague, mike jacobson, who was my partner in crime here in the program, and a sign of your wisdom was recruited to work for you in the office of counterterrorism. please join me in welcoming dan benjamin. [applause]

>> thanks very much, matt. >> i want to thank matt for the invitation. matt and i appeared on a panel before the anti-defamation league just a couple of weeks ago. i don't know how many times we have done that sort of thing, but it has always been, to my mind, a very productive and creative discussion, and wells all be poorer without matt's insight into these critical issues. i want to congratulation the institute on its continued very high level of scholarly performance. i also want to say that every time i run into rob satloff, he is headed into yet another event in which his superb book or documentary is being

discussed, giving us all hope that there is some kind of future for those of us who were once in the class. congratulations, rob. that is fabulous. i am especially grateful to the institute for loaning me mike jacobson, who is one of the country's top experts on terrorist financing, on law enforcement, on radicalization. he is one of the great all-arounders, and he has been a huge gain for us in our bureau, and i hope you don't co-try and get him back any time soon. >> you used the term loan. >> well, we all work for the taxpayers. let me just say it is also great to be here speaking in the counterterrorism lecture series, which my predecessor kicked off in december of 2007. i know you have had at least 20

of the u.s.g.'s top officials and counterterrorism officials here since then. i am glad to have this chance to talk with you today because, as i think everyone in the room recognizes, there have been some very important changes in the nature of the threat in recent months. these have become manifest in various ways. i want to discuss with us what those changes are and how the obama administration is adapting and reshaping how the uses combats terrorism in the short term and long-term. let me begin with the base line. over the last year, al qaeda has suffered a number of serious set-backs. as you have heard, on a number of occasions, the group remains under pressure in pakistan, due to pakistani military operations aimed at eliminating trong hold in the federally administered tribal areas. al qaeda senior leadership has had quite a number of serious losses. it is finding it more difficult

to raise money, train recruits and plan attacks outside of the region. as my friend and colleague, the assistant treasury secretary noted here last month, it is now in the worst financial shape it has been in for years. this by no means suggests we can signal the all-clear on conspiracies driven by their senior leadership. we know they are still a highly capable, highly innovative and very determined group. but even outside the fattah, the group is becoming more challenging. al qaeda has suffered from popular muslim disaffection due to past indiscriminate tarringing of muslims alleys allies in any number of countries. the number of clerics speaking out against the organization

has increased, and that is very good news indeed. despite these set-backs to the core leadership, what we might call the broader a.q. threat is becoming more widely distributed and diversified among the affiliates and those inspired by the message. we saw that most dramatically by the attempted december 25 bombing of a commercial airliner. one unit has not just the will, but the capability to launch a strike targeting the united states as home. we have every expectations that well hear more from aqap. we have learned something else important this year. the assumption that americans have some special inmuent to al qaeda's ideology has been dispelled. their several high profile cases have demonstrated that we need to remain vigilant.

as you all know, five americans from nearby virginia were arrested in pakistan on suspicion of terrorist ties. we have seen americans traveling to somalia, ones who wound up joining el shabad. the native californian, adam gadan has become a spokesman, enabling the group to spread its propaganda to american audiences. of course the most notable of all is the yemeni american, who has become the most influential voice among english-speaking extremists. he has catalyzed a pool of potential volunteers. the fort hood attacker sought

him out for advice. we should make no mistake about his nature. as his recent video suggests, this is not just any log, but someone who incites acts of mass violence against americans and other and someone who is at the heart of a group plotting such actions. another domestic of the -- domestic dimension of the changing threat. in the last month we have seen two high profile law enforcement cases involving individuals who appear to be trained in the u.s. borders. an airport shuttle driver, trained in pakistan and recently pleaded guilty to charges he was planning to set off several bombs in the united states. even american citizen, david

headly, has pleaded guilty in court to crimes relating to his role in the november 2008 attacks in mumbai, which killed 160 people. it is important to note that we found these people, that the intelligence and law enforcement trip wires worked. but that is not reason enough for complacency. the threat we are facing is dine nick, and it is evolving. now we have the times square incident to add to the list. you have seen the public remarks from the attorney general about shah zad and his links to the pakistani taliban, and you know of the search warrants that were executed in the northeast in connection with the investigation. because this is an ongoing investigation, i can't say more. what you can say is that the significance of that case cannot be ignored. obviously these changes we have seen and the threat challenge us in important ways.

a nigerian suicide bomber, someone with virtually no prior record of involvement in terrorism, who can be effectively launched from yemen at us, this presents an intelligence and security challenge. so, too, do operatives in the borders of the us connected with radical groups in south asia. there is a requirement to improve our intelligence. i can assure you that the intelligence community is working hard on this. there are challenges for our defenses, especially our aviation security, since aviation remains at the top of the list of al qaeda's targets. as they have demonstrated recently through successful and unsuccessful plots. the united states has taken steps both on its on and with international partners to bolster aviation security in the wake of the failed bombing on christmas day.

under secretary napolitano's leadership, we have had led a global initiative against the evolving threats. over the past several months, we have signed declarations with numerous parters on strengthening afeyigs security measures and standards and working together to deploy new security technologies to airports around the world. we have strengthened the watch listing system and developed new more flexible security protocols based on real team, threat-based intelligence. this consists of multiple layers of security, seen and unseen, which are tailored to intelligence about potential threats. defenses of course are an essential part of the equation. another important part is engaging with countries used as

platforms by terrorists and working with them to eliminate these threats. given what we have seen over the last year and years before, pakistan and yemen are the countries of greatest concern. first, pakistan. pakistan we should all remember is a front line partner in fighting extremists. we provide a wide speck truck of assistance to pakistani efforts which ranges from police training to money laundering efforts. the hundreds of millions of dollars directed to pakistani efforts have saved american lives. pakistan has captured or put out of business more al qaeda operatives than any other country. over the past year, the u.s. government has seen very encouraging signs that pakistan not only recognizes the severity of the threat from violent extremists, but is actively working to counter and constrain it.

pakistani military operations have eliminated militant strongholds and damaged the operative ability of grooze. we are seeing increased cross-border cooperation between afghanistan and isaf forces, which is important. in the wake of the operation in swat, we have seen public opinion turn more decisively against the militance. in late march with beginning of the strategy dialogue with pakistan, we started a new faith in our partnership with a new focus and commitment to work together to achieve the goals we shared, prosperity, security and opportunity for the people there. while this wasn't the first strategic dialogue between our countries, it was the first at that level, and it reflects this administration's commitment to its success. we will be providing pakistan with $1.5 billion a year for five years to address key

developmental issues. the discussions in the strategic dialogue generated new momentum and mutual trust to jointly tackle the extremist groups who threaten both pakistan's and our security. i should mention that under this new dialogue, i will travel to islamabad for the second time in three manuals to discuss terrorism with the pakistanis. we will discuss how to better use nonmilitary capabilities to fight extremism. >> we have seen pakistani's commitment to clamping down. several top taliban leaders have been apprehended, and we are grateful to the pakistani authorities for this. immediately after the times square incident, we also began working closely with the government of pakistan on the investigation, and they have been very cooperative in assisting our efforts, and we

will continue to work with islamabad on this important prosecution. let me turn to yemen. it is important to remember that yemen did not turn into an important al qaeda safe haven overnight. it was the first front since the september of 1992 attempt to bomb u.s. troops. those troops you were en route to somalia to support the u.s. mission there almost eight years before the u.s.s. cole was attacked in 2000. al qaeda has had a foot hold in yemen receiver since than a it has always been a major concern for the united states. when the obama administration came into office, it was clear that the government of yemen was distracted by other domestic security concerns and our bilateral cooperation had experienced set banks. in the spring of 2009 the administration initiated a full scale review of our yemen

policy. the review has led to a new whole government approach to them. to advance this strategy, we have engaged consistently and intensively with our yemeni courpt parts. senior officials, including the deputy national security advisor, assistant secretary of state, general petraeus and i have all visited yemen to discuss how we can jointly confront the threat of al qaeda. the result has been significant and we hope enduring. a turn by the government to take on al qaeda consistently and effectively. those actions it is important to underscore began before the december 25th plot and have continued ever since. yemen has conducted multiple operations designed to disrupt operational planning and to deprive its leadership of safe hanche in yemeni territory. we recognize that al qaeda has taken advantage of the

insecurity in various regions of yemen and that has all been worsened with internal conflict. it is the poorest country in the arab world. the lack of resources inhibits good governance, the delivery of services and the security that is needed to deal with terrorism. so to have any chance of success, u.s. counterterrorism policy has to be conceived in strategic and not merely tactical terms and time lines. we have developed a two-prong approach. helping confront the situation in al qaeda and helping with the governance issues that the country faces over the long-term. not only are we working to cricket the space in which al qaeda it operate, but building up the capacity to deal with the threats, and we are working to build government capacity for basic services and economic

