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February 14, 2011

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Edith Orenstein

Tom,

Thank you for bringing my attention to the Schwarcz article through your thoughtful post (some parties may not view it as 'thoughtful' in the emotional sense but it is certainly well thought out and thought-provoking).

I have particularly honed in on one section of your post, on a subject I also hold to be extremely important: due process. You state:

"Only the notion of investor complacency can explain why investors have not yet stormed the FASB's headquarters, much as Egyptians demonstrated in Tahriri Square to protest a plutocracy operating behind the façade of democracy and due process.

I have no suggestions for altering the calculus leading to consistent investor complacency. The only solution is for regulators, most especially accounting standard setters, to embrace the reality that investors will not tend to exercise their right to be heard, rather than exploit that tendency. For example, accounting standards should acknowledge that investor preferences dictate that disclosure – even under the best possible circumstances – cannot be an adequate substitute for financial statement recognition. They should also acknowledge that due process is not working just because thousands of comments against a proposed standard have been received from issuers, whose comments vastly outnumber investors' comments."

I would respectfully note (I'm not sure I 'disagree,' per se) that:
- as noted in one of my own blog posts yesterday, due process can be difficult to examine, and one question to consider is whether a flood of identical comment letters (aka to some people 'form letters') should necessarily be discounted. I personally don't think so. If a point is generally agreed upon by tens, hundreds, or thousands of companies (or investors) I do not believe their choice of using an efficient means of communicating their views, even if the template was developed by a member of a business advocacy group -- or -- an investor advocacy group -- should color the substance of the view expressed, nor should the sheer quantity of responses be discounted just because they arrive as 'form letters.' Importantly, it is the quality of comment letters ('form letter' or not) that should be paramount, in addition to the quantity of comment letters - quantity, for whatever it's worth, is how democracy is determined.

But bottom line, I wholeheartedly agree with you about the importance of due process. NOTE: These views are solely my own and not necessarily those of my employer or anyone associated therewith.

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