In the wake of the congressional hearings surrounding the Enron case, each step of the financial reporting process of public companies is under scrutiny, with the SEC taking a hard line in demanding clear and consistent reporting in audited financial statements. From company management and board audit committees to outside auditors, investment bankers and research analysts, the key word has become "transparency."

In the past few years, real estate companies have come a long way in providing analysts and investors the data needed to properly assess a company's profitability and financial position.

There has been a great deal of internal debate as to whether or not the real estate industry should more completely embrace traditional measures of profitability such as earnings per share. Whatever the outcome, publicly traded real estate companies need to be cognizant of the way financial information is presented. The industry as a whole must work to ensure that the most appropriate and effective levels of financial disclosure are employed, in order to satisfy regulatory requirements as well as to provide a clear idea of company performance.

Significant focus has also been directed toward off-balance sheet financing activities, such as joint venture arrangements and special-purpose entities. An important result of the Enron situation will be a fresh evaluation of the effectiveness of disclosures with respect to joint ventures. The real estate industry should seize this opportunity to enhance the level of transparency in order to proactively satisfy the needs of investors and other financial statement users.

In the area of corporate governance, new attention will be placed on seeing that related-party transactions pass muster and that audit committees include individuals with appropriate levels of understanding about accounting principles and financial reporting. Along these lines, stock exchanges are working toward new rules to bolster corporate governance requirements that would tighten the definition of "independent director" and prevent outside auditors from performing certain non-audit services.

NAREIT's Financial Standards team plays an important role in assisting member companies and providing guidance for financial reporting practices with the goal of better investor understanding. It is not yet certain which proposals will be implemented, but the eventual changes resulting from the Enron fallout have the potential of dramatically affecting the industry and its financial reporting standards. Every publicly traded real estate company shares the responsibility to provide clear, transparent financial information to investors. It is critical that NAREIT members lead the implementation of these initiatives—this will have a significant impact on the credibility of the industry in the future.

William D. Sanders
NAREIT Chair