growth. this dual strategy will help yemen confront the immediate concerns of al qaeda and also help the economic issues the country faces in the longer term. it's a strategy that requires full yemeni partnership. it requires working closely with regional partners and ally and america resources. the challenges are great and many, but the risk of doing nothing is far too grave. what we are doing in yemen, what we are doing in pakistan and many other countries is building capacity. consistent diplomatic engagement with counterparts and senior leads helps build political will. will, we can engage the nuts and poles aspects that are required for dealing with terrorism. we are working to make border

officials, the judiciary, you name, it more systemic, more innovative and far-reaching. we are looking at counterterrorism finance training, and this is another aspect of the whole government approach. this is both good counterterrorism and good state craft. we are addressing the fundamental stated service that terrorism thrives on and helping invest our partners more effectively in confronting the threat rather than have them look thousands of miles away for help or look away all together. well, i focused on the diplomat's traditional tools, engagement, building political will and capacity. the diversification of the threat i have described means we can't stop them. we need to use the tools in our tool box and create new ones. for example, we need to advance our agenda of building

international security cooperation against the terrorist threat. our allis in europe have become central partners in the counterterrorism arena as a number of plots in recent years have demonstrated dramatically how intertwined u.s. and european interests are. it is essential that we work together more closely to prevent al qaeda and associates from carrying out a successful attack. the finance tracking program and the passenger make tracking important tools. we have a long-standing partnership to product the security of our citizens and their personal data. we know our two approaches to pro he can't iting privacy have

much more in common than they have in contrast, and we both share a strong commitment to protecting human rights. challenge now is to reach aagreement on the proper balance between security and privacy without inhibiting programs, and monitoring security gaps. there is one more key area in which we need for innovate. in the past eight years the united states has made enormous strides in what might be called taxable counterterrorism. taking individual terrorists off the street, disrupting cells and their operations. as we all know an effective counterterrorism strategy has to go beyond efforts to thwart those who seek to harm the united states, its citizens, allis and interests. military, law enforcement, these are not going to do it by themselves. they are not going to solve the long-term challenge we face.

instead we must look at well to the political, economic and social factors that terrorist associations scomploiment and to their ideology, that that is their key instrument in mushing vulnerable individuals down the path of violence, as president obama put it, a cam paper against extremism will not succeed with bullets or bombs alone. we need to reduce the recruitment of terrorists. to combat terrorism successfully, we have to isolate extremists from the people they pretend to serve. many have attempted these efforts over a number of years and from a number of different agencies, but we haven't had sufficient focus. now we have an administration that is is committed to cutting down on radicalization and recruitment. now the indiscriminate targeting of muslim citizens as i mentioned before by violent extremists in places such as

iraq and pakistan have led to a deadline in support for al qaeda and its program. it has outraged clerics and former allis. but we cannot count on al qaeda to put itself out of business. so we are focusing our efforts on undermining and preventing the radicalization of vulnerable individuals. we are working to better understand the dynamics of the communities in which violent extremism has taken root. they possess a set of factors that contribute to the radicalization process. for this reason we know that one size fits all programs have limited appeal. instead, programs need to be tailored to fit the characteristics of the audience. micro strammings need to be customized for communities and neighborhoods, and they will have a better chance of

succeeding and enduring. credible local voices have to take their place in communities. they are the pest way to counter narratives for extremism. the u.s. government is working to identify reliable partners and to amplify legitimate voices. the u.s. can hem empower these local actors through assistance, funding or providing them with the spacings physical or electronic, to challenge extremist views. nontraditional actors such as n.g.o.'s, public-private partnerships and businesses are some of the best partners in local communities. partner nations are looking for understand the linkages. through familiarial and business networks, events that effect one community have an impact on the other.

with the aid of credible messengers, the united states is trying to make use of the terrorist violence taboo, and we hope to offer something more hopeful. we create partners as he outlined in speeches provides an opportunity to provide a more positive story than the negative one prop gated by al qaeda. we have in the anythinged it all out. al qaeda is a nimble adversary. because of the flatness of their organization, high level inspiration and ingenuity, we need to be on top of our game all the time. we need to keep in mind the words of the 9/11 commission, which got it right. it is crucial, they wrote to

find ways of staying sharp, innovating our systems and maintaining our electricity wal edge. these are ali essential. i know that a speech at the washington institute on terrorism would not be complete without some remarks regarding the other side of the caller:, which is the state sponsors of terrorism. we have talked about the nonstate sponsors.

good morning. since the start of the financial crisis, we've done much work to understand its root causes and pass robust reform legislation initially in the house and yesterday in the senate that will nd the era of too big to fail finanal companies, reform credit rang agencies and operation and implement a broad array of sorely-needed measures that will better protect innocent main street investors from unscrupulous wall street operators. in debating these matters, accounting and auditing issues have surfaced more than once. as a result, the house passed wall street reform bill which includes my reforms aimed at esponding to the madoff fraud by better regulating the auditors for brokered dealers. this legislation also contains my provisions designed to

enhance the ability of security authorities to coordinate foreign and domestic investigations and to improve the ability of the public company accounting oversight board to collect from and share nformation with foreign tities. the bill additionally includes a provision by congressman lee of new york providing for an annual accounting transparency hearing like the one we were having today. it further incorporates a provisn by congressman miller of california to create a financial reporting form for regulators. finally, congressman adlr and capital markets ranking member garrett, both of new jersey, amended the bill to exempt small public companies from the sarbanes-oxley acts requirements for external audits of international control, a provision which contins to concern me. at today's hearing we will doubtlessly re-examine each of these matters as well as the pending supreme court cas on

the process for appointg members of the public company accounting oversight board. we will also continue to explore whetr or not accounting and auditing standards helped to contribute to the financial crisis. decisions to move poblematic assets off of their balance sheets allowed some companies to hide the real nature of their financial health. moreover, the recent court-appointed examiner's report of the lehman brothers bankruptcy highlighted the troubling repo 105 practice that some companies may use to embellish their financial viability and inaccurately portray leverage. these practices motivated purely by short-term self-interests are not literary works to be admired. rather, they are fictional storie based on half truths that have no place in r capital markets. accounting standards and those that apply them ought to portray a company's financial condition

candidly and in a way that investors can readily understand. today we will also explore what progress regulators and standard setters have made to simplify our reporting framework and produce books that investors want to read. we will further examine how to improve accounting transparency, decrease leg rah story burdens -- regulatory burdens and address old issues like auditor concentration and newer ones. the financial crisis demonstrated just how intercnected our economic fortunes are. capital now moves across international borders at a lightning speed as investors diversify their portfolios and take advantage of opportunities both here and abroad. investors, therore, need to have access to timely, accurate financial information that allows them to make apples to apples instead of apples o oranges comparisons and similar

companies around the world. while we have moved quickly on converging global accounting standards, we must also proceed carefully to insure that these rules produce high-quality results for investor. america's markets and its financial reporting framework are amongthe most developed in the world because of the independence of standard setting and enforcement. to protect the credibility of our markets and instill invest trust, we must insure that any new international system continues to adhere to the core principles of independence, transparency and accuracy. in closing, i look forward to hearing from today's witnesses on the state of accounting and auditing regulation, the progress they have each made in improving standards and enforcement, their riorities, their coordination efforts and the challenges they now or may soon face. i thank each of them for coming and look forward to their testimony.

now recognize the gentleman from new jersey, the ranking member, mr. garrett, for 5 minutes. >> and i thank he chairman. thank you for this important oversight hearing today, thk you for all the witnesses who are coming here today with all the changes occurring in our regulatory structure, i look forward to all your testimony. reason being that accountants and auditors do play a crucial role for insuring that investors basically have the appropriate and reliable information. so i would like, though, to begin my comments by mentioning the current case that's before the supreme court to determine the constitutiality of the public company accounting oversight board, the pcaob that was created by the sarbanes-oxley act. let me be clear, i believe that the pcob as currently established is unconstitutional. i believe it is in direct violation of the appointments clause, and i believe when the supreme court ruling is delivered, maybe as early as next week, that they'll agree

with me on that point. you know, several congresses ago i started a caucus in the house called the constitution caucus, and one of the goals of that caucus is to educate other meers of congress about the constitutional limitations on congressional actions and legislation. because too many times members of this body similarly abdicate their responsibility to examine each law and determine whether it adheres to the constitution on the. you know, our founding fathers expresley stated tha it is incumbent on all three branches of government to examine and determine the constitutionality of each law before them. so no member of congress should ever pass a legislation and say, we'll just let the courts decide if this is constitutional or not. each member must look at each law and determine for themselves if the legislation is within the confines of the constitution. maybe if more members had done this, for example, with the health care bill, we wouldn't have passed a basically unconstitutional monstroity like the house and senate did. so partly in response to my concerns on the constitutionality of pcob, i

