VideoIs there a direct link between the complexity of the current financial reporting system and the large number of restatements among public companies?
That was the major question hovering over the first meeting of a committee charged with simplifying financial reporting. The Advisory Committee on Improvements to Financial Reporting is made up of current and former CFOs, professors, securities lawyers, investor advocates, and audit-firm executives (see the list at the end of this article). It was created at the behest of the Securities and Exchange Commission and will examine a host of issues, including how the Financial Accounting Standards Board and the Public Company Accounting Oversight Board work, the debate over principles-based versus rules-based accounting, and the consequences of giving auditors more leeway to use professional judgment.
Several participants noted that 10 percent of public companies restated their financials in 2006. Robert Pozen, chairman of MFS Investment Management and of the advisory committee, recommended that a subcommittee be formed to address whether the glut of restatements stems from an overly broad definition of materiality, increasingly detailed accounting standards, or some other issue. Data from a commission formed by the U.S. Treasury may shed light on why the number of restatements has risen so dramatically; its report is expected in the first quarter of 2008.
There was also no shortage of reasons floated for the current situation, encompassing everything from management fears of being second-guessed by auditors and regulators to poorly written rules to conflicting interpretations of and guidance on those rules. Collectively, members noted, all the guidance and related bulletins, speeches, and letters amount to what Pozen described as "too much GAAP running around," adding that "we need to figure out what is and isn't GAAP and grab hold of it."
There are certainly plenty of things to figure out. In particular, FASB's rules on hedge accounting and fair-value accounting have caused widespread misunderstanding.
The members questioned whether MD&A disclosures should be improved and if earnings releases, which often include non-GAAP financials, should be included in regulatory filings. Also discussed: how the ongoing FASB — International Accounting Standards Board convergence project might affect complexity and how to advance the XBRL data-tagging system.
The committee plans to present a list of 12 recommendations to the SEC next August. Despite the premium placed on simplifying financial reporting, Joseph Grundfest, a professor at Stanford Law School, suggested that the group not go too far. "Sometimes, to describe a complicated transaction, you have to give a complicated answer," he said. If you force everyone to give "a simple yes-or-no answer to a complicated question, then you can end up forcing someone to lie." — Sarah Johnson
The CIFR Members
- Dennis Beresford, professor of accounting, University of Georgia; will represent Fortune 500 audit committees.
- Susan Bies, former Federal Reserve Board governor (2001–07); will represent banking regulators.
- J. Michael Cook, former chairman/CEO, Deloitte & Touche LLP; will represent Fortune 500 audit committees.
- Jeffrey J. Diermeier, president/CEO, CFA Institute; will represent investment professionals.
- Scott C. Evans, EVP at TIAA-CREF and CEO of two TIAA-CREF subsidiaries; will represent pension funds.
- Linda Griggs, partner, Morgan Lewis, Washington, D.C.; will represent securities attorneys.
- Joseph A. Grundfest, professor, Stanford Law School; will represent securities attorneys.
- Greg Jonas, managing director, Moody's Investors Service; will represent credit-rating agencies.
- Christopher Liddell, CFO, Microsoft; will represent Fortune 500 technology companies.
- William H. Mann III, senior investment analyst, Motley Fool; will represent individual investors.
- G. Edward McClammy, CFO, Varian; will represent midsize companies.
- Edward E. Nusbaum, executive partner/CEO, Grant Thornton; will represent auditors of small/midsize public companies.
- Robert C. Pozen, chairman, MFS Investment Management; will represent mutual funds.
- James H. Quigley, CEO, Deloitte Touche Tohmatsu; will represent auditors of large/multinational public companies.
- David Sidwell, CFO, Morgan Stanley; will represent securities broker-dealers.
- Peter J. Wallison, senior fellow, American Enterprise Institute; will represent proponents of interactive data for financial reporting (XBRL).
- Thomas Weatherford, former EVP/CFO of Business Objects; will represent small/midsize company audit committees.
Fraud by the Numbers
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