Transparency in Financial Disclosure Bill Lutz

Transparency in Financial Disclosure:

Beyond the Financial Crisis

William LutzClarity 2010

Lisbon, 12 October 2010

Part I

An introduction, of sorts

The Premature BurialEdgar Allan Poe

1844

What is the question?

The answers we get depend on the questions we ask.

Different questions lead to different answers.

How can we make high speed trains stronger so passengers will have a better chance of surviving a crash?

How can we make passenger airplanes safer so passengers

will have a better chance of surviving a crash?

Part II

A list

Blogs widgets cell phones

HDTV Hulu digital cameras

DVR MySpace social media

Flip Face Book webcasts

MP3 You Tube spiders

iTunes Plaxo text messaging

iPod LinkedIn video on demand

iPhone Second Life streaming video

Apps Wikipedia email

WIFI Flicker SMS

GPS Yahoo cloud computing

Kindl Pandora cyberspace

Bing Shazam crowdsourcing

Wolfram Alpha Android

Google Photoshop

Part III

Data, data everywhere

10-K filings by one company

1996 263 pages

1999 265 pages

2009 1,376 pages

“I read a few prospectuses for residential-mortgage-backed securities – mortgages, thousands of mortgages backing them, and then those all tranched into maybe 30 slices. You create a CDO by taking one of the lower tranches of that one and 50 others like it. Now if you’re going to understand that CDO, you’ve got 50-times-300 pages to read, it’s 15,000. If you take one of the lower tranches of the CDO and take 50 of those and create a CDO squared, you’re now up to 750,000 pages to read to understand one security.”

Warren Buffett, Fortune Magazine, April 8, 2008.

A weekday edition of The New York Times has more data than the average person in 17th-century England would encounter in a lifetime.

The Nov. 13, 1987 edition of The New York Times contained over 12,000,000 words and weighed 12 pounds.

In 2006, companies used 301 forms to file 740,995 copies of required disclosure with the U.S. Securities and Exchange Commission.

Of these 301 forms,14 accounted for 77% of all filings.

Part IV

What do you know?

What is information?

Information is that which

reduces uncertainty.

Claude Shannon and Warren Weaver, (The Mathematical

Theory of Communication, 1949)

Information is that which leads to understanding.

That which is not information is NOISE.

What is information to one person may be noise to

another.

What is noise in one context may be

information in another.

Information is created by each user of data.

Data are facts.

Information is the meaning that we assign to the facts.

Knowledge is using information to accomplish a

task or achieve a goal.

Data →

Information →

Knowledge

London Underground - 1913

London Underground - 1932

London Underground - today

New York City Subway Map - today

Field 9 production increased by 10,000 barrels per week.

Profits increased 4.6%.

Interest expenses declined 3.2%.

What do these mean?

Answering this question produces information. Using that information produces knowledge.

This is a financial statement from ca. 2270BCE.

The Library of Alexandria

Part V

A world of 1’s and 0’s

See Part II.

We are moving from a top-to-down world to a bottom-to-up world.

Digital music: create your own albums

DVR: no scheduled television

Netflik: movies when you want

Pandora: create you own radio station

Once you have reduced something to 1’s and 0’s, you can do anything you want with it.

And just about anything can be digitized.

We are living in a user-created world.

Part VI

People are changing.

A 2005 study by the Consumer Federation of America found that

Over 70% between the ages of 18 to 44

61% between 45 to 54

45% between 55 to 64, and

24% of those over 65

use the Internet to carry out transactions.

Part VII

What do investors want, anyway?

What is the question?

It is NOT what information we should require to be disclosed.

The question is, how do we provide data so investors can get the information they want?

Part VIII

What is transparency today?

Disclosure today is top down and paper-driven in a bottom up, digital world.

Too many investors are driving a Model T in a Formula One race.

New Premise

Transparency is data in a format that investors can use to create the information they want.

We should move from a paper-based to an electronic-based disclosure and data system.

It should provide investors with tools so they can use that data to create the information they want.

Interlude 1

Data and capital have been reduced to 1’s and 0’s.

Data and capital are boarderless. They flow everywhere.

The world capital markets now function as one market.

Financial data is being standardized with the merging of GAAP and IFRS.

Data must be interactive.

Interlude 2

In 1946 0.005% of US households had a TV

In 1962 90% had a TV

From 1997 to 2007, there were 97 cell phones per 100 inhabitants in the developed world.

1997 – 48,000 PCs manufactured

2001 – 125 million

2007 – 264 million

In 2009, North American wireless networks carried about 17 petabytes every month, equal to 1,700 Libraries of Congress.

By 2014, this amount is projected to be 740 petabytes per month.

A petabyte is one quadrillion (1,000,000,000,000,000) bytes.

Number of apps for the iPhone:

250,000+

Number of apps for the Android system:

70,000+

Around 1439 Gutenberg developed moveable type.

By the end of the 15th century there were 217 printing presses in 6 countries.

An estimated 8 million books were printed in the first 50 years.

Part IX

Ready or not,

the revolution is here.

The shift from paper and printing to digital and electronic is as profound, fundamental, and far-reaching as the shift from oral to print in the 15th century.

It took about 100 years for society to absorb that change. The change today will be much quicker.

Interlude 3

The defendant says, and the SEC agrees, that the information was disclosed in public documents, yet the SEC maintains that this disclosure did not meet the legal requirements for disclosure. “The SEC says those documents were too obscure and difficult to understand to qualify as adequate disclosure.”The Wall Street Journal, September 3, 2010

“Disclosure isn’t disclosure if it doesn’t communicate.”

Arthur Levitt, Chairman

U.S. Securities and Exchange Commission

1993-2001

Part X

A non-conclusion

What does all this mean?

What do we do?

Where are we going?

How do we get there?

And what does “this” and “there” mean?