introducd legislation three years ago. we called it the amend misinterpreted excessive regulation in corporate america act which basically came out to be the america act. and one provision in the america act just simply attempted to fix the appointment clause at the heart of the current case, the court case by requiring that the pcob, the board be appointed directly by the president and confirmed by the senate. if you think about it, had more of my colleagues focused on this issue then, perhaps we would not have had to engage in this very long and drawn out and also cost legal battle that's going on across the street. and when you consider the constitutionality of the p cob, i'm not sure why we are giving this same body additional powers and authorities until this is determined. you know, we marked up legislation affecting the pcob in november of 2009, and less than just a month later the supreme court was hearing arguments of whetr the enity

should even exist or not. i believe it is prudent before congress ives different entities more powers that we make sure they're operating in a manner and accord with the constitution. another issue from the sarbanes-oxley law currently being debated is whether to permanently exempt small businesses from the costly indepeent order adaptation of management and internal controls. i know my good friend here, chairman kanjorski, and i differ on this topic, but uring this economic downturn where thousands of small businesses across the country are struggling to make payroll, i don't see how adding one more costly, burdensome regulation which at best has dubious benefits will help improve the economy. so i will repeat my comments from yesterday by stating this is one of numerous ways we can help small businesses without throwing in another $30 billn of deficit spending. in regards to financial accounting stanards board, i

look forward to hearing how the changes and additional guidance you have provided to fair accounting so far have worked. i would also like to explore in greater detail with both fasb and regulation ab and the potential impact those new rules when you combine them and couple them with the new proposals will basically have on the availability of the cost of credit. i'm also interested in learning further on the progress as we talked about, international convergence of accounting standards. i believe this is a critical long-term goal for international competitiveness and want to make sure we're moving forward as i think we'll probably hear on this expeditiously. again, i want to thank the chairman for holding this oversight hearing. general oversight hearings with government regulators are informative, they allow us to discuss a wide range of issues, and we're going to do another

one later next week and again in june. i do look forward to those and once again thank the members of the pal before us. >> thank you very much, mr. garrett. and we'll now recognize the gentleman from california, mr. sherman, for 5 minutes. >> i thank the chairman for holding these hearings. due to flight schedule, i may not be here until the very end, but i recognize e importance of these hearings. the chairman comments on the action taken by the senate. i've been informed that the senate passed the bill without passing the manager's amendment. if that's true, then section 210n10 remains a phony limit on the ount that the fdic can borrow of taxpayer funds in order to help the creditors of a defunct fnancial institution. i am cnfident that anyone who voted for the bill in the senate really intended the manager's amendment to be part of it and confident that those limits

which are so important to the bailout versus nonbailout question will be dealt with. these hearing are on auditing standards and accounting principles. i'll leave to others a discussion of the auditing standards and the discussion of section 404. because accounting principles are so important. corporations dedicate their focus to showing higher earnings per share. he who controls the rules controls the behavior of corporate america. the fasb, therefore, has the highest ratio of anonymity to power of any entity in the business world. i've been one of the loudest voices in congress for the independence of the fasb not because i was convinced they were doing a great job, but because i thought they would do better, and i wasn't so sure that congress would be helpful. and i was also told again and again, don worry.

international standards are on the way, and they'll solve all the problems. mr. herz, we'll get the internationalstandards when you and i get here. the -- and so we do have to take a look at whether the accounting standards make any sense from an accounting theory standpoint. accounting theory would tell you that two companies should be comparable and that two companies that are virtually identical should have identical results notwithstanding superficial differences. and et we still allow one company to choose lifo and another to choose fifo. why? because accounting theory isn't as important as just keeping everybody happy. let e business world do what they wan, investors figure it out on your own. we dealt with some nonoptional requirements with stock options,

and i think that may have been a step in the right direction. as to mark-to-market, these much ballyhooed rules don't give you capability because if one bank invests in $100 million loan on a shopping center which they hold for their own portfolio, they made the loan the old-fashioned way and another invests in $100 million worth of the collateralized debts, collateralized shopping centers, perhaps identil shopping centers, the two would be treated differently under this rule. and yet all the shopping centers are down in value, not just the ones where the debt happened to be securitized. but the biggest problem the fasb has is the desire to go with the verifiable rather than the relevant. the desire to make it easy on the auditor rather than useful for the investor. and the best empleof this and by far the most harmful act that

nobody ever talks about is fasb number 2 which requires the writeoff of all expenses, penalizes those companies that choose to do research while we in congress are providing large benefits to those same companies and the success of america depends upon the research done in the private sector. this isn't good accounting. good accounting says you're supposed to capitalize research expenditures that provide useful results. why do we have fasb number2? because good accounting theory would require accountants to distinguish between useful and useless research projects. that's difficult. that's like eliminating the strike zone in baseball and saying every pitch is a strike because the umpires don't want to be second guessed as to their ba and strike calls. the fact is for us to be

penalizing those corporations that engage in research making them write off the money they spend, providing higher earnings per share to those companies that choose not to do research, and to do this not only in the high-tech sector where i think investors may be savvy enough to adjust for it, but in the rest of our may is the most harmful change that's been done to our economy that nobody knows about. so i look forward to going back to good accounting when it comes to research instead of adopting a system that is easy for the umpire and terrible for everyone in theballpark. i yield back. >> thank you very much, mr. sherman. now recognize the gentleman from california, mr. campbell, for 3 minutes. >> thank you, mr. chairman. you know, i am one of the two cpas on the committee here along with my california colleague mr. sherman, and i remember when i was first getting my certificate and, you know, accounting was a very

nice, steady thing, boring. one of the three of your organizations didn't even exist. we would have probably never had this hearing because nobody would have cared and nobody would have come. but, unfortunately, i guess that is not the case anymore. and accounting, as my colleague mr. sherman pointed out, for many entities and many things are now under a great deal of scruty and under the spotlight. the one thing we do not, any of us, want this to yield is that we up here in congress start to dictate accounting standards. that is the worst possible result we could ever get to. because e will politicize them. and we will, we will not make a judgment on the basis of proper accounting, good accounting, any kind of reasonae judgment. we will make them on the basis of what groups here are powerful and what ones are not and have different accounting standards for the same companies that are of different sizes or in different states or with different treatments.

and we don't want to go there, and we don't want to be there. so, but becausef the focus on accounting, it means that asb and other organizations are, will need to be more responsive, and, i think, quicker in response to things that have happened out there. one thing we do deal with, though, are reporting standards for public companie and also banking regulations. and a couple things i'll mention in my short time here that hopefully will come out over time is i am, for example, supportive of going to every six months financial statements and other things we might do in order to try and reduce volatility in the markets. my colleague, mr. garrett, mentioned harmization with international accounting standards. i'd like to hea what you all think is happening on that because we shouldn't be having situations wherewo international companies based in different countries have completely different accounting

reporting on the same fundamental results. what's going to happen if the banking sector is far from being out of the woods and far from being out of the problems of 2008? what's going to happen if banking regulations start diverging from accounting regulations? if some of the things that we do and are looking at in terms of reserves and o forth diverge from accounting? and then, also, i wondered about financial statements and financial reporting in general. it hasn't changed a whole lot since when i took the exam some years ago, decades ago. t yet markets today are using a whole lot of other measures and metrics to evaluate the performance of companies than the traditional three financial statements that we have been putting out for decades and decades. now, much of that information may be derived from audited results, and i understand that, but should we be taking a look at what we are auditing and what we are reporting given the

realities of the market today, and i yield back. thank you, mr. chairman. >> thank you very much, mr. campbell. we'll now recognize mr. sherman for -- >> five seconds. >> five seconds. >> i misspoke in a way when i said the manager's amendment had not been adopted, they adopted the first manager's amendment, they failed to adopt the second manager's amendment, and we can breathe a little easier. >> only an accountant -- [laughter] >> it's an occupational hazard, mr. chairman. >> now recognize the gentleman from colorado for 2 minutes. >> thank y, and it'll be much shorter than that. i just appreciate you all being here toy. we tangled a little bit the last time you all were here. and i just want to say thank you to working with various people, vario parties, various industries in helpingus move through a very difficult time for this country financially.

