In a call to action for the energy industry Wednesday, KMPG LLP CEO Stephen G. Butler said the “systemic flaws” revealed by Enron Corp.’s bankruptcy have to be fixed, but warned it will take more than just rewriting accounting rules. Speaking at Cambridge Energy Research Associates’ 21st Annual CERAWeek Executive Conference in Houston, Butler suggested several reforms, including replacing required quarterly reports with information in “real time” to offer a more transparent picture of a company’s health.

The current events in the energy industry have become “a watershed moment in the history of our capital markets,” Butler said, and “to restore confidence, the voice of the investor must be heard.”

As one of the so-called Big 5 Accountants, KMPG, is committed to doing its part to fix the flaws in the system, said Butler, but action is also required by corporate executives and financial management, directors and audit committees, investment bankers and their analysts, rating agencies, the Securities and Exchange Commission and accounting-standard setters. “All of these participants share some responsibility for the current crisis. All of them have an important role in restoring confidence.”

In line with Butler’s comment, the Financial Accounting Standards Board (FASB) on Wednesday said it plans to propose a new general standard in late March “that would potentially close the gap between broad conceptual and detailed guidances,” It said that the proposal would address “revenue recognition as it applies to business entities, to resolve current revenue recognition issues, and provide consistent guidance for future issues.”

Butler, who spoke during the natural gas plenary session, said, “We can’t restore confidence by simply doing better audits of information that is not relevant to investors or can’t be understood by them.” One of the first areas for improvement should be in the financial reporting model, he said. “The challenge is that we’ve evolved into a post-industrial economy, with a business climate that is infinitely more complex than before, when most of our accounting standards and securities regulations were formulated.” In this context, he said, “generally accepted accounting principles (GAAP) don’t do a very good job of describing any modern company.”

While his profession will play an important role in reform, Butler said accounting standards have to be improved to “more transparently describe business operations, account for intangible assets, disclose leading indicators and trends” both financial and nonfinancial, and “better inform investors and creditors about risks and opportunities.”

Improving GAAP is one thing, but Butler warned that everyone has to focus on the way “financial information is distributed to investors. The implications of achieving this new model of reporting are clear: just as you will have to reinvent your corporate information infrastructures, we will have to reinvent our audits.”

Instead of quarterly reports, which he said requires companies to stretch numbers that may be misleading, he instead called for real-time reporting, which would allow investors to see what’s going on in a company at any given moment. The transition to real-time reports is coming, he said, because there is technology available to make it work.

“The SEC should encourage companies to experiment with new types of non-financial disclosures, as well as more timely and frequent ways of disclosing information to investors,” he said, adding that, “appropriate safe harbors should be constructed to encourage innovation and protect against frivolous lawsuits.” To “keep pace with the evolution of businesses and our markets, my profession must continue investing in research and development necessary to reinvent the audit, to cover a wider bandwidth of business information and to permit real-time assurance.”

Butler also called for the so-far silent investor community to “get engaged in standard setting,” noting that “they are noticeably absent today.” He also called for alternative funding structures for standard setting to eliminate the perception that the “accounting profession dominates the process in its own self interest.” He said that “despite the current noise in the system, we must start with the premise that we’re all hurt by what’s going on, and we need to work together to make it right.”

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