Bob Pozen was the first day luncheon keynote speaker for Compliance Week 2008, charged with updating us on the progress and preliminary conclusions of the SEC Advisory Committee on Improvements To Financial Reporting.
His opening comments mentioned that Chairman Cox had come to him originally with the request to Chair a committee focused on reducing financial reporting complexity and was thinking of calling it “Committee to Reduce Financial Reporting Complexity” or some such nonsense. Bob Pozen says he told Chairman Cox that, maybe, that didn’t tell the whole story and so a new and improved Committee title was christened.
After hearing Chairman Cox’s own update on the progress of this Committee at the US Chamber of Commerce meeting in April, I am not surprised that Cox comes off again as focused primarily on making things easier for his corporate constituents, rather than focusing on investors’ needs. As others said many times during the conference with regard to risk management and FCPA, sometimes there’s complexity because the transactions are complex.
I remember when, as my responsibilities for financial accounting and financial reporting grew during the first ten years of my own career, it was increasingly irritating to hear that “senior management” wanted less detail and more summary, couldn’t handle the detail, weren’t interested in the details, and that detail was my job not theirs. Even though the businesses I was involved in were large, complex, fast moving, and sometimes icky, it seemed that the higher up you went, the more luxury you felt you deserved in not having to get your hands dirty with the detail.
Well, I’m here to tell you that business is messy.
The Committee’s objective is to examine the U.S. financial reporting system, with a view to providing specific recommendations as to how unnecessary complexity in that system could be reduced and how that system could be made more useful to investors.
1. The current approach to setting financial accounting and reporting standards, including (a) principles-based vs. rules-based standards, (b) the inclusion within standards of exceptions, bright lines, and safe harbors, and (c) the processes for providing timely guidance on implementation issues and emerging issues;
2. The current process of regulating compliance by registrants and financial professionals with accounting and reporting standards; the current systems for delivering financial information to investors and accessing that information;
3. Other environmental factors that may drive unnecessary complexity, including the possibility of being second-guessed, the structuring of transactions to achieve an accounting result, and whether there is a hesitance of professionals to exercise judgment in the absence of detailed rules;
4. Whether there are current accounting and reporting standards that do not result in useful information to investors, or impose costs that outweigh the resulting benefits (the Committee could use one or two existing accounting standards as a “test case,” both to assist in formulating recommendations and to test the application of proposed recommendations by commenting on the manner in which such standards could be improved); and
5. Whether the growing use of international accounting standards has an
impact on the relevant issues relating to the complexity of U.S. accounting
standards and the usefulness of the U.S. financial reporting system.
All errors, other than clearly insignificant errors, should be promptly corrected and disclosed in the current period
In the “dark period” during the restatement process (e.g., 1-2 years), investors receive little information
Therefore, prior period financial statements should be restated only if the error is material to current investors
On accounting judgement: (Haven’t they been using any up until now???)
Increased role of judgment
Fair value estimates
Principles vs. rules
Policy statement, not “safe harbor”
Disciplined consideration of factors
Material facts of transaction
Alternative accounting views
Review relevant literature
Known diversity of practice
Documented rationale for alternative chosen
On delivery of reported information (AKA XBRL)
XBRL: Gradual implementation
Furnished, not filed
No auditor assurance
At front of 10Ks and 10Qs
More use of corporate websites
Advantage of hyperlinks
Call for legal clarification
Off-balance sheet rules:
Easily avoid consolidation under current rules
Voting control test
Proposal: Require independent holder of substantial equity to have governance role
Disclosures by sponsor
Informal and formal obligations
Likelihood of future consolidation
Go slow on fair value
Suggestion for division of income statement into realized and unrealized income (???!!!###???)
Elimination of bright lines such as with regard to lease accounting
CIFiR is focused on administrative solutions (no legislation)
Financial restatements and accounting judgment are high priorities for SEC
Fair value is controversial: Division of income statement is compromise
FASB will endorse process proposals of CIFiR
International convergence is going to be a lot tougher than expected