and i would say to my friend, mr. campbell, i agree for the most part the accounting profession, there's a lot of objective kinds of things. two plus two equals four. we've come throh a time, though, where there was some subjective analysis that had to be involved, and i just appreciate the willingness of the board, of the different agencies for looking at bigger picture. and, quite frankly, helping us get through a very difficult period. so i look forward to your testimony, appreciate you being here today. thank you. with that, i yield back. >> thank you, mr. perlmutter. now recognize the gentleman from illinois for 3 minutes. >> thank you, mr. chairman. in the wake of the financial crisis that we went through and the destruction, largest destruction of wealth in human

history, approximately $7 and a half trillion of household net worth in the last 18 months of the previous administration, a lot of attention is focused on the pro-cyclical versus countercyclical effects of accounting standards. and much of theattention has focused on providing relief after the bubble has burst. and i think it is more important to adopt countercyclical accounting standards that actually suck is energy out of the bubble on the way up. and it seems to me that the key principle there is to treat keptically the value of recently-appreciated value assets. and we're going to he a workshop next month at the american enterprise institute which will include two frequent witnesses in front of this committee on preventing the next real estate bubble which i think is the single most imptant thing have to do, and we're going to look specifically at proposals to calculate the loan to value for mortgages using not simply the current market price, but the current market price

deflated by the amount that real estateas gone up regionally in the last several years. and if that had been in place, i think it's very clear that that would have just sucked all the energy out of these enormous real estate housing bubbles that we've gone through and have been the big dog in destroying net worth. and so that's one of the specific things i'd like to hear your reactions on. secondly, the pcob, i found, to be a very interesting model as the possible way forward for the oversight of the rting agencies. you know, i think, frankly, tat there is no satisfactory solution to the conflict of interests in the rating agency models. the pcob was an attempt to deal with similar conflictsof interest on the, in the accounting business, and i'd be very interested in the people's general reaction as to how effective that approach has been. because, to my mind, you know, the best stand at that, and i s partly successful in getting amendments into the regulatory reform bill. and the third issue has to do

with the high frequency accounting standards for firms, especially large firms where thingscan fluctuate on a day-to-day, hour to our or even minute to minute basis. and you're not going to be able to publish reports that continuously update, but we're going to need to have some mechanism of looking over the shoulder of these lar firms with high volatility to understand -- and give investor confidence that there are at least systems in place so there are good realtime monitoring of these, and that's different than just publishing a report every six months or year. anyway, so those are what i see the big issues here, and i look forward to your testimony. >> thank you very much, mr. fter. are there any other members that desire time? if not, we'll move to our panel. first, thank you for appearing today before the subcommittee, and without objection your written statements will be made part of the record.

you will each be recognized for a 5-minute summary of your testimony, and first we have mr. james kroeker, chief accountant u.s. securities and exchange commission. mr. kroeker? >> chairman kanjorski, ranking member garrett and members of the subcommittee, i' jim kroeker, chief to the ant which advices the commission on auditing matters, and i'm pleased to testify on behalf of the commission. one of the lessons from the financial crisis is that financial reporting plays a critical role in establishing, maintaining and rebuilding investor confidence. the objective is to provide useful information for capital allocation. market participants must be confident that the information they receive is neutral, it is reliable, and it portrays the economic results in an accurate and faithful manner. as the agency in power to be the investor's advocate, the

commission is responsible for this reporting. to further insure the integrity of this reporting, the federal securities laws mandate that an independent audit by qualified professionals be performed. as more fully described i my written testimony, in discharging our responsibilities we oversee the work of the fasb and the pcaob, and we do that to monitor existing standards for potential improvement and to increase consistency in the application of those standards. let me just outline from my written testimony some of the pending proposals and emerging issues in these areas. let me turn, first, to what is often referred to off-balance sheet accounting. last year the fasb issued standards relating to accounting and related disclosure with respect to what are often referred to as special purpose vehicles which include many securitization structures. the new standard should enhance financial reporting by better portraying a company's risk exposure. of coue, we will continue to

review the reporting practices to determine if companies are complying with their requirements, and we will continue to see whether further improvement is warranted. we're also focused on the commission's ongoing consideration of global accounting standards and the con convergence of u.s. gap and ifrs. the commission has engaged significant efforts toward the development of a single set of high quality globally-accepted standards. these efforts are reaching a critical stage, and in february the commission directed my office to execute a work plan to evaluate the areas relevant to further incorporating ifrs into the u.s. financial reporting system. we will begin providing public progress reports on our ork no later than october of this year. ather critical component to our consideration is convergence between the fasb and the isb which is urther covered in my written testimony.

turning to auditing, pcob oversig of the auditing profession has provided clear benefits to financial reporting quality and to investor protection. as you may know, the pcob is currentlyfacing a constitutional challenge before the supreme court, and we are hopeful that the pcob's constitutionality will be upheld, so it's important work can continue uninterpreted. if not, the commission stands ready to issue necessary guidance to provide continuity. if congressional action is needed, we will promptly provide technical assistance so changes can be conidered as quickly as possible. another challenge fcing the pcob is the inspection of overseas awd doors whose -- auditors whose reports are filed with the commission. access to these firms has ben hampered by the pcob's inability to share information with their foreign counterparts. i would like to thank chairman kanjorski and this subcommittee for their leadership in

including a provision to address this issue in the house rulatory reform bill. i would also like to thank the chairman and this subcommittee for another provision in the bill to address the important issue of pcob oversight of auditors of brokered dealers. clarifying the pcob's authority will improve audit quality and strengthen both investor protection and broker dealer compliance. in closing, a significant lesson from the recent crisis i the same one underlying the commitment to securities regulation over 75 years ago. that is transparent financial reporting is critical when pressures are highest and investor confidence may be shaken by uncertainty. thank you for the opportunity to appear today, and i'm happy to answer any questions that you may have. >> thank you very much, mr. kroeker. next we have mr. robert herz, chairman financial accounting standards board. mr. herz? >> chairman kanjorski, ranking member garrett and members of the subcommittee, thank you for inviting me to participate in

today's hearing. the fasb is an independent private sector organization whose mission is to establish standards of financial accounting and reporting for u.s. nongovernmental entities. ose standards are recognized as authoritative, generally-accepted accounting principles or gaap by the sec and by the aerican institute of certifiedpublic accountants for other entities. gaap is essential to the functioning of the u.s. economy because investors, creditors, donorsand other users of financial reports rely heavily on credible transparent, comparable and unbiased financial information to make their resource allocation decisions. an independent standard-setting process is the best means of insung high quality accounting standar since it relies on the collective judgment of eperts informed by the input of all interested parties through a thorough, open clptive process. however, we are also fully appreciate that the fasb does

not operate in this a vacuum. they are accountable in two important ways, first by engaging in robust due process and setting standards including consultation with stakeholders and second, by being subject to oversht in the public interest by both the accounting foundation's board of trustees and by the sec. our very extensive process involves public meetings, public round tables, visits to interested parties and, of course, the exposure of our proposals for public comment. we meet regularly on both a formal and informal basis with the sec and pcob and their staffs and with bank regulators. fasb and faf also regularly brief members of congress and their staffs on developments. indeed, a mber of faf trustees and fasb board members will be meeting with members of congress next week. over the past year, the fasb has acted vigors to improve u.s.

gaap highlighted by the financialcrisis. the standards we issued in 2008 and 2009 made improvements to u.s. gaap in a number of areas including the valuation of financial assets, especially in the inactive markets, securitizations and other involvements with special-purpose entities, accounting and disclosures for impairments, credit default swaps and other derivatives and for financial guarantee insurance. in these and other standards we have issued in recent years, we have focused on communicating clear objectives and principles supported by a sufficient level of implementation guidance. the fasb has also reduced complexity in the u.s. financial reporting system through the launch last july of the accounting standards codification. the codification will benefit everyone in the financial reporting system by replacing the previous myriad of separate accounting pronouncements with an easily-accessible,

topilly-organized online research system which also links in the u.s. gaap reporting tax. during the past year we have made good progress working with the international accounting standards board on projects aimed at improving both u.s. gaap and international financial reporting standards and achieving convergence between those standards. many of these projects are nearing their exposure draft stage. on some of the projects, i believe the boards are on track to both make the desired improvements to u.s. gaap and ifrs and achieve convergence while on other projects achieving substantial convergence is proving to be quite a challenge. let me be clear, we re committed to and are making every effort to foster convergence between u.s. gaap and ifrs, but consistent with our mandate under sarbanes-oxley, we must also insure that the resulting standards represent improvements that are in the best interests of u.s. investors and other users of u.s. gaap information. my written testimony also

details our extensive efforts regarding the private company and not-for-profit sectors. i've also been asked to comment on financial arrangements the companies may employ to manage their financial position near the end of a reporting period, presumably including arrangements such as the so-called repo 105 transactions engaged in by lehman brothers. as i explained last month, the fasb does not have regulatory or enforcement powers, but we do work closely with the sec and stand ready to take any additional standard-setting actions that may be appropriate as they obtain further information concerning the practices of financial institutions. in conclusion, the demands on accounting staard setters tat stemmed from the financial crisis together with the goals of continuing to improve u.s. gaap and achieving convergence have made this past year one of the more challenging in the fasb's 37-year history, and i expect the coming year will be

equally as challenging. thank yo again, and i'd be pleased to respond to any questions. >> thank you very much, mr. herz. and now, finally, we'll hear from mr. daniel gelzer, acting chairman, u.s. public company accounting oversight board. mr. goelzer. >> thank you. chairman kanjorski, ranking member garrett, members of the subcommittee, i appreciate the opportunity to appear before you today on behalf of the public company accounting oversight board. congress created the boad in 2002 to provide rigorous, independent oversight of public company auditors. i would like to summarize how we discharge our responsibilities and how the board has responded to issues raised by the financial crisis. i also want to mention some challenges w currently face. the board has four basic functions. first, no accounting firm may prepare or substantially contribute to an audit report for a company that files financial statements with the

securities and exchange commission without first registering with the pcaob. there are currently about 2,500 board-registered accounting firms in 87 countries. second, the board conducts a continuing program of inspections of registered firms' public company auditing including reviews of individual engagements and evaluations that affirms systems of quality control. since 2003 the board has performed more than 1300 such inspections and reviewed aspects of over 6,000 public company audits including 173 non-u.s. inspections. third, the board has broad authority to sanction firms and associated persons that violate applicable laws. the pcaob has announced the resolution of 31 enforcement proceedings. these cases do not, however,

fully reflect the board's enforcement activity since they do not include ongoing investigations and contested disciplinary proceedings which are by statute nonpublic. fourth, the board sets the professional standards for public company auditing. the board has an active program to update and strengthen the auditing standards. our standard-setting agenda is appended to my written testimony. i want to turn next to the financial crisis. the financial crisis affected our work i three basic ways. first, our inspection program is designed to focus on difficult audit issues. we're currently reviewing the results of the recent inspection cycs and intend to prepare a report on findings from those inspections related to the impact of the financial crisis on auditing. second, this inspection experience has also informed several ongoing standard-setting projects including risk

assessment, use of specialists and audito communications with audit committees. in addition, the board's chief auditor has issued a series of practice orders on crisis-related ait issues. third, the enforcement staff has opened several investigations related to audits of public companies involved in the financial crisis. as i've noted, thes matters are nonpublic. before closing, iwant to mention three challenges we currently face. first, we are not at present able to conduct inspections in the european union, switzerland or china. significant audit work on which investors and sec reporting companies rely occurs in these countries. one of the obstacles, particularly in the e.u., has been the board's inability to share confidential ispections and investigation information with foreign audit oversight authorities. sections 7602 of the wall street reform act passed by the house

last year would correct this problem. the senate financial services bill contains a similar provision. hopefully, enactment of the formation-sharing provisions will allow e.u. inspections to go forward. the second challenge relates to overseeing auditors of securities broker dealers. while such auditors must register with the pcob, we currently lack any authority over their work. both the reform act and the senate financial services bill would extend board inspections, enforcement and standard-setting authority to audits of broker dealers. both bills would close the deal between broker dealer auditor rebel station and board authority over these firms. finally, there's a pending challenge to the board's constitutionality. that litigation now before the u.s. supreme court deals principally with the way in which board members are appointed and the circumstances under which we could be removed. i expect the court to issue its

decision witn the next few weeks. the pcob won in the district court and in the court of appeals, and we hope the supreme court will reach the same result. if the pcob does not prevailand the decision requires a legislative change, i would urge congress to act quickly to fix whatever structural problems the court identifies. the need for investor protection through independent oversight of the auditing profession is as great today as in 2002 when the board was created. my written statement covers these topics in greater detail, and i would ask that it be made part of the record, certainly happy to answer any questions. thank you. >> thank you very much, mr. goelzer. i thank th panel for their teimony, and i suspect we have some questions here from our panel. not to be facetious, mr. kroeker, i'm going to ask

the question why do i get the feeling sometimes that we are playing a game of cops and robbers, waiting always behind the fact to find out what happened? and then to close, quote, loopholes or take positions? the repo 105 problem. wasn't that observed, and wasn't that evaluated at some point to be an attempt to avoid transparency? and if that were the case, doesn't the sec have the authority in conjunction with these other entities to propound rules to prevent that from happening, or if you don't have that authority, why wasn't that quested of the congress for additional authority? this question is predicated on the fact that when i talk to my constituents, they're not nearly as sophisticated as you all are, but they don't understand why we're always catching up,

playing the game of catch-up as opposed to why we don't have a system that prevents some of this abuse. maybe you can giveme -- >> i suspect in in some respects it goes back to the issue of are we goin to continually be playing cops and robbers. it goes back to human nature and that when a standard is put in place, there are very ingenious people who work to design around that. one of the things that the sec did coming out of the post-enron reforms was to do a study on accounting standards themselves recommending that the proper balances to come up wth and objectives-based standard. that is, we shouldn't lean too heavily ononly principles by which you can circumvent the principle or try to circumvent the principle by creative structuring, but if you lean too

heavily on a rules-based system, we've seen the outcome of people saying, well,the rule didn't cch me, if you will. and suggesting an optimal balance, in our view, of sufficient specificity of the object i of the standard -- objective of the standard coupled with guidance that would help you operationalize that in practice. a number of the fasb's recent standards i would characterize in that vein. their standard on business combations, their relook at off-balance sheet accounting in statements 166 and 167 that dealt with off-balance sheet and securitization accounting providing a clear objective of the standard. so i suspect that in some form it wilbe human nature for some small minority to try and escape that. but the second piece of that question, then, is do we have the authority, and, yes, we have the authority. and important in my mind or my

way of thinking, an important element of insuring that the conduct doesn't continue is enforcing standards where standards are already in place as opposed to suggesting that the standard itself should change if the standard is clear. >> well, in enforcing those standards are we remiss in giving you certain authorities? i mean, let's say an accounting firm purposely concentrates on avoidance for the purpose of changing leverage o giving a false impssion of a company's financial condition. and that's quite pparent from what went on. i mean, nothing is 100%, but the high probability is up in the 90th percentile. do you have a power to say, look, if you persist in that type of operation, we're not only going to put some conditions on the company or potentially fines or what can be levied, but we're going to bar

you from practicing, that you're just not going to be allowed for a given number of years or we're going to fine you individually as an accounting firm? i mean, it just seems to me we're constantly chasing. i use the term cops and robbers. to a level of real frustration. i'm trying to think of the operation down there in the south, the guys putting the accounts offshore. [inaudible conversations] >> what? stanford financial. i mean, that was observed for a number of years, what he was doing, and that it was putting in jeopardy investors and citizens, and when i've talked to those groups, they just thought it wasclearly something that government regulation had addressed and would not allow it to happen. now, that wasn't under he sec, that was under bank regulators

and others that would have the authority there. but it just seems to me people just said, ll, it's not a clear case for us to get involved, we're not going to get involved in it. i guess the question i'm asking you, is thre something we can put in this reform bill now that makes it so clear that were just not going to take it anymore for not just creative accounting, but for fraudulent accounting, for aavoidance of truth and to injury for the average investor? something we can do here? >> one, we do have authority including authority of barring accountants from appearing and practicing. we've used that authority with respect to firms, i believe, since the 2002 era 66 times against firms and multiple of that against individual accountants. but i can certainly think more fully and get back to you if the there are more specifics. >> i'd appreciate it. i'm going to take one more

minute even though i'm over time. it violates what i call the bastard rule. i want to believe with that because assuming that all accountants don't do their job. the fact is most accountants and most business executives do the right thing, want to do the right thing, want to engage in fairness in their businesses, but if you've got an element of 3 or 5% -- those are my bastard violaters -- you almost get forced into doing the same thing they did or you're going to be at a decided disadvantage after a while. and we've got to find a way of tting them out of theystem. >> i agree. >> so join me in my bastard hunt, if you will. >> i aree. >> the gentleman from new jersey. >> thank you. and thank the panel again. excuse me, sir. you may have heard if you were listening to the hearing we had the other day i gave an example of a company in my district that

manufactures products for troops overseas. it's a $.5 million market camp, they have 30 employees, e ceo and the cfo all work basically in the same room, if you will, and they told me weeks or a month ago if they don't receive a permanent exemption from the 404b requirements that they will have to pay upwards to $100,000 by the end of the second quarter to get things up and working to be in compliance. so that's only four, five, six, six weeks away. so, you know, in light of where the economy is right now, i guess the short question is, you know, what do i go bck to tell them that it's better that they spend about 100 grand to be in compliance with a little tiny company with them with 404b as opposed to using the $100,000 to hire another employee or two or make sure their stuff is up to

snuff with regard to that they're sending overseas to our troops? >> the objective of the auditors opining on or giving an opinion with respect to 404 wasn't to put in place a costly or nonbeneficial requirement, and investors that i speak to almost man mousily -- man mousily both with respect to indidual companies but as well as the financial system as a whole indicate that they receive significant benefit from knowing that there's increased quality to financial reporting, and it goes back to the 1977 foreign corrupt practices act where it's an integral part of strengthening financial reporting is strong internal controls. that doesn't mean that the cost should be disproportionate. the sec working with the pcob has taken a number of steps to reform the cost going back to the outset of 404 and what we

heard -- >> you've got to admit $100,000 when you're dealing with a tiny little company is a lot of money. and so i just don't know where when you're talking about the transparency that you're trying to get with a little company like this, does the cost really meet the benefits? isn't there some level that maybe the cost exceeds the benefits when you're getting down to this size? that's not talking about when you're talking about the gms of the world or who knows whether gm, i guess we have a whole different situation with gm. see how well it worked with them, right? >> yeah. the confidence that the individual investor has when they put that money at stake in a company that size, we hear from them that it takes tremendous confidence not just from the gaap financials, but from the process. and i appreciate that, obviously, there is balancing that trade-off between what are

the costs and what are those benefits. >> well, how -- someone just mentioned to me with regard to the sec itself, with regard to their own internal control requirements that the gao required certain -- gao has certain internal audit requirements. is it a case that the sec has not met their own requirements or set those audits? >> so we do have the gao does -- effectively the equivalent of 404b, the auditor opinion -- >> so how'd you do? how'd the sec do? sh. >> we did have a weakness. and the process by which we looked at our own controls and the gao looking at that has actually caused an increase in our internal focus on financial reporting. >> yeah, so we're asking this little company to try to meet some standards that the sec can't meet. nowof course, the difference is the sec gets all the money

they need, basically, to do so, and this little company here is just i don't want to say they're holding on, that'd make them sound they're not doing well. i think they are doing okay. so you can see how the ceo of a company like this might say, hey, that doesn't seem right. the sec can't even meet its standards, and yet they're coming and saying we're supposed to meet a standard that they can't even meet. can you see the problem that i have in discussions with folks like that? >> yeah. the standard, i guess, itself is an opinion on controls same as the opinion -- taking a self-look at controls the sec internally reported a material weakness as the gao agreed, so it's the same assessment that we're asking companies to do. >> but you just can't do it. okay. joust in the time that -- just in the time that i have left, so we had this discussion with regard to trying to make look at companies with regard to maybe one of the areas we had problems with in the past where the companies actually had controls in the past and say that they

should all be on their own balance sheet, right? and that's a good thing? one word answer is -- and, yes, you're nodding yes. so if that's a good thing, if we want to have transparency and openness and what have you, shouldn't we be doing the same thing for the federal government? don't we have an entity with fannie mae and freddie mac where you basically have an inti where the cbo says if we were to treat the gses like we were trying to treat all these public companies, wouldn't they have t bring the gses onto our budget? if you apply your rules to how we run our system? >> i've not done that exat analysis, but the criteria are, essentially in layman's term, if you're running the show and you've got significant skin in the game, then it's on your books.

>> yeah. i mean, we control it we fund it, we decide who's in tharnlg tharnlg -- charge of it, and there's one other criteria. >> under our standards, that's the approach. >> i see my red light's on, but thanks for the nod. >> thank you, mr. garrett. now we'll hear from mr. perlmutter for his 5 minutes. .p.m.

the move ford in deal with the problem and do the best way they can. women not agree on some things from time to time. oftentimes, we do not agree, but we do agree -- we may not agree on some things on time to time. oftentimes, we do not agree, but sometimes we do agree. here in the congress, we need to figure certain things out. my question to you is, madoff, who is watching -- you are going to have lots of people looking over the shoulders of others. it goes on and on. in that instance, what

repercussions, who is the policeman for the accountants who said, year after year, to the statements that are coming out of the madoff organization? ed with the pcob and s not required to be registered with pcob. because at that time the sec had exempted broker-dealer autors from pcob registration. so we had no contact whatsoever with them. my understanding is they shod have been subject to peer review. that is, their review under industry run system by another firm, but they misled as to whether they were conducting audits or they weren't subject to. >> use it at that time. is there now a new regulation in place? is that kind of accounting still accept? >> yes. the sec's exemption that caused

auditors of broker-dealers not to be registered with us, expire at the end of 2008, shortly after the madoff events became public. as a result of that, we picked up on other probably 550 firms, registered with us, all auditors of broker-dealers are now required to be registered. the pcob. the difficulty is we have no other authority over them. we can't inspect their work. we can't write standards for how the work is performed. perhaps most important we couldn't bring an enforcement action, anti-madoff repeated today, mr. madoff firm would be registered with us but we wouldn't be able to take any action. >> so now that they are registered, and yo're basically telling me you can't do anything? >> i am telling you exactly that. however, fortunately, from our perspective financial services

legislation that the house passed, thanks to this committee, includes an amendment that would give us authority, inspections, enforcement, and standard-setting authority over the auditors of the now registered with these broker-dealer auditors. >> do you know if the senate version has that? i don't know him. >> yes, a slightly somewhat different version of the. but from a big picture stepler, yes, it does. this is very important to us because we're concerned about the fact that the public might perceive that we have some responsibility now for these firms, particularly in light of the madoff situation when, in fact, we currently lack the capacity to do anything with it. >> mr. chairman, i yield back. >> thank you very much. the gentleman from california, mr. campbell. >> thank you, mr. chairman. i wanted to focus on rules versus principles-based accounting would just ask on a moment ago. we've increasingly moved to old-based accounting, in part, i

believe, because of litigation risk. and because of the desire of accounting firms to have, in the accounting industry to have the safe harbor place they know they can go, and not have litigation. but that's resulted in some very, very, very complex fasb pronouncements and so forth. i have one i should have brought, and i've kg summary of the stock-option. which is about this thick. and i actually took a seminar on that, eight hours on that. and it was the beginning seminar. there were like three more days on that, if you wanted to do the rest of it. what do each of you feel about rules versus principles-based accounting, and should we be moving in one direction or the

other, andow do we get thre? start with you. >> my reacon would be we need to start a balance between the two. we should have a system that has a clear objective of the standard, but it goes to your opening remarks, and what are the objectives of finance report is have some degree of consistency as well. and so part of the reason, i think, that the accounting profession seeks ight lines is to ensure some degree that the objective of the stanrd is prepared, or the funds are prepared with a relative degree of consistency so that companies that are engaging in similar activities canbe compared on a comparable basis. >> mr. herz? >> i wholeheartedly agree with jim's comments, and i believe we have been fighting our standards without focus in mind in recent

years. i worked for some time in the profession in the u.k., and also as a chartered accountant. and that was one extreme, the consolidation stand. principles-based, but to the point where some believe almost anything goes. on the other hand, you know, we in the past have had standards with lots and lots of facts, and lots and lots of, i don't know if you call them rules, but very detailed implementation, guidance. i think aboutthis summer in between, starting with the articulation of clear objectives and principles. >> so would you say that right now you're too far towards the rule-based and we need to come back? >> well, we are currently doing a lot of our major projects together with the international oards. we are writing common standards. and when you're writing common

standards, essentially for good, major parts of the world, not just the united states or europe, but other parts of the world, that use isf or companies, a lot companies, for example, japan uses u.s. gaap. you had to find that kind of balance across those buryg societies and economies and the like. >> mr. goelzer, would you like to comment? >> sure. we don't have responsibility for the accounting standards so i will answer to the auditing standards, although i think the answer would be about the same. we try to take what i would call an objective-based approach when we sit auditing standards, and each of our standard that includes the beginning, a statement of what the objective is. we are charged with enforcing the standards also, so i think it's important, important to us that they be written in a clear and precise enough way that when we do an inspection or bring an

enforcement case, we can make a determination about whether -- >> my time is going to run out. as we harmonize with ifrs and so forth, if we're to move to more of a balance, the risk is that our litigation system is very different from that in the u.k. and other countries. are we putting -- we cannot go to a big three, okay, with sarbes-oxley, we physically cannot exist if we go to the big three. are we putting our accounting firms at risk with our current litigation system if we move to more principles-based of which i agree with you beuse i think we should, and other changes we should make in our litigation system to enable this to happen and harmonize with the international accounting standard, but to make the litigation risk not so great if the accounting firms comply with what we ask them to do?

whoever wants to comment. >> i agree with the sentiment that going him for 23 would not be a good idea, would not be a good thing. in terms of the litigation system itself, a recommendation now of the committee on improvement to financial reporting, and acc advisory committee. recommended guidance on how firms and how the sec might look at judgment in a system that has less prescriptive guidance. and i'm a big supporter of the idea that if a firm exercises a company or an audit firm exercises reasonable judgment, documents, that thinks about that in the context of what would be uful information that would go a long way for them and then depending in any conext, the subsequent result of that judgment. >> thank you. yieldack. >> thank you very much, mr. campbell. and now the gentleman from illinois, mr. foster. >> thank you. i would like to start by

thanking the ranking member for his concern over the liabilities of the gses and, of course, had to recognize all of those liabilities at the time that they were taken over by the previous administration, people would've realized our financial situation in here to buy the current administration was in fact far worse than what's recognized. but what i'd like to ask first, perhaps of mr. goelzer, is the state of play of countercyclic counrcyclical, countercyclical concerns in the definition of accounting practices. how services is that being incorporated in the next generations? >> i really think i would have to defer to my colleagues on that, since we have no jurisdiction over the accounting disclosure edibles or enforcement your >> you know, the accounting standards involves measurement and reporting the underlying economic situation, including

thefinancial condition of the reporting companies. and, thereforethe goal is to report economicreality, not to adjust it through policy. now i bieve that good accounting can be countercyclical, in that it gives evidence of an early warning of additional risk, additional leverage. those kinds of things. but i think it's then up to regulators and polymakers to take that information and do what they need to do in order to manage the economy and the markets. >> okay. so you're not seeing big changes in accounting standards that it's not regulate and corporate as on of the desired aspects of any -- >> we're trying to tell like it is, rather than, you know, take

numbers and adjust them fr policy matters. but other people can do that and take the right policy. ihink they need to start with the right numbers. >> i would agree with the chaian's remarks that the objective of financial reporting be neutral, unbiased, unvarnished reporting on the economic circumstances. they are as a group of standards for the ifrs and fasb, for example, look at loan-loss provision and whether or not the forward-looking, if you will, on the credit cycle would be useful information, would that be unbiased and useful information to new investors and part of that project. the objective is an outcome space in that it would be less procyclical, but what investors have that information if they were unaware earlier in the

credit cycle of loan losses. >> i guess the next thing i would like to bring up is, lot of the uncertainty that surrounds the violation of structured financial products and securities, things like that. and as you're probably aware, there isn't sec initiative to encourage our mandate to publication of key underlying information of hese, including in the case of mortgage-backed securities you mortgage-backed securities utah zip codes, credit scores, unit, the income history and all this sort of thing. as well as the water code that specifies the behavior of the tranches and so one. and this in principle will make things much more transparent. i was wondering, do you view that as something that is realistically going to incorporated into the whole accounting and valuation game in a much more transpent wy? are you optimistic that that was going to lead to a sort of a more objective analyses of the thighs of different tranches of these? do you view that as an experiment that might or might not work or fundamental game

changer in the violation of these complex financial products? >> right now it's a proposal by the sec, so we will be informed by the feedback. but i hope that it is a significant improvement in terms of discover so that would flowhrough all of them. >> yeah, i have been fairly strong and vocal on the subject. accounng and reporting by companies with significant challenge during the crisis, essentially because we had markets for which there were not the necessary infrastructures. and that included the markets for a certain pass back cities. it's very hard to properly value something or provide for anticipated credit losses when there's no prices when the effect of the waterfall and the

condition of the collateral is not, you know, so it took people with great sophistication and a lot of flavor intensity to be able to parse through a lot of the structures in order to then better understand what they had and to value them. >> i am a big supporter of trying to put in what the nessary infrastructure in order to just for myself, but the whole system to be able to do the better reporting. >> thank you. i guess my red light is on so i yield back. >> thank you, mr. foster. and now we'll hear from the gentleman fromcalifornia. >> thank you. i'm going to ask mr. herz the question, and he goes to an issue in which ifrs stands, international standards, frankly would've handled the layman situations a lot differently than we did.

under ifrs, lehman'severage ratios would have shown up as much, much higher. it would've been harder for them to continue the overleveraging, as i understand it, as they did under the u.s. standards. and the amended aspects of discsure related to the classificatioof assets under fas 140 requiring an institution to sclose all of its continuing involvement with transferred financial assets. these amendments were related to lehman brothers use of repo 105's to take assets off the books at the end of the reporting period, and thereby of course disguised the true leverage that was a foot. lehman officials even refer to these transactions as balanced sheet window dressing.

you wrote a letter to the committee on april 19, and you mentioned that the accounting guidance for repose has not changed since 1997. and i guess my question is, should fasb consider a minithe standards governing the use of repo tansactions in light of the use of repo 105 by lehman and other financial institutions? and a the end of the day i guess to what extent would moving towards ifrs address this problem, but to the europeans see something, that we just go to mess in terms of our accounting of it? >> a couple of points. we're not an enforcement or regulatory agency, but in that letter i did indicate some points as to whether or not the

repo 105 transactions act so alified as sale under u.s. standards. and again, witho all the facts i cannot tell. but the sec has been doing an extensive infomation gathering process of the practices of major financial institutions with regard to repo's and secured lending and the like. and to the extent that those reveal practices like that, we stand very ready to change the standards. >> just to get back to the bottom line, to what extent would moving toward ifrs address this problem? >> it's not too -- were to me whether under ifrs it would have appeared as financing or sales either. we have a joint project with the international board on subct of the recognition which includes these kinds of items. and the goal has been to

harmonize our standards there. there are many other current differences in the way financial institutions, balance sheets, are reported as between u.s. cap and ifrs, including issues as to whether agreements are sufficient to net derivatives, and various other things, which we're also exploring, harmonizing. >> i appreciate that. let me ask mr. kroeker a question as well, and this goes to the testimony that we had from mr. markopolos here, who noted that, for a number of years, he tried to warn individuals from within he sec about the madoff ponzi scheme. and he found an ally in the boston branch with industry

express in the sec, but his problem was that he could never get beyond the new york office, i guess, because as he says, folks in washington simply couldn't comprehend the case, certainly the people in new york could and probably handed. and he offered noted the over lawyering at the sec. i know ms. schapiro is attempting to address this feather, but i'm concerned that this won't be enough, that the basic, if you look back over the years, the focus of he sec, the way it has been overboard by those who, for me, who didn't have the technical knowledge about the markets in the sec, to rely uncover things like the ponzi schemes that are out there. has always been a problem, institutionally. could you comment on that? >> look, let me comment on my perspective on accunting and auditing. our office is approximately 50 people. the vast majority are folks who

were prticing either in accounts or as auditors. from thaterspective our office, again, the vast majority are auditors, but to the heart of whether we can be more forward-looking, what market practices are out there, i think we have taken significant steps just as one example, we are hiring the deputy within the office of chief accountant whose job will be to monitor market actices, to look at new standards that have been put in place. >> just very quickly. the sec official in boston who did understand it had been a portfolio manager, he had been a traitor, he had that experience in the market. and i think it's that kind of hiring at some point that has to be addressed. i understand the british had the same problem so i just raise it again. thank you very much. mr. chairman. >> thank you very much, mr. royce.

does the gentleman have any furtr questions? do you want to take additional time? okay. if i could, inyour opening, you are remarks, you referre to the section 760 to fix that we have put in to allow transmittal information, investigate findings between foreign entities and the american entities. and you indicated that that fix is the e.u. problem, but you caution that it doesn't fix the china problem. and while we are now going from house and the senate to conference, i'm curious whether or not you have structured in your own mind what would fix the china problem so that we could included in the act when it comes back, or what you would do. we anticipate there will be a problem, whethe there is

potential bomb and we haven't done anything about, what do you suggest we do? >> i appreciate the question because it's a very difficult issue. i don't think i have an answer as to what congress could do to fix the problem with china. but let me say, as to the e.u., th ability to share information would let us essentially resume the negotiations with them, and i'mopeful it would open the door to inspections. they have raised other issues with us that will also have to be resolved. with respect to china, i think the best hope we have at the moment is that as we bring all of the rest of the world into our inspection system, china will not want to be an outlier and feel the incentive to netiate with us and open the doors they're also. i can certainly assure you that if we see any kind of legislative action that would help us with china, i will let

you know. but at the moment, i don't see anything that would address this situation. >> welcome if we don't address it, and are you suggesting it would require some treaty arrangement? >> i don't believe tha any of thse foreign auditor access issues we have should require treaties. i think it's simply a matter of negotiation and understanding between ourselves and the audit oversight audit or other governmental authorities in each country. >> aren't we one step away from a china disaster, china meltdown, if we don't do something? >> i think it's a very service problem. i think it's unknown to us about the quality of financial reporting in china, and quality of auditing in china. and there are an increasing number of chinese-based companies that are in our markets. and yes, i think it is a substantial risk to u.s.

investors. >> does anyone else have anything else? mr. herz? mr. kroeker? >> as it relates to -- >> there's a provision in the reform regulations that are pending that allow, where was disallowed before for investigative information between the united states and foreign, we're not an issue that. mr. goelzer is that taste of our palm with e.u. budget he indicates it doesn't take care the problem with china. do you recognize there may be a problem for china and you have any helpful hints? >> yes. for one i agree, and a second provision that could be helpful is a provision that is in the house regulatory reform bill on section 106, sarbanes-oxley that would give us a greater ability to subpoena workpapers form foreign auditors. that would be of assistance as

well as. >> what exactly es it allow you to be she and if they don't respond to our subpoenas? >> it allows great access, as i understand it, in serving a subpoena, a then enforcing a subpoena for more, access to foreign papers. >> very good. >> if i can make ne brief additional point. i do want to be clear that we do have existing authority to be register forei firms, or any firm that doesn't cooperate in an inspection. with us. and i don't want to take that off the table as a solution. obviously, would have significant ramifications if they're in a foreign country where no auditor in essence was registered in the united states, but in tms of our existing authority that is the ultimate step that we can take. >> thank you, mr. goelzer. the german from new jersey. >> okay. so what i hear, and other places of will from you folks is the

accounting standard study folks are all about the transparency and disclosure and making sure the information is out there, right? and that it's the regulators job to deal with it, to reconcile the applications of it. and that's the regulators job to al with. so we have the financial service reform bill that is going through right now, and as a risk retention element to it. mandates 5% on each loan or bond issue, be held on. and so some folks look at that and say hey, you can put that 5% risk retention assets on it, thatill tighten down credit availability even further than where the markets are today. so with that whole issue out there living right now, is it even more important than ever before that you have, i think your words, a decoupling of the

accounting rules from what the regulators are putting in place? the regulars are putting in place if you want to make sure that we still have some availability of cret availability going forward? >> as i nderstand it, there already is that flexibility to decouple supervision and the measures used by bank supervisors from accounting -- accounting as set by the fasb as a starting point to have the flexibility to be couple, so as i understand that already exist. but i do thnk that it calls for continuing coordination between the fasb, sec, prudential supervisors as we do already. we know less than a quarterly basis at the senior staff level with the bank supervisors and my staff italking t their staff on a real-time continuous basis. . .

not a factor in in unrealized gains and losses on debt securities. there is a regulatory capital. there is reporting that does it affect the amount of stockholders' equity that is reported. our changes on of overstatements 166 and 167 we did involve them

and keep them apprised as we were going along to the development of those. they did factor into the stress test last year. they followed up late last year and early this year with some guidance on the impacts that those new standards would have on the regulatory capital terminations. they did provide a transition time frame for the regulated institutions to build the additional capital. >> ok. as long as you are still talking, with regard to the convergence issues that you touched on, the g-20 has recommended county standards. they want to work with banking regulators. we have not hit this one point very much today.

it is on the issue of market to market. they said they would want it. you all take a contrary view. can you lay that out a little bit as to why you are taking a contrary view to where the g-20 and the investors and regulators are on this issue? under the g20 common financial stability board which actually i think would periodically as well, you know, obviously been a financial stability bard their first interest is an instability of the overall system, you know, our job i'm totally for stability. their jobs more transparent for investors like the capital allocation process. so, work very closely with the banking regulators t try to

understand their point of view. we work closely with investors to understand their points of viw. we get the point of view of the companies and we really try to square the circle in terms of meeting all those different name and waves. and a lot of investors would've liked to see more and imation on current values of the financial assets of institutions. >> so it's clearly difficult in some of those. okay, thanks. >> thank you, mr. kerry. mr. campbell. >> thank you, mr. chairman. i would like to follow up on standard 166 and 167. if there's a risk retention requirement you got to keep a percent banks off into securitization. you've got to keep 5%. under 166 and 167, that pincus to kee the whole loan unfair,

no? i am wrong. tatsumi. >> it really depends on what the 5% are present. if he represents the first loss, yes. if it affects like the equity purchase mint in me transaction is their first love. it is more of a pro rata 5% retention, i would not be deemed significant. >> okay, if it is the first loss, then they you have to keep the entire loan on their books, rate? >> yet. >> right, okay. and this is the kind of place where we do these prescriptive, very prescriptive accounting standards, this is the sort of thing when you do that you probably weren't anticipating this sort of thing and there may be some other actions in the future where we've got a lot of thanks with a lot of debt that there may be various ways that

that can be moved to other places, but where they're going to have to keep a slice of it somewhere in order to make the whole transaction word. our change and make some of these things a little more solvent in the future. and this is where i think you can see that divergence between substance baking regulation in order to make this thing work out. and also look at standard 166 and 17 and say as far as the audited balance sheet, this bank is going to not improve it at all. not a problem and i'm curious for any of you, in that specific instance, not a problem, you guys can look at it and respond quickly or what? >> in that instance, it is a problem if you saidyou have

significant say in the game, if you will. a significant risk and you have control you need to consodate. if it was 5% -- you've got to have the majority of, let's say it's high-quality assets. you might actually have most of the risk of those assets. and so i think that the principle of standards. if you have most of the risk of those,maybe there are to be on your books. not a problem in terms of being able to respond. >> if you've are $3 million loan, you can lose $3 million in theory and method in your and so forth. if that will go somewhere else and it's sometimes a bit of his first loss, but gives you ximum $200,000 plus wishes to, is that a different situation? >> think of it in these terms. if you had a company and had some risk in it and you were the equity investor and the rest of the capital is sort of provided

by other people in a form debt financing, but, you also ran the show. i think you'd agree under long-standing account, you would consolidate that entity. and so that's the basic analogy they are. >> but i guess, does it bother if you if you have divergence between the financial accounting standard and the way the banking regulators will treat the transaction? >> you know, in an ideal world we would have the same reporting for financial reporting, for regulatory reporting, for tax reporting. but because the all-star from different objectives, sometimes that's not possible. >> okay. >> in the instance of 166 and 167, as i understand it and regulators have looked at those standards and indicate it will

help them to a better assessment of risk. in fact, a process like that went through or was included in the stress test, effectively taking fasb's nuke finance and saying would we get a better identification of risk for these two standards? >> a question for mr. goelzer. i mntioned before about the markets using different data than the traditional three elements of the financial statement. are there things that we ought to -- a lot of that comes from audited data, but does it all and are there things we got to be auditing, numbers that are to be audited for public companies that are currently being audited? >> because the markets are using the >> this is a hard question to answer. i thinkfrom our perspective the important thing would be that the scope of the auditor' responsibilities are clear and

that if we are going to bring in additional information, in fact, currently part of the financial statements that information is audited at all, not so dependent on judgments or management that an auditor can develop evidence and supporting an opinion on if we have a chance to read a standard. i mean, as to what some of the conten would eat at additional information brought under the auditing, you think you have to think about that a little. >> thank you, mr. chairman. thank you. >> the gentleman from california. >> thank you, mr. chairman. i'm going to follow up by mr. garrett and mr. campbell's line of questioning here because last week we had fasb's cabins across submit testimony here that in many ways recognized or admit a certain dichotomy here

or a certain problem when it comes to the impact or effect on this decision. he said --e said that keeping assets on the books will better reflect financial institutns exsures to risk, but may also, in his words, affects their ability to comply with the regulatory capital requirements and therefore affect the liquidity available to real estate in the u.s. to commercial realstate specifically. and on of the debates that we have had about the vicious circle that we've got ourselves caught in is the fact that in many cases you have performing loans, but banks aren't allowed to be banks right now. you know, if the appraiser -- if the appraisal comes back and the value, you know, isn't what

necessary, there regardless the fact it's a performing mound a in the past maybe you keep it on the books and you have to make that tough decision because the regulator is breathing down your neck. and at that hearing, u.s. up a witness is involved in the commerci real estate industry expressed their grave concerns over this treatment. and i guess we're just getting back to what is fasb's response engaged and acknowledged by, you know, your technical advisor there by kevin in that hearing last week. you know, and someone at some point in time to give the banks the ability to work out some of these problems using theirbest judgment? cannot also just ask, you know, the sec's perspective as well because he'll have to deal it -- ts will affect, you know, companies that she will oversee

as to become more and more rigid in terms of the ways in which we define and control the ability of thinkers tose their judgment. ultimately, you oversee those firms. you mht have a comment on this, so go ahead and the please. mr. herz. >> the goal of financial reporting this to underline the economic reality as best we can with the tools available and often requiring necessary judgment of the companies and auditors involved. we believe the new standards strike the right balance in that area, in fact, regulators seem to agree that for their purposes it does as well. i mean, you know, arguably some of the poblems that caused the

crisis work, you know, too much free reign, too much liquidity, too much thanks that were improperly on the balance sheets. >> mr. herz, i cringe about that. somehow when you get to the point when you have performing loans, which no longer make the test, you're in something of unchartered waters here when you notice that it became to have this domino effect in communities and it's almost a self-fulfilling prophecy in that sense. i mean, if you n't roll over these performing loans because you don't make -- the reality is they're performing loans at least for here and now. and that sort of the dichotomy i think we're in, right-click >> i'm not sure those are ala and of 166 or 167.

>> no, but the further crimp on liquidity for commercial real estate compounds this problem, where we are to have this lack of liquidity and titan occurs on them. and at the end of the day, there is in the capital they are. and so the decision is made not to roll over the performing loan. >> and a capital requirements of things that the bank regulators determine if they've given some forbearance or a transition period related to her new standard, but they concluded that the new standard provides a better basis for them to make d. terminations. >> let me ask the sec very quickly and then i'm finished. >> i don't think banks should have greater flexibility in terms of keeping risk of balance sheet. and that's probably a better reception for bank regulators,

as i understand it, they have the flexibility in terms of how they'll respond. >> the flexibility hasn't been used to our ability to discern it, but thank you very much. >> thank you very much. it isn't surprising and this action was an interesting commentary when i started out i suggested that we who are not accounted good for the deaths. but quite frankly i've really enjoyed the witness' testimony. i want to thank them and they want to send this message to within the next several weeks or weak willed will convene a conference on the snate and the house bill. and obviously our need to reconcile some differences and potentially at some parts of the bill that they may be missing. and all